- ------------------------ (1) TRH, through its wholly-owned subsidiary TRC, acquired Trans Re Zurich (TRZ) in the third quarter of 1996. TRZ's results for the second half of 1996 are included in the Consolidated Financial Statements and accompanying notes included elsewhere herein.
(2) Represents a benefit of $47,000 and a charge of $660 for the cumulative effect of adoption of accounting standards related to income taxes (SFAS No. 109) and postretirement benefits (SFAS No. 106), respectively.
(3) Weighted average common shares outstanding was 22,983 for 1996, 22,939 for 1995, 22,902 for 1994, 22,886 for 1993 and 22,867 for 1992.
American International Group, Inc. and subsidiaries (the AIG Group) own approximately 49% of the Company's outstanding Common Stock. Financial data discussed below have been affected by certain transactions between TRH and the AIG Group. (See Notes 8 and 10 of Notes to Consolidated Financial Statements.)
In the third quarter of 1996, Transatlantic Holdings, Inc. (the Company), through its wholly-owned subsidiary, Transatlantic Reinsurance Company (TRC), acquired all of the outstanding shares of Trans Re Zurich (TRZ), formerly known as Guardian Ruckversicherungs-Gesellschaft ("Guardian Re"), an international reinsurance company based in Zurich, Switzerland, for approximately $105 million in cash. Assets of TRZ totaled $366.8 million at the date of acquisition.
TRH derives its revenue from two principal sources: premiums from reinsurance assumed net of reinsurance ceded (i.e. net premiums earned) and income from investments. Gross premiums assumed and reinsurance ceded are initially deferred and then are credited or charged to income, respectively, over the terms of the underlying contracts or certificates in force. The deferred amounts constitute the unearned premium reserve or prepaid reinsurance premium and are generally ratably credited or charged, respectively, to income over the contract periods. The relationship between net premiums written and net premiums earned will, therefore, vary depending generally on the volume and inception dates of the business assumed and ceded and the mix of such business between pro rata and excess-of-loss reinsurance.
Generally as a result of more favorable conditions in certain sectors of the market in 1995 as compared to other sectors, premiums increased as compared to 1994 in specialty casualty lines, particularly medical malpractice, and in auto liability (including nonstandard risks), ocean marine, surety and credit lines and decreased in certain general casualty classes. Property lines premiums also increased in 1995 versus 1994 due primarily to an increase in allied lines and, as a group, represented 33.0% of net premiums written in 1995 compared to 34.8% in 1994. In addition, approximately one-half of the increase in 1995 premium volume emanated from the international locations, particularly TRH's London office, which recorded significant premium increases in the ocean marine and auto liability lines. International business increased to 30.9% of net premiums written in 1995 compared to 28.0% in 1994. The increases noted above were primarily from treaty business and generally resulted from increased coverage provided. (See Note 11 of Notes to Consolidated Financial Statements.)
The following table sets forth TRH's combined ratios and the components thereof for the years indicated:
1995 results included $4.5 million of losses from the Kobe, Japan earthquake. In addition, these results benefited from net favorable development on losses occurring in prior years of $3.5 million. Favorable development in 1995 from losses occurring in 1992 through 1994, particularly in the fire lines in 1994, was partially offset by adverse development from casualty treaty losses occurring in 1982 and prior
The increase of the underwriting expense ratio in 1996 compared to 1995 consisted of an increase in the ratio of net commissions to net premiums written of 0.5 and an increase in the other operating expense ratio of 0.3. The increase of the underwriting expense ratio in 1995 compared to 1994 consisted of an increase in the net commission ratio of 0.8 and a decrease in the other operating expense ratio of 0.3.
