SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 Identification No.)
incorporation or organization)
600 Montgomery Street
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 983-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock--$1 Par Value New York Stock Exchange
Pacific Stock Exchange
9-1/8% Cumulative Monthly Income New York Stock Exchange
Preferred Securities, Series A*
*Issued by Transamerica Delaware, LP, and
guaranteed by Transamerica Corporation
Securities registered pursuant to section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
Aggregate market value of Common Stock, $1 par value, held by nonaffiliates
of the registrant as of the close of business on March 5, 1999: $9,077,897,261
Number of shares of Common Stock, $1 par value, outstanding as of the close
of business on March 5, 1999: 124,617,823
TABLE OF CONTENTS
Page
----
Part I:
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . .13
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . .13
Item 4. Submission of Matters to a
Vote of Securities Holders . . . . . . . . . . . . . . . .14
Part II:
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . .15
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . .15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . .16
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . . .29
Item 8. Financial Statements and Supplementary Data . . . . . . . . .31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . .50
Part III:
Item 10. Directors and Executive Officers of the Registrant . . . . . .51
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . .54
Item 12. Security Ownership of Certain
Beneficial Owners and Management . . . . . . . . . . . . .58
Item 13. Certain Relationships and Related Transactions . . . . . . . .59
Part IV:
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . . . .60
Page 2
PART I
ITEM I. BUSINESS
Transamerica Corporation is a financial services organization which engages
primarily through its subsidiaries in life insurance, commercial lending,
leasing and real estate services. Transamerica was incorporated in Delaware in
1928.
On February 18, 1999, Transamerica announced that it had signed a merger
agreement with AEGON N.V. (AEGON) providing for AEGON's acquisition of all of
Transamerica's outstanding common stock for a combination of cash and AEGON
stock worth $9.7 billion. The merger is expected to close during the summer of
1999.
Effective January 1, 1998, principally through its indirect subsidiary
Transamerica Distribution Finance Corporation, Transamerica completed the
acquisition of substantially all of the inventory and retail finance businesses
of Whirlpool Financial Corporation for a total purchase price of $1.3 billion in
cash. A definitive agreement for the acquisition was originally announced on
September 18, 1997. The assets acquired consisted of approximately $1.1 billion
of net receivables and other assets of Whirlpool's inventory financing, retail
financing and international factoring businesses, as well as Whirlpool Financial
National Bank, a credit card bank. Funds for the purchase of the assets were
provided by short term borrowings and cash from operations.
On June 23, 1997, Transamerica sold its branch-based consumer lending
operation. Gross proceeds from the sale were $3.9 billion, or $1.1 billion after
repayment of associated debt. Net proceeds were used to purchase Transamerica
Corporation common stock, reduce debt and for other general corporate purposes.
On October 14, 1996, Transamerica acquired all of the outstanding shares of
Trans Ocean Ltd., a closely held container leasing company, in exchange for 3.2
million shares ($112.7 million) of Transamerica common stock.
For information concerning Transamerica's investment portfolio see
"Investment Portfolio" in Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 7, and "Note B. Financial
Instruments" in the financial statements included in Item 8.
BUSINESS SEGMENT INFORMATION
See "Note C. Business Segment Information" in the financial statements
included in Item 8.
The business activities of Transamerica's principal subsidiaries are more
fully described below.
Life Insurance
Transamerica's life insurance business is generated through lines of
business which include life insurance products, asset management, annuities,
reinsurance and Canada. These lines of business conduct their operations through
one or more of the following entities: Transamerica Occidental Life Insurance
Company, Transamerica Life Insurance and Annuity Company, Transamerica Life
Insurance Company of New York, Transamerica Life Insurance Company of Canada and
Transamerica Assurance Company (hereinafter collectively referred to as
"Transamerica Life Companies"). The Transamerica Life Companies operate in all
states of the United States, the District of Columbia, Puerto Rico, the Virgin
Islands, Guam, Canada, Taiwan, Bermuda and Hong Kong.
The Transamerica Life Companies design, underwrite, sell and service life
insurance, annuities, long-term care insurance, reinsurance and other financial
security products. These products are sold in the U.S., Canada and Asia through
general agencies, financial institutions and broker/dealers by independent
agents and financial planners. Our customers include individuals and families
who buy life insurance, annuities, mutual funds and long-term care insurance;
businesses that purchase retirement, annuity, mutual fund and other investment
Page 3
products; other life insurance companies that buy reinsurance; and the U.S.
government, for which we process Medicare claims.
The Transamerica Life Companies have approximately 3,100 employees in Los
Angeles, California, Kansas City, Missouri, Charlotte, North Carolina, Purchase,
New York and Canada who service outstanding policies and new business submitted
by agency offices, and approximately 200 field sales office employees serving
its sales force.
The life insurance business is highly competitive. Competition arises from
numerous stock and mutual life insurance companies primarily in the United
States, many of which offer products similar to those offered by the
Transamerica Life Companies. In the pension and annuity markets, competition
also arises from banks, mutual funds and other investment managers. Both product
and price competition are intense. We believe that the Transamerica Life
Companies' key competitive strengths are their financial position, broad product
range, market position, brand name, and diversified distribution system.
Page 4
The following table sets forth certain statistical information relating to the Transamerica Life Companies' operations.
Years Ended December 31,
-------------------------------------------------------
1998 1997 1996
Life Insurance in force: ($ in millions)
Individual - Universal $ 61,663.4 $ 60,010.9 $ 59,446.5
Individual - Traditional (1) 161,624.3 148,117.4 132,944.1
Worksite marketing - Universal 7,322.0 7,018.2 6,955.8
Group Term Life/Other 24,831.2 22,583.4 20,816.5
------------ ------------ ------------
255,440.9 237,729.9 220,162.9
Reinsurance assumed 282,317.0 225,685.7 201,560.4
------------ ------------ ------------
$ 537,757.9 $ 463,415.6 $ 421,723.3
============ ============ ============
New life insurance issued and paid:
($ in millions) (volume)
Individual - Universal $ 5,621.1 $ 3,990.4 $ 4,928.2
Individual - Traditional (1) 33,754.4 33,206.4 19,527.4
Worksite marketing - Universal 1,415.4 1,560.1 1,657.2
Premiums and related income:
($ in millions)
Traditional Life Premiums: (1)
First year premiums $ 66.1 $ 58.7 $ 38.6
Renewal premiums 330.8 319.5 282.5
Other 111.0 92.6 59.8
------------ ------------ ------------
507.9 470.8 380.9
Less: reinsurance premiums ceded (138.7) (119.8) (101.7)
------------ ------------ ------------
Total traditional life premiums 369.2 351.0 279.2
Single premium immediate annuities (2) 44.4 61.1 66.9
Group annuities (3) 12.7 15.0 47.6
Charges on interest-sensitive policies (4) 690.5 629.4 555.2
Insurance ceded on interest-sensitive policies (94.8) (91.6) (87.1)
Fee income (5) 106.1 82.7 64.4
Reinsurance (net of retroceded) (6) 601.5 619.5 596.8
Canada (7) 81.2 116.8 117.4
Corporate and other 36.2 34.1 51.6
------------ ------------ ------------
Total premiums and other considerations $ 1,847.0 $ 1,818.0 $ 1,692.0
============ ============ ============
Page 5
Years Ended December 31,
-------------------------------------------------
1998 1997 1996
Average face amount per life insurance policy in force:
Individual - Universal $ 171,513 $ 170,602 $ 165,656
Individual - Traditional $ 183,559 $ 175,101 $ 169,382
Worksite Marketing-Universal $ 35,987 $ 36,261 $ 37,550
Number of life insurance policies in force:
Individual - Universal 359,526 351,760 358,855
Individual - Traditional (1) 880,502 845,895 784,877
Worksite Marketing-Universal 203,462 193,547 185,239
Ratio of underwriting expenses to premiums and other considerations (8) 20.4% 22.7% 19.2%
Lapse ratio-adjusted for decreases and expiries of term insurance and
reinsurance assumed: (9)
Transamerica Life Companies 8.1% 7.9% 8.7%
All U.S. stock life insurance companies (10) (11) 8.3% 8.3%
<FN>
- ----------
(1) The increases were generated primarily by lower premiums on these policies consistent with industry trends.
(2) The 1998 decrease was due to a reduction in structured settlements business.
(3) The decreases in group annuity premiums resulted primarily from a decline in single premium pension contracts.
(4) The increases resulted primarily from growth in reinsurance of interest sensitive blocks of business.
(5) The increases were due to growth in separate accounts business.
(6) Certain modified coinsurance premiums are shown on a net basis.
(7) The 1998 decrease was primarily due to a new reinsurance contract established during the fourth quarter as well as unfavorable
foreign exchange rate fluctuations.
(8) The ratio is the percentage of salaries and other operating expenses to premiums and related income. The higher ratio in 1997
was due to charges for a legal settlement and higher general operating expenses.
(9) The lapse ratio is calculated in accordance with the A.M. Best Company, Inc. formula. It is the ratio of amounts of universal
and traditional life insurance terminated during the year to the aggregate of (1) universal and traditional life insurance in
force at the beginning of the year plus (2) new business issued during the prior year.
(10) Industry median, as provided by A.M. Best Company, Inc.
(11) Information not yet available for 1998.
</FN>
Page 6
--------------------
Of life insurance in force at December 31, 1998, 19.3% was on residents of
California, followed by Texas (9.7%), Illinois (5.3%), Florida (4.1%) and
Pennsylvania (3.2%). No other state accounted for more than 3% of life insurance
in force. Canada accounted for 12.2% and all other foreign operations accounted
for 1.7% of life insurance in force.
Reinsurance. Portions of the Transamerica Life Companies' life insurance
risks are reinsured with other companies. The maximum amount of individual
insurance retained on any one life is $2 million at ages 16 to 65 inclusive.
This maximum is reduced for health impairments, for other ages and for certain
other special classes of risks. The Transamerica Life Companies also reinsure a
minor part of their liability under accident and health policies.
For many years the Transamerica Life Companies have solicited life
reinsurance from other companies. As of December 31, 1998, the Transamerica Life
Companies were accepting business from 298 companies under automatic reinsurance
agreements and from approximately 75 other companies on a case by case basis.
Reserves. In accordance with the life insurance laws and regulations under
which they operate, the Transamerica Life Companies are required to carry on
their books as liabilities actuarial reserves to meet the obligations on their
various life insurance policies. Such life insurance reserves are calculated
pursuant to mortality and annuity tables in general use in the United States and
Canada and are the computed amounts which, with additions from premiums to be
received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Transamerica Life Companies'
policy obligations at their maturities if deaths occur in accordance with
mortality tables employed.
For a fee, Transamerica's life insurance operation issues guaranteed
investment contracts which guarantee the payment by pension plans of certain
qualified benefits if the plans' other sources of liquidity are exhausted.
Unlike traditional guaranteed investment contracts, these are synthetic
contracts in which the plan sponsor retains the assets and credit risk while the
life insurance operation assumes some limited degree of interest rate risk. To
minimize the risk of loss, the life insurance operation underwrites these
contracts based on the plan sponsor, at the beginning of the contract, agreeing
to the investment guidelines to be followed. These guidelines include the
overall portfolio credit and maturity requirements. The life insurance operation
regularly monitors adherence to these requirements. At December 31, 1998 the
life insurance operation had outstanding commitments to maintain liquidity for
benefit payments on notional amounts of $5.2 billion compared to $3.3 billion at
December 31, 1997. At December 31, 1998 and December 31, 1997 there were no
advances outstanding to provide sponsor liquidity under these contracts.
Investments. The Transamerica Life Companies' investments at December 31,
1998 totaled $32.6 billion which was invested as follows: 88.6% in fixed
maturities; 2.6% in mortgage loans and real estate; 2.8% in common stocks; 1.4%
in policy loans; 3.7% in short-term investments; 0.5% in redeemable preferred
stocks; and 0.4% in other long-term investments. Fixed maturities are invested
as follows: 70.9% in industrial and other non-government bonds; 15.2% in public
utility bonds; 11.4% in mortgage backed securities (primarily government
agencies); 1.4% in United States government bonds; 0.2% in foreign government
bonds; and 0.9% in municipal bonds.
The following table sets forth pretax mean investment yields, including
interest earned and dividends received, before (gross) and after (net) deducting
investment expenses for the Transamerica Life Companies' various investments.
The yields are computed based on the mean of beginning and end of year assets,
producing results which vary somewhat from the daily average yield.
Page 7
Years Ended December 31,
------------------------
1998 1997 1996
Fixed maturities, at amortized cost--gross 7.99% 7.92% 8.08%
Equity securities, at market value--gross (1) 0.48 1.07 1.59
Mortgages--gross (2) ........................... 8.73 8.83 9.08
Total invested assets:
Gross ...................................... 7.66 7.65 7.86
Net ........................................ 7.40 7.44 7.64
- ----------
(1) The decreases in the yield resulted primarily from an increase in the
market value of the portfolio.
(2) The decreases were primarily due to the funding of new loans at current
market rates which were below the average of the existing loans.
Commercial Lending
The commercial lending business operates from 70 branch lending offices
located in the United States (58), Canada (4) and Europe (8). The activities of
the commercial lending business are discussed below.
The product offerings of the distribution finance operation of commercial
lending include inventory financing, trade receivable servicing and funding,
accounts receivable financing, vendor leasing, retail consumer financing,
commercial collection services, credit insurance brokerage, international
financing and border to border financing. After initial review of the borrower's
credit worthiness, the ongoing management of credit risk includes various
monitoring techniques, such as periodic physical inventory checks, monitoring of
the borrower's sales and quality of collateral and reviewing customer compliance
with financial covenants. In inventory financing, repurchase agreements are
generally maintained with manufacturers which provide a degree of security in
the event of a repossession.
The business credit operation of commercial lending provides asset-based
loans and equipment financing to middle-market customers, as well as revolving
and term loans to early stage technology companies. The asset-based lending
activities consist of secured, primarily revolving, loans to manufacturers,
retailers, and selected service businesses, as well as other financial services
companies. These loans are collateralized and consist of retained credit lines
typically from $5 million to $40 million with terms ranging from three to five
years. Advances under asset-based loans are limited to specific percentages of
the borrowers' eligible collateral. Credit risk is managed by monitoring the
quality of the collateral, the borrowers' financial performance, and compliance
with financial covenants. The equipment financing activities include
collateralized loans and leases, primarily to middle-market manufacturing,
transportation and other service companies, secured by equipment essential to
the borrowers' businesses. Credit risk in the equipment finance business is
managed through rigorous underwriting and transaction structuring. Loans are
structured to amortize at a rate that is faster than the term over which the
underlying equipment is expected to depreciate. Leases are also structured with
guaranteed residuals or are recorded using conservative estimates of the
projected fair market value of the collateral at lease expiration. Technology
financing consists of term and revolving loans to growing companies in the life
sciences and specialized electronics industries to finance research and
development, manufacturing and other business activities. All loans are secured
and are underwritten based on the strength and viability of the customers'
technology, which is evaluated with the help of industry experts and other
advisors retained by the business credit unit.
The relatively short-term nature of the company's financings enables the
commercial lending business to adjust its finance charges in response to
competitive factors and changes in its costs. The interest rates at which the
commercial lending business borrows funds generally move more quickly than the
Page 8
rates at which it lends to customers. As a result, in rising interest rate
environments, margins are normally compressed until changes in the prime lending
rates are effected. Conversely, in declining interest rate environments, margins
are generally enhanced.
In 1997, the commercial lending operation announced that it intended to
sell its insurance premium finance operation and reclassified the insurance
premium finance receivables to assets held for sale. In early 1998 management
decided not to proceed with such sale. Accordingly, the insurance premium
finance receivables were transferred back to finance receivables on the balance
sheet.
During 1998, the commercial lending operation securitized $600 million of
distribution finance floorplan finance receivables and $200 million of business
credit equipment loans and leases. In 1997 the distribution finance operation
securitized $1.5 billion of floorplan finance receivables.
On December 31, 1997, the ongoing mortgage lending operation that remained
from the former consumer lending segment, which was sold on June 23, 1997, was
contributed to commercial lending. Receivables, net of unearned finance charges,
increased from $107.6 million at December 31, 1997 to $320.8 million (198%) at
December 31, 1998.
During 1995, the commercial lending operation also entered into a
three-year arrangement in which it securitized a $475 million participation
interest in a pool of its insurance premium finance receivables. This amount was
reduced by $100 million to $375 million during 1997. At December 31, 1998, $360
million of securitized insurance premium finance receivables remained
outstanding.
The commercial lending industry is highly competitive and has seen
increasing numbers of new market entrants. In addition to competition from other
finance companies, there is competition from captive finance subsidiaries of
manufacturing companies and commercial banks. The commercial lending business
competes by offering a variety of financing products, superior customer service
including prompt credit review, and competitive pricing.
Page 9
The following table sets forth certain statistical information relating to the commercial lending operation's finance
receivables for the years indicated. The table does not include the receivables of the insurance premium finance operation as of
December 31, 1997. At that date those receivables were classified as assets held for sale.
Years Ended December 31,
------------------------------------------------------
1998 1997 1996
(Dollar amounts in millions)
Volume of finance receivables acquired:
Distribution finance (1) ...................................... $ 15,720.4 $ 12,415.8 $ 8,315.6
Business credit (2) ........................................... 6,512.1 4,855.6 5,321.6
Retail (3) .................................................... 1,130.8
Other ......................................................... 0.1
------------ ------------ ------------
Total ...................................................... $ 23,363.3 $ 17,271.4 $ 13,637.3
============ ============ ============
Finance receivables outstanding at end of year:
Distribution finance (4) ...................................... $ 2,220.5 $ 2,081.1 $ 2,530.9
Business credit (5) ........................................... 3,096.1 1,541.4 1,263.0
Retail (3) .................................................... 717.0 109.2
Other ......................................................... 3.2
------------ ------------ ------------
6,033.6 3,731.7 3,797.1
Less unearned finance charges (5) ............................. 330.3 199.3 142.0
------------ ------------ ------------
Net finance receivables - owned ............................... 5,703.3 3,532.4 3,655.1
Net finance receivables securitized, sold and serviced (6) .... 2,988.0 1,810.7 474.3
------------ ------------ ------------
Net finance receivables owned and serviced .................... $ 8,691.3 $ 5,343.1 $ 4,129.4
============ ============ ============
Allowance for losses at end of year (7) (8) ...................... $ 141.7 $ 98.6 $ 82.5
Ratio to outstandings less unearned finance charges:
Owned ......................................................... 1.99% 2.35% 2.22%
Owned and serviced ............................................ 1.63% 1.85% 2.00%
Provision for credit losses charged to income (9) ................ $ 49.8 $ 16.2 $ 10.2
Credit losses (net of recoveries) (9) ............................ $ 34.2 $ 10.1 $ 5.2
Ratio to average net finance receivables outstanding:
Owned ......................................................... 0.77% 0.25% 0.16%
Owned and serviced ............................................ 0.48% 0.22% 0.14%
Page 10
<FN>
- ----------
(1) The increases were primarily due to aggressive sales and marketing in most of the product lines financed and the addition in
1997 of $888 million in gross receivables from the acquisition of the inventory finance and international factoring businesses
from Whirlpool Finance Corporation.
(2) The increase in 1998 was primarily due to increased sales in the asset based lending, equipment finance and lease, and
technology finance divisions.
(3) The 1998 volume amount includes $334.1 million of gross receivables acquired from Whirlpool Finance Corporation in January
1998. The December 31, 1997 receivables amount represents the residual ongoing assets from the discontinued consumer lending
segment.
(4) The 1998 increase was due to the aggressive sales and marketing referred to above which was significantly offset by the
securitization of $600 million of inventory floor plan finance receivables. The 1997 decrease was primarily due to the
securitization of $1.5 billion of inventory floor plan finance receivables, which more than offset the $888 million increase of
gross finance receivables from the Whirlpool Finance Corporation acquisition.
(5) The increases were primarily due to growth of net receivables in the asset based lending, equipment finance and lease, and
technology finance divisions. In 1997, $281 million of insurance premium finance receivables were transferred to assets held
for sale in line with a plan to sell the operation in 1998. In early 1998 management decided not to proceed with such sale.
Accordingly, the insurance premium finance receivables were transferred back to finance receivables.
(6) The amounts are the balances of securitized receivables outstanding at year end. In 1998, $600 million of distribution finance
floorplan receivables and $200 million of equipment loans and leases in business credit were securitized. In 1997, $1.5 billion
of distribution finance floorplan receivables were securitized. Amounts serviced by the insurance premium finance business of
$375 million were excluded for 1997 following the decision to reclassify the insurance premium finance receivables to assets
held for sale. In 1998 and 1996, securitized insurance premium finance receivables of $360 million and $475 million were
included in the balances.
(7) Includes allowance for losses on the securitized, sold and serviced portfolio of $28 million in 1998, $15.5 million in 1997 and
$1.2 million in 1996 which is reported in other liabilities in the consolidated balance sheet.
(8) The increases were attributable to receivables growth.
(9) The 1998 increase was primarily due to the addition of the new retail lending operation acquired from Whirlpool Finance
Corporation.
</FN>
--------------------
Leasing
Transamerica Leasing leases, services and manages containers, chassis and
trailers throughout the world. The leasing operation is based in Purchase, New
York and operates through approximately 430 offices, depots and other facilities
in 49 countries. The company specializes in intermodal transportation equipment,
which allows goods to travel by road, rail or ship. The company's customers
include railroads, steamship lines, distribution companies and motor carriers.
The leasing operation's fleet of intermodal transportation equipment is one
of the largest in the world based on units of equipment available for hire. We
provide service, rental and term operating leases through an extensive worldwide
network of offices and third party depots and offer a wide variety of equipment
used in international and domestic commerce around the world, in the United
States and in Europe. We also utilize technology, including our TradexTM On-line
Internet capability, to enable customers around the world to book their own
on-hire and off-hire transactions. In addition, our leasing operation provides
structured financing that enables customers to purchase equipment over time, and
an equipment matching service, GreyboxTM Logistic Services, in which we manage
containers for customers and broker equipment interchanges among them. The
leasing operation's main competitors are other transportation equipment leasing
companies and financial institutions. Due to a worldwide oversupply of
containers and low new equipment prices, the demand for leased container
equipment declined in 1998 and 1997. As a result, a program of accelerated
Page 11
equipment disposal, initiated at the end of 1997, was implemented in 1998.
