One-half of the office space of TRH's New York headquarters, and its Hong Kong and Toronto offices are rented from AIG, which either owns the property or leases it from others. The remaining office space of TRH's headquarters and the Chicago, Miami, Buenos Aires, Rio de Janeiro, Zurich, London, Paris, Shanghai and Tokyo offices, are rented from third parties. The leases for the office space occupied by TRH's New York headquarters expire in 2005.
- ------------------------ (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 and thereafter 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. In addition, the total cumulative effect of accounting changes in 1993, amounted to a net benefit of $1.35 per common share on both a basic and diluted basis.
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.
Net premiums written increased in 1997 compared to the prior year, generally as a result of more favorable conditions in certain sectors of the market in 1997 as compared to other sectors, and due to the inclusion of a full year of net premiums written from TRZ in 1997 compared to six months net premiums written in 1996, when TRZ was acquired. Such net premiums written by TRZ amounted to $172.3 million
Generally as a result of more favorable conditions in certain sectors of the market in 1996 as compared to other sectors, net premiums written increased in 1996. Net premiums written by our international locations increased by 48.2% compared to 1995, to $462.7 million, while domestic net premiums written decreased by 2.5% to $679.8 million. International business represented 40.5% of total net premiums written. International net premiums written increased significantly in treaty property, motor, ocean marine and other liability lines, aided by $78.2 million of net premiums written by newly-acquired TRZ. The decrease in domestic net premiums written was due to significant market competition. Decreases in domestic property lines and certain specialty and general casualty classes other than medical malpractice were partially offset by increases in treaty workers' compensation, motor (including nonstandard risks), medical malpractice, surety and marine lines. On a worldwide basis, property lines business represented 33.5% of net premiums written in 1996 compared to 33.0% in 1995. The balance represented casualty lines. The increased amount of property business increases the potential for volatile underwriting results caused by major natural disasters. Treaty volume represented 90.5% of net premiums written in 1996 compared to 87.2% in 1995. The balance represented facultative accounts. The net increases noted above were primarily from treaty business and generally resulted from increased coverage provided.
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 years.
Reserves for the reinsurance of risks related to environmental impairment and asbestos-related illnesses amounted to $74 million and $78 million at December 31, 1997 and 1996, respectively. The majority of TRH's environmental and asbestos-related liabilities arise from contracts entered into after 1984. These obligations generally arose from contracts underwritten specifically as environmental or asbestos-related coverages rather than from standard general liability coverages where the environmental
The decrease of the underwriting expense ratio in 1997 compared to 1996 was due to a reduction in the ratio of net commissions to net premiums written, caused, in large part, by a slight change in the mix of business. The increase of the underwriting expense ratio in 1996 compared to 1995 consisted of an increase in the net commission ratio of 0.5 and an increase in the other operating expense ratio of 0.3.
Realized net capital gains on the disposition of investments totaled $32.9 million in 1997, $18.7 million in 1996 and $11.1 million in 1995. Income before income taxes was $234.7 million in 1997, $196.3 million in 1996 and $163.8 million in 1995. The increases in income before income taxes in 1997 and 1996 over the respective prior years resulted from increased net investment income and realized net capital gains, and improved underwriting results.
The provisions for federal and foreign income taxes were $49.2 million in 1997, $41.5 million in 1996 and $31.9 million in 1995. 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 1997 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.
The effective tax rates were 21.0% in 1997, 21.1% in 1996 and 19.5% in 1995. The increase in the effective tax rate in 1996 as compared to the prior year was due, in large part, to higher earnings and a lower proportion of tax-exempt investment income to income before income taxes in 1996 as compared to 1995.
Net income and net income per common share on a diluted basis, respectively, were as follows: 1997--$185.5 million, $5.34; 1996--$154.9 million, $4.48; 1995--$131.9 million, $3.82. Reasons for these increases are as discussed above. Per share amounts have been retroactively adjusted to reflect the 3-for-2 common stock split paid in July 1997. (See Note 2(j) of Notes to Consolidated Financial Statements.)
