As of December 31, 2001, one-half of the office space of TRH's New York headquarters and its Toronto office are rented from AIG, which leases it from others. The remaining office space of TRH's headquarters and the Chicago, Miami, Buenos Aires, Rio de Janeiro, London, Paris, Zurich, Warsaw, Sydney, Hong Kong, 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.
The following discussion refers to the consolidated financial statements of TRH as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001, which are presented elsewhere herein. TRH's principal operating subsidiaries are Transatlantic Reinsurance Company (TRC), Trans Re Zurich (TRZ) and Putnam Reinsurance Company (Putnam).
expenses incurred but not reported (IBNR) on the basis of past experience and other factors. The methods of making such estimates and for establishing the resulting reserves and related recoverables are continually reviewed and updated, and any adjustments resulting therefrom are reflected in income currently. Provisions for inflation and 'social inflation' (e.g., awards by judges and juries which progressively increase in size at a rate exceeding that of general inflation) are implicitly considered in the overall reserve setting process as an element of numerous judgments which are made as to expected trends in average claim severity.
Results for 2001 include pre-tax net losses and loss adjustment expenses of $200 million from the September 11th terrorist attacks, or $130 million after tax. The pre-tax net loss estimate is comprised of gross incurred losses and loss adjustment expenses of approximately $500 million less related reinsurance ceded of approximately $300 million. The losses recorded for this event represent TRH's estimate of ultimate losses based upon information presently available. Loss payments related to this event were not material in 2001.
reinsurance premiums represent the portion of gross premiums assumed and reinsurance ceded, respectively, relating to the unexpired terms of such coverages. 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.
Insurance industry estimates of losses from the September 11th attacks ranged from $30 billion to $70 billion and made this event the most costly insured catastrophe ever. The range of expected industry loss is extremely broad due to the unprecedented nature of this event and the many lines of business affected. Attracted by the improved market conditions resulting from the decline in industry capacity, additional capital has entered the market through the formation of new companies, principally in Bermuda, and through the addition of capital to certain existing companies. The additional market capacity will spur additional competition and will likely serve to lessen the magnitude of pricing improvements resulting from the burden of industry costs from September 11. Nevertheless, TRH cannot predict, with any reasonable certainty, future market conditions.
Of the total increase in net premiums written in 2001 compared to 2000, domestic net premiums written increased by $167.5 million, or 19.8%, to $1,013.0 million, with significant increases recorded in auto liability, general casualty and professional liability lines. These increases were partially offset by significant decreases in accident and health and aviation net premiums written.
Net premiums written by international offices increased in 2001 by $79.6 million, or 9.8%, over the prior year, to $892.7 million. The majority of international offices recorded increases in net premiums written, led by London and TRZ. International net premiums written increased significantly in auto liability and professional liability lines. These increases were partially offset by significant decreases in aviation and accident and health lines. International business represented 46.8% of 2001 net premiums written compared to 49.0% in 2000.
liability, accident and health and property catastrophe excess-of-loss lines. International business represented 49.0% of 2000 net premiums written compared to 49.9% in 1999.
The increase in net premiums earned in each of 2001 and 2000 compared to the respective prior year amounts resulted primarily from the growth in net premiums written in both years.
Net investment income increased in 2001 compared to 2000 due to an increase in income from equities and in other interest income, offset, in part, by a reduction in interest income from fixed maturities, due principally to lower interest rates on fixed maturities purchased compared to interest rates on fixed maturities sold or matured. Net investment income grew in 2000 compared to 1999 due to an increase in investment income from other invested assets offset largely by a decrease from fixed maturities, and a reduction in investment expenses. The growth in net investment income in 2000 versus 1999 was adversely affected by the impact of negative operating cash flow in the first two quarters of 2000, caused largely by the high level of paid losses in that year (see discussion of operating cash flow under Financial Condition and Liquidity) and the negative impact of foreign exchange related to certain of our international locations. (See Note 3 of Notes to Consolidated Financial Statements.)
The property and casualty insurance and reinsurance industries use the combined ratio as a measure of underwriting profitability. The combined ratio reflects only underwriting results, and does not include income from investments. Generally, a combined ratio under 100 indicates an underwriting profit and a combined ratio exceeding 100 indicates an underwriting loss. Underwriting profitability is subject to significant fluctuations due to competition, natural and man-made catastrophic events, economic and social conditions, foreign currency exchange rate fluctuations, interest rates and other factors.
TRH's 2001 results included net pre-tax catastrophe losses of $215 million ($200 million of which represents the estimated cost of the September 11th attacks) and a net pre-tax loss of $60 million for the estimated reinsurance exposure related to Enron Corporation, which together added 15.4 to each of the loss and loss adjustment expense ratio and combined ratio.