Accordingly, at December 31, 1997, the leasing operation reclassified $96.1
million of revenue earning equipment to assets held for sale of which $2.3
million was still held for sale at December 31, 1998. The oversupply of
containers also resulted in decreased per diem rates in 1998 and 1997.
At December 31, 1998, the leasing operation's fleet consisted of standard
twenty and forty foot dry containers and specialized containers such as
refrigerated containers, tank containers, high cube, open top and flatrack
equipment types, chassis and U.S. domestic containers totaling 826,500 units
which are leased to customers from approximately 380 depots worldwide; 26,200
rail trailers leased to all major United States railroads and to roll on/roll
off steamship operators, shippers, shipper's agents and regional truckers; and
19,400 over-the-road trailers in Europe.
The following table sets forth the leasing operation's fleet size, in
units, including owned, managed, leased from others and units held for sale:
As of December 31,
-----------------------------------
1998 1997 1996
Containers and chassis (1) 826,500 882,100 896,300
Rail trailers (2) 26,200 29,900 34,500
European trailers (3) 19,400 15,100 10,300
- ----------
(1) The 1998 decrease was primarily due to the program of accelerated equipment
disposition from less desirable logistical locations in response to the
worldwide oversupply of units in 1998 and 1997.
(2) The decreases were due to a decline in demand for this type of equipment in
favor of domestic container double-stack rail service and from the sale of
older units.
(3) The increases reflect expansion in the European trailer operating lease and
rental market.
The percent of the leasing operation's fleet on term lease with commitment
periods from one to fifteen years or service contract minimum lease was 56% in
1998, 55% in 1997 and 53% in 1996. The increases reflect the continuing trend
toward increasing term and service contract minimum leases.
The following table sets forth the leasing operation's fleet utilization
for the years indicated:
Years Ended December 31,
----------------------------
1998 1997 1996
Containers and chassis (1) 79% 79% 81%
Rail trailers (2) 83% 85% 82%
European trailers (3) 88% 92% 92%
- ----------
(1) Utilization rates have continued to be negatively impacted by the worldwide
oversupply of container equipment despite the accelerated equipment
disposition program implemented in 1998.
(2) The decrease in 1998 was due to a decline in demand for this type of
equipment in favor of domestic container double-stack rail service while
the increase in 1997 resulted from a strong U.S. economy and a decline in
the overall supply of equipment.
(3) 1998 utilization declined as rental on-hires were negatively affected by
the Russian financial crisis and its impact on trade with Western European
countries.
--------------------
Real Estate Services
Real estate services comprise Transamerica's real estate information
businesses as well as certain real estate and other investments.
Page 12
The largest business is Transamerica Real Estate Tax Service, which serves
lending institutions and other loan servicing entities by providing tax parcel
identification services, reporting annual tax amount or delinquency information,
assisting in the actual creation of tax payments, forwarding payments to taxing
authorities, completing related ancillary functions and insulating servicers
from many penalty risks associated with the property tax process.
As of December 31, 1998, tax reports were generated for more than 2,000
institutional mortgage servicers. Competition is increasing in the tax service
market, driving down fees at the same time that customers are demanding more
services. In response, the Transamerica Real Estate Information Companies have
initiated a number of strategies to maintain their industry leadership including
development of new technology and centralization of operations.
The following table sets forth the number of tax service contracts under
management at the end of the years indicated and new life of loan contracts
written during those years:
As of and Years Ended December 31,
----------------------------------
1998 1997 1996
(Amounts in thousands)
Tax service contracts under management 17,905 17,735 17,529
New life of loan contracts 5,498 3,630 3,580
The real estate services segment includes investments in fixed income and
equity securities, and collateralized bond obligations. Certain of these
investments collateralize obligations of Transamerica Corporation to the
Transamerica Life Companies. At December 31, 1998, 1997 and 1996 total
investments comprised:
As of December 31,
-----------------------------------
1998 1997 1996
(Amounts in millions)
Equity securities at fair value $ 1,266.9 $ 780.0 $ 541.3
Fixed maturities at fair value 494.8 502.7 471.3
Other 2.7 5.8 23.6
---------- ---------- ----------
$ 1,764.4 $ 1,288.5 $ 1,036.2
========== ========== ==========
Page 13
REGULATION
Insurance Activities
The Corporation's life insurance business, in common with those of other
companies in this industry, is subject to regulation and supervision in the
states, territories and countries in which they operate. Although the extent of
such regulation varies, in general state laws establish supervisory agencies
with broad powers relating to licensing of insurance companies and their agents
to transact business therein, supervising premium rates and forms of policies
used, and regulating the form and content of required financial statements and
the types of investments that may be made. Insurance companies are also required
to file annual reports with the supervisory agencies in states in which they do
business and are subject to periodic examination by such agencies.
Finance Activities
Transamerica's commercial lending business is subject to various state,
federal and foreign laws. Depending upon the type of lending, these laws may
require licensing and certain disclosures and may limit the amounts, terms and
interest rates that may be offered.
EMPLOYEES
The Corporation and its subsidiaries employed approximately 9,200 persons
at December 31, 1998.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratios of earnings from
continuing operations to fixed charges of Transamerica Corporation and its
subsidiaries for each of the five years ended December 31, 1998.
Years Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
3.05 2.32 2.52 2.36 2.55
The ratios of earnings from continuing operations to fixed charges were
computed by dividing earnings from continuing operations before fixed charges
and income taxes by the fixed charges. Fixed charges consist of interest and
debt expense, minority interest charges related to certain securities of
affiliates and one-third of rent expense, which approximates the interest
factor.
ITEM 2. PROPERTIES
The executive offices of Transamerica Corporation are located in the
Transamerica Pyramid in San Francisco, California, a 48-story office building.
Approximately 15% of the 499,000 square feet of rentable space is occupied by
Transamerica and some of its subsidiaries.
The Transamerica Center in Los Angeles, California consists of a 32-story
building, an 11-story building and a 10-story building. Transamerica Center is
the home office of certain divisions of the Transamerica Life Companies and
certain other subsidiaries of Transamerica. Approximately 57% of the 1,358,000
square feet of rentable space is occupied by Transamerica subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
Various pending or threatened legal proceedings by or against the
Corporation or one or more of its subsidiaries involve tax matters, alleged
breaches of contract, torts, employment discrimination, violations of antitrust
laws and miscellaneous other causes of action arising in the course of their
businesses.
Page 14
Based upon information presently available, and in light of legal and other
defenses and insurance coverage available to the Corporation and its
subsidiaries, contingent liabilities arising from threatened and pending
litigation, income taxes and other matters are not expected to have a material
effect on the consolidated financial position or results of operations of the
Corporation and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
Page 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is traded on the New York and Pacific Stock
Exchanges in the U.S. and on the Amsterdam, Frankfurt, London, Paris and the
Swiss Exchanges.
High and low sale prices for the Corporation's common stock on the New York
Stock Exchange for each quarter in 1998 and 1997:
High and low sales prices for common shares:
March 31 June 30 September 30 December 31 Year
1998 $ 63 1/4-49 3/8 $ 60 15/16-56 5/16 $ 63 1/8-49 1/2 $ 58 9/16-45 3/4 $ 63 1/4-45 3/4
1997 $ 45 15/16-38 9/16 $ 48-39 5/16 $ 50 13/16-45 1/8 $ 58 1/4-48 9/16 $ 58 1/4-38 9/16
Cash dividends declared during 1998 and 1997: Quarterly dividends per share
were 25 cents in 1998 and 1997.
There were 39,400 common stockholders of record as of the close of business
on March 5, 1999.
ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
(Amounts in millions except for per share data)
Revenues $ 6,428.6 $ 5,726.5 $ 5,311.7 $ 5,170.3 $ 4,663.9
Income from continuing operations $ 707.0 $ 532.0 $ 501.5 $ 390.1 $ 336.9
Basic earnings per share from continuing
operations (1, 2) $ 5.65 $ 4.06 $ 3.64 $ 2.71 $ 2.10
Diluted earnings per share from continuing
operations (1) $ 5.44 $ 3.93 $ 3.55 $ 2.66 $ 2.07
Total assets $ 58,502.6 $ 51,172.9 $ 49,931.2 $ 47,952.6 $ 40,299.0
Long-term debt $ 6,273.1 $ 5,236.7 $ 9,087.0 $ 9,341.5 $ 7,489.1
Dividends declared per share of common stock (1) $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
<FN>
- ----------
(1) On January 15, 1999 Transamerica effected a two-for-one stock split. All share, per share and common stock amounts have been
restated to reflect the effect of this split.
(2) Basic earnings per share are based on the weighted average number of common shares outstanding in each year after deduction of
preferred dividends and, in 1997 and 1994, premium and expenses on the redemption of preferred stock.
</FN>
Page 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Consolidated Results
On February 18, 1999, Transamerica announced that it had signed a merger
agreement with AEGON N.V. (AEGON) providing for AEGON's acquisition of all of
Transamerica's outstanding common stock for a combination of cash and AEGON
stock worth $9.7 billion. The merger is expected to close during the summer of
1999.
Transamerica's income from continuing operations in 1998 grew $175 million
(33%) from 1997 to $707 million. Transamerica's income from continuing
operations before investment transactions in 1998 declined $16.7 million (3%)
from 1997 to $472 million. Results in 1997 included a $90 million benefit mainly
from the resolution of prior years' tax matters and a $25.8 million after tax
provision for fleet downsizing and organizational realignment in the leasing
operation.
Excluding the items discussed above, 1998 income from continuing operations
before investment transactions increased $47.5 million (11%) over 1997. The
increase was primarily due to higher operating results at the real estate
services, life insurance and commercial lending businesses. These results were
offset in part by lower operating results at the leasing business and higher
unallocated interest and other expenses.
Operating Income by Business Segment
1998 1997 1996
(Amounts in millions except for per share data)
Life Insurance $ 335.2 $ 306.4 $ 325.4
Finance
Commercial lending 102.9 92.1 73.2
Leasing 63.8 40.6 80.8
Real estate services 103.2 74.0 44.4
Amortization of goodwill (15.9) (13.3) (12.7)
---------- ---------- ----------
Total finance 254.0 193.4 185.7
Unallocated interest and other expenses (117.2) (11.1) (35.1)
---------- ---------- ----------
Income from continuing operations before investment transactions 472.0 488.7 476.0
Gain on investment transactions 235.0 43.3 25.5
---------- ---------- ----------
Income from continuing operations $ 707.0 $ 532.0 $ 501.5
========== ========== ==========
Earnings per share of common stock - diluted (1)
Income from continuing operations before investment transactions $ 3.63 $ 3.61 $ 3.36
Gain on investment transactions 1.81 0.32 0.19
---------- ---------- ----------
Income from continuing operations $ 5.44 $ 3.93 $ 3.55
========== ========== ==========
Average shares outstanding (2) 129.9 133.6 136.5
========== ========== ==========
<FN>
- ----------
(1) On January 15, 1999 Transamerica effected a two-for-one stock split. All share, per share and common stock amounts herein have
been restated to reflect the effect of this split.
(2) Includes the dilutive effect of stock options.
</FN>
Net income, as reported in the consolidated financial statements, for 1998
totaled $707 million, an $86.8 million (11%) decline from 1997, and included net
after tax gains from investment transactions of $235 million compared to $43.3
million of investment gains in 1997. During 1998 we realized substantial
investment gains on our equity portfolio that reflected another year of
exceptional results for the nearly $8 billion of equities we own or manage for
others. Net income in 1997 of $793.8 million included $261.8 million of income
from discontinued operations that was primarily due to a $275 million
Page 17
after tax gain from the sale of the branch-based consumer lending business. Net
income in 1997 was a $337.5 million (74%) improvement over 1996.
In 1997, income from continuing operations before investment transactions
increased $12.7 million (3%) from 1996. The 1996 amount included $68.4 million
in benefits primarily from the resolution of prior years' tax matters, and a
$4.5 million after tax benefit from the elimination of various contingencies
related to the 1995 sale of assets by the commercial lending operation.
Excluding the items discussed above for both years, income from continuing
operations before investment transactions for 1997 rose to $424.5 million from
$403.1 million, an increase of $21.4 million (5%). The increase was due
primarily to higher operating results at the real estate services and commercial
lending businesses and lower unallocated interest and other expenses. Lower
results at the leasing and life insurance businesses in 1997 partially offset
those increases.
Life Insurance
Net income from our life insurance operations increased by $180.3 million
(54%) in 1998 after decreasing $5.9 million (2%) in 1997. Net income included
net after tax gains from investment transactions totaling $178.8 million in
1998, $27.3 million in 1997 and $14.2 million in 1996. In 1997, results were
affected by a $20.1 million after tax charge for a legal settlement in the life
insurance products division and a $5 million after tax provision for costs
associated with legal proceedings related to a reinsurance contract. Excluding
investment transactions and the 1997 items discussed above, income from
insurance operations rose $3.7 million (1%) in 1998 and $6.1 million (2%) in
1997.
The life insurance products division's income before investment
transactions rose $15 million (21%) in 1998. Excluding the $20.1 million after
tax charge discussed above, 1998 income decreased $5.1 million primarily due to
higher net claims that were partially offset by higher investment income and
lower operating expenses.
At the annuities division, 1998 income before investment transactions
increased $4.2 million (8%) because interest rate spreads improved and fee
income was higher on our larger variable annuity base.
The asset management group's income before investment transactions rose $14
million (26%) in 1998 due to favorable interest rate spreads and increased fee
income from a larger asset base.
At the reinsurance division, income before investment transactions declined
$2.6 million (4%) in 1998 primarily due to higher reserve increases and
operating expenses. These were partially offset by higher fee income generated
by an increase in annuity production.
Income before investment transactions from our Canadian operations in 1998
was slightly higher when denominated in Canadian dollars but decreased $300,000
(1%) when denominated in U.S. dollars because of unfavorable foreign exchange
rates.
In the corporate line, income before investment transactions declined $1.5
million (4%) in 1998 primarily due to lower rental income and increased
technology expenses.
In 1997, income before investment transactions decreased at the life
insurance products division compared to 1996 primarily due to the $20.1 million
after tax charge for the legal settlement related to the sale and performance of
certain universal and whole life insurance policies.
In the annuities division, income before investment transactions grew in
1997. Interest rate spreads were favorable, fee income was higher because our
variable annuity asset base was larger and our operating costs were lower.
The asset management group had slightly higher income before investment
transactions in 1997. Interest rate spreads were favorable and fee income was
higher because we were managing more assets. The group's results were reduced by
the decision late in 1996 to reduce the scale of the capital-intensive
structured settlements business.
Income before investment transactions was slightly lower at the reinsurance
division in 1997 due to increased claim costs partially offset by growth in
policy revenue.
Page 18
Income before investment transactions from our Canadian operations grew in
1997 because of improved persistency, favorable claims experience and higher
management fees from growth in the segregated funds business.
In the corporate line, income before investment transactions declined in
1997 primarily because increased general operating expenses more than offset
higher investment income.
After tax gains on investment transactions by the life insurance operations
comprised:
1998 1997 1996
-------- ------- -------
(Amounts in millions)
Net gain on sale of investments $ 312.6 $ 32.9 $ 41.9
Provision for impairment in value (31.1) (11.4) (5.9)
Amortization of acquisition costs (102.7) 5.8 (21.8)
-------- ------- -------
$ 178.8 $ 27.3 $ 14.2
======== ======= =======
Net investment income for the life insurance companies rose $76.1 million
(4%) in 1998 and $89.7 million (4%) in 1997 primarily because of our growing
base of invested assets.
Premiums and other income for the life insurance companies increased $29
million (2%) in 1998 after increasing $126 million (7%) in 1997. Income
increased in 1998 largely because of the growth in traditional life products and
higher fees from interest sensitive policies. These factors were partially
offset by a decline in premiums from reinsurance and single premium annuities.
The reinsurance line's lower premium revenue in 1998 was primarily the result of
our decision to reduce our exposure to certain accident and health reinsurance
contracts by retroceding premiums to another company.
Life insurance benefit costs and expenses increased $53 million (1%) in
1998 after growing $257.3 million (8%) in 1997. Expenses in 1997 included the
charges for the legal matters mentioned earlier. Excluding those charges,
expenses rose in 1998 primarily due to increases in the interest credited on
interest-sensitive policies, higher insurance claims and increases in
commissions.
Cash provided by the operations of the life insurance companies was
$1,303.3 million in 1998, an increase of $314.5 million (32%) from 1997. The
increase was primarily due to the timing of the settlement of certain
receivables and payables. We continue to maintain a sufficiently liquid
investment portfolio at the life insurance companies to cover operating
requirements. The balance of our funds are invested in long-term securities.
Page 19
Life Insurance
1998 1997 1996
(Amounts in millions)
Assets
Investments $ 32,580.3 $ 31,693.7 $ 28,935.4
Deferred policy acquisition costs 2,094.7 2,102.6 2,138.2
Separate accounts 9,101.0 5,494.7 3,527.9
Other assets 2,409.9 2,096.3 1,880.5
----------- ----------- -----------
$ 46,185.9 $ 41,387.3 $ 36,482.0
=========== =========== ===========
Liabilities and Equity
Policy reserves and related items $ 30,336.3 $ 30,141.9 $ 28,542.8
Separate accounts 9,101.0 5,494.7 3,527.9
Other liabilities 1,932.1 1,443.0 1,038.8
Equity (1) 4,816.5 4,307.7 3,372.5
----------- ----------- -----------
$ 46,185.9 $ 41,387.3 $ 36,482.0
=========== =========== ===========
Revenues
Investment income, net of expenses $ 2,245.5 $ 2,169.4 $ 2,079.7
Premiums and other income 1,847.0 1,818.0 1,692.0
Gain on investment transactions 275.0 42.0 21.9
----------- ----------- -----------
4,367.5 4,029.4 3,793.6
Expenses
Policyholder benefits 2,878.0 2,810.9 2,649.7
Commissions and other expenses 720.8 734.9 638.8
Income taxes 254.7 149.9 165.5
----------- ----------- -----------
3,853.5 3,695.7 3,454.0
----------- ----------- -----------
Net income $ 514.0 $ 333.7 $ 339.6
=========== =========== ===========
Source of Cash
Cash provided by operations $ 1,303.3 $ 988.8 $ 913.9
Receipts from interest-sensitive policies 9,597.9 6,851.6 6,202.7
----------- ----------- -----------
$ 10,901.2 $ 7,840.4 $ 7,116.6
=========== =========== ===========
Application of Cash
Returns on interest-sensitive policies $ 10,477.6 $ 6,411.2 $ 5,211.0
Net purchases of investments 249.7 1,315.4 1,862.4
Equity transactions 79.9 56.2 40.0
Other 94.0 57.6 3.2
----------- ----------- -----------
$ 10,901.2 $ 7,840.4 $ 7,116.6
=========== =========== ===========
- ---------
(1) Equity includes the effect of marking investments to fair value comprising
net gains of $1,280.9 million in 1998, $1,190.6 million in 1997, and $549.8
million in 1996.
See note B of the notes to the financial statements for consolidated
components of unrealized gains.
--------------------
Transamerica Finance Corporation
Transamerica Finance Corporation, which is a separate Securities and
Exchange Commission registrant, includes Transamerica's commercial lending and
leasing operations. Transamerica Finance Corporation provides funding for these
businesses. Its principal assets are finance receivables and equipment held for
lease, which totaled a combined $9.3 billion at December 31, 1998 and $6.9
billion at December 31, 1997. These operations have a high level of liquidity
since a significant portion of our assets are short term finance receivables.
Principal cash collections of finance receivables totaled $21.2 billion in 1998,
$16.9 billion in 1997 and $12.9 billion in 1996. Transamerica Finance
Corporation's total notes and loans payable were $7.8 billion at December 31,
1998 and $6 billion at December 31, 1997. Its variable-rate debt totaled $4.5
billion at December 31, 1998 compared to $3.5 billion at December 31, 1997.
Transamerica Finance Corporation's ratio of debt to tangible equity was 6.3:1 at
December 31, 1998 compared with 6.5:1 at December 31, 1997.
Page 20
From time to time, Transamerica Finance Corporation publicly and privately
offers senior or subordinated debt securities. It issued a total of $1.9 billion
of public debt in 1998, $120 million in 1997 and $688 million in 1996. Under a
shelf registration statement filed in December 1998 with the Securities and
Exchange Commission, Transamerica Finance Corporation may offer up to $4 billion
of senior or subordinated debt securities with varying terms, none of which had
been issued at December 31, 1998.
Transamerica Finance Corporation
1998 1997 1996
(Amounts in millions)
Assets
Finance receivables less unearned fees and allowance for losses $ 6,298.4 $ 3,903.3 $ 4,018.4
Net assets of discontinued operations 4,326.2
Equipment held for lease 3,038.0 2,996.5 3,118.5
Goodwill 423.4 423.0 368.1
Assets held for sale 180.8 377.8 3.4
Other assets 859.0 1,024.9 885.0
----------- ----------- -----------
$ 10,799.6 $ 8,725.5 $ 12,719.6
=========== =========== ===========
Liabilities and Equity
Notes and loans payable $ 7,798.6 $ 6,025.2 $ 9,879.3
Other liabilities 1,411.1 1,397.1 1,087.6
Equity 1,589.9 1,303.2 1,752.7
----------- ----------- -----------
$ 10,799.6 $ 8,725.5 $ 12,719.6
=========== =========== ===========
Revenues
Finance and leasing revenues $ 1,549.5 $ 1,329.5 $ 1,206.5
Expenses
Operating expenses 620.4 488.7 406.0
Interest 382.2 354.4 314.2
Depreciation on equipment held for lease 281.5 275.8 255.1
Provision for losses on receivables 53.0 18.1 10.2
Income taxes 71.6 74.3 81.7
----------- ----------- -----------
1,408.7 1,211.3 1,067.2
----------- ----------- -----------
Income from continuing operations $ 140.8 $ 118.2 $ 139.3
=========== =========== ===========
Source of Cash
Cash provided by operations $ 551.8 $ 363.4 $ 495.8
Finance receivables collected 21,245.8 16,917.6 12,864.7
Proceeds from sale and cash transactions with discontinued operations 14.9 4,413.2 1,021.8
Proceeds from debt financing 4,202.7 3,401.7 6,784.5
Equity transactions 139.2
Other 114.0 382.5
----------- ----------- -----------
$ 26,268.4 $ 25,478.4 $ 21,166.8
=========== =========== ===========
Application of Cash
Additions to equipment held for lease $ 400.5 $ 378.4 $ 391.5
Finance receivables originated 23,035.0 16,136.9 13,543.0
Purchase of finance receivables from Whirlpool Finance Corporation 386.3 881.9
Payments of notes and loans 2,446.6 7,263.5 6,932.9
Equity transactions 817.7 237.9
Other 61.5
----------- ----------- -----------
$ 26,268.4 $ 25,478.4 $ 21,166.8
=========== =========== ===========
Page 21
Commercial Lending
Net income from our commercial lending operations was $89.1 million in
1998, an increase of $8.2 million (10%) from $80.9 million in 1997. Income
before the amortization of goodwill grew $10.8 million (12%) from 1997.