Realized net capital gains on the disposition of investments totaled $18.7 million in 1996, $11.1 million in 1995 and $14.9 million in 1994. Income before income taxes was $196.3 million in 1996, $163.8 million in 1995 and $119.3 million in 1994. The increase in income before income taxes in 1996 over 1995 resulted
The provisions for federal and foreign income taxes were $41.5 million in 1996, $31.9 million in 1995 and $17.6 million in 1994. The Company and its domestic subsidiaries, TRC and Putnam Reinsurance Company (Putnam), filed consolidated federal income tax returns for the years under discussion, except those for 1996 which are not yet due. The tax burden among the companies is allocated in accordance with a tax sharing agreement. TRC will include as part of its taxable income those items of income of the non-U.S. subsidiary, TRZ, which are subject to U.S. income tax currently, pursuant to Subpart F income rules of the Internal Revenue Code, and included, as appropriate, in the consolidated federal income tax return.
At December 31, 1996, total investments and cash were $3,589.9 million compared to $2,987.9 million at December 31, 1995. This increase is principally due to net cash provided by operating activities which totaled $373.4 million in 1996, investments and cash acquired upon the purchase of TRZ, net of purchase price, of $246.4 million and net unrealized appreciation of investments available for sale during the year of $3.7 million. (See Note 3 of Notes to Consolidated Financial Statements.)
TRH's operating cash flow in 1996 and 1995 surpassed the respective prior year amounts due, in part, to a significant increase in net premium volume and increased net investment income received, partially offset by increased commissions and paid losses. International operations, most significantly London, accounted for 67.1%, 62.0% and 85.6% of net positive operating cash flow, other than cash flow from net investment income, (i.e. primarily, assumed premiums received less ceded premiums paid, net commissions paid, net losses paid and other operating expenses) in 1996, 1995 and 1994, respectively. In each of 1996 and 1995 as compared to the respective prior year, the increase in paid losses is principally due to increases in premium volume and a shift in the business mix towards lines with shorter loss payment patterns in recent years.
TRH believes that its balance of cash and short-term investments of $136.7 million as of December 31, 1996 and its future cash flows will be sufficient to meet TRH's cash requirements through the end of 1997
TRH's fixed maturity investments, approximately 87.1% of total investments as of December 31, 1996, are predominantly investment grade, liquid securities concentrated in maturities of less than 10 years. Also as of that date, approximately 11.2% of total investments were in common and nonredeemable preferred stocks and the remaining 1.7% consisted of short-term investments. In considering the impact of inflation in conducting its operations, TRH structures investment maturities to minimize the effects of interest rate fluctuations on operating results. Based on the foregoing, TRH considers its liquidity to be adequate through the end of 1997 and thereafter for a period the length of which is difficult to predict, but which TRH believes will be at least one year.
As of December 31, 1996, 17.3% of the bond portfolio represented U.S. Government and government agency bonds and 12.6% represented foreign government bonds. Of the remainder, 57.4% were rated Aaa or Aa by Moody's, an additional 12.0% were also rated investment grade or better by Moody's or similar foreign or domestic services and 0.7% were not rated. Also, as of December 31, 1996, TRH had no real estate or derivative financial instruments. (See Note 3 of Notes to Consolidated Financial Statements.)
Insurance practices and regulatory guidelines suggest that property and casualty insurance companies maintain a statutory ratio of net premiums written to policyholders' surplus of not more than approximately 3 to 1. For the reinsurance industry, a ratio of 2 to 1 is generally considered more prudent. For the year ended December 31, 1996, based on statistics distributed by the Reinsurance Association of America, the reinsurance industry's average ratio of statutory net premiums written to policyholders' surplus was approximately 0.7 to 1. For the year ended December 31, 1996, TRH's ratio was 1.1 to 1, which includes the statutory net premiums written of TRC and Putnam on a combined basis and the policyholders' surplus of TRC. (See Note 9 of Notes to Consolidated Financial Statements.) TRH believes that this ratio falls within an acceptable range and, as such, reflects an appropriate leveraging of its surplus. Note that for U.S. statutory purposes, TRZ is carried as an equity investment and, therefore, its net premiums written are not consolidated into the Company's statutory total.
SFAS No. 125 is effective as of January 1, 1997 and is to be applied prospectively. However, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," defers, for one year, the effective date of certain provisions of SFAS No. 125 which affect repurchase agreements, dollar-rolls, securities lending and similar transactions. While the Company is currently assessing the impact of the new standard, management believes that the implementation of SFAS No. 125 will not have a material impact on results of operations, financial position or liquidity.