In addition, as a result of net decreases in estimates of losses occurring in prior years, net losses and loss adjustment expenses were reduced by $67.5 million in 1999. Significant favorable development was recorded in 1999 on losses occurring in 1987 through 1996 in the other liability line and in 1994 through 1998 in the aviation line. These reductions to incurred losses were partially offset by adverse development in 1999 on losses occurring in 1997 and 1998, principally in fire, allied lines, auto liability and ocean marine lines, and prior to 1984 in the other liability line.
The underwriting expense ratio, which represents the sum of net commissions and other operating expenses expressed as a percentage of net premiums written, increased in 2001 compared to 2000 due principally to an increase in the commission ratio. This increase was caused, in large part, by a slight shift in the mix of business between years, including an increase in 2001 of ceded excess-of-loss premiums which have minimal ceding commissions. The underwriting expense ratio decreased in 2000 compared to 1999 due principally to a decrease in the commission ratio, caused, in large part, by a slight shift in the mix of business between years.
Pre-tax realized net capital (losses) gains on the disposition of investments totaled ($0.2) million in 2001, $33.1 million in 2000 and $82.8 million in 1999. The reduction in realized net capital gains in 2001 compared to 2000 was consistent with our overall asset management strategy to maximize after-tax income. The high levels of realized net capital gains in 1999 as compared to 2000 was caused by the redeployment of a portion of the equity portfolio in early 1999 generally into fixed income investments.
A federal and foreign income tax benefit of $53.0 million was recorded in 2001, compared to federal and foreign income tax expense of $56.3 million in 2000 and $48.7 million in 1999. The Company and its domestic subsidiaries, TRC and Putnam, filed consolidated federal income tax returns for the years under discussion, except those for 2001 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 or loss those items of income of the non-U.S. subsidiary, TRZ, which are subject to U.S.
Net income and net income per common share on a diluted basis, respectively, were as follows: 2001 -- $18.9 million, $0.36; 2000 -- $211.6 million, $4.03; 1999 -- $187.4 million, $3.58. Reasons for the changes between years are as discussed earlier. Per share amounts have been retroactively adjusted, as appropriate, to reflect the 3-for-2 common stock split paid in July 2001. (See Note 7 of Notes to Consolidated Financial Statements.)
2001 compared to 2000 -- Domestic revenues were higher in 2001 due to increased net premiums written, as discussed earlier in the Operational Review, offset, in part, by a greater increase in net unearned premiums and a reduction in realized net capital gains in 2001 as compared to 2000. The greater increase in net unearned premiums in 2001 was due, in large part, to increased net premiums written volume in the 2001 period, differences in earnings patterns related to variances in the inception dates of business assumed and the mix of business between pro rata and excess-of-loss between periods. The difference between the loss before income taxes in 2001 compared to the income before income taxes in 2000 was primarily due to a $115 million increase in net pre-tax catastrophe losses (including $100 million related to September 11), a net pre-tax loss of $60 million from estimated reinsurance exposure related to Enron Corporation, a reduction of pre-tax realized net capital gains of $29.4 million and an increase in net acquisition costs -- all in 2001 as compared to 2000.
2000 compared to 1999 -- Domestic revenues were slightly higher in 2000 compared to 1999 primarily due to a significant increase in net premiums written, as discussed earlier in the Operational Review, offset, in large part, by a significant decrease in realized net capital gains. Income before income taxes declined in 2000 compared to 1999 due to a reduction in realized net capital gains offset, in part, by improved underwriting performance (principally due to an improved loss ratio) in 2000 versus 1999.
2000 compared to 1999 -- Revenues were higher in 2000 compared to 1999 due principally to increases in net premiums written, principally in London and TRZ. Income before income taxes increased in 2000 compared to 1999 due to significant catastrophe loss activity recorded in Europe in 1999, due, in large part, to the European storms, partially offset by adverse development recorded in 2000 on losses occurring prior to 2000 in fire and allied lines.
2001 compared to 2000 -- Revenues in 2001 were slightly lower than in 2000 principally as a result of a reduction in realized net capital gains. The difference between loss before income taxes recorded in 2001 and income before income taxes recorded in 2000 was due, in large part, to increased loss activity in the Latin American region and in Asia, other than Japan.
2000 compared to 1999 -- Revenues increased primarily due to a significant difference in the change in unearned premium reserve between years, and to a lesser extent, an increase in net premiums written. The difference between income before income taxes in 2000 versus loss before income taxes in 1999 was caused by a significant improvement in underwriting results in 2000 versus 1999.