Operating results for 1998 included an after tax gain of $7.2 million on the
sale and securitization of $800 million of floor plan and equipment lease
finance receivables and a $6.5 million tax benefit from the resolution of prior
year tax matters. In 1997, operating results included an after tax gain of $5.4
million on the sale and securitization of $1.5 billion of floor plan finance
receivables and a $3.2 million benefit from tax matters resolved in 1997. In
1996, operating results included a $4.5 million benefit primarily from the
favorable resolution of disputed issues surrounding the 1995 sale of assets in
Puerto Rico.
Excluding the above items, commercial lending income from operations before
the amortization of goodwill increased $5.7 million (7%) in 1998 and $14.8
million (22%) in 1997. Income increased in 1998 because we had higher average
net receivables outstanding which more than offset increased operating expenses
and a higher provision for losses on receivables. Increased income in 1997 was
also due to receivables growth.
Commercial lending revenues rose by $197.3 million (38%) in 1998
principally due to strong receivables growth and higher servicing and other
income on securitized receivables. Revenues in 1997 grew $82.7 million (19%)
from 1996 as higher average net receivables outstanding more than offset a
decline in yield due to increased competition in the commercial lending market.
Revenues in 1998 and 1997 included the above-mentioned gains on the
securitization of finance receivables.
Net commercial finance receivables outstanding at December 31, 1998
increased $2.2 billion (61%) from December 31, 1997. The increase in receivables
was largely the result of the following factors: 1) continued growth in the
business credit portfolio, 2) the decision not to sell the insurance premium
finance operation and the reclassification of those receivables from assets held
for sale to finance receivables, and 3) the acquisition during the first half of
1998 of $386.3 million of net finance receivables from Whirlpool Financial
Corporation. This last transaction completed the acquisition of $1.1 billion in
net receivables and other assets that made up substantially all of the inventory
and retail finance businesses of Whirlpool Financial.
Interest expense increased $23.4 million (13%) from 1997 principally due to
the higher average debt levels needed to support receivables growth and higher
average interest rates during the first half of 1998. In 1997, interest expense
increased $31.5 million (21%) from 1996 principally due to higher average debt
levels.
Operating expenses rose $131.4 million (74%) in 1998 primarily because of
increases in business volume and receivables outstanding and the integration of
the Whirlpool Financial acquisition described above. Operating expenses rose $17
million (11%) in 1997 primarily because of higher business volume and
receivables growth. The provision for losses on receivables increased $33.6
million (207%) in 1998 principally as a result of credit losses from the new
retail loan portfolio acquired as part of the Whirlpool Financial acquisition
and additional provisions made on the insurance premium finance portfolio. The
provision for losses on receivables increased by $6 million (60%) in 1997
partially due to growth in the average net receivables outstanding.
Credit losses, net of recoveries, as a percentage of average commercial
finance receivables outstanding, net of unearned finance charges, were 0.77% in
1998, 0.25% in 1997, and 0.16% in 1996.
We have established an allowance for losses equal to 1.99% of net
commercial finance receivables outstanding as of December 31, 1998 compared to
2.35% at December 31, 1997.
Delinquent receivables are defined as the instalment balance for inventory
finance and business credit asset based lending receivables more than 60 days
past due and the receivable balance for all other receivables 60 days past due.
At December 31, 1998, delinquent receivables were $98.6 million (1.63% of
receivables outstanding) compared to $18 million (0.48% of receivables
outstanding) at December 31, 1997. The increase was primarily due to increased
delinquency in the equipment leasing portfolio of the business credit operation,
the inclusion of the insurance premium finance receivables that were reported as
assets held for sale at December 31, 1997, and the inclusion of the receivables
of the new retail lending operation. Delinquent insurance premium finance
Page 22
receivables included in assets held for sale at December 31, 1997 were $14.2
million.
Nonearning receivables are defined as balances from borrowers that are over
90 days delinquent for non credit card receivables or at such earlier time as
full collectibility becomes doubtful. Nonearning receivables on revolving credit
card accounts included in retail are defined as balances from borrowers in
bankruptcy and accounts for which full collectibility is doubtful. Accrual of
finance charges is suspended on nonearning receivables until such time as past
due amounts are collected. Nonearning receivables were $65.7 million (1.09% of
receivables outstanding) at December 31, 1998 compared to $26.4 million (0.71%
of receivables outstanding) at December 31, 1997. Nonearning receivables
increased primarily due to the inclusion of the receivables of our new retail
lending operation and the inclusion of the insurance premium finance receivables
that were reported as assets held for sale at December 31, 1997. At December 31,
1997, nonearning insurance premium finance receivables totaled $7.5 million.
Commercial Lending
1998 1997 1996
(Amounts in millions)
Revenues
Finance charges and related income $ 712.8 $ 515.5 $ 432.8
Expenses
Interest 203.3 179.9 148.4
Operating expenses 308.3 176.9 159.9
Provision for losses on receivables 49.8 16.2 10.2
Income taxes 48.5 50.4 41.1
-------- -------- --------
609.9 423.4 359.6
-------- -------- --------
Income from operations 102.9 92.1 73.2
Amortization of goodwill (13.8) (11.2) (10.6)
-------- -------- --------
Net income $ 89.1 $ 80.9 $ 62.6
======== ======== ========
Leasing
Net income in 1998 increased 60% to $61.8 million. However, earnings in
1997 were reduced by a $25.8 million after tax provision for fleet downsizing
and organizational realignment primarily in the standard container fleet. Income
before the amortization of goodwill was $63.8 million in 1998 versus $40.6
million in 1997 (or $66.4 million excluding the provision).
Earnings in 1998 were reduced by lower standard and refrigerated container
per diem rates and on-hires and lower European trailer short term rental
utilization. Partially offsetting these factors were $6.7 million in net tax
benefits realized from a tax efficient structured equipment financing. Earnings
from the chassis line were higher due to increased on-hire units and per diem
rates associated with rail traffic congestion caused by railroad merger
inefficiencies.
Net income in 1997 declined 51% to $38.6 million. Income before the
amortization of goodwill was $40.6 million compared to $80.8 million in 1996.
Earnings in 1997 were reduced by the provision for fleet downsizing and
organizational realignment noted above, by reduced per diem rates and a decline
in utilization for standard and refrigerated containers, and by decreased gains
on the sale of used standard containers. Improved earnings from tank and
domestic containers and European trailers partially offset these declines.
Income from rail trailers was also higher due to favorable utilization and per
diem rates.
Revenue increased in 1998 by $18.7 million (2%) because of the unfavorable
impact of the fleet downsizing provisions' effect on 1997's revenues. Excluding
the fleet provision, revenue declined $12.2 million (2%) due to lower container
per diem rates and lower container on-hires associated with a continuing
oversupply of equipment and low prices for new equipment. Lower rail trailer
on-hires also reduced revenues. Larger fleets and more on-hire units for tank
containers, chassis, domestic containers and European trailers partially offset
these declines.
Revenue increased in 1997 by $32.2 million (4%) primarily because the
October 1996 acquisition of Trans Ocean Ltd. increased the standard,
refrigerated and tank container and chassis fleets by approximately 25%. Revenue
Page 23
also grew due to a larger portfolio of finance leases and more on-hire European
trailers. Offsetting these increases were the fleet provision noted above, lower
revenues from decreased per diem and utilization rates for standard and
refrigerated containers resulting from an industry wide oversupply of equipment
and low new equipment prices. In addition, rail trailer revenues were lower
because the fleet was smaller.
Expenses declined $8.9 million (1%) in 1998 primarily due to the effect of
the realignment provision on 1997's expenses. Higher depreciation from the
larger fleets of tank container, chassis, domestic container and European
trailers was offset by favorable interest expenses and lower selling and
administrative expenses.
Expenses increased $89.3 million (14%) in 1997 due to the realignment
provision, higher ownership and operating costs associated with the Trans Ocean
Ltd. acquisition and larger fleets of standard and refrigerated containers,
chassis and European trailers.
The combined utilization rate for containers and chassis was 79% in both
1998 and 1997. Trade imbalances between Asia, the U.S. and Europe negatively
affected container utilization in 1998 while the strong U.S. economy aided
chassis utilization levels. Rail trailer utilization declined to 83% in 1998
from 85% in 1997 reflecting the continued decline in demand for this equipment
type in favor of double-stack domestic containers. European trailer utilization
declined to 88% in 1998 from 92% in 1997 as we increased the size of our rental
fleet. Rental on-hires were negatively affected by the Russian financial crisis
and its impact on trade with Western Europe.
Leasing
1998 1997 1996
(Amounts in millions)
Revenues
Total leasing revenues $ 816.5 $ 797.8 $ 765.6
Expenses
Operating expenses 175.3 174.1 129.2
Depreciation on equipment held for lease 281.5 275.8 255.1
Selling and administrative expenses 113.3 116.7 95.5
Interest 153.7 166.1 163.6
Income taxes 28.9 24.5 41.4
-------- -------- --------
752.7 757.2 684.8
-------- -------- --------
Income from operations 63.8 40.6 80.8
Amortization of goodwill (2.0) (2.0) (2.0)
-------- -------- --------
Net income $ 61.8 $ 38.6 $ 78.8
======== ======== ========
Real Estate Services
Net income from the real estate services segment increased $69.4 million
(77%) in 1998 and $25.2 million (39%) in 1997. Net income included net after tax
gains from investment transactions of $56.2 million in 1998, $16 million in
1997, and $20.4 million in 1996. Income before investment transactions increased
$29.2 million (39%) in 1998 primarily because higher levels of mortgage
refinancings and home sales increased income at the tax service business. In
1997, income before investment transactions increased $29.6 million (67%) driven
by $27.4 million of after tax gains on the sale of six real estate properties
and higher earnings at the real estate information companies.
Revenues in 1998 increased $134.7 million (32%) primarily because of
increased business at the tax service resulting from higher levels of mortgage
originations and refinancings and higher gains on investment transactions. In
1997, revenues increased $59.1 million (17%) because of the gains on real estate
sales noted above and increased business at the tax service business.
Transamerica's tax service operation recognizes revenue as new contracts
are received and defers a portion of that revenue sufficient to cover the future
service liability over the average life of the loan portfolio serviced. The
average life of the portfolio is determined using historical data on the payment
of loans serviced. Effective January 1, 1999 Transamerica plans to adopt
prospectively a new policy of recognizing revenue. Although the exact method has
not yet been determined, we anticipate that the change will result in a
reduction of revenue recorded in the year a contract is executed, the effect of
which will be offset by increased recognition of deferred revenue in future
years.
These businesses generate the funds they need for capital expenditures and
working capital from their operations. Cash, cash equivalents and accounts
receivable are the real estate services' principal sources of liquidity.
Page 24
Real Estate Services
1998 1997 1996
(Amounts in millions)
Assets
Cash, cash equivalents and accounts receivable $ 140.9 $ 253.1 $ 276.5
Investments in marketable securities 1,764.4 1,288.5 1,036.2
Land and buildings 171.1 123.3 163.9
Other assets 260.3 69.4 54.9
---------- ---------- ----------
$ 2,336.7 $ 1,734.3 $ 1,531.5
========== ========== ==========
Liabilities and Equity
Loss and future service reserves $ 194.6 $ 180.0 $ 169.4
Notes and loans payable 810.1 800.5 810.6
Other liabilities 393.2 162.9 101.7
Equity (1) 938.8 590.9 449.8
---------- ---------- ----------
$ 2,336.7 $ 1,734.3 $ 1,531.5
========== ========== ==========
Revenues
Real estate services revenues $ 463.9 $ 390.9 $ 325.6
Gain on investment transactions 86.8 25.1 31.3
---------- ---------- ----------
550.7 416.0 356.9
Expenses
Salaries and other operating expenses 299.2 272.2 260.2
Income taxes 92.1 53.8 31.9
---------- ---------- ----------
391.3 326.0 292.1
---------- ---------- ----------
Income from operations 159.4 90.0 64.8
Amortization of goodwill (0.1) (0.1) (0.1)
---------- ---------- ----------
Net income $ 159.3 $ 89.9 $ 64.7
========== ========== ==========
Source of Cash
Cash provided by operations $ 80.4 $ 16.5 $ 35.0
Proceeds from debt financing 18.2 76.3 55.9
Net sale of investments 99.2
Equity transactions 15.3
Other 89.8
---------- ---------- ----------
$ 197.8 $ 182.6 $ 106.2
========== ========== ==========
Application of Cash
Net purchases of investments $ 119.2 $ 35.4
Payments of notes and loans 8.6 44.0 30.1
Equity transactions 134.6 19.4
Other 54.6 40.7
---------- ---------- ----------
$ 197.8 $ 182.6 $ 106.2
========== ========== ==========
<FN>
- ----------
(1) Equity includes net unrealized gains from marking investments to fair value of $662.6 million in 1998, $342.4 million in 1997,
and $213.3 million in 1996. See note B of the notes to the financial statements for consolidated components of unrealized
gains.
</FN>
Unallocated interest and expenses
Unallocated interest and expenses, after related income taxes, for the last
three years were:
1998 1997 1996
(Amounts in millions)
Interest expense $ 33.7 $ 39.5 $ 46.5
Other expenses (income) 83.5 (28.4) (11.4)
-------- ------- -------
$ 117.2 $ 11.1 $ 35.1
======== ======= =======
In the aggregate, unallocated interest and other expenses increased $106.1
million (956%) in 1998 from 1997. Results in 1997 included $90 million primarily
of benefits from the resolution of prior years' tax matters. Excluding this
benefit in 1997, unallocated interest and expenses rose $16.1 million (16%) in
Page 25
1998 primarily due to dividends paid on the Capital Trust Pass-Through
Securities issued in November 1997 which replaced previously outstanding
preferred stock, the method used by the Corporation to settle tax matters with
its subsidiaries and expenses associated with the Corporation's long term
incentive plan. The 1996 results also included a benefit from the satisfactory
resolution of prior years' tax matters of $68.4 million. Excluding the unusual
items in 1997 and 1996, unallocated and other expenses decreased $2.4 million
(2%) in 1997.
Discontinued Operations
In the fourth quarter of 1997, we discontinued the remainder of our
consumer lending business following the sale of our branch-based lending
operations. In 1997, income from these operations was $261.8 million including a
$275 million after tax gain on the sale of the branch-based consumer lending
operations. This gain was offset in part by an operating loss of $13.2 million.
Corporate Liquidity and Capital Requirements
Transamerica Corporation receives funds from its subsidiaries in the form
of dividends, income taxes and interest on loans. We use these funds to pay
dividends to our stockholders, purchase shares of our common stock, invest in
the operations of our subsidiaries and pay corporate interest, expenses and
taxes. We invest funds in our subsidiaries based on expected returns, the
potential for creating shareholder value added, and the capital needs of these
operations. We may invest in a subsidiary by allowing it to retain all or a
portion of its earnings, or by making capital contributions or loans.
Transamerica also borrows funds to finance acquisitions or to lend to
subsidiaries to finance working capital needs. Our subsidiaries are required to
maintain prudent financial ratios consistent with other companies in their
industries, and to retain the capacity through committed credit lines or liquid
assets to repay working capital loans from the Corporation.
At December 31, 1998, Transamerica and its subsidiaries had short-term
borrowings, principally commercial paper, totaling $2.8 billion supported by a
credit agreement with 43 banks. It is our policy to maintain credit line
coverage equal to at least 100% of short-term borrowings. At December 31, 1998,
we had credit available under this line equal to $3.5 billion, or 125% of these
borrowings; credit support equal to 95% of the borrowings was with banks rated
AAA/AA or the equivalent by one or more of the major credit rating agencies.
In 1991, Transamerica filed a registration statement with the Securities
and Exchange Commission under which up to $500 million of debt securities with
varying terms may be sold. These securities may be senior or subordinated and,
if subordinated, may be convertible into common stock. In November 1996,
Transamerica sold $200 million of senior notes bearing interest at 6.75% due in
November 2006. Of the remaining $300 million of debt securities available to be
sold under the registration statement, $200 million has been designated as
medium term notes, none of which have been sold.
Transamerica's commercial paper and senior debt are rated by independent
rating agencies. We continue to maintain debt to capital ratios consistent with
our current ratings.
Transamerica Finance Corporation, a wholly owned subsidiary of
Transamerica, also issues debt publicly and privately to fund the commercial
lending and leasing operations. During 1998, Transamerica Finance Corporation
issued $1.9 billion of public debt. In September 1998, it issued $100 million of
medium term notes at a variable interest rate due in September 2001, $150
million of senior notes at a floating rate due in September 2001 and $30 million
of medium term notes bearing interest at 5.74% due in September 2003. In October
1998, it issued $735 million of floating rate medium term notes due in the
fourth quarter of 1999 and $10 million of floating rate medium term notes due in
October 2001. In November 1998, it issued $625 million of senior notes bearing
interest at 6.13% due in November 2001 and $250 million of senior notes bearing
interest at 7.10% due in 2028 and callable in 2003.
In November 1998, to better manage the duration of its debt and improve tax
efficiency, Transamerica Finance Corporation exchanged $146.8 million of
outstanding senior notes bearing interest at 6.5% due in 2011 for a like amount
of senior debt bearing interest at 6.4% due in 2008.
Page 26
A subsidiary of Transamerica securitized $800 million of commercial lending
loans in 1998 and $1.5 billion in 1997.
In November 1997, Transamerica Capital III, an affiliate of Transamerica,
issued $190 million of noncallable Capital Trust Pass-Through Securities
maturing November 15, 2037 with a coupon of 7.625%. Proceeds from the issuance
of these securities were invested by the affiliate in subordinated debentures
issued by Transamerica, bearing interest at 7.625% and maturing on November 15,
2037. Proceeds to Transamerica were used to repay debt and for other corporate
purposes. These and the other Capital Trust Pass-Through Securities issued in
1996 are shown as guaranteed preferred beneficial interest in Transamerica's
junior subordinated debentures on Transamerica's consolidated balance sheet.
In December 1996, a subsidiary of Transamerica closed a $307 million
leveraged lease transaction involving the sale and leaseback of 69,000
intermodal shipping containers.
In November 1996, Transamerica Finance Corporation issued $200 million of
senior notes bearing interest at 6.375% due in November 2001.
In November 1996, Transamerica Capital I and II, affiliates of
Transamerica, issued $325 million of Capital Trust Pass-Through Securities.
These included $100 million of 30-year securities maturing December 1, 2026
redeemable beginning in 2006 with a coupon of 7.80% issued by Transamerica
Capital I, and $225 million of 30-year, non-callable securities maturing
December 1, 2026 with a coupon of 7.65% issued by Transamerica Capital II. The
proceeds were invested by the affiliates in subordinated debentures issued by
Transamerica, bearing interest at 7.65% and 7.80% and maturing on December 1,
2026. The proceeds to Transamerica were used for general corporate purposes.
In January 1998, we completed the acquisition of $1.1 billion of net
receivables and other assets of Whirlpool Financial Corporation's inventory
finance, retail finance and international factoring businesses for $1.3 billion
in cash. The acquisition of the retail finance business closed in January 1998.
We funded the purchase primarily with short term debt.
In June 1997, we sold our branch-based consumer lending operation for $3.9
billion, or $1.1 billion after repayment of associated debt.
In October 1996, we acquired Trans Ocean Ltd., a closely held container
leasing company, in exchange for approximately 3.2 million shares ($112.7
million) of Transamerica common stock.
Stockholders' Equity
Transamerica's capital structure includes debt, common stock, and the
Monthly Income Preferred Securities and Capital Trust Pass-Through Securities
that are classified as guaranteed preferred beneficial interest in
Transamerica's junior subordinated debentures. We continuously strive to
minimize our cost of capital while maintaining investment-grade credit ratings.
Ratings are very important to our life insurance customers. Our ratings also
enable us to borrow at attractive rates, which improves the spreads at our
finance businesses.
During 1998, we continued to return excess equity capital to stockholders
by purchasing the company's common stock. Stock purchases during 1998 totaled
2,941,800 shares at a cost of $170.4 million (an average price of $57.93 per
share). Since we began our share purchase program in May 1993, a total of 45.9
million shares have been acquired through December 31, 1998 at an aggregate
purchase price of $1.6 billion. At December 31, 1998, there were outstanding
authorizations from the board of directors for the purchase of 893,200
additional shares.
In February 1997, we completed the redemption of our outstanding Series D
Preferred Stock and our outstanding Dutch Auction Rate Transferable
Securities(TM) Preferred Stock.
Investment Portfolio
Transamerica's total invested assets were $33.7 billion at December 31,
1998, most of them held by our life insurance companies. Transamerica Investment
Services, a wholly owned subsidiary of Transamerica, manages all of
Page 27
Transamerica's securities portfolios. At the end of 1998, total invested assets
represented 73% of our insurance assets and 58% of Transamerica's total assets.
In 1998 our investment income was $2.3 billion and represented 35% of
Transamerica's total revenues.
The majority of our invested assets are in fixed maturity securities. We
generally make long-term investments primarily in investment-grade corporate
bonds and government securities to fund the payment of our life insurance
liabilities. We use fundamental research and active management, and seek to
achieve a balanced bond portfolio that meets our goals for income, security of
principal and diversification. At the end of 1998, 93.9% of our fixed maturity
investments were rated as "investment grade," and an additional 3.8% were rated
in the BB category or its equivalent. An "investment grade" security is
generally defined as any issue rated above Ba by Moody's Investors Service or
above BB by Standard & Poor's Corporation.