At December 31, 1997, total investments and cash were $3,992.5 million compared to $3,589.9 million at December 31, 1996. This increase is principally due to net cash provided by operating activities which totaled $318.9 million in 1997 and an increase during the year in net unrealized appreciation of investments available for sale of $87.1 million. (See Note 3 of Notes to Consolidated Financial Statements.)
TRH's fixed maturity investments, approximately 87.7% of total investments as of December 31, 1997, are predominantly investment grade, liquid securities concentrated in maturities of less than 10 years. Also as of that date, approximately 11.9% of total investments were in common and nonredeemable preferred stocks and the remaining 0.4% 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 1998 and thereafter for a period the length of which is difficult to predict, but which TRH believes will be at least one year.
Basic EPS, which is calculated by dividing net income by the weighted average number of common shares outstanding, replaces primary EPS from the prior standard. For all periods previously reported by TRH, basic EPS is the same as primary EPS, since the impact of the Company's common stock equivalents (principally stock options) for those periods did not reach the significance threshold prescribed to require adjustment under the prior standard. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS from the prior standard.
Pursuant to the standard, TRH has adopted SFAS No. 128 for the 1997 annual financial statements and has restated all prior period EPS data presented.
FRR No. 48 amends rules and forms for registrants and requires clarification and expansion of existing disclosures for derivative financial instruments, other financial instruments and derivative commodity instruments, as defined therein. The amendments require enhanced disclosure with respect to these derivative instruments in the notes to financial statements. As of December 31, 1997, TRH has no derivative financial instruments.
1996 ACCOUNTING STANDARD: In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In addition, it provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.
SFAS No. 125 was effective as of January 1, 1997 and was to be applied prospectively. However, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," deferred for one year the effective date of certain provisions of SFAS No. 125 which affect repurchase agreements, dollar-rolls,
IMPACT OF THE YEAR 2000 ISSUE: The year 2000 (Y2K) problem results from certain computer programs having been written using two digits, rather than four, to define the applicable year. A program left uncorrected may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in system failures or miscalculations causing disruption of operations and financial losses.
TRH's major reinsurance application systems have recently been the subject of significant upgrades, scheduled for completion in mid-1998. These updated systems were constructed to be Y2K compliant. TRH's other computer systems are relatively new, generally having been written or purchased in the last five years, when the Y2K issue had already been identified and was usually a consideration in the development process. TRH is currently working to ensure that all its computerized data processing systems will treat the year 2000 properly in date-sensitive fields. Accordingly, TRH is reviewing its internally developed systems as well as contacting its software vendors to ensure that all critical systems are Y2K compliant. These reviews and corrective actions, if necessary, are expected to be substantially completed before the end of 1998. The additional costs that will result from these activities are not expected to have a material effect on net income, financial condition or cash flows.
We have audited the consolidated financial statements and the financial statement schedules of Transatlantic Holdings, Inc. and Subsidiaries listed in the index on page 31 of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
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 and thereafter are included in the consolidated results of the Company. 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 1997.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
(c) CASH EQUIVALENTS: A portion of cash equivalents is invested in a money market fund managed by an American International Group, Inc. (AIG, and collectively, with its subsidiaries, the AIG Group) subsidiary. (See Note 9.)
(e) LOSSES AND LOSS ADJUSTMENT EXPENSES: Losses and loss adjustment expenses, net of related reinsurance recoverable, are charged to income as incurred. Unpaid losses and loss adjustment expenses are principally based on reports and individual case estimates received from ceding companies. An amount is included for losses and loss adjustment expenses incurred but not reported (IBNR) on the basis of past experience. The methods of making such estimates and for establishing the resulting reserves are continually reviewed and updated, and any adjustments resulting therefrom are reflected in income currently. TRH does not discount its unpaid losses and loss adjustment expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) REINSURANCE DEPOSITS: Amounts received pursuant to reinsurance contracts that are not expected to indemnify the ceding company against loss or liability are recorded as deposits and included in the Consolidated Balance Sheet as "reinsurance balances payable." These deposits are treated as financing transactions and are credited with interest according to contract terms.