As a holding company, the Company's assets consist primarily of the stock of TRC and the Company's future cash flows depend on the availability of dividends or other statutorily permissible payments from TRC and its wholly-owned operating subsidiaries, TRZ and Putnam. (See Note 13 of Notes to Consolidated Financial Statements for a discussion of restrictions on dividend payment.) In 2001 and 2000, the Company received cash dividends from TRC of $26.4 million and $18.1 million, respectively. Sources of funds for the operating subsidiaries consist primarily of premiums, reinsurance recoverables, investment income, proceeds from sales, redemptions and the maturing of investments and funds received under securities loan agreements. Funds are applied primarily to payments of claims, ceded reinsurance premiums, insurance operating expenses, income taxes and investments in fixed income and equity securities. Premiums are generally received substantially in advance of related claims payments. Cash and cash equivalents are maintained for the payment of claims and expenses as they become due. TRH does not anticipate any material capital expenditures in the foreseeable future.
As a result of an immaterial amount of 2001 catastrophe losses being paid in 2001, future years (2002 and 2003, most significantly) are expected to include net payments for those losses as well as for losses from reinsurance exposure related to Enron Corporation.
For 2000, TRH's operating cash flow was modestly negative, a substantial reduction from the positive amount reported in 1999. The reduction in cash flow was caused largely by a significant increase
A portion of consolidated operating cash flow, namely, $138.6 million, - -$5.0 million and $104.6 million, was derived from international operations in 2001, 2000 and 1999, respectively.
TRH believes that its balance of cash and cash equivalents of $124.2 million as of December 31, 2001 and its future cash flows will be sufficient to meet TRH's cash requirements through the end of 2002 and thereafter for a period the length of which is difficult to predict, but which TRH believes will be at least one year.
Gross unrealized gains and losses on bonds available for sale as of December 31, 2001 amounted to $124.0 million and $21.0 million, respectively.
recoverable on unpaid losses and loss adjustment expenses totaled $825.7 million, an increase of $376.5 million, or 83.8%, from the prior year. This increase was due, in large part, to reinsurance recoverable of approximately $300 million related to September 11. Of the total reinsurance recoverable on paid and unpaid losses and loss adjustment expenses, 95% of the unsecured balance was due from companies rated A or better. (See Note 14 of Notes to Consolidated Financial Statements.)
TRH has performed VaR analyses to estimate the maximum potential loss of fair value for financial instruments for each type of market risk. In this analysis, financial instrument assets include all investments and cash and accrued investment income. Financial instrument liabilities include unpaid losses and loss adjustment expenses and unearned premiums, each net of reinsurance. TRH has calculated the VaR for 2001 and as of December 31, 2000 using historical simulation. The historical simulation methodology entails re-pricing all assets and liabilities under explicit changes in market rates within a specific historical time period. In this case, the most recent three years of historical market information for interest rates, equity index prices and foreign currency exchange rates are used to construct the historical scenarios. For each scenario, each transaction is re-priced. Consolidated totals are calculated by netting the values of all the underlying assets and liabilities. The final VaR number represents the maximum potential loss incurred with 95% confidence (i.e., only 5% of historical scenarios show losses greater than the VaR figure). A one-month holding period is assumed in computing the VaR figure.
The decrease in accumulated other comprehensive income mentioned above consisted principally of the following: net unrealized depreciation of equities, net of income tax, of $27.2 million, caused principally by a general weakening of the U.S. economy during the year, which was exacerbated by the terrorist attacks of September 11; net unrealized appreciation of bonds available for sale, net of income tax, of $3.6 million; net unrealized currency translation loss, net of income tax, of $17.7 million, caused by a strengthening of the U.S. dollar, particularly against certain European currencies; partially offset by an increase from the cumulative effect of an accounting change, net of income taxes, of $32.4 million,
resulting from the transfer of bonds held to maturity to the bonds available for sale classification. (See discussion of change in classification of certain bonds in the section below on Accounting Standards(a).)
Net unrealized appreciation (depreciation) of investments, net of income taxes, is subject to significant volatility resulting from changes in the market value of bonds and equities available for sale. Market values may fluctuate due to changes in general economic and political conditions, market interest rates, prospects of investee companies and other factors.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 101, 'Revenue Recognition in Financial Statements.' SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. In accordance with the bulletin and subsequent guidance that deferred the implementation date, TRH adopted SAB 101 in the fourth quarter of 2000. With respect to results of operations, financial position and cash flows, SAB 101 did not have a material impact in 2001 nor 2000 and is not expected to have a material impact thereafter.