The average yield of the fixed maturity portfolio was 7.7% at December 31,
1998 and 7.8% at December 31, 1997 and 1996.
At December 31, 1998, our fixed maturity portfolio had a total market value
of $29 billion and an amortized cost of $26.6 billion, resulting in a net
unrealized gain of $2.4 billion. An adjustment for impairment in value reduced
the amortized cost of certain fixed maturity investments by $78.9 million at
December 31, 1998 and $72.9 million at December 31, 1997.
We also have a portfolio of equity securities with an aggregate market
value of $2.2 billion at December 31, 1998, $1.6 billion in excess of its cost.
Our philosophy is to invest in the equities of a very select group of high
quality companies after conducting our own research. Our research is focused on
anticipating and understanding long-term changes.
In addition to our fixed maturity and equity investments, at December 31,
1998 we had $790.7 million invested in mortgage loans and real estate. This
amount represented 2.3% of our total investments and 1.4% of our total assets.
These additional investments included $699.2 million in commercial mortgage
loans, $76.9 million in real estate investments, $1.4 million in foreclosed real
estate and $44 million in residential mortgage loans. Problem loans, defined as
restructured loans yielding less than 8% and delinquent loans, totaled $3.5
million at December 31, 1998 and $2.3 million at December 31, 1997. We have
established allowances to cover possible losses from our mortgage loans and real
estate investments. These allowances totaled $30.8 million at December 31, 1998
and $36.2 million at December 31, 1997. Transamerica also owns land, buildings
and equipment used in its operations, including the Transamerica Pyramid, our
corporate headquarters in San Francisco.
New long-term investments acquired in 1998 totaled $5.7 billion. Of that
amount, 89% was in taxable, fixed maturity securities and 11% was invested
principally in common and preferred stocks, mortgage loans and loans to our life
insurance policyholders. The average yield on new fixed maturity securities was
6.6%. During 1998, we committed to or funded $1.9 billion of new private
placement securities.
Year 2000
Transamerica has developed a plan to modify its information systems to
ensure the readiness of our business applications, operating systems and
hardware on mainframes, servers and personal computers, and wide and local area
networks to recognize the Year 2000. The plan also addresses non-information
technology embedded software and equipment, the readiness of key business
partners, and updating business continuity plans.
The project has four phases: (1) problem determination, (2) planning and
resource acquisition, (3) remediation and (4) testing and acceptance. During
phase one, Transamerica determined the size and scope of the problem and
prepared an inventory of the hardware, software, interfaces and other items that
may be affected. In addition, software code was scanned and third parties were
contacted to determine the status of their efforts. During phase two,
Transamerica assessed the risks and decided whether to fix, replace, discard, or
test the items identified in the inventory, prepared a project plan and
allocated appropriate resources as necessary. Phase three covers remediation
where date occurrences in internally maintained systems are analyzed and
corrected and software and hardware are replaced where necessary. In addition,
operating systems that interface with outside parties are examined in more
detail and modified if required. Phase four includes testing and acceptance of
Page 28
all software, hardware, third party interfaces and related items to ensure they
will work in a number of different Year 2000 scenarios.
The most significant categories of outside parties to Transamerica are
agents and brokers, financial institutions, software vendors, governmental
agencies, third party service providers and utility providers (gas, electric and
telecommunications). Transamerica's assessment of its key business partners
continues. Surveys have been mailed, follow up contacts are underway and
strategies are being developed to address issues as they are identified. This
effort is expected to continue well into 1999.
Following is the status of Transamerica's Year 2000 compliance efforts for
critical systems at each of its business segments.
The life insurance operation had completed a significant portion of the
remediation phase as of December 31, 1998, and is expected to be substantially
complete by March 1999. As of December 31, 1998, testing was well underway and
is expected to be substantially complete by June 1999.
The commercial lending operation had completed a significant portion of the
remediation phase as of December 31, 1998 and is expected to be substantially
complete by March 1999. As of December 31, 1998, testing had commenced and is
expected to be substantially finished by June 1999. The commercial lending
operating systems in Europe, which affect a small percentage of the business,
are being remediated and tested in 1999.
The leasing operation had completed the remediation phase as of December
31, 1998. Testing was substantially completed by December 31, 1998. In addition
to the systems being remediated, the customer service, fleet management and
equipment repair and maintenance system is scheduled for replacement in 1999.
The major business in the real estate segment, Transamerica Real Estate Tax
Service, and most of the other businesses in this segment had substantially
completed the remediation phase as of December 31, 1998. At December 31, 1998,
testing had commenced and the testing phase, including testing with numerous
governmental agencies, is expected to be substantially complete by September
1999.
The projected total cost associated with required modifications to become
ready for the Year 2000 is between $35 million and $40 million. These costs are
being expensed as incurred and funded through operations. At this time there can
be no assurance that these estimates will not be exceeded and actual results may
differ significantly from those projected. Some factors that may cause actual
expenditures to differ include the availability and cost of trained personnel
and the ability to locate and correct all relevant computer problems. This
estimate includes internal costs, but excludes the costs to upgrade and replace
systems in the normal course of business. The total amount expended on the
project through December 31, 1998, was $21 million. Transamerica does not expect
the project to have a significant effect on its financial condition or results
of operations.
Transamerica believes it will achieve Year 2000 readiness; however, the
size and complexity of our systems and the need for them to interface with other
systems internally and with those of customers, vendors, partners, governmental
agencies and other outside parties, creates the possibility that some of our
systems may experience Year 2000 problems. Specific factors that give rise to
this concern include a possible loss of qualified resources, failure to identify
and remediate all affected systems, noncompliance by third parties whose systems
and operations interface with Transamerica's systems and other similar
uncertainties. Transamerica is developing contingency plans to minimize any
possible disruptions.
Euro Conversion
Transamerica conducts business in a number of the European countries that
converted to a common currency, the "Euro," as of January 1, 1999. Transamerica
has evaluated the potential impact of the Euro conversion on our operations
including possible effects on our competitive position, potential information
technology and currency risks, our derivative and financial instrument exposure,
the continuity of contracts and changes in taxation. As a result of this
evaluation, we are in the process of upgrading those information systems
necessary to support transactions denominated in the Euro. Transamerica derived
revenues from the group of eleven countries converting to the Euro of $63.9
million and $41.2 million in the years ended December 31, 1998 and 1997, and had
total assets in these countries of $574.7 million at December 31, 1998.
Page 29
Transamerica does not anticipate that the Euro conversion will have a material
impact on its financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk
Market risk is the risk of loss that may occur when fluctuations in
interest and currency exchange rates and equity and commodity prices change the
value of a financial instrument. Because both derivative and nonderivative
financial instruments have market risk, our risk management extends beyond
derivatives to encompass all financial instruments we hold. Of the various types
of market risk, Transamerica is primarily exposed to interest rate risk and
equity price risk.
Interest Rate Risk
Transamerica's operations are subject to risk from interest rate
fluctuations when there is a difference between the amount of our interest
earning assets and the amount of our interest bearing liabilities that are
prepaid, mature or are repriced in specified periods. We manage our exposure to
interest rate fluctuations by managing the characteristics of our assets and
liabilities so that changes are offset. Our 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. To help
achieve these objectives, we use derivative financial instruments including
interest rate swaps, floors and swaptions that correlate to instruments recorded
on our balance sheet.
To understand the sensitivity of our assets to interest rate risk, consider
the following scenario. If market interest rates on December 31, 1998 and 1997
had abruptly increased 75 basis points, it would have the following effects on
the fair value of Transamerica's assets and liabilities: our investment
portfolio subject to interest rate risk would decrease about $1.3 billion and
$1.5 billion in value; our finance receivables portfolio would decline
approximately $33 million and $23 million; those insurance liabilities that are
defined as interest sensitive financial instruments would fall approximately
$640 million and $670 million; our debt would decrease approximately $110
million and $90 million; and our interest rate swaps, floors and swaptions would
decline approximately $180 million and $120 million. Conversely, if rates on
December 31, 1998 and 1997 had abruptly decreased 75 basis points, it would have
the following effects on the fair value of our assets and liabilities:
Transamerica's investment portfolio subject to interest rate risk would increase
about $1.4 billion and $1.5 billion; our finance receivables portfolio would
increase approximately $38 million and $23 million; our interest sensitive
insurance liabilities would increase approximately $720 million and $750
million; our debt would increase approximately $110 million and $90 million; and
our interest rate swaps, floors and swaptions would increase approximately $220
million and $190 million.
Although our assets appear to be more interest rate sensitive than our
liabilities, this is because much of our liability portfolio, such as
reinsurance contracts and whole life insurance policies, are not considered to
be interest rate sensitive financial instruments for purposes of this
disclosure. The change in fair value of these liabilities would mitigate to a
certain extent the effects of a rise in interest rates. We determined the
amounts used in this example by considering only the impact of the hypothetical
interest rate change. Also, these analyses do not consider the possible effects
of a change in economic activity that might occur in such an environment. In
addition, in the event of a change of such magnitude, we would likely take
action to mitigate our exposure to the negative consequences. Our customers and
competitors would also respond to these fluctuations, and regulators or
legislators might act in ways we cannot foresee. Because we cannot be certain
what specific actions would be taken and what their actual effects would be, the
sensitivity analysis above assumes no significant changes in Transamerica's
financial structure.
Equity Price Risk
Transamerica is exposed to equity price risk due to our investments in
equity securities. Changes in the level or volatility of equity prices affect
the value of our equity securities and instruments that derive their value from
a particular stock, a group of stocks or a stock index.
Page 30
If the market price of Transamerica's equity investment portfolio as of
December 31, 1998 and 1997 had abruptly increased or decreased by 10%, the
market value of our equity portfolio would have increased or decreased by $219
million and $161 million.
Page 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEET
December 31 1998 1997
(Amounts in millions)
Assets
Investments, principally of life insurance subsidiaries:
Fixed maturities $ 29,009.4 $ 29,210.8
Equity securities 2,187.9 1,607.5
Mortgage loans and real estate 790.7 750.2
Loans to life insurance policyholders 455.5 451.0
Short-term investments 1,212.6 336.0
----------- -----------
33,656.1 32,355.5
Finance receivables, of which $3,832.8 in 1998 and $2,726.9 in 1997
matures within one year 6,943.7 4,333.4
Less unearned fees of $521.2 in 1998 and $340.8 in 1997
and allowance for losses 645.3 430.1
----------- -----------
6,298.4 3,903.3
Cash and cash equivalents 159.5 132.9
Trade and other accounts receivable 2,254.2 2,165.8
Property and equipment, less accumulated depreciation
of $1,614.8 in 1998 and $1,465.9 in 1997
Land, buildings and equipment 489.1 395.4
Equipment held for lease 3,038.0 2,996.5
Deferred policy acquisition costs 2,094.7 2,102.6
Separate accounts assets 9,101.0 5,494.7
Goodwill, less accumulated amortization of $172.6 in 1998 and $156.2 in 1997 423.4 423.0
Assets held for sale 180.8 377.8
Other assets 807.4 825.4
----------- -----------
$ 58,502.6 $ 51,172.9
=========== ===========
<FN>
See notes to financial statements
</FN>
Page 32
CONSOLIDATED BALANCE SHEET (continued)
December 31 1998 1997
(Amounts in millions)
Liabilities and stockholders' equity
Life insurance policy liabilities $ 30,336.3 $ 30,141.9
Notes and loans payable, principally of finance subsidiaries, of which $1,924.8
in 1998 and $998.6 in 1997 matures within one year 8,197.9 6,235.3
Accounts payable and other liabilities 2,394.4 2,096.9
Income taxes, of which $1,981.4 in 1998 and $1,582.7 in 1997 is deferred 2,052.1 1,607.8
Separate account liabilities 9,101.0 5,494.7
Guaranteed preferred beneficial interest in Transamerica's junior subordinated debentures 715.0 715.0
Stockholders' equity:
Common stock ($1 par value):
Authorized-300,000,000 shares
Outstanding-124,490,670 in 1998 and 125,808,216 shares in 1997,
after deducting 34,986,254 and 33,668,708 shares in treasury in 1998 and 1997 124.5 125.8
Retained earnings 3,693.1 3,267.9
Components of other cumulative comprehensive income:
Net unrealized gain from investments marked to fair value 1,943.4 1,533.6
Foreign currency translation adjustments (55.1) (46.0)
----------- -----------
5,705.9 4,881.3
----------- -----------
$ 58,502.6 $ 51,172.9
=========== ===========
<FN>
See notes to financial statements
</FN>
Page 33
CONSOLIDATED STATEMENT OF INCOME
December 31 1998 1997 1996
(Amounts in millions except for per share data)
Revenues
Investment income $ 2,273.6 $ 2,191.4 $ 2,092.3
Life insurance premiums and related income 1,847.0 1,818.0 1,692.0
Finance charges and other fees 705.1 522.5 457.9
Leasing revenues 732.5 758.7 689.1
Real estate and tax service revenues 369.7 302.6 255.7
Gain on investment transactions 361.8 67.1 39.2
Other 138.9 66.2 85.5
------------ ------------ ------------
6,428.6 5,726.5 5,311.7
Expenses
Life insurance benefits 2,878.0 2,810.9 2,649.7
Life insurance underwriting, acquisition and other expenses 720.8 734.9 638.8
Leasing operating and maintenance costs 456.8 449.9 384.3
Interest and debt expense 429.1 420.9 396.5
Provision for losses on receivables 53.0 18.1 10.2
Other, including administrative and general expenses 827.7 630.0 570.6
------------ ------------ ------------
5,365.4 5,064.7 4,650.1
------------ ------------ ------------
1,063.2 661.8 661.6
Income taxes 356.2 129.8 160.1
------------ ------------ ------------
Income from continuing operations 707.0 532.0 501.5
Income (loss) from discontinued operations 261.8 (45.2)
------------ ------------ ------------
Net income $ 707.0 $ 793.8 $ 456.3
============ ============ ============
Earnings per share of common stock Basic:
Income from continuing operations $ 5.65 $ 4.06 $ 3.64
Income (loss) from discontinued operations 2.02 (0.34)
------------ ------------ ------------
Net income $ 5.65 $ 6.08 $ 3.30
============ ============ ============
Diluted:
Income from continuing operations $ 5.44 $ 3.93 $ 3.55
Income (loss) from discontinued operations 1.96 (0.33)
------------ ------------ ------------
Net income $ 5.44 $ 5.89 $ 3.22
============ ============ ============
<FN>
See notes to financial statements
</FN>
Page 34
CONSOLIDATED STATEMENT OF CASH FLOWS
December 31 1998 1997 1996
(Amounts in millions)
Operating activities
Income from continuing operations $ 707.0 $ 532.0 $ 501.5
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Increase in insurance related liabilities, excluding
policyholder balances on interest-sensitive policies 993.9 1,108.8 1,042.9
Amortization of policy acquisition costs 427.2 256.3 268.8
Policy acquisition costs deferred (524.8) (467.7) (388.0)
Depreciation and amortization 354.9 342.0 318.5
Other (77.4) (367.9) (329.3)
----------- ----------- -----------
Net cash provided by operating activities 1,880.8 1,403.5 1,414.4
Investing activities
Finance receivables originated (23,035.0) (16,136.9) (13,543.0)
Finance receivables collected 21,245.8 16,917.6 12,864.7
Purchase of investments (7,539.2) (10,609.4) (7,990.4)
Sales and maturities of investments 7,433.3 9,132.8 6,153.8
Purchase of finance receivables from Whirlpool Financial Corporation (386.3) (881.9)
Proceeds from the sale of and cash transactions with discontinued operations 14.9 4,413.2 1,021.8
Other (393.1) (363.4) (77.1)
----------- ----------- -----------
Net cash provided (used) by investing activities (2,659.6) 2,472.0 (1,570.2)
Financing activities
Proceeds from debt financing 4,285.2 3,370.5 6,852.4
Payments of notes and loans (2,339.9) (7,398.7) (7,204.6)
Receipts from interest-sensitive policies credited to
policyholder account balances 9,597.9 6,851.6 6,202.7
Return of policyholder balances on interest-sensitive policies (10,477.6) (6,411.2) (5,211.0)
Proceeds from sale of capital securities of affiliates 188.6 323.9
Redemption of preferred stock (318.8)
Treasury stock purchases (235.5) (443.5) (330.2)
Proceeds from issuance of common stock 100.4 108.3 45.6
Dividends (125.1) (130.3) (149.2)
----------- ----------- -----------
Net cash provided (used) by financing activities 805.4 (4,183.5) 529.6
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 26.6 (308.0) 373.8
Cash and cash equivalents at beginning of year 132.9 440.9 67.1
----------- ----------- -----------
Cash and cash equivalents at end of year $ 159.5 $ 132.9 $ 440.9
=========== =========== ===========
<FN>
See notes to financial statements
</FN>
Page 35
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated Other
Comprehensive Income
-----------------------
Net
Unrealized
Gain (Loss)
from
Investments Foreign
Additional Marked Currency
Preferred Common Paid-in Comprehensive Retained to Fair Translation
Stock Stock Capital Income Earnings Value Adjustments
======== ========== ======== ========== ========== ========== =======
(Amounts in millions)
Balance at December 31, 1995 $ 315.0 $ 136.0 $ 2,798.0 $ 1,079.9 $ (29.0)
Comprehensive income
Net income $ 456.3 456.3
Other comprehensive income, net of tax:
Unrealized losses from investments
marked to fair value (269.2) (269.2)
Reclassification adjustment for gains
included in net income (26.3) (26.3)
Foreign currency translation adjustments 1.0 1.0
----------
Comprehensive income $ 161.8
==========
Dividends declared on common stock (132.2)
Dividends declared on preferred stock (17.0)
Common stock issued 4.8 $ 155.9
Treasury stock purchased (8.8) (72.9) (250.9)
-------- ---------- -------- ---------- ---------- -------
Balance at December 31, 1996 315.0 132.0 83.0 2,854.2 784.4 (28.0)
Comprehensive income
Net income $ 793.8 793.8
Other comprehensive income, net of tax:
Unrealized gains from investments
marked to fair value 791.5 791.5
Reclassification adjustment for gains
included in net income (42.3) (42.3)
Foreign currency translation adjustments (18.0) (18.0)
----------
Comprehensive income $ 1,525.0
==========
Dividends declared on common stock (127.7)
Dividends declared on preferred stock (2.6)
Common stock issued 2.8 106.9
Treasury stock purchased (9.0) (186.1) (249.8)
Redemption of preferred stock (315.0) (3.8)
-------- ---------- -------- ---------- ---------- -------
Balance at December 31, 1997 125.8 3,267.9 1,533.6 (46.0)
Comprehensive income
Net income $ 707.0 $ 707.0
Other comprehensive income, net of tax:
Unrealized gains from investments
marked to fair value 641.0 641.0
Reclassification adjustment for gains
included in net income (231.2) (231.2)
Foreign currency translation adjustments (9.1) (9.1)
----------
Comprehensive income $ 1,107.7
==========
Dividends declared on common stock (125.1)
Common stock issued 2.7 97.7
Treasury stock purchased (4.0) (97.7) (156.7)
-------- ---------- -------- ---------- ---------- -------
Balance at December 31, 1998 $ $ 124.5 $ $ 3,693.1 $ 1,943.4 $ (55.1)
======== ========== ======== ========== ========== =======
<FN>
See notes to financial statements
</FN>
Page 36
Notes to Financial Statements--December 31, 1998.
A. SIGNIFICANT ACCOUNTING POLICIES
Business
Transamerica Corporation is a financial services organization which
engages, through its subsidiaries, in life insurance, commercial lending,
leasing and real estate services. The United States is the primary market for
the services offered by most of Transamerica's subsidiaries except for the
leasing business, which operates in the container leasing 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. Such amounts may
ultimately differ from those estimates.
Investments
Investments in fixed maturities, comprising bonds, notes and redeemable
preferred stocks, and investments in equity securities, comprising marketable
corporate common and nonredeemable preferred stocks, are carried at fair value.
Fair value for actively traded securities is based on quoted market prices. For
fixed maturity securities that are not actively traded, fair value is estimated
using information obtained from independent pricing services.
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. Cost for equity securities is based on
the original purchase price. For fixed maturities cost is adjusted for
amortization of any discount or premium.
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.
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
Page 37
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 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.
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 90 days.
Leasing revenues are recognized in the period earned. Transamerica's tax
service operation recognizes revenue as new contracts are received and defers a
portion of that revenue sufficient to cover the future service liability over
the average life of the loan portfolio serviced. The average life of the
portfolio is determined using historical data on the payment of loans serviced.
Effective January 1, 1999 Transamerica plans to adopt prospectively a new policy
of recognizing revenue. Although the exact method has not yet been determined,
we anticipate that the change will result in a reduction of revenue recorded in
the year a contract is executed, the effect of which will be offset by increased
recognition of deferred revenue in future years.
Derivatives
Transamerica uses derivative financial instruments to hedge some of its
interest rate and foreign exchange rate risks. 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 through stockholders' equity 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.
When an asset or liability which is hedged by a derivative contract is sold
or otherwise disposed of, the derivative contract is either reassigned to hedge
another asset or liability or closed out, and any gain or loss recognized.
Stock Based Compensation
Transamerica accounts for stock based compensation under the provisions of
Accounting Principles Board Opinion No. 25.
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Transamerica is required to adopt this statement as of
January 1, 2000. The effect on Transamerica's financial statements of adopting
this standard is uncertain at this time.
Stock Distribution
On January 15, 1999 Transamerica effected a two-for-one stock split in the
form of a special stock distribution to stockholders of record as of December
31, 1998. All share, per share, Common Stock, and stock option amounts herein
have been restated to reflect the effect of this split.
Page 38
B. FINANCIAL INSTRUMENTS
Guaranteed Preferred Beneficial Interests in Transamerica's Junior Subordinated
Debentures
In November 1997, an affiliate of Transamerica issued $190 million of
7.625% cumulative Capital Trust Pass-through Securities payable November 15,
2037. In November 1996, two affiliates of Transamerica issued $100 million of
7.80% and $225 million of 7.65% cumulative Capital Trust Pass-through Securities
payable December 1, 2026. The fair value of these obligations at December 31,
1998 was $544 million.