(j) NET INCOME PER COMMON SHARE: Net income per common share has been computed in the following table in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (See Note 2k(i)), based upon weighted average common shares outstanding. Share amounts have been retroactively adjusted to reflect a 3-for-2 split of the common stock in the form of a 50% stock dividend, paid in July 1997.
For all entities with complex capital structures, basic and diluted EPS must be shown on the face of the income statement with equal prominence. In addition, a reconciliation of the numerator and denominator from the basic EPS computation to the diluted EPS computation is required. (See Note 2(j))
ii. 1996 ACCOUNTING STANDARD: In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In addition, it provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.
iii. 1995 ACCOUNTING STANDARD: In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes new financial accounting and reporting standards for stock-based employee compensation plans, including stock option and stock purchase plans. Compensation resulting from the award of stock-based compensation must be determined based on the fair value of consideration received or fair value of the equity instrument issued, whichever is more reliably measurable. Such compensation expense, net of income taxes, may be recognized in the Statement of Operations over the service period of the employee (generally the vesting period). In lieu of recording such compensation expense, entities are permitted to disclose its pro forma impact, net of income taxes, on reported net income and earnings per share. Entities choosing such disclosure will continue to measure compensation expense from stock-based compensation in the Statement of Operations based on the
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) intrinsic value method prescribed in Statement of the Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees."
Common stock activity for each of the three years in the period ended December 31, 1997 was as follows:
As a result of a common stock split in the form of a 50% stock dividend, common stock increased and additional paid-in capital decreased by $11.5 million in 1997. This stock split was paid on July 18, 1997 to holders of record on June 27, 1997.
The charges made to operations for these plans for 1997, 1996 and 1995 were $732,000, $678,000 and $555,000, respectively.
In 1995, the Company's Board of Directors adopted, and the stockholders approved, the "1995 Stock Option Plan" (the 1995 Plan). This plan, as amended, provides that options may be granted to certain key employees and non-employee directors to purchase a maximum of 1,500,000 shares of the Company's common stock at prices not less than their fair market value at the date of grant. At December 31, 1997, 950,631 shares were reserved for future grants under the 1995 Plan. Options granted under the plan may be used to purchase the Company's common stock at the fair market value of each share at the date of grant. The Company also maintains the "Transatlantic Holdings, Inc. 1990 Stock Option Plan" (the 1990 Plan) which operates under substantially the same terms as the 1995 Plan. The 1995 Plan and the 1990 Plan are together hereinafter referred to as the Company Plans.
A summary of the status of the Company Plans as of December 31, 1997, 1996 and 1995 and changes during the years ended on those dates is presented below:
The following table summarizes information about the Company Plans' outstanding and exercisable options at December 31, 1997:
8. STOCK OPTION PLANS (Continued) The Company accounts for its stock options based on the intrinsic value method prescribed in APB No. 25 and related interpretations, as permitted under SFAS No. 123. Had compensation cost been charged to earnings in accordance with the fair value method discussed in SFAS No. 123, the Company's net income and net income per share (on a pro forma basis) would have been as follows:
As of December 31, 1997, the AIG Group beneficially owned approximately 49% of the Company's outstanding common stock.
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
10. DIVIDEND RESTRICTION AND STATUTORY FINANCIAL DATA (Continued) 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. The statutory surplus of TRC includes the statutory surplus of Putnam since all the capital stock of Putnam is owned by TRC. At December 31, 1997, TRC had statutory earned surplus of $624,545,000 and, in 1998, could pay dividends of approximately $116,386,000 without such regulatory approval.
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.
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 1997 and 1996. 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.