SFAS No. 142, 'Goodwill and Other Intangible Assets,' was issued by the FASB in June 2001. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles (Codification) as primary guidance on statutory accounting effective January 1, 2001. The Codification provides guidance for areas where previously statutory accounting had been silent and changes current statutory accounting in some areas. The New York Insurance Department (the state of domicile of TRC and Putnam) adopted most of the Codification guidance for implementation on January 1, 2001, but did not adopt several key provisions including those on deferred income taxes. The cumulative effect of the implementation of Codification guidance (as adopted by the New York Insurance Department) on the statutory surplus of TRC and Putnam as of January 1, 2001 was not material. In addition, the Codification guidance is not expected to have a material effect on future statutory net income, financial position or cash flows.
As one or both of TRC and Putnam is also licensed, accredited or otherwise permitted to serve as a reinsurer in all states and the District of Columbia in the United States, they are required to disclose the differences between implementing Codification guidance on a New York State basis and Codification guidance adopted by the NAIC in a footnote to their statutory filings. Statutory surplus of both TRC and Putnam as reported on an NAIC basis exceeded statutory surplus reported to the New York Insurance Department as of December 31, 2001 and 2000, principally as a result of the recognition of certain deferred tax assets on an NAIC basis. The difference in statutory net income between such bases in 2001 was not material and is not expected to be material in the future.
As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 133 'Accounting for Derivative Instruments and Hedging Activities' in 2001.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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). TRC owns all of the common stock of Trans Re Zurich (TRZ) and Putnam Reinsurance Company (Putnam). As of December 31, 2001, American International Group, Inc. (AIG, and collectively, with its subsidiaries, the AIG Group) beneficially owned approximately 60% of the Company's outstanding shares.
Realized gains or losses on the sale of investments are determined on the basis of specific identification. Changes in unrealized appreciation (depreciation) of bonds available for sale, equity investments and other invested assets are charged or credited, net of deferred income taxes, directly to accumulated other comprehensive income (see Note 9), a component of stockholders' equity. Investment income is recorded as earned. Amortization of bond premium and the accrual of bond discount are charged or credited to net investment income.
Unpaid losses and loss adjustment expenses include certain amounts for the reinsurance of risks related to environmental impairment and asbestos-related illnesses. 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 or asbestos-related liabilities were neither clearly defined nor specifically excluded. The reserves carried at December 31, 2001 for such claims, including IBNR, are based upon known facts and current law. However, significant uncertainty exists as, among other things, there are inconsistent court resolutions and judicial interpretations with respect to underlying policy intent and coverage and uncertainties as to the allocation of responsibility for resultant damages. Further, there is always the possibility of changes in statutes, laws, regulations and other factors that could have a material effect on these liabilities and, accordingly, future earnings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (g) DEFERRED INCOME TAXES: Deferred income taxes are provided for the expected tax effect of temporary differences between the amounts of assets and liabilities used for financial reporting purposes and the amounts used in tax returns.
(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 'reinsurance balances payable' on the Consolidated Balance Sheets. These deposits are treated as financing transactions and are credited with interest according to contract terms.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) after December 15, 2000. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is to be applied prospectively with certain exceptions. Adoption of the new requirements on their effective dates has not had and is not expected to have a material impact on TRH's results of operations, financial position or cash flows.
(a) STATUTORY DEPOSITS: Investments, the substantial majority of which are bonds and common stocks available for sale, were deposited with governmental authorities as required by law and amounted to approximately $113,000,000 and $118,000,000 at December 31, 2001 and 2000, respectively.
(c) INVESTMENT GAINS AND LOSSES: Realized net capital (losses) gains and the change in net unrealized (depreciation) appreciation of investments are summarized as follows:
(2) Amounts for 2001 include the change in classification of certain bonds (see Note 2(j)(i)).
(d) FIXED MATURITIES: The amortized cost and market value of bonds at December 31, 2001 and 2000 are summarized as follows:
Gross gains of $6,069,000, $6,688,000 and $4,961,000 and gross losses of $7,145,000, $41,457,000 and $9,273,000 were realized on sales of investments in fixed maturities available for sale in 2001, 2000 and 1999, respectively.
The U.S. federal income tax rate was 35% for 2001, 2000 and 1999. Actual tax (benefit) expense on (loss) income before income taxes differs from the 'expected' amount computed by applying the U.S. federal income tax rate because of the following:
(b) The components of the net deferred income tax asset at December 31, 2001 and 2000 were as follows:
(c) Income tax payments by TRH totaled $27,702,000, $47,594,000 and $61,861,000 in 2001, 2000 and 1999, respectively.