The $100 million, 7.80% issue may be redeemed in whole or in part, on or
after December 1, 2006.
In October 1994, an affiliate of Transamerica issued $200 million of 9.125%
cumulative Monthly Income Preferred Securities payable October 25, 2024. The
affiliate may redeem the outstanding Monthly Income Preferred Securities, in
whole or in part, on or after October 25, 1999. Dividends on the outstanding
Monthly Income Preferred Securities are cumulative and payable monthly in
arrears. The fair value of these obligations at December 31, 1998 was $205
million.
Transamerica has guaranteed 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 for each of the Capital Trust
Pass-through Securities issues and the Monthly Income Preferred Securities.
Dividends on the Capital Trust Pass-through Securities and Monthly Income
Preferred Securities are reported in the consolidated statement of income as a
component of other expense.
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, 1998 and 1997
were:
Carrying Estimated
Value Fair Value
(Amounts in millions)
December 31, 1998
Single and flexible premium deferred annuities $ 6,180.3 $ 5,828.9
Single premium immediate annuities 4,382.4 5,305.7
Guaranteed investment contracts 3,112.9 3,183.3
Other deposit contracts 4,616.1 4,624.0
----------- -----------
$ 18,291.7 $ 18,941.9
=========== ===========
December 31, 1997
Single and flexible premium deferred annuities $ 6,780.0 $ 6,261.7
Single premium immediate annuities 4,361.3 5,122.5
Guaranteed investment contracts 3,211.8 3,265.4
Other deposit contracts 4,944.9 4,992.9
----------- -----------
$ 19,298.0 $ 19,642.5
=========== ===========
Page 39
Notes and Loans Payable
The weighted average interest rate on short-term borrowings at December 31,
1998 and 1997 was 5.22% and 5.81%.
Assets with a net book value of $336.6 million at December 31, 1998, consisting primarily of land, buildings and equipment, are
collateral for certain of the below debt.
1998 1997
(Amounts in millions)
Transamerica Finance Corporation:
Short-term bank loans, commercial paper and current portion of long-term debt $ 1,924.5 $ 890.8
Long-term debt due subsequent to one year:
Notes and debentures; interest at 4.85% to 9.85%; maturing through 2028 2,731.2 2,510.6
Notes and debentures; interest at 13.8% to 14.77%;
maturity value of $582.8 million; maturing through 2012 194.9 182.4
Commercial paper and other notes at various interest rates
and terms supported by a credit agreement expiring in 2002 2,726.0 1,793.7
Subordinated notes and debentures; interest at 6.05% to 9.95%;
maturing through 2003 222.0 433.2
Loans due to parent company 214.5
---------- ----------
7,798.6 6,025.2
Parent Company and Other Subsidiaries:
Short-term bank loans, commercial paper and current portion of long-term debt 0.3 107.8
Long-term debt due subsequent to one year:
Notes and debentures, net of discounts; interest at 6.75% to 10%; maturing through 2020 316.5 316.8
Commercial paper and other notes at various interest rates
and terms supported by a credit agreement expiring in 2002 82.5
Loans to Transamerica Finance Corporation (214.5)
---------- ----------
399.3 210.1
---------- ----------
$ 8,197.9 $ 6,235.3
========== ==========
The aggregate annual maturities for the four years subsequent to December
31, 1999 are $0.6 billion in 2000, $1.4 billion in 2001, $3 billion in 2002 and
$0.4 billion in 2003.
Under a credit agreement with various banks, Transamerica and its
subsidiaries had the ability to borrow up to $3.5 billion with interest at
variable rates at December 31, 1998. There were no borrowings outstanding under
this credit line at that date. This credit agreement, which expires in 2002,
requires a fee on the commitment.
Transamerica and its subsidiaries use interest rate swap agreements to
hedge the interest rate sensitivity of a portion of outstanding indebtedness.
Interest payments, net of amounts received from interest rate swap
agreements, totaled $428.9 million in 1998, $548.8 million in 1997 and $705
million in 1996.
The estimated fair value of notes and loans payable, using rates currently
available for debt with similar terms and maturities, was $8.5 billion at
December 31, 1998 and $6.6 billion at December 31, 1997.
Concentration of Risk and Fair Value of Receivables
Transamerica's commercial lending operation engages in the extension of
credit to individuals and businesses through a variety of services. These
services include inventory financing, asset-based lending, retail financing,
accounts receivable financing and equipment finance and leasing. The majority of
these loans is secured by the assets being financed. The risk associated with
that credit is subject to economic, competitive and other influences. While a
Page 40
substantial portion of the risk is diversified, certain borrowers are
concentrated in one industry or geographic area.
The finance receivables portfolio represents lending arrangements with
approximately 470,000 customers. At December 31, 1998, the portfolio included 17
customers with individual balances in excess of $25 million. These accounts in
total represented 14% of total net finance receivables outstanding at December
31, 1998.
The estimated fair values of the fixed rate finance loans and long-term
variable rate 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 short-term variable rate loans, which
comprise the majority of the 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, 1998 and 1997 were:
Carrying Estimated
Value Fair Value
(Amounts in millions)
December 31, 1998
Fixed rate receivables $ 2,183.7 $ 2,252.6
Variable rate receivables 4,114.7 4,114.7
---------- ----------
$ 6,298.4 $ 6,367.3
========== ==========
December 31, 1997
Fixed rate receivables $ 1,248.0 $ 1,275.3
Variable rate receivables 2,655.3 2,660.5
---------- ----------
$ 3,903.3 $ 3,935.8
========== ==========
Investments
The cost and fair value of fixed maturities and equity securities at December 31, 1998 and 1997 were:
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
(Amounts in millions)
December 31, 1998
U.S. Treasury securities and obligations of
U.S. government authorities and agencies $ 298.1 $ 112.7 $ 410.8
Obligations of states and political subdivisions 259.2 25.5 284.7
Foreign governments 120.4 9.5 $ 7.8 122.1
Corporate securities 18,793.8 1,729.7 168.0 20,355.5
Mortgage-backed securities 2,988.7 304.1 3.3 3,289.5
Public utilities 3,952.7 426.3 2.3 4,376.7
Redeemable preferred stock 163.7 17.3 10.9 170.1
----------- ---------- -------- -----------
Total fixed maturities $ 26,576.6 $ 2,625.1 $ 192.3 $ 29,009.4
=========== ========== ======== ===========
Equity securities $ 605.7 $ 1,597.4 $ 15.2 $ 2,187.9
=========== ========== ======== ===========
Page 41
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
December 31, 1997
U.S. Treasury securities and obligations of
U.S. government authorities and agencies $ 274.5 $ 78.4 $ 352.9
Obligations of states and political subdivisions 243.6 19.0 262.6
Foreign governments 139.7 9.1 $ 1.8 147.0
Corporate securities 18,420.5 1,475.0 58.2 19,837.3
Mortgage-backed securities 3,798.1 342.8 2.0 4,138.9
Public utilities 4,018.8 340.6 0.8 4,358.6
Redeemable preferred stock 95.2 28.0 9.7 113.5
----------- ---------- -------- -----------
Total fixed maturities $ 26,990.4 $ 2,292.9 $ 72.5 $ 29,210.8
=========== ========== ======== ===========
Equity securities $ 642.7 $ 980.6 $ 15.8 $ 1,607.5
=========== ========== ======== ===========
The cost and fair value of fixed maturities at December 31, 1998 by
contractual maturity, were:
Cost Fair Value
(Amounts in millions)
Due in one year or less $ 838.1 $ 846.2
Due after one year through five years 3,521.1 3,684.5
Due after five years through ten years 6,180.9 6,565.4
Due after ten years 13,047.8 14,623.8
----------- -----------
23,587.9 25,719.9
Mortgage-backed securities 2,988.7 3,289.5
----------- -----------
$ 26,576.6 $ 29,009.4
=========== ===========
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.
The carrying values and estimated fair values of investments in mortgage
loans on real estate and loans to life insurance policyholders at December 31,
1998 and 1997 were:
Carrying Estimated
Value Fair Value
(Amounts in millions)
December 31, 1998
Mortgage loans on real estate $ 718.6 $ 870.4
======== ========
Loans to life insurance policyholders $ 455.5 $ 432.9
======== ========
December 31, 1997
Mortgage loans on real estate $ 684.3 $ 774.6
======== ========
Loans to life insurance policyholders $ 451.0 $ 427.9
======== ========
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,
comprised:
1998 1997 1996
(Amounts in millions)
Net gain on sale of investments $ 567.6 $ 75.7 $ 81.9
Provision for impairment in value (47.8) (17.5) (9.1)
Amortization of deferred policy
acquisition costs (158.0) 8.9 (33.6)
-------- ------- -------
$ 361.8 $ 67.1 $ 39.2
======== ======= =======
Proceeds from sales of fixed maturities and equity securities were $7.3
billion in 1998, $9.1 billion in 1997 and $5.9 billion in 1996. Gross gains of
$622.8 million in 1998, $198.2 million in 1997 and $119.8 million in 1996, and
Page 42
gross losses of $61.2 million in 1998, $126 million in 1997 and $41.3 million in
1996 were realized on those sales.
Transamerica and its subsidiaries use interest rate exchange and other
agreements to hedge the interest rate sensitivity of a portion of its fixed
maturity investments.
The net unrealized gain included in stockholders' equity as a result of
marking the fixed maturities and equity securities to fair value at December 31,
1998 and 1997 were:
1998 1997
(Amounts in millions)
Net unrealized gain on fixed maturities $ 2,302.1 $ 2,143.0
Net unrealized gain on equity securities 1,582.2 964.8
Net unrealized gain on derivative instruments which
hedge a portion of investments in fixed maturities 130.7 77.4
Adjustment to deferred policy acquisition costs (633.8) (546.1)
Adjustment to life insurance policy liabilities (391.3) (281.0)
Deferred income taxes (1,046.5) (825.8)
Other assets 1.3
---------- ----------
$ 1,943.4 $ 1,533.6
========== ==========
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). 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, the
likelihood of nonperformance is considered low due to the high credit rating of
the counterparties. At December 31, 1998 and 1997, all of 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. Transamerica purchases 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. Interest
rate swap agreements are intended to help Transamerica more closely match the
cash flow received from its assets to the payments on its liabilities, and
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, 1998 and 1997, the unamortized cost of the instruments that
hedge assets was $83.6 million and $73 million, and the fair value of these
asset hedges comprised gross obligations to counterparties of $26.6 million and
$19 million and gross benefits from counterparties of $240.9 million and $169.4
million. The net unrealized gain (loss) on derivative contracts that hedge
assets is included in stockholders' equity. At December 31, 1998 and 1997 the
net after tax unrealized gain included in stockholders' equity from marking
asset hedges to fair value was $85 million and $50.3 million.
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, 1998 and 1997 were gross
obligations of $5.8 million and $6.3 million and gross benefits of $123.2
million and $68.6 million resulting in net benefits from counterparties of
$117.4 million and $62.3 million.
Page 43
At December 31, 1998 and 1997 derivative hedges comprised:
Weighted Weighted
Notional Avg. Fixed Avg. Floating
Asset Hedges Amount Interest Rate Interest Rate
1998 (Dollar amounts in millions)
Interest rate swap agreements -Transamerica receives:
Floating rate interest income, pays fixed rate interest expense $ 471.9 5.6% 6.0%
Fixed rate interest income, pays floating rate interest expense $ 325.0 6.5% 5.4%
Floating rate interest income based on one index (5.87%) and pays
floating rate interest expense based on another index (4.91%) $ 147.6
Interest rate floor agreements $ 560.5 6.5%
Swaptions $ 8,370.0 4.3%
S&P call options $ 35.6
Cross currency swaps and foreign interest rate swaps $ 106.1
1997
Interest rate swap agreements -Transamerica receives:
Floating rate interest income, pays fixed rate interest expense $ 366.4 6.0% 5.9%
Fixed rate interest income, pays floating rate interest expense $ 275.0 6.5% 5.9%
Floating rate interest income based on one index (5.86%) and pays
floating rate interest expense based on another index (4.23%) $ 324.2
Interest rate floor agreements $ 560.5 6.5%
Swaptions $ 8,401.0 4.3%
S&P call options $ 28.8
Cross currency swaps and foreign interest rate swaps $ 62.7
Liability Hedges
1998
Interest rate swap agreements - Transamerica pays:
Floating rate interest expense, receives fixed rate interest income $ 3,987.2 5.5% 5.4%
Fixed rate interest expense, receives floating rate interest income $ 450.5 5.2% 5.5%
Floating rate interest expense based on one index (5.29%) and receives
floating rate interest income based on another index (4.93%) $ 362.7
Swaptions $ 100.0 7.4%
Cross currency swaps and foreign interest rate swaps $ 28.6
1997
Interest rate swap agreements - Transamerica pays:
Floating rate interest expense, receives fixed rate interest income $ 3,452.2 6.3% 5.8%
Fixed rate interest expense, receives floating rate interest income $ 80.5 6.2% 5.8%
Floating rate interest expense based on one index (5.91%) and receives
floating rate interest income based on another index (5.80%) $ 289.0
Swaptions $ 150.0 7.0%
Cross currency swaps and foreign interest rate swaps $ 76.0
C. BUSINESS SEGMENT INFORMATION
Business segment data, as required by Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, for each of the years in the three year period ended December 31,
1998 included in the tables in Item 7 are an integral part of these financial
statements.
Page 44
1998 1997 1996
(Amounts in millions)
Revenues
Life insurance $ 4,367.5 $ 4,029.4 $ 3,793.6
Commercial lending 712.8 515.5 432.8
Leasing 816.5 797.8 765.6
Real estate services 550.7 416.0 356.9
Other (18.9) (32.2) (37.2)
----------- ----------- -----------
$ 6,428.6 $ 5,726.5 $ 5,311.7
=========== =========== ===========
Assets
Life insurance $ 46,185.9 $ 41,387.3 $ 36,482.0
Commercial lending 6,495.4 4,613.2 4,023.5
Leasing 4,108.1 3,929.4 3,928.5
Real estate services 2,336.7 1,734.3 1,531.5
Other (1) (623.5) (491.3) 3,965.7
----------- ----------- -----------
$ 58,502.6 $ 51,172.9 $ 49,931.2
=========== =========== ===========
- ----------
(1) In 1997 Transamerica sold its branch-based consumer lending operation. At
December 31, 1996 net assets of discontinued operations were $4,326.2
million.
D. INCOME TAXES
The provision (benefit) for income taxes on income from continuing
operations comprised:
1998 1997 1996
(Amounts in millions)
Federal current $ 103.2 $ (52.2) $ 24.8
Federal deferred 227.5 153.9 111.0
State 10.1 1.7 9.1
Foreign 15.4 26.4 15.2
-------- -------- --------
$ 356.2 $ 129.8 $ 160.1
======== ======== ========
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, 1998 and 1997 were:
1998 1997
(Amounts in millions)
Deferred tax assets:
Allowance for losses $ 40.9 $ 36.2
Impairment of investments 36.7 33.1
Life insurance policy liabilities 520.8 614.2
Accrued expenses 127.0 161.6
Loss and tax credit carryforward 63.3
Other 63.6 27.3
---------- ----------
852.3 872.4
Deferred tax liabilities:
Deferred policy acquisition costs 807.2 783.7
Accelerated depreciation 700.9 674.7
Unrealized gain on marking
investments to fair value 1,046.5 825.8
Discount amortization on notes
and loans payable 96.6 76.9
Direct finance and sales type leases 92.9 50.1
Other 89.6 43.9
---------- ----------
2,833.7 2,455.1
---------- ----------
Net deferred tax liability $ 1,981.4 $ 1,582.7
========== ==========
Page 45
The difference between federal income taxes on income from continuing
operations computed at the statutory rate and the provision for income taxes
was:
1998 1997 1996
(Amounts in millions)
Federal income taxes at statutory rate $ 372.1 $ 231.6 $ 231.6
Prior year items (6.5) (80.2) (63.8)
Tax credits (26.7) (22.9) (20.8)
Other 17.3 1.3 13.1
-------- -------- --------
$ 356.2 $ 129.8 $ 160.1
======== ======== ========
Income tax payments totaled $37.5 million in 1998, $3.1 million in 1997 and
$97.5 million in 1996. Pretax income from foreign operations was $63.1 million
in 1998, $66.4 million in 1997 and $36.9 million in 1996.
E. COMPREHENSIVE INCOME
The components of other comprehensive income in the statement of stockholders' equity are shown net of the following tax
provision (benefit):
1998 1997 1996
Income tax effect on components of other comprehensive income: (Amounts in millions)
Unrealized holding gains (losses) from investments marked to fair value $ 345.2 $ 426.2 $ (145.0)
Reclassification adjustment for (gains) losses included in net income (124.5) (22.8) (14.1)
Foreign currency translation adjustments (4.9) (9.7) 0.5
-------- -------- --------
Income tax effect on other comprehensive income: $ 215.8 $ 393.7 $ (158.6)
======== ======== ========
F. CALCULATION OF EARNINGS PER SHARE OF COMMON STOCK
1998 1997 1996
Per-Share Per-Share Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
(Amounts in millions except for per share data)
Income from continuing operations $ 707.0 $ 532.0 $ 501.5
Preferred dividends (2.6) (17.0)
Preferred stock purchase premium (3.8)
-------- ------- --------
BASIC EPS
Income from continuing operations
available to common stockholders 707.0 125.2 $ 5.65 525.6 129.4 $ 4.06 484.5 133.2 $ 3.64
Dilutive effects of stock options 4.7 (0.21) 4.2 (0.13) 3.3 (0.09)
-------- ----- ------- ------- ----- ------ -------- ----- ------
DILUTED EPS
Income from continuing operations
available to common stockholders $ 707.0 129.9 $ 5.44 $ 525.6 133.6 $ 3.93 $ 484.5 136.5 $ 3.55
======== ===== ======= ======= ===== ====== ======== ===== ======
G. CAPITAL STOCK
At December 31, 1998, 1,200,000 shares of preferred stock ($100 par value)
and 5,000,000 shares of preference stock (without par value) were authorized but
unissued.
At December 31, 1996 Transamerica had 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. In
December 1996, Transamerica announced the redemption of all of the outstanding
DARTS. The redemption was completed in February 1997.
Page 46
Transamerica also had outstanding 3,601,827 depositary shares at December
31, 1996, each of which represented a 1/20 interest in a share of Series D
Preferred Stock ($100 par value, $500 liquidation preference). In February 1997,
Transamerica completed the redemption of all its Series D Preferred Stock.
In October 1996, Transamerica acquired Trans Ocean Ltd. in exchange for
approximately 3.2 million shares ($112.7 million) of Transamerica common stock.
H. 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, 1998 approximately $4.6 billion is so restricted, and
$0.7 billion is free for remittance to Transamerica subject to investment and
operating requirements.
I. STOCK OPTIONS
Transamerica has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for stock-based compensation because, as discussed
below, the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options.
At December 31, 1998, under Transamerica's stock option plans, 31,660,604
shares of common stock (34,332,104 shares at December 31, 1997) were reserved
principally for sale to key employees of the Corporation and subsidiaries.
Except as noted below for the 1995 Performance Stock Option Plan and a portion
of the January 1999 grant, all options granted have 10 year terms and vest and
become exercisable ratably over four years. Options were exercised for 2,671,900
shares in 1998, 2,864,820 shares in 1997 and 1,557,596 shares in 1996, at
aggregate option prices of $67.8 million, $59.9 million and $31 million. In
January 1999, Transamerica's board of directors approved 2,319,900 options for
grant at an option price equal to market value on the date granted and options
priced above fair market value on the date of grant of 20,000 with an exercise
price of $62.50 and 30,000 with an exercise price of $75.
In April 1995, the stockholders approved the 1995 Performance Stock Option
Plan and in April 1998, approved an amendment to it, and under the terms of the
Plan, Transamerica has made premium-priced grants of nonqualified stock options
totaling 12.2 million shares. Transamerica's share price on the date of the
initial grant was $25.38. Options for 2,050,000 shares were granted at an
exercise price of $30 per share, which vest ratably on the third, fourth and
fifth anniversaries of the date of grant. Options for 2,650,000 shares were
granted with an exercise price of $41 per share all of which vested in 1997, and
options for 5,300,000 shares were granted with an exercise price of $50 per
share, of which 4,800,000 vested in 1997 resulting in compensation expense of
$4.9 million after tax. In 1998, options for 210,000 shares were granted at an
exercise price of $62.50 per share. These premium-priced options vest annually
in three equal instalments beginning on the third anniversary of the date of
grant and have terms ending ten years from the date of grant. Also in 1998,
options for 2,890,000 shares were granted with an exercise price of $75.00 per
share. These options will become exercisable only if (i) the reported closing
price of Transamerica's common stock is at least $75.00 per share on ten days
within any period of 30 consecutive trading days ending on or before the fifth
anniversary of the date of grant and (ii) by or after the time the preceding
condition is met, but no later than the tenth anniversary of the date of grant,
Transamerica's total return to stockholders is at or above the median
stockholder return for the S&P Financial Index excluding banks and savings and
loan institutions. If these options become exercisable, they will have terms
ending ten years from the date of grant. Options for 460,000 shares in 1997, and
160,000 shares in 1996 were cancelled due to forfeiture. Forfeited options may
be reissued.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires the information be determined as
if Transamerica had accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996: risk-free interest rate of 5.20%, 6.31% and 5.14%; dividend
yields of 1.8%, 2.3% and 2.6%; volatility factors of the expected market price
of Transamerica's common stock of 0.198, 0.185 and 0.175; and a weighted-average
expected option life of four years.
Page 47
In management's opinion, existing stock option valuation models do not
provide an entirely reliable measure of the fair value of nontransferable
employee stock options with vesting provisions.
The following table presents pro forma disclosures as if the estimated fair value of the options is recognized ratably in
income from continuing operations over the options' vesting period.
1998 1997 1996
(Amounts in millions except per share data)
Pro forma income from continuing operations (1) $ 696.8 $ 527.5 $ 496.5
Pro forma basic earnings per share from continuing operations (1) $ 5.57 $ 4.03 $ 3.60
Pro forma diluted earnings per share from continuing operations (1) $ 5.36 $ 3.90 $ 3.51
<FN>
- -------
(1) As Statement 123 is applicable to options granted subsequent to December 31, 1994, the full effect of its implementation was
not reflected in pro forma disclosures until 1998.