In accordance with the standard, TRH adopted SFAS No. 123 for the 1996 annual financial statements and chose the pro forma disclosure option of implementation. (See Note 7 of Notes to Consolidated Financial Statements.)
1994 ACCOUNTING STANDARD: In October 1994, the FASB issued SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." Among other things, this standard requires disclosure about the amounts, nature and terms of derivative financial instruments and is effective for fiscal years ending after December 15, 1994. In 1996, 1995 and 1994, TRH had no derivative financial instruments as defined in SFAS No. 119.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transatlantic Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
Transatlantic Holdings, Inc. (the Company) is a holding company, incorporated in the state of Delaware, which owns all of the common stock of Transatlantic Reinsurance Company (TRC). In addition to TRC, the Company owned 100% of Putnam Reinsurance Company (Putnam) until December 29, 1995, when the Company contributed all the stock of Putnam to TRC.
In the third quarter of 1996, TRC acquired all of the outstanding shares of Trans Re Zurich (TRZ), formerly known as Guardian Ruckversicherungs-Gesellschaft (Guardian Re), an international reinsurance company based in Zurich, Switzerland, for approximately $105 million in cash. The acquisition was accounted for as a purchase. Accordingly, TRZ's results for the second half of 1996 are included in the consolidated results of the Company in 1996. This acquisition has not had a material effect on financial position or net income.
(a) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). Certain reclassifications have been made to conform prior years' presentations with 1996.
(f) UNEARNED PREMIUMS: Unearned premiums represent the portion of gross premiums written which is applicable to the unexpired terms of reinsurance contracts or certificates in force. Accordingly, premiums written are taken into income as earned. Unearned premiums are calculated principally by the monthly pro rata method or are based on reports received from ceding companies. In the Consolidated Statements of Operations, the change in unearned premiums is presented net of the change in prepaid reinsurance premiums.
(i) NET INCOME PER COMMON SHARE: Net income per common share has been computed based on the weighted average number of common shares outstanding.
(e) EQUITIES: Gross gains of $23,621,000, $15,830,000 and $20,187,000 and gross losses of $5,398,000, $5,370,000 and $5,068,000 were realized on sales of equities in 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995, net unrealized appreciation of equities (before applicable income taxes) included gross gains of $98,316,000 and $57,795,000 and gross losses of $2,165,000 and $1,311,000, respectively.
4. FEDERAL AND FOREIGN INCOME TAXES (Continued) The U.S. Federal Income tax rate is 35% for 1996, 1995 and 1994. Actual tax expense on income before income taxes differs from the "expected" amount computed by applying the U.S. Federal income tax rate because of the following:
(c) Income tax payments by TRH totaled $39,939,000, $31,588,000 and $25,036,000 in 1996, 1995 and 1994, respectively.
As a result of net decreases in estimates of losses occurring in prior years, net losses and loss adjustment expenses incurred were reduced by $7.7 million in 1996. In the other liability line, favorable development on losses occurring in more recent years was offset by adverse development in 1984 and prior years. In addition, in more recent years, favorable development, particularly in the fire, allied line and aircraft lines was partially offset by adverse development in the auto liability line.
As a result of net decreases in estimates of losses occurring in prior years, net losses and loss adjustment expenses incurred were reduced by $3.5 million in 1995. Favorable development in 1995 from losses occurring in 1992 through 1994, particularly in the fire line in 1994, was partially offset by adverse development from casualty treaty losses occurring in 1982 and prior years. As a result of increases in estimates of losses occurring in prior years, losses incurred increased by $15.0 million in 1994. Adverse development in 1994 from casualty treaty losses occurring prior to 1984 and property treaty losses occurring in 1992 was partially offset by favorable development on 1992 and prior fidelity treaty losses.
TRH's employees participate in benefit plans sponsored by AIG including a noncontributory defined benefit pension plan and a voluntary savings plan (a 401(k) plan) which provides for certain matching
6. PENSION, SAVINGS AND STOCK PURCHASE PLANS (Continued) contributions. These plans cover a substantial majority of TRH's employees. The AIG plans do not separately identify plan benefits and plan assets attributable to employees of participating companies. In the opinion of TRH, no material additional liability would accrue to TRH were such plan benefits and plan assets identifiable.
