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
(2) Share and per share data have been retroactively adjusted to reflect a 3-for-2 common stock split effected in the form of a 50% stock dividend, paid July 18, 1997.
The following discussion refers to the consolidated financial statements of Transatlantic Holdings, Inc. and its subsidiaries (TRH) as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which are presented elsewhere herein.
Increasingly in more recent years, the reinsurance market has been characterized by significant competition worldwide in most classes. The increases in net premiums written were primarily from treaty business and resulted from increased coverage provided. On a worldwide basis, casualty lines business represented 71.0% of net premiums written in 1998 versus 67.1% in the prior year. The balance represented property lines. Treaty business represented 94.7% of net premiums written versus 93.8% in the prior year. The balance represented facultative accounts.
Net premiums written by international offices increased in 1998 by $57.8 million, or 9.3%, over the prior year, to $682.0 million. Most international offices recorded increases in net premiums written, led by Paris and London. TRZ recorded a significant decrease compared to 1997 as a result of the shift of
Domestic net premiums written increased by $41.7 million, or 6.2%, over 1997, to $711.7 million, with significant increases recorded in the automobile liability line (including nonstandard risks) and certain specialty casualty classes (particularly other professional liability and accident and health lines), and a significant decrease recorded in the medical malpractice line.
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 in 1997 and $78.2 million in 1996.
The increase in net premiums earned in each of 1998 and 1997 compared to the respective prior year amounts resulted primarily from the significant growth in net premiums written in both years. Net investment income grew each year due to significant cash flow available for investment which was generated by operating activities. The percentage of growth has decreased in each