</FN>
Transamerica's stock option activity and related information for the years ended December 31 follow:
1998 1997 1996
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000's) Price (000's) Price (000's) Price
Outstanding-beginning of year 23,140 $ 35.85 24,014 $ 33.33 23,232 $ 31.84
Granted 7,702 66.45 3,168 43.75 3,270 38.89
Exercised (2,672) 25.37 (2,864) 20.91 (1,556) 20.46
Forfeited (1,203) 48.82 (1,178) 41.99 (932) 37.17
------ ------ ----
Outstanding-end of year 26,967 $ 45.04 23,140 $ 35.85 24,014 $ 33.33
Exercisable-end of year 15,387 $ 37.07 15,136 $ 35.59 8,002 $ 21.83
Weighted average fair value of an option
granted during the year, excluding the
Performance Stock Option Plan $ 9.41 $ 8.80 $ 6.37
Weighted average fair value of an option
granted during the year under the
Performance Stock Option Plan $ 5.90 $ 7.21 $ 3.46
Outstanding and exercisable options at December 31, 1998:
Options Outstanding Options Exercisable
---------------------------------------------------------------------- --------------------------------
Weighted Avg Number
Range of Remaining Weighted Avg Outstanding Weighted Avg Number
Exercise Contractual Life Exercise at 12/31/98 Exercise Exercisable
Prices (Years) Price (000's) Price (000's)
------- ------- ----- ------- ----- -------
$17-$21 2.6 $19.82 1,455 $19.82 1,455
$22-$28 5.2 25.62 4,427 25.48 4,075
$29-$38 6.7 34.22 3,970 34.78 1,778
$39-$75 8.2 54.71 17,115 46.53 8,079
------ ------
26,967 15,387
====== ======
J. PENSION PLANS
Transamerica Corporation and its subsidiaries have a number of
noncontributory defined benefit pension plans covering most salaried employees.
Page 48
A summary of the components of net periodic pension cost (benefit) follows:
1998 1997 1996
(Amounts in millions)
Service cost-benefits earned during the period $ 17.4 $ 16.7 $ 16.7
Interest cost on projected benefit obligation 56.3 52.7 51.6
Actual return on plan assets (345.8) (305.7) (164.9)
Deferral of current gains varying from expected return 254.6 228.3 97.4
Net amortization and deferrals (15.8) (10.3) (0.6)
-------- -------- --------
Total pension cost (benefit) $ (33.3) $ (18.3) $ 0.2
======== ======== ========
The following table sets forth the amounts recognized in the consolidated statement of financial position for the pension
plans:
1998 1997
Change in benefit obligation: (Amounts in millions)
Projected benefit obligation, including effects of
future salary increases, at beginning of year $ 823.1 $ 779.1
Service cost 17.4 16.7
Interest cost 56.3 52.7
Actuarial loss, principally reduced discount rate in 1998 129.4 8.5
Benefits paid (43.9) (33.9)
---------- ----------
Projected benefit obligation, including effects of
future salary increases, at end of year (1) 982.3 823.1
========== ==========
Change in plan assets:
Plan assets at fair value at beginning of year 1,393.3 1,119.4
Actual return on plan assets 345.8 305.7
Asset transfer (7.8)
Employer contribution 2.2 2.1
Benefits paid (35.2) (33.9)
---------- ----------
Plan assets at fair value at end of year 1,698.3 1,393.3
---------- ----------
The excess of plan assets over projected benefit obligations $ 716.0 $ 570.2
========== ==========
The excess of plan assets over projected benefit obligation comprises:
Net pension asset (liability) $ 27.6 $ (6.4)
Unrecognized net gain 661.8 582.7
Unrecognized prior service cost (9.5) (13.2)
Adjustment required to recognize minimum liability 36.1 7.1
-------- --------
$ 716.0 $ 570.2
======== ========
- ----------
(1) 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 discount rate of 6%
at December 31, 1998 and 7% at December 31, 1997 and an assumed rate of
compensation increase of 5.5% for 1998 and 1997. The expected long-term rate of
return on plan assets was 7.75% and 8.25% at December 31, 1998 and 1997. During
1997, the company recognized a curtailment gain of $18.8 million as a result of
the sale of its branch-based consumer lending operation. The projected benefit
obligation and plan assets at fair value included above for Transamerica's under
funded pension plans were $87.3 million and $14 million as of December 31, 1998
and $59 million and $14.1 million at December 31, 1997.
K. COMMITMENTS AND CONTINGENCIES
In connection with the 1993 sale of Transamerica Insurance Group, 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
Page 49
liquidation of the business. Transamerica has collateralized the estimated
ultimate obligation of approximately $203.5 million at December 31, 1998 by
providing letters of credit aggregating $135 million and by placing certain
assets in a trust. At December 31, 1998, the fair value of the assets in the
trust was $152.5 million. 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.
Proceedings seeking rescission of reinsurance contracts in connection with
business in the personal accident market in London are currently underway. The
ultimate effect on the company is unknown.
Substantially all leases of Transamerica and its subsidiaries are operating
leases principally for the rental of real estate. Total rental expense amounted
to $103.6 million in 1998, $108.2 million in 1997 and $57 million in 1996.
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 subsidiaries.
L. DISCONTINUED OPERATIONS
On June 23, 1997, Transamerica sold its branch-based consumer lending
operation. Gross proceeds from the sale were $3.9 billion, or $1.1 billion after
repayment of associated debt. In December 1997, Transamerica decided to exit the
consumer lending business entirely.
The following results of the discontinued consumer lending business were
included in income (loss) from discontinued operations:
1997 1996
(Amounts in millions)
Revenues $ 290.4 $ 759.9
Gain on sale of branch based consumer lending operation 469.0
-------- --------
Total revenues 759.4 759.9
Expenses 310.3 836.4
-------- --------
Income (loss) before taxes 449.1 (76.5)
Income tax provision (benefit) 187.3 (31.3)
-------- --------
Income (loss) from discontinued operations $ 261.8 $ (45.2)
======== ========
M. SUBSEQUENT EVENT (Unaudited)
On February 18, 1999, Transamerica announced that it had signed a merger
agreement with AEGON N.V. (AEGON) providing for AEGON's acquisition of all of
Transamerica's outstanding common stock for a combination of cash and AEGON
stock worth $9.7 billion. The merger is expected to close during the summer of
1999.
Page 50
SUPPLEMENTAL FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (adjusted for 2 for 1 stock split)
1998 March 31 June 30 September 30 December 31 1998 Total
(Dollar amounts in millions except for share data)
Revenues $ 1,558.9 $ 1,543.4 $ 1,489.7 $ 1,836.6 $ 6,428.6
=========== =========== =========== =========== ===========
Income from continuing operations
before investment transactions $ 99.0 $ 124.3 $ 123.0 $ 125.7 $ 472.0
Investment transactions 54.7 28.1 1.1 151.1 235.0
----------- ----------- ----------- ----------- -----------
Income from continuing operations
and net income $ 153.7 $ 152.4 $ 124.1 $ 276.8 $ 707.0
=========== =========== =========== =========== ===========
Earnings per share of common stock:
Basic:
Income from continuing operations
before investment transactions $ 0.79 $ 0.99 $ 0.98 $ 1.01 $ 3.77
Investment transactions 0.43 0.22 0.01 1.21 1.88
----------- ----------- ----------- ----------- -----------
Income from continuing operations
and net income $ 1.22 $ 1.21 $ 0.99 $ 2.22 $ 5.65
=========== =========== =========== =========== ===========
Diluted:
Income from continuing operations
before investment transactions $ 0.76 $ 0.95 $ 0.95 $ 0.98 $ 3.63
Investment transactions 0.41 0.22 0.01 1.17 1.81
----------- ----------- ----------- ----------- -----------
Income from continuing operations
and net income $ 1.17 $ 1.17 $ 0.96 $ 2.15 $ 5.44
=========== =========== =========== =========== ===========
1997 March 31 June 30 September 30 December 31 1997 Total
Revenues $ 1,372.0 $ 1,432.1 $ 1,423.4 $ 1,499.0 $ 5,726.5
=========== =========== =========== =========== ===========
Income from continuing operations
before investment transactions $ 75.7 $ 108.9 $ 156.6 $ 147.5 $ 488.7
Investment transactions 5.3 4.0 (7.7) 41.7 43.3
----------- ----------- ----------- ----------- -----------
Income from continuing operations 81.0 112.9 148.9 189.2 532.0
Income (loss) from
discontinued operations 275.0 1.1 (14.3) 261.8
----------- ----------- ----------- ----------- -----------
Net income $ 81.0 $ 387.9 $ 150.0 $ 174.9 $ 793.8
=========== =========== =========== =========== ===========
Earnings per share of common stock:
Basic:
Income from continuing operations
before investment transactions $ 0.52 $ 0.82 $ 1.24 $ 1.17 $ 3.73
Investment transactions 0.04 0.03 (0.06) 0.33 0.33
----------- ----------- ----------- ----------- -----------
Income from continuing operations 0.56 0.85 1.18 1.50 4.06
Income (loss) from
discontinued operations 2.07 0.01 (0.11) 2.02
----------- ----------- ----------- ----------- -----------
Net income $ 0.56 $ 2.92 $ 1.19 $ 1.39 $ 6.08
=========== =========== =========== =========== ===========
Diluted:
Income from continuing operations
before investment transactions $ 0.51 $ 0.80 $ 1.20 $ 1.13 $ 3.61
Investment transactions 0.04 0.03 (0.06) 0.32 0.32
----------- ----------- ----------- ----------- -----------
Income from continuing operations 0.55 0.83 1.14 1.45 3.93
Income (loss) from
discontinued operations 2.01 0.01 (0.11) 1.96
----------- ----------- ----------- ----------- -----------
Net income $ 0.55 $ 2.84 $ 1.15 $ 1.34 $ 5.89
=========== =========== =========== =========== ===========
<FN>
- ----------
(1) On March 5, 1999 the closing sales price for Transamerica common shares was $73.
</FN>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Page 51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of the Corporation are listed below.
SAMUEL L. GINN, 61, Director since 1989.
Chairman of the Board, Chief Executive Officer and a director of AirTouch
Communications, Inc., a worldwide wireless telecommunications company, since
December 1993. He was Chairman of the Board, President, Chief Executive Officer
and a director of Pacific Telesis Group, a diversified telecommunications
company, from 1988 to 1994. He also serves as a director of Chevron Corporation
and Hewlett-Packard Company.
FRANK C. HERRINGER, 56, Director since 1986.
Chairman of the Board, Chief Executive Officer and President of the Corporation.
He has been Chairman since January 1996, Chief Executive Officer since 1991 and
President since 1986. He also serves as a director of The Charles Schwab
Corporation and Unocal Corporation.
ROBERT W. MATSCHULLAT, 51, Director since 1996.
Vice Chairman of the Board, Chief Financial Officer and a director of The
Seagram Company Ltd., a beverage and entertainment/communications company, since
1995. He was a managing director, and head of worldwide investment banking, at
Morgan Stanley & Co., Inc. from 1991 to 1995. He also serves as a director of
USA Networks, Inc.
GORDON E. MOORE, 70, Director since 1981.
Chairman Emeritus of the Board and a director of Intel Corporation, a
semiconductor manufacturing company. He was Chairman of the Board of Intel
Corporation from 1979 until May 1997. He also serves as a director of Gilead
Sciences, Inc.
TONI REMBE, 62, Director since 1995.
Partner at Pillsbury Madison & Sutro LLP, a law firm. She also serves as a
director of Potlatch Corporation and SBC Communications Inc.
CONDOLEEZZA RICE, 44, Director since 1991.
Vice President and Provost of Stanford University since 1993. She is Professor
of Political Science at Stanford and has been a member of the Stanford faculty
since 1981. She also serves as a director of Chevron Corporation.
CHARLES R. SCHWAB, 61, Director since 1989
Chairman of the Board, Co-Chief Executive Officer and a director of The Charles
Schwab Corporation, a discount brokerage firm. He also serves as a director of
AirTouch Communications, Inc., The Gap, Inc. and Siebel Systems, Inc.
FORREST N. SHUMWAY, 71, Director since 1973
Retired Vice Chairman of the Board of Allied-Signal Inc., a multi-industry
company.
PETER V. UEBERROTH, 61, Director since 1984
Managing Director of The Contrarian Group, Inc., a business management company,
since 1989. He also serves as Chairman of the Board of Ambassadors
International, Inc. and as a director of CB Richard Ellis Services, Inc., The
Coca-Cola Company and Promus Hotel Corporation.
Page 52
The officers of the Corporation are listed below. Executive officers are designated by an asterisk.
Name Position Age Name Position Age
- ---- -------- --- ---- -------- ---
Frank C. Herringer*..... Chairman of the Board, 56 Burton E. Broome*.... Vice President and 63
President and Chief Controller
Executive Officer Patricia Clarey...... Vice President-- 45
Thomas J. Cusack* ..... Executive Vice President 43 Public Affairs
Edgar H. Grubb* ........ Executive Vice President 59 James B. Dox ........ Vice President--Taxes 59
and Chief Financial James F. McArdle .... Vice President-- 35
Officer Investor Relations
Robert A. Watson* ..... Executive Vice President 53 William H. McClave .. Vice President-- 55
Shirley H. Buccieri*... Senior Vice President, 47 Corporate
General Counsel and Communications
Secretary John Morrissey....... Vice President and 41
Richard N. Latzer*...... Senior Vice President 62 General Auditor
and Chief Investment Rona Pehrson ........ Vice President-- 51
Officer Human Resources
Richard H. Fearon*..... Senior Vice President-- 43 Philip Rice*......... Vice President 40
Corporate Development and Treasurer
Nancy C. Bonner ....... Vice President-- 46 George B. Sundby .... Vice President--Financial 47
Executive Development Planning and Analysis
Maureen Breakiron- Vice President--Control 44 and Assistant Controller
Evans* .............. and Services Judith M. Tornese ... Vice President--Risk 56
Management
Page 53
Mr. Herringer was elected Chairman of the Board of the Corporation
effective January 1, 1996. He has been Chief Executive Officer of the
Corporation since 1991 and President since 1986.
Mr. Cusack was elected Executive Vice President of the Corporation in 1995.
He was Senior Vice President of the Corporation from 1993 to 1995.
Mr. Grubb was elected Executive Vice President and Chief Financial Officer
of the Corporation in 1993.
Mr. Watson was elected Executive Vice President of the Corporation in 1995.
He was with Westinghouse Electric Corporation from 1992 to 1995 where he served
as an Executive Vice President and as Chairman and Chief Executive Officer of
Westinghouse's financial services division.
Ms. Buccieri was elected Senior Vice President, General Counsel and
Secretary of the Corporation in 1995. She was with Gibson, Dunn & Crutcher from
1983 to 1995 and served as a Partner from 1991 to 1995.
Mr. Latzer was elected Senior Vice President and Chief Investment Officer
of the Corporation in 1988.
Mr. Fearon was elected Senior Vice President--Corporate Development of the
Corporation in 1997. He was Vice President--Corporate Development in 1995 and
1996. He was General Manager of Corporate Development and Vice Chairman of
NatSteel Chemicals from 1990 to 1995.
Ms. Bonner was elected Vice President--Executive Development of the
Corporation in 1996. She was Vice President of Executive Development of Banc One
from 1991 to 1996.
Ms. Breakiron-Evans was elected Vice President--Control and Services of the
Corporation in 1997. From 1994 to 1997 she served as Vice President and General
Auditor of the Corporation. She was with Arthur Andersen LLP from 1980 to 1994.
Mr. Broome was elected Vice President and Controller of the Corporation in
1979.
Ms. Clarey was elected Vice President--Public Affairs of the Corporation in
1998. She previously served as deputy chief of staff for California Governor
Pete Wilson from 1991 to 1998.
Mr. Dox was elected Vice President--Taxes of the Corporation in 1993.
Mr. McArdle was elected Vice President--Investor Relations of the
Corporation in 1997. He held a number of positions within the commercial lending
operation between 1991 and 1997, most recently serving as group vice president
of the distribution finance unit.
Mr. McClave was elected Vice President--Corporate Communications of the
Corporation in 1981.
Mr. Morrissey was elected Vice President and General Auditor of the
Corporation in 1997. He was with PricewaterhouseCoopers LLP from 1979 to 1997.
Ms. Pehrson was elected Vice President--Human Resources of the Corporation
in 1989.
Mr. Rice was elected Vice President and Treasurer of the Corporation in
1998. He was with Atlas-Pleiades Partners from 1997 to 1998, executive director
of SBC Warburgs west coast office from 1994 to 1997 and Goldman Sachs from 1993
to 1994.
Mr. Sundby was elected Vice President--Financial Planning and Analysis of
the Corporation in 1995. He was Assistant Controller and Director of Accounting
of the Corporation from 1989 to 1995. He continues to serve as Assistant
Controller.
Ms. Tornese was elected Vice President--Risk Management of the Corporation
in 1987.
Page 54
There is no family relationship among any of the foregoing officers or
between any of the foregoing officers and any director of the Corporation.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers, and persons who own more than 10 percent of our common
stock, to file periodic ownership reports with the Securities and Exchange
Commission. We believe, based solely on our review of the reporting forms that
we have received or written representations that no reports were required to be
filed that for 1998 all such filing requirements were satisfied.
ITEM 11. EXECUTIVE COMPENSATION
The following tables contain compensation information for Transamerica's
Chief Executive Officer and the next four most highly compensated executive
officers.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
------------------- ------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation (1)
- --------------------------- ------ ------ ------- ------- ----------------
Frank C. Herringer 1998 $ 975,000 $1,443,780 1,290,000 $ 152,764
Chairman, President and 1997 975,000 975,000 0 128,873
Chief Executive Officer 1996 975,000 756,132 0 125,513
Robert A. Watson 1998 $ 775,000 $ 700,000 500,000 $ 109,623
Executive Vice President 1997 670,000 380,000 0 74,141
1996 640,000 300,000 100,000 68,466
Richard N. Latzer 1998 $ 510,000 $ 700,000 90,000 $ 107,022
Senior Vice President and 1997 475,000 450,000 75,000 90,410
Chief Investment Officer 1996 450,000 350,000 70,000 80,132
Thomas J. Cusack 1998 $ 650,000 $ 500,000 500,000 $ 135,240
Executive Vice President 1997 575,000 300,000 0 133,323
1996 500,000 300,000 0 128,797
Edgar H. Grubb 1998 $ 495,000 $ 439,798 400,000 $ 98,449
Executive Vice President and 1997 475,000 285,000 0 78,961
Chief Financial Officer 1996 455,000 242,592 0 79,349
<FN>
- ----------
(1) Includes (i) employer matching contributions under the Stock Savings Plan, a 401(k) plan, of $1,200 for each of the named
executive officers; (ii) employer matching contributions under the Stock Savings Plan Plus, a plan designed to supplement the
401(k) plan, of $86,541 for Mr. Herringer, $50,781 for Mr. Watson, $42,001 for Mr. Latzer, $37,051 for Mr. Cusack and $32,783
for Mr. Grubb; (iii) employer contributions for additional life, accidental death and dismemberment, and disability insurance
of $41,597 for Mr. Herringer, $22,413 for Mr. Watson, $47,315 for Mr. Latzer, $9,383 for Mr. Cusack and $29,574 for Mr. Grubb;
(iv) above-market interest on deferred compensation of $23,426 for Mr. Herringer, $35,229 for Mr. Watson, $16,506 for Mr.
Latzer, $2,606 for Mr. Cusack and $34,892 for Mr. Grubb; and (v) for Mr. Cusack, forgiveness of $85,000 in principal amount of
a loan.
</FN>
Page 55
Option Grants in Last Fiscal Year
Number of Percent of
Securities Total Options Potential Realizable Value
Underlying Granted to Exercise or at Assumed Annual Rates of
Options Employees in Base Price Stock Price Appreciation
Name Granted(1) Fiscal Year ($/share)(2) Expiration Date for Option Term (3)
- ---- ---------- ----------- ----------- --------------- -------------------
5% 10%
----------- ------------
Frank C. Herringer 1,290,000 16.80% $ 75.00 January 2, 2008 (4) (5)
Robert A. Watson 500,000 6.51% 75.00 January 22, 2008 (4) (5)
Richard N. Latzer 90,000 1.17% 62.50 January 22, 2008 $ 1,998,000 $ 6,513,300
Thomas J. Cusack 500,000 6.51% 75.00 January 22, 2008 (4) (5)
Edgar H. Grubb 400,000 5.21% 75.00 January 22, 2008 (4) (5)
<FN>
- -----------
(1) Options granted under the 1995 Performance Stock Option Plan are premium-priced and performance-vesting. The options granted to
Messrs. Herringer, Watson, Cusack and Grubb will become exercisable only if (i) the reported closing price of Transamerica's
common stock is at least $75.00 per share on ten days within any period of 30 consecutive trading days ending on or before the
fifth anniversary of the date of grant and (ii) by or after the time the preceding condition is met, but no later than the
tenth anniversary of the date of grant, Transamerica's total return to stockholders is at or above the median stockholder
return for the S&P Financial Index excluding banks and savings and loan institutions. If these options become exercisable, they
will have terms ending ten years from the date of grant. Messrs. Watson, Cusack and Grubb will receive no additional stock
options, except in the case of a promotion, until 2000, and Mr. Herringer will receive no additional stock options until 2002.
The options granted to Messrs. Herringer, Watson, Cusack and Grubb were granted with tandem limited stock appreciation rights
("TLSARs"), which are exercisable only upon a change of control. Exercise of the TLSARs requires proportionate cancellation of
the related option and vice versa. The number of shares and exercise prices of the TLSAR's are as follows: Mr. Herringer,
470,000 shares, $52.595; Mr. Watson, 212,980 shares, $52.00; Mr. Cusack, 212,980 shares, $52.00; Mr. Grubb, 170,384 shares,
$52.00. The options granted to Mr. Latzer will vest annually in three equal installments beginning on the third anniversary of
the date of grant and have a term ending ten years from the date of grant.
(2) The Management Development and Compensation Committee may permit the exercise price and tax withholding obligations to be paid
in stock.