Each of the above plans provide that 25% of the options granted become exercisable on the anniversary date of the grant in each of the four years following the grant and expire 10 years from the date of grant. No further options can be granted under the 1990 Plan although options outstanding continue in force until exercise, expiration or forfeiture.
The following table summarizes information about the Company Plans' outstanding and exercisable options at December 31, 1996:
The effects of applying SFAS No. 123 in the pro forma calculations previously mentioned may not be indicative of future amounts as this standard does not apply to options granted prior to 1995. Additional grants in future years are anticipated.
TRH has service and expense agreements and certain other agreements with the AIG Group which provide for the reimbursement to the AIG Group of certain administrative and operating expenses which include, but are not limited to, investment advisory services, office space, data processing and payroll processing services. In 1996, 1995 and 1994, $8,500,000, $7,700,000 and $7,600,000, respectively, of operating and investment expenses relate to services and expenses provided by the AIG Group under these agreements.
The payment of dividends by the Company is dependent on the ability of its subsidiaries to pay dividends. The payment of dividends by TRC and its wholly-owned subsidiaries, TRZ and Putnam, is restricted by insurance regulations. Under New York insurance law, TRC and Putnam may pay dividends only out of their statutory earned surplus. Generally, the maximum amount of dividends that a company may pay without regulatory approval in any twelve-month period is the lesser of adjusted net investment income or 10% of statutory policyholders' surplus as of the end of the most recently reported quarter unless the New York Insurance Department, upon prior application, approves a greater dividend distribution. Adjusted net investment income is defined for this purpose to include net investment income for the twelve months immediately preceding the declaration or distribution of the current dividend increased by the excess, if any, of net investment income over dividends declared or distributed during the period commencing thirty-six months prior to the declaration or distribution of the current dividend and ending twelve months prior thereto. At December 31, 1996 and 1995, the statutory surplus of TRC includes the statutory surplus of Putnam since, during 1995, all the capital stock of Putnam was contributed by the Company to TRC. Also, at December 31, 1996, TRC had statutory earned surplus of $475,872,000 and, in 1997, could pay dividends of approximately $95,271,000 without such regulatory approval.
9. DIVIDEND RESTRICTION AND STATUTORY FINANCIAL DATA (Continued) TRC and Putnam each prepare statutory financial statements in accordance with accounting practices prescribed or permitted by New York--their state of domicile. Prescribed statutory accounting practices are discussed in a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as in state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. All material statutory accounting practices of TRC and Putnam are prescribed in the authoritative literature described above.
10. REINSURANCE CEDED (Continued) Amounts recoverable from retrocessionnaires are recognized in a manner consistent with the claims liabilities associated with the retrocession and are presented on the balance sheet as reinsurance recoverable on paid and unpaid losses and loss adjustment expenses. Such balances at December 31, 1996 and 1995 are comprised as follows:
Ceded reinsurance arrangements do not relieve TRH from its obligations to the insurers and reinsurers from whom it assumes business. The failure of retrocessionnaires to honor their obligation could result in losses to TRH; consequently, an allowance has been established for estimated unrecoverable reinsurance on paid and unpaid losses totaling $13.3 million in each of 1996 and 1995. TRH evaluates the financial condition of its retrocessionnaires through a security committee. With respect to reinsurance recoverable on paid and unpaid losses and prepaid reinsurance premiums, TRH holds substantial amounts of funds and letters of credit to collateralize these amounts. Such funds and letters of credit can be drawn on for amounts remaining unpaid beyond contract terms. No uncollateralized amounts recoverable from a single retrocessionnaire, other than amounts due from AIG affiliates, are considered material to the financial position of TRH.
The following table is a summary of business by geographic segment. Premium revenues from certain international operations are derived from many countries, generally within their respective regions. With respect to London, while a majority of premium revenues are derived from ceding companies in the United Kingdom and continental Europe, a significant portion of premium revenues are also derived from
(3) In 1994, the Company's only European operations were based in London.