2000 catastrophe losses had an immaterial impact on that year's results. In addition, as a result of net increases in estimates of losses occurring in prior years, net losses and loss adjustment expenses were increased by $14.4 million in 2000. In particular, significant adverse development was recorded in 2000 on losses occurring in 1998 and 1999 in fire and allied lines. These increases to incurred losses were partially offset by favorable development in 2000 on losses occurring primarily in 1994 through 1999 in the other liability line.
Common stock activity for each of the three years in the period ended December 31, 2001 was as follows:
Results for 2001 include pre-tax net losses and loss adjustment expenses of $200 million from the September 11th terrorist attacks, or $130 million after tax. The pre-tax net loss estimate is comprised of gross incurred losses and loss adjustment expenses of approximately $500 million less related reinsurance ceded of approximately $300 million. The losses recorded for this event represent TRH's estimate of ultimate losses based upon information presently available.
The charges made to operations for these plans for 2001, 2000 and 1999 were $1,912,000, $1,599,000, and $751,000, respectively.
In each of 1994 and 1992, the Stock Option and Purchase Plan Committee granted 45,000 options to certain non-employee directors of the Company, who are directors, officers and employees of AIG, to
11. STOCK OPTION PLANS (CONTINUED) purchase shares of the Company's common stock at $22.67 per share and $23.33 per share, respectively. Such options were granted outside of, but on substantially the same terms and conditions as, the 1990 Plan. As of December 31, 2001, all of these options were exercisable as none have been exercised or forfeited. The impact of these options on the financial statements is not material.
A summary of the combined status of the 2000 Plan, the 1995 Plan and the 1990 Plan (collectively, the Company Plans) as of December 31, 2001, 2000 and 1999 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, 2001:
The Company accounts for its stock options based on the intrinsic value method prescribed in Accounting Principles Board Opinion (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
13. DIVIDEND RESTRICTION AND STATUTORY FINANCIAL DATA (CONTINUED) 2001, TRC had statutory earned surplus of $983,249,000, and, in 2002, could pay dividends of approximately $140,105,000 without such regulatory approval.
TRH conducts its business and assesses performance through segments organized along geographic lines. Financial data from the London and Paris branches and from TRZ are reported in the aggregate as International-Europe and considered as one segment due to operational and regional similarities. Data from branches in the Americas, other than those in the United States which underwrite primarily domestic business, and from branches in the Asia Pacific region are grouped as International-Other and
15. SEGMENT INFORMATION (CONTINUED) represent the aggregation of non-material segments. In each segment, property and casualty reinsurance is provided to insurers and reinsurers on a treaty and facultative basis, through brokers or directly to ceding companies.
While the great majority of premium revenues and assets relate to the regions where particular offices are located, a portion of such amounts are derived from other regions of the world. In addition, two large international brokers, respectively, accounted for non-AIG business equal to 15% and 14% in 2001, 15% and 14% in 2000 and 14% and 14% in 1999, of consolidated revenues, with a significant portion in each segment. Further, one customer accounted for approximately 12%, 10% and 8% of consolidated revenues in 2001, 2000 and 1999, respectively. Revenues from such customer, a significant portion of which were obtained through the two large international brokers discussed above, are included principally in the International-Europe segment, for all periods discussed.
(2) Domestic revenues and income before income taxes include realized net capital gains of $241, $29,668 and $82,162 in 2001, 2000 and 1999, respectively. Realized net capital gains (losses) for other segments in each of the years presented are not material.
(3) Net revenues from affiliates approximate $100,300, $110,038 and $80,237 in 2001, 2000 and 1999, respectively, and are included primarily in domestic revenues.
15. SEGMENT INFORMATION (CONTINUED) Net premiums earned by major product grouping are as follows:
(b) COMMERCIAL COMMITMENTS: In the normal course of business, TRH has issued letters of credit to ceding companies amounting to $16,767,000, which will expire by the end of 2003 unless renewed. Where TRH provides a letter of credit, it is generally contractually obligated to continue to provide a letter of credit to the ceding company in the future to secure certain reserves and other balances.
Rent expense approximated $7,844,000, $8,281,000 and $6,446,000 in 2001, 2000 and 1999, respectively.
The following is a summary of unaudited quarterly financial data for each of the years ended December 31, 2001 and 2000. However, in the opinion of management, all adjustments, consisting of normal recurring accruals, necessary to present fairly the results of operations for such periods have been made. Per share amounts have been retroactively adjusted, as appropriate, to reflect the 3-for-2 common stock split paid in July 2001.