(3) Transamerica's stock price (i) on January 2, 2008 would be $85.67 and $136.42 and (ii) on January 22, 2008 would be $84.70 and
$134.87, at annual appreciation rates of 5 percent and 10 percent, respectively. There can be no assurance that such increase,
or any increase, in the price of the stock will be achieved.
(4) For the options granted to Messrs. Herringer, Watson, Cusack and Grubb, an annual appreciation rate of 5% would result in
failure to satisfy the first condition specified in note 1 above and therefore such options would not vest.
(5) Because the vesting of the options granted to Messrs. Herringer, Watson, Cusack and Grubb depends on the total return condition
being satisfied as well as price appreciation (see note 1 above), such options may not vest even if Transamerica's stock price
appreciates annually by 10% during the first five years of the option term. In the event that both conditions specified in note
1 are satisfied and Transamerica's stock price continues to appreciate by 10% for the remainder of the term of these options,
the potential realizable values would be as follows: Mr. Herringer: $79,231,800, Mr. Watson: $29,935,000, Mr. Cusack,
$29,935,000, and Mr. Grubb, $23,948,000.
--------------------
</FN>
Page 56
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of
Shares Securities Underlying Value of Unexercised
Acquired Value Unexercised Options at in the Money Options at
on Exercise Realized(1) December 31, 1998 December 31, 1998(2)
----------- ----------- ------------------ --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Frank C. Herringer 100,000 $ 3,695,060 3,453,333 566,667 $62,332,241 $15,725,009
Robert A. Watson 0 1,000,000 100,000 14,098,500 2,386,000
Richard N. Latzer 40,000 1,634,324 706,250 108,750 17,197,525 2,038,575
Thomas J. Cusack 0 1,185,266 133,334 21,957,343 3,700,019
Edgar H. Grubb 56,600 1,955,830 956,666 133,334 19,135,882 3,700,019
<FN>
- -----------
(1) The value realized is the difference between (a) the average of the high and low prices of Transamerica's common stock as
reported in the New York Stock Exchange Composite Transactions on the date of exercise and (b) the exercise price of the
option, multiplied by the number of shares exercised.
(2) The value of unexercised options is the closing price of Transamerica's common stock as reported in the New York Stock Exchange
Composite Transactions on December 31, 1998 ($57.75) less the exercise price of the option, multiplied by the number of options
outstanding.
--------------------
</FN>
Pension Plan and Supplemental Pension Plans
We have had a retirement plan for eligible employees since 1935.
Substantially all of our subsidiaries participate in the plan. Since applicable
federal laws and the pension plan limit certain participants' retirement plan
benefits to an amount less than the amount otherwise provided by the formula and
prohibit certain compensation from being counted for pension purposes, we will,
in accordance with the terms of its Supplemental Pension Plan and SSP+
Supplemental Pension Plan, make supplemental payments to make up those
differences. The table below shows the total estimated annual retirement
benefits payable under all pension plans to employees, including executive
officers, upon normal retirement on January 1, 1999 for the indicated periods of
service assuming such employees and their spouses elect a single life annuity
rather than a joint and survivor or other form of annuity (under which benefits
would generally be lower than those shown in the table).
Years of Service
----------------
Remuneration 10 15 20 25 or more
------------ -- -- -- ----------
$ 200,000 $ 39,000 $ 58,000 $ 78,000 $ 97,000
400,000 79,000 118,000 158,000 197,000
600,000 119,000 178,000 238,000 297,000
800,000 159,000 238,000 318,000 397,000
1,000,000 199,000 298,000 398,000 497,000
1,200,000 239,000 358,000 478,000 597,000
1,400,000 279,000 418,000 558,000 697,000
1,800,000 359,000 538,000 718,000 897,000
2,200,000 439,000 658,000 878,000 1,097,000
2,600,000 519,000 778,000 1,038,000 1,297,000
3,000,000 599,000 898,000 1,189,000 1,497,000
<FN>
As of December 31, 1998, these executive officers had the following years of service: Mr. Herringer, 20 years, Mr. Watson, 6
years, Mr. Latzer, 10 years, Mr. Cusack, 9 years and Mr. Grubb, 9 years.
</FN>
The pension plans currently provide for a benefit payable as a single life
annuity for each participant, including the executive officers named in the
Summary Compensation Table, of 2 percent of the average compensation during the
highest 60 consecutive months of the final 120 months of employment less 0.4
percent of the participant's age 65 monthly Social Security-covered
compensation, with the result multiplied by years of benefit service (up to a
maximum of 25 years). Under the pension plans, "pensionable remuneration" or
"covered compensation" means salary and target bonus under the bonus plan(s)
Page 57
applicable to the participant. Mr. Cusack's covered compensation for 1998 was
within 10 percent of his total Annual Compensation shown in the Summary
Compensation Table. For each other executive officer named in the Summary
Compensation Table, covered compensation represented 81% (Mr. Herringer), 85%
(Mr. Watson), 65% (Mr. Latzer) and 85% (Mr. Grubb), of the total shown in such
table. Benefits earned under the pension plans' prior benefit formulas are
protected to the extent they exceed benefits earned under the current formula. A
participant is fully vested in his or her retirement benefit after five years of
service.
Director Compensation and Benefits
Directors who are employees of Transamerica or its subsidiaries do not
receive any compensation for service on the Board. Compensation for non-employee
directors consists of cash meeting fees, annual grants of stock options and
annual grants of shares of phantom restricted stock.
Cash compensation and deferral plans. In 1998, cash compensation for
non-employee directors consisted of an annual retainer of $30,000, fees of
$1,000 for each Board or committee meeting attended, an annual retainer of
$5,000 for committee chairs, and reimbursement of expenses. Each year, directors
may defer with interest $5,000 or more of their retainers and meeting fees. The
interest rate is an average of rates paid on ten-year U.S. Treasury Notes
(adjusted annually), plus a premium of up to 3 percent, depending on the
deferral term. Participating directors elect specific terms and conditions in
advance of each deferral.
Stock options. Each non-employee director was granted options in 1998
exercisable for 3,000 shares of Transamerica common stock at an exercise price
equal to the fair market value on the effective date of the grant. The options
generally have a term not exceeding ten years and one month and became
exercisable in full six months after the grant date.
Phantom restricted stock. Each non-employee director was also granted
259.74 "shares" of phantom restricted stock on April 23, 1998. The number of
phantom shares equaled half of the annual cash retainer, or $15,000, divided by
the fair market value of a share of Transamerica common stock on the grant date.
Phantom shares are credited with dividends on the same basis as common stock,
and the dividends are reinvested in additional phantom shares at the then fair
market value of the common stock. The phantom shares will be paid in cash when
the director leaves the Board or upon a change of control of Transamerica,
whichever occurs first.
Employment and Severance Agreements
Mr. Herringer entered into an employment agreement in November 1997 under
which he agreed to remain as Transamerica's Chairman and Chief Executive Officer
at least until December 31, 2001. The agreement provides for a base salary of no
less than $975,000 per year and a target annual bonus of at least 100 percent of
his base salary under the annual Value Added Incentive Plan, although the actual
amount of the bonus, if any, will be determined in accordance with the terms of
the plan. Under the agreement, Mr. Herringer was granted stock options to
purchase 1,290,000 shares of common stock with an exercise price of $75 per
share. Mr. Herringer was also granted 470,000 TLSARs with an exercise price of
$52.595, which cannot be exercised unless (among other things) there is a change
of control. As a retention incentive, Mr. Herringer was credited on January 2,
1998 with 210,000 shares of phantom restricted stock. These shares, together
with additional shares of phantom restricted stock that are credited to Mr.
Herringer as dividends on the shares initially credited, will generally vest on
December 31, 2001. However, under the agreement, a pro-rated portion of the
phantom shares will vest upon a change of control, and the balance will vest if
his employment is subsequently terminated within 24 months after the change of
control but before December 31, 2001. Payment of Mr. Herringer's vested phantom
restricted stock will occur upon his termination of employment. The agreement
also entitles Mr. Herringer to participate in the employee benefit plans
generally available to other Transamerica executives and employees.
Each executive officer named in the Summary Compensation Table has entered
into a severance agreement that entitles him to receive a lump sum payment equal
to three times the sum of his highest target annual compensation during the
three years immediately preceding the change in control, together with certain
other payments and benefits, including continuation of employee welfare benefits
if (i) he is terminated other than for cause, retirement or disability within
three years after a change of control, or (ii) he terminates his employment for
good reason within such three-year period (or voluntarily during the 30-day
period following the first anniversary of the change of control). In addition,
each executive officer will be paid the amount necessary to compensate for
Page 58
excise taxes imposed on payments or benefits received due to a change of control
and for any income taxes imposed on such additional payment.
Compensation Committee Interlocks and Insider Participation
There are no "interlocks" (as defined by the rules of the Securities and
Exchange Commission) with respect to any member of the Management Development
and Compensation Committee, and such Committee consists entirely of independent,
non-employee directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table lists the stock ownership of each director, each executive officer named in the Summary Compensation Table,
all directors and executive officers as a group, and the sole holder of more than 5% of our common stock known to us. The
information for directors and executive officers is current as of March 5, 1999.
Shares
Acquirable Percentage of
Shares within 60 Outstanding
Name Owned(1) Days(2) Total Shares
- ---- -------- ------- ----- ------
Directors
Samuel L. Ginn (3)(4) 8,510 15,000 23,510 *
Frank C. Herringer (3)(4)(5) 263,066 3,736,666 3,999,732 3.11%
Robert W. Matschullat (4) 4,048 6,000 10,048 *
Gordon E. Moore (4) 14,082 15,000 29,082 *
Toni Rembe (4) 4,422 12,000 16,422 *
Condoleezza Rice (4) 2,000 9,000 11,000 *
Charles R. Schwab (4) 16,950 15,000 31,950 *
Forrest N. Shumway (3)(4) 22,484 15,000 37,484 *
Peter V. Ueberroth (3)(4) 20,000 15,000 35,000 *
Executive Officers
Thomas J. Cusack (3)(5) 1,906 1,251,933 1,253,839 1.00%
Edgar H. Grubb (3)(5) 22,020 1,023,333 1,045,353 *
Richard N. Latzer (5) 7,462 760,000 767,462 *
Robert A. Watson (5) 710 1,025,000 1,025,710 *
All directors and
executive officers
(18 persons)(3)(4)(5) 433,614 8,580,532 9,014,146 6.77%
Oppenheimer Capital(6) 11,070,548 0 11,070,548 8.88%
<FN>
*Less than 1%
- ------------
(1) Represents shares held directly and with sole voting and investment power (or with voting and investment power shared with a
spouse) unless otherwise indicated. Excludes shares that may be acquired through stock option exercises.
(2) Represents shares that may be acquired upon exercise of stock options and are considered outstanding for purposes of
calculating percentage ownership.
(3) Includes shares held by family trusts as to which each of the following directors and executive officers and their respective
spouses have shared voting and investment power: Mr. Ginn, 8,510 shares; Mr. Shumway, 22,484 shares; Mr. Ueberroth, 20,000
shares; Mr. Cusack, 1,000 shares; Mr. Grubb, 21,000 shares; as to which Mr. Herringer has sole, or he and his spouse have
shared, voting and investment power, 246,820 shares; and all directors and executive officers as a group, 339,176 shares. Mr.
Herringer disclaims beneficial ownership of 29,592 shares held by his spouse, as to which he has no voting or investment power.
Page 59
(4) Excludes deemed "shares" of phantom restricted stock held by each of the following directors under the Phantom Restricted Stock
Plan for Nonemployee Directors: Mr. Ginn, 638 shares; Mr. Matschullat, 798 shares; Mr. Moore, 6,362 shares; Ms. Rembe, 1,459
shares; Ms. Rice, 1,178 shares; Mr. Schwab, 2,808 shares; Mr. Shumway, 638 shares; Mr. Ueberroth, 3,649 shares; all directors
as a group, 17,530 shares. Also excludes 214,810 deemed "shares" of phantom restricted stock held by Mr. Herringer under the
terms of his employment agreement.
(5) Includes shares held under Transamerica's Employees Stock Savings Plan on December 31, 1998 and as to which the participant has
sole voting and investment power, as follows: Mr. Cusack, 906 shares; Mr. Grubb, 1,020 shares; Mr. Herringer, 7,758 shares; Mr.
Latzer, 1,462 shares; Mr. Watson, 710 shares; all directors and executive officers as a group, 28,448 shares.
(6) Based on information contained in a report on Schedule 13G filed with the Securities and Exchange Commission by Oppenheimer
Capital on February 16, 1999. The address of Oppenheimer Capital is Oppenheimer Tower, World Financial Center, New York, New
York 10281.
</FN>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions
In August 1995, we loaned Mr. Cusack $425,000 to assist him with the
purchase of a residence in connection with his relocation to the Southern
California area. The loan, which is interest-free and is secured by a deed of
trust on the residence, is being forgiven in equal installments over its
five-year term provided that Mr. Cusack remains an employee at each anniversary
date of the loan. In 1998, the principal amount of $85,000 was forgiven. The
current balance of the loan is $170,000. The loan will be forgiven in full if
Mr. Cusack dies or becomes permanently disabled, if he terminates his employment
for good reason (as defined in the agreement), if we terminate his employment
other than for cause (as defined in the agreement) or if, at our request, he
sells his residence and relocates in connection with his continued employment
with Transamerica. If Mr. Cusack dies or becomes permanently disabled during the
loan term, we have agreed to reimburse him or his estate for taxes paid as a
result of the loan forgiveness. If Mr. Cusack voluntarily terminates his
employment (other than for good reason) or we terminate his employment for cause
during the loan term, he will be required to repay the principal amount then
outstanding plus interest at 12 percent per annum from the date of such
termination.
In 1998, Transamerica and its subsidiaries obtained legal services from the
law firm of Pillsbury Madison & Sutro LLP, of which Ms. Rembe is a member, on
terms that we believe were as favorable as we could have obtained from other law
firms. We expect that Pillsbury Madison & Sutro LLP will perform additional
legal services for us in 1999.
In 1998, certain indirect subsidiaries of Transamerica made payments of
approximately $500,000 to Charles Schwab Corporation ("Schwab") and/or its
affiliates in connection with the distribution of shares of the Transamerica
Premier family of mutual funds through Schwab's Mutual Fund One Source service.
Mr. Schwab is a director of Transamerica and may be deemed to have an indirect
material interest in the distribution arrangements since he is Chairman,
Co-Chief Executive Officer, and a significant shareholder of Schwab. Schwab and
its affiliates will continue to provide such services in 1999.
Page 60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report.
(3) List of Exhibits:
2.1 Agreement and Plan of Merger and Reorganization, dated as of
February 17, 1999, by and among AEGON N.V., Tony Merger
Corp. and Transamerica Corporation (incorporated by
reference to Exhibit 2.1 of the Registrant's Current Report
on Form 8-K (File No. 1-2964) dated February 22, 1999).
3.(i) Transamerica Corporation Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.(i) of
the Registrant's Quarterly Report on Form 10-Q/A (File No.
1-2964) for the quarter ended September 30, 1998).
3.(ii) Transamerica Corporation By-Laws, as amended.
4.2*
10.1 Executive Benefit Plan for Transamerica Corporation and
Affiliates, as amended (incorporated by reference to Exhibit
EX-10.2 of the Registrant's Annual Report on Form 10-K (File
No. 1-2964) for the year ended December 31, 1992).
10.2 1997 Bonus Plan (incorporated by reference to Exhibit 10.5
of the Registrant's Annual Report on Form 10-K (File No.
1-2964) for the year ended December 31, 1996).
10.3 1998 Bonus Plan (incorporated by reference to Exhibit 10.33
of the Registrant's Annual Report on Form 10-K (File No.
1-2964) for the year ended December 31, 1997).
10.4 1985 Stock Option and Award Plan, as amended (including
Amendments No. 1 through 9) (incorporated by reference to
Exhibit 4.1 of the Registrant's Post-Effective Amendment No.
1 to Registration Statement on Forms S-8 (File No. 33-43927)
as filed with the Commission on August 7, 1998, and to
Exhibit 10.6 of the Registrant's Annual Report on Form 10-K
(File No. 1-2964) for the year ended December 31, 1997).
10.5 Form of Non-Qualified Stock Option Agreement under the
Registrant's 1985 Stock Option and Award Plan (incorporated
by reference to Exhibit 10.7 of the Registrant's Annual
Report on Form 10-K (File No. 1-2964) for the year ended
December 31, 1997).
---------
*Neither the Corporation nor its subsidiaries are parties to
any instrument with respect to long-term debt for which securities
authorized thereunder exceed 10% of the total assets of the
Corporation and its subsidiaries on a consolidated basis. Copies of
instruments with respect to long-term debt of lesser amounts will be
provided to the Commission upon request.
Page 61
10.6 Form of Incentive Stock Option Agreement under the
Registrant's 1985 Stock Option and Award Plan (incorporated
by reference to Exhibit 10.9 of the Registrant's Annual
Report on Form 10-K (File No. 1-2964) for the year ended
December 31, 1990).
10.7 Form of Restricted Stock Award Agreement under the
Registrant's 1985 Stock Option and Award Plan (incorporated
by reference to Exhibit 10.9 of the Registrant's Annual
Report on Form 10-K (File No. 1-2964) for the year ended
December 31, 1997).
10.8 Form of Non-Qualified Stock Option Agreement for Nonemployee
Directors under the Registrant's 1985 Stock Option and Award
Plan.
10.9 Deferred Compensation Policy for Transamerica Corporation
and Affiliates effective January 1, 1987 (incorporated by
reference to Exhibit 10.12 of the Registrant's Annual Report
on Form 10-K (File No. 1-2964) for the year ended December
31, 1991).
10.10 Deferred Compensation Policy for Transamerica Corporation
and Affiliates effective January 1, 1988 (incorporated by
reference to Exhibit EX-10.14 of the Registrant's Annual
Report on Form 10-K (File No. 1-2964) for the year ended
December 31, 1992).
10.11 Deferred Compensation Policy for Transamerica Corporation
and Affiliates effective January 1, 1989 (incorporated by
reference to Exhibit 10.17 of the Registrant's Annual Report
on Form 10-K (File No. 1-2964) for the year ended December
31, 1989).
10.12 Deferred Compensation Policy for Transamerica Corporation
and Affiliates effective January 1, 1990 (incorporated by
reference to Exhibit 10.18 of the Registrant's Annual Report
on Form 10-K (File No. 1-2964) for the year ended December
31, 1989).
10.13 Deferred Compensation Policy for Transamerica Corporation
and Affiliates effective July 1, 1992 (incorporated by
reference to Exhibit EX-10.17 of the Registrant's Annual
Report on Form 10-K (File No. 1-2964) for the year ended
December 31, 1992).
10.14 Deferred Compensation Policy for Transamerica Corporation
and Affiliates effective January 1, 1994 (incorporated by
reference to Exhibit EX-10.18 of the Registrant's Annual
Report on Form 10-K (File No. 1-2964) for the year ended
December 31, 1993).
10.15 Transamerica Corporation Deferred Compensation Plan, as
amended (including Amendment No. 1) (incorporated by
reference to Exhibit 10.19 of the Registrant's Annual Report
on Form 10-K (File No. 1-2964) for the year ended December
31, 1995, and to Exhibit EX-10.20 of the Registrant's Annual
Report on Form 10-K (File No. 1-2964) for the year ended
December 31, 1994).
10.16 Form of Termination Agreement between Transamerica
Corporation and certain of its officers and certain officers
of its subsidiaries, as amended (incorporated by reference
to Exhibit 10.20 of the Registrant's Annual Report on Form
10-K (File No. 1-2964) for the year ended December 31,
1997).
10.17 Reinsurance Agreement dated December 31, 1992 by and between
ARC Reinsurance Corporation and Transamerica Insurance
Company, as amended (incorporated by reference to Exhibit
EX-10.26 of the Registrant's Annual Report on Form 10-K
(File No. 1-2964) for the year ended December 31, 1992).
Page 62
10.18 Letter dated December 31, 1992 from the Registrant to
Transamerica Insurance Company regarding ARC Reinsurance
Corporation (incorporated by reference to Exhibit EX-10.27
of the Registrant's Annual Report on Form 10-K (File No.
1-2964) for the year ended December 31, 1992).
10.19 Transamerica Corporation 1995 Performance Stock Option Plan,
as amended (including Amendment Nos. 1 and 2) (incorporated
by reference to Exhibit B of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on
April 23, 1998.).
10.20 Transamerica Corporation Value Added Incentive Plan
(incorporated by reference to Exhibit EX-10.2 of the
Registrant's Quarterly Report on Form 10-Q (File No. 1-2964)
for the quarter ended March 31, 1994).
10.21 Form of Nonqualified Stock Option Agreement under the
Registrant's 1995 Performance Stock Option Plan
(incorporated by reference to Exhibit EX-10.2 of the
Registrant's Quarterly Report on Form 10-Q (File No. 1-2964)
for the quarter ended June 30, 1995).
10.22 Form of Nonqualified Stock Option Agreement granted with
Tandem Limited Stock Appreciation Right under the
Registrant's 1995 Performance Stock Option Plan
(incorporated by reference to Exhibit EX-10.3 of the
Registrant's Quarterly Report on Form 10-Q (File No. 1-2964)
for the quarter ended June 30, 1995).
10.23 Form of Tandem Limited Stock Appreciation Right under the
Registrant's 1995 Performance Stock Option Plan
(incorporated by reference to Exhibit 10.27 of the
Registrant's Annual Report on Form 10-K (File No. 1-2964)
for the year ended December 31, 1997).
10.24 Transamerica Corporation 1998 Cash Long-Term Incentive Plan
(incorporated by reference to Exhibit A of the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be
held on April 23, 1998).
10.25 Transamerica Corporation 1996 Stock Option and Award Plan,
as amended (including Amendment Nos. 1 through 3)
(incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form S-8 (File No.
333-70557) as filed with the Commission on January 14,
1999), Exhibit 10.35 of the Registrant's Annual Report on
Form 10-K (File No. 1-2964) for the year ended December 31,
1997, and to Exhibit 4.3 of the Registrant's Registration
Statement on Form S-8 (File No. 333-23945) as filed with the
Commission on March 25, 1997).
10.26 Form of Nonqualified Stock Option Agreement (100% of Fair
Market Value) under the Registrant's 1996 Stock Option and
Award Plan (incorporated by reference to Exhibit 4.4 of the
Registrant's Registration Statement on Form S-8 (File No.
333-23945 as filed with the Commission on March 25, 1997).
10.27 Employment Agreement by and between Transamerica Corporation
and Frank C. Herringer dated as of November 4, 1997
(incorporated by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q (File No. 1-2964)
for the quarter ended September 30, 1997).
10.28 Form of $150 Nonqualified Stock Option Agreement granted
with Tandem Limited Stock Appreciation Right under the
Registrant's 1995 Performance Stock Option Plan to Frank C.
Herringer (incorporated by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q (File No. 1-2964)
for the quarter ended September 30, 1998).
Page 63
10.29 Form of Tandem Limited Stock Appreciation Right (tandem to
$150 Option) granted under the Registrant's 1995 Performance
Stock Option Plan to Frank C. Herringer (incorporated by
reference to Exhibit 10.2 of the Registrant's Quarterly
Report on Form 10-Q (File No. 1-2964) for the quarter ended
September 30, 1998).
10.30 Form of $125 Nonqualified Stock Option Agreement under the
Registrant's 1995 Performance Stock Option Plan
(incorporated by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q (File No. 1-2964)
for the quarter ended March 31, 1998).
10.31 Form of $150 Nonqualified Stock Option Agreement granted
with Tandem Limited Stock Appreciation Right under the
Registrant's 1995 Performance Stock Option Plan
(incorporated by reference to Exhibit 10.2 of the
Registrant's Quarterly Report on Form 10-Q (File No. 1-2964)
for the quarter ended March 31, 1998).
10.32 Form of Tandem Limited Stock Appreciation Right (Tandem to
$150 Options) under the Registrant's 1995 Performance Stock
Option Plan (incorporated by reference to Exhibit 10.3 of
the Registrant's Quarterly Report on Form 10-Q (File No.
1-2964) for the quarter ended March 31, 1998).
10.33 Form of $125 Nonqualified Stock Option Agreement under the
Registrant's 1996 Stock Option and Award Plan (incorporated
by reference to Exhibit 10.4 of the Registrant's Quarterly
Report on Form 10-Q (File No. 1-2964) for the quarter ended
March 31, 1998).
10.34 Form of $150 Nonqualified Stock Option Agreement granted
with Tandem Limited Stock Appreciation Right under the
Registrant's 1996 Stock Option and Award Plan (incorporated
by reference to Exhibit 10.5 of the Registrant's Quarterly
Report on Form 10-Q (File No. 1-2964) for the quarter ended
March 31, 1998).
10.35 Form of $150 Tandem Limited Stock Appreciation Right (tandem
to $150 Options) under the Registrant's 1996 Stock Option
and Award Plan (incorporated by reference to Exhibit 10.6 of
the Registrant's Quarterly Report on Form 10-Q (File No.
1-2964) for the quarter ended March 31, 1998).
12 Ratio of Earnings to Fixed Charges Calculation.
21 List of Subsidiaries of Transamerica Corporation.
23 Consent of Ernst & Young LLP to the incorporation by
reference of their report dated January 22, 1999 in the
Registrant's Registration Statements on Form S-8 (File Nos.
33-3722, 33-26317, 33-43927, 33-55587, 33-64221, 333-23945,
333-61055 and 333-70557) and on Form S-3 (File Nos.
33-32419, 33-37889, 33-41008, 33-55047 and 33-63049).
24 Power of Attorney executed by the directors of the
Registrant.
27 Financial Data Schedule.
Page 64
Exhibits will be furnished to stockholders of the
Corporation upon written request and upon payment of a fee of 30 cents
per page, which fee covers the Corporation's reasonable expenses in
furnishing such exhibits.
(b) Reports on Form 8-K filed in the fourth quarter of 1998: None
(c) Exhibits: Certain of the exhibits listed in Item (a)(3) above have been
submitted under separate filings, as indicated.
(d) Financial Statement Schedules: The response to this portion of Item 14
is submitted as a separate section of this report.
Page 65
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 18, 1999 by the following persons on
behalf of the registrant and in the capacities indicated.
Signature Title
Principal Executive Officer:
FRANK C. HERRINGER* Chairman of the Board, President and
Chief Executive Officer
Principal Financial Officer:
Edgar H. Grubb Executive Vice President and Chief
Financial Officer
Principal Accounting Officer:
Burton E. Broome Vice President and Controller
Directors:
SAMUEL L. GINN* Director
FRANK C. HERRINGER* Chairman of the Board and Director
ROBERT W. MATSCHULLAT* Director
GORDON E. MOORE* Director
TONI REMBE* Director
CONDOLEEZZA RICE* Director
CHARLES R. SCHWAB* Director
FORREST N. SHUMWAY* Director
PETER V. UEBERROTH* Director
*Burton E. Broome
Attorney-in-Fact
A majority of the members of the Board of Directors.
Page 66
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) and (2) and ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1998
TRANSAMERICA CORPORATION AND SUBSIDIARIES
SAN FRANCISCO, CALIFORNIA
Page 67
FORM 10-K--ITEM 14(a)(1) AND (2)
TRANSAMERICA CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements:
The following consolidated financial statements of Transamerica Corporation
and subsidiaries are included in Item 8:
Consolidated Balance Sheet -- December 31, 1998 and 1997
Consolidated Statement of Income --Years ended December 31, 1998, 1997
and 1996
Consolidated Statement of Cash Flows --Years ended December 31, 1998,
1997 and 1996
Consolidated Statement of Stockholders' Equity --Years ended December
31, 1998, 1997 and 1996
Notes to Financial Statements -- December 31, 1998
Financial Statement Schedules:
- ----------
The following consolidated financial statement schedules of Transamerica
Corporation and subsidiaries are included in Item 14(d).
I -- Summary of Investments Other Than Investments in Related Parties
-- December 31, 1998
II -- Condensed Financial Information of Registrant -- December 31,
1998 and 1997, and years ended December 31, 1998, 1997 and 1996
III -- Supplementary Insurance Information -- Years ended December 31,
1998, 1997 and 1996
IV -- Reinsurance -- Years ended December 31, 1998, 1997 and 1996
V -- Valuation and Qualifying Accounts -- Years ended December 31,
1998, 1997 and 1996
All other schedules provided for in the applicable accounting regulation of
the Securities and Exchange Commission pertain to items which do not appear in
the financial statements of Transamerica Corporation and subsidiaries or to
items which are not significant or to items as to which the required disclosures
have been made elsewhere in the financial statements and supplementary notes,
and such schedules have therefore been omitted.
Page 68
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Transamerica Corporation
We have audited the accompanying consolidated balance sheet of Transamerica
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholder's equity, and cash flows for each
of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedules listed in the index at Item 14(a)(1)
and (2). These financial statements and schedules are the responsibility of
Transamerica Corporation's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and related
schedules are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and related schedules. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Transamerica Corporation and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects the
information set forth therein.
Ernst & Young LLP
San Francisco, California
January 22, 1999
Page 69
SCHEDULE I
TRANSAMERICA CORPORATION AND SUBSIDIARIES
---------------------
SCHEDULE I--SUMMARY OF INVESTMENTS OTHER
THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
Column A Column B Column C Column D
- ------------------------------------------------------------------------------------------------------------------------------------
Amount at
which shown in
Type of Investment Cost Value the balance sheet
- ------------------------------------------------------------------------------------------------------------------------------------
(Amounts in millions)
Fixed maturities available for sale:
Bonds and notes:
U.S. Treasury securities and obligations of
U.S. government authorities and agencies ...................... $ 298.1 $ 410.8 $ 410.8
Obligations of states and political
subdivisions .................................................. 259.2 284.7 284.7
Foreign governments .............................................. 120.4 122.1 122.1
Corporate securities ............................................. 18,793.8 20,355.5 20,355.5
Mortgage-backed securities ....................................... 2,988.7 3,289.5 3,289.5
Public utilities ................................................. 3,952.7 4,376.7 4,376.7
Redeemable preferred stocks ........................................ 163.7 170.1 170.1
----------- ----------- -----------
Total fixed maturities ........................................ 26,576.6 $ 29,009.4 29,009.4
=========== =========== ===========
Equity securities:
Common stocks:
Banks, trust and insurance companies .............................
Industrial, miscellaneous and all other .......................... 588.6 $ 2,171.2 2,171.2
Nonredeemable preferred stocks ..................................... 17.1 16.7 16.7
----------- ----------- -----------
Total equity securities .............................................. 605.7 $ 2,187.9 2,187.9
===========
Mortgage loans on real estate ........................................ 743.2 718.6
Real estate .......................................................... 73.5 72.1
Loans to life insurance policyholders ................................ 455.5 455.5
Short-term investments ............................................... 1,212.6 1,212.6
----------- -----------
Total investments ............................................. $ 29,667.1 $ 33,656.1
=========== ===========
<FN>
- ----------
The differences between Column B and Column D as to mortgage loans on real estate and real estate represent write downs and
allowances for possible permanent impairment in value.
</FN>
Page 70
SCHEDULE II
TRANSAMERICA CORPORATION AND SUBSIDIARIES
---------------------
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TRANSAMERICA CORPORATION (PARENT COMPANY)
(Amounts in millions except share data)
BALANCE SHEET
December 31,
1998 1997
Assets:
Investments in subsidiaries $ 6,558.5 $ 5,762.1
Equity securities at fair value (cost: $287.5 in 1998 and $308.8 in 1997) 1,287.9 796.1
Short-term investments 2.5 4.8
Notes and accounts receivable from subsidiaries 130.7 359.1
Cash and cash equivalents 17.4 18.5
Other assets 177.9 213.5
---------- ----------
$ 8,174.9 $ 7,154.1
========== ==========
Liabilities and stockholders' equity:
Notes and loans payable $ 387.3 $ 404.8
Income taxes payable, including deferred taxes payable of $194.5 in 1998 and $45.7 in 1997 233.5 78.7
Income taxes due to subsidiaries 440.5 356.8
Notes and accounts payable to subsidiaries 947.4 936.5
Accounts payable and other liabilities 460.3 496.0
Stockholders' equity:
Common Stock ($1 par value):
Authorized--300,000,000 shares
Outstanding--124,490,670 shares in 1998 and 125,808,216 shares in 1997,
after deducting 34,986,254 and 33,668,708 shares in treasury in 1998 and 1997 124.5 125.8
Retained earnings, including equity in undistributed net income of subsidiaries
of $2,186.4 in 1998 and $1,700.5 in 1997 3,693.1 3,267.9
Components of other cumulative comprehensive income
Net unrealized gain from investments marked to fair value 1,943.4 1,533.6
Foreign currency translation adjustments (55.1) (46.0)
---------- ----------
5,705.9 4,881.3
---------- ----------
$ 8,174.9 $ 7,154.1
========== ==========
<FN>
See note to balance sheet
</FN>
Page 71
SCHEDULE II
(Continued)
TRANSAMERICA CORPORATION AND SUBSIDIARIES
---------------------
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TRANSAMERICA CORPORATION (PARENT COMPANY)
STATEMENT OF INCOME
Years Ended December 31,
1998 1997 1996
(Amounts in millions)
Revenues:
Dividends from subsidiaries $ 184.8 $ 615.2 $ 313.6
Tax service fees 331.0 214.7 206.5
Interest, principally from subsidiaries 12.3 16.2 3.8
Investment income 5.9 7.5 10.4
Gain on investment transactions 82.7 18.7 18.1
-------- -------- --------
616.7 872.3 552.4
Expenses:
Interest 116.9 131.7 109.7
General and administrative 258.7 199.6 213.4
-------- -------- --------
375.6 331.3 323.1
-------- -------- --------
241.1 541.0 229.3
Income tax (provision) benefit (20.0) 117.1 88.4
-------- -------- --------
Income before equity in undistributed income
of subsidiaries and income (loss)
of discontinued operations 221.1 658.1 317.7
Equity in undistributed income (dividends in
excess of income) of subsidiaries 485.9 (126.1) 183.8
-------- -------- --------
Income from continuing operations 707.0 532.0 501.5
Income (loss) from discontinued operations 261.8 (45.2)
-------- -------- --------
Net income $ 707.0 $ 793.8 $ 456.3
======== ======== ========
<FN>
- ----------
For comprehensive income see Item 8, "Consolidated Statement of Stockholders Equity."
</FN>
Page 72
SCHEDULE II
(Continued)
TRANSAMERICA CORPORATION AND SUBSIDIARIES
---------------------
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TRANSAMERICA CORPORATION (PARENT COMPANY)
STATEMENT OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
(Amounts in millions)
Operating activities:
Income from continuing operations $ 707.0 $ 532.0 $ 501.5
Adjustments to reconcile income from continuing
operations to net cash provided
by operating activities:
Accounts payable and other liabilities (37.2) (17.1) (71.4)
Income taxes payable, including related accounts
with subsidiaries 45.6 67.6 (0.6)
Dividends in excess of income (Equity in
undistributed income) of subsidiaries (485.9) 126.1 (183.8)
Net gain on investment transactions (82.7) (18.7) (18.1)
Other 12.8 (80.5) 2.2
-------- -------- --------
Net cash provided by operating activities 159.6 609.4 229.8
Investing activities:
Capital transactions with subsidiaries (239.5) 302.3 (36.3)
Sales of investments 285.8 97.0 219.4
Purchases of investments (184.5) (136.6) (158.4)
Decrease (increase) in accounts with subsidiaries 281.2 (44.7) 170.8
Other (26.0) (13.9) (19.6)
-------- -------- --------
Net cash provided by investing activities 117.0 204.1 175.9
Financing activities:
Proceeds from debt financing 188.6 198.4
Increase (decrease) in commercial paper obligations 82.5 (198.4) (157.8)
Payments of long-term notes (100.0) (5.0) (10.0)
Redemption of preferred stock (318.8)
Treasury stock purchases (235.5) (443.5) (330.2)
Proceeds from issuance of common stock 100.4 108.3 45.6
Dividends (125.1) (130.3) (149.2)
-------- -------- --------
Net cash used by financing activities (277.7) (799.1) (403.2)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1.1) 14.4 2.5
Cash and cash equivalents at beginning of year 18.5 4.1 1.6
-------- -------- --------
Cash and cash equivalents at end of year $ 17.4 $ 18.5 $ 4.1
======== ======== ========
Page 73
SCHEDULE II
(Continued)
TRANSAMERICA CORPORATION AND SUBSIDIARIES
---------------------
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
TRANSAMERICA CORPORATION (PARENT COMPANY)
NOTE TO BALANCE SHEET
Financial Instruments
At December 31, 1998 and 1997 notes and loans payable comprised:
December 31,
1998 1997
(Amounts in millions)
Short-term bank loans, commercial paper and current portion of long-term debt ................ $ 100.0
Long-term debt due subsequent to one year:
Notes; interest at 6.75% to 9.875%; maturing through 2008 ................................. $ 304.8 304.8
Commercial paper and other notes at various interest
rates and terms supported by a credit agreement
expiring in 2002 ...................................................................... 82.5
-------- --------
$ 387.3 $ 404.8
======== ========
<FN>
There are no maturities of debt in 1999, 2000 or 2003. Amounts of debt maturing in 2001 and 2002 are $5 million and $82.5
million.
</FN>
Transamerica manages a portion of its interest rate risk by entering into interest rate swap agreements. At December 31, 1998
and 1997 interest rate swap agreements comprised:
Weighted Weighted
Notional Average Fixed Average Floating
Amount Interest Rate Interest Rate
(Dollar amounts in millions)
1998:
Interest rate swap agreements - Transamerica pays:
Floating rate interest expense,
receives fixed rate interest income $ 275.0 7.03% 5.25%
1997:
Interest rate swap agreements - Transamerica pays:
Floating rate interest expense,
receives fixed rate interest income $ 275.0 7.03% 5.77%
Page 74
SCHEDULE III
TRANSAMERICA CORPORATION AND SUBSIDIARIES
---------------------
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
Column A Column B Column C Column D Column E Column F
Future policy
Deferred benefits, Other policy
policy losses, claims and
acquisition claims and Unearned benefits Premium
Segment costs loss expenses premiums payable revenue
(Amounts in millions)
Life insurance:
Year ended December 31:
1998 ................... $2,094.7 (A) $6,199.7 (B) $ 7.1 $ 24,191.9 $ 1,050.4
1997 ................... $2,102.6 (A) $5,957.7 (B) $ 17.7 $ 24,184.2 $ 1,105.9
1996 ................... $2,138.2 (A) $5,644.5 (B) $ 17.9 $ 22,898.4 $ 1,072.4
Column G Column H Column I Column J Column K
Benefits, Amortization
claims, of deferred
Net losses and policy Other
investment settlement acquisition operating Premiums
income expenses costs expenses written
(Amounts in millions)
Life insurance:
Year ended December 31:
1998 .................................... $ 2,245.5 $ 2,878.0 $427.2 (C) $ 451.5 $240.9 (D)
1997 .................................... $ 2,169.4 $ 2,810.9 $256.3 (C) $ 469.6 $238.0 (D)
1996 .................................... $ 2,079.7 $ 2,649.7 $268.8 (C) $ 403.6 $286.1 (D)
<FN>
- ----------
(A) Includes reduction from fair value adjustments of $633.8 million in 1998, $546.1 million in 1997 and $306.6 million in 1996
required under Financial Accounting Standards Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
(B) Includes increase from fair value adjustments of $391.3 million in 1998, $281 million in 1997 and $195 million in 1996 required
under Financial Accounting Standards Statement No. 115.
(C) Includes accelerated amortization of deferred policy acquisition costs of $158 million in 1998, $8.9 million in 1997 and $33.6
million in 1996 and associated with interest-sensitive products due to realized investment gains.
(D) Health insurance premiums written.
</FN>
Page 75
SCHEDULE IV
TRANSAMERICA CORPORATION AND SUBSIDIARIES
---------------------
SCHEDULE IV--REINSURANCE
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
Segment amount companies companies amount to net
(Dollar amounts in millions)
Year ended December 31, 1998:
Life insurance in force ................. $ 255,440.9 $ 290,754.6 $ 282,317.0 $ 247,003.3 114.3%
============ ============ ============ ============
Premium revenue:
Life insurance ...................... $ 637.8 $ 464.7 $ 667.3 $ 840.4 79.4%
Accident and health
insurance ........................... 197.1 506.2 519.1 210.0 247.2%
------------ ------------ ------------ ------------
$ 834.9 $ 970.9 $ 1,186.4 $ 1,050.4 112.9%
============ ============ ============ ============
Year ended December 31, 1997:
Life insurance in force ................ $ 241,379.9 $ 207,533.1 $ 225,685.7 $ 259,532.5 87.0%
============ ============ ============ ============
Premium revenue:
Life insurance ...................... $ 894.5 $ 637.4 $ 610.2 $ 867.3 70.4%
Accident and health
insurance ........................... 90.3 350.6 498.9 238.6 209.1%
------------ ------------ ------------ ------------
$ 984.8 $ 988.0 $ 1,109.1 $ 1,105.9 100.3%
============ ============ ============ ============
Year ended December 31, 1996:
Life insurance in force ................ $ 220,162.9 $ 195,158.2 $ 201,560.3 $ 226,565.0 89.0%
============ ============ ============ ============
Premium revenue:
Life insurance ...................... $ 816.6 $ 551.9 $ 521.3 $ 786.0 66.3%
Accident and health
insurance ........................... 59.2 355.4 582.6 286.4 203.5%
------------ ------------ ------------ ------------
$ 875.8 $ 907.3 $ 1,103.9 $ 1,072.4 102.9%
============ ============ ============ ============
Page 76
SCHEDULE V
TRANSAMERICA CORPORATION AND SUBSIDIARIES
---------------------
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
----------Additions----------
Balance at Charged to Charged to Balance at
beginning costs and other accounts - Deductions - end of
Description of period expenses describe describe period
(Amounts in millions)
Year ended December 31, 1998: Deducted from asset accounts:
Allowance for losses -
Mortgage loans on real estate .......... $ 24.5 $ 0.1 (D) $ 24.6
Real estate ............................ 11.8 $ 0.1 (B) 5.7 (E) 6.2
Finance receivables .................... 104.8 $ 53.0 28.5 (C) 34.2 (F) 152.1 (H)
Other assets ........................... 5.4 4.8 (C) 0.6 (C)
-------- --------- --------- -------- --------
$ 146.5 $ 53.0 $ 28.6 $ 44.8 $ 183.5
======== ========= ========= ======== ========
Year ended December 31, 1997: Deducted from asset accounts:
Allowance for losses -
Mortgage loans on real estate .......... $ 22.6 $ 2.0 (B) $ 0.1 (D) $ 24.5
Real estate ............................ 20.2 8.4 (E) 11.8
Finance receivables .................... 87.0 $ 18.1 14.8 (C) 15.1 (F) 104.8 (H)
Other assets ........................... 1.8 5.4 (C) 1.8 (G) 5.4
-------- --------- --------- -------- --------
$ 131.6 $ 18.1 $ 22.2 $ 25.4 $ 146.5
======== ========= ========= ======== ========
Year ended December 31, 1996: Deducted from asset accounts:
Allowance for losses -
Mortgage loans on real estate .......... $ 21.5 $ 2.1 (B) $ 1.0 (D) $ 22.6
Real estate ............................ 27.2 2.5 (B) 9.5 (E) 20.2
Finance receivables .................... 82.1 $ 10.2 7.0 (C) 12.3 (F) 87.0 (H)
Other assets ........................... 6.1 (3.6) (A) 0.7 (G) 1.8
-------- --------- --------- -------- --------
$ 136.9 $ 6.6 $ 11.6 $ 23.5 $ 131.6
======== ========= ========= ======== ========
<FN>
- ----------
(A) Reversal of excess valuation allowance no longer required due to the favorable terms on disposition of assets held for sale.
(B) Included in gains on investment transactions.
(C) Changes in connection with receivables and other adjustments.
(D) Reduction in reserves associated with the settlement of mortgage loan transactions.
(E) Reduction in reserves associated with the settlement of real estate transactions.
(F) Charges for net credit losses.
(G) Charges for losses on disposal of assets held for sale.
(H) Includes $28 million in 1998, $15.5 million in 1997 and $1.2 million in 1996 related to securitized, sold and serviced
receivables which is reported in other liabilities in the consolidated balance sheet.
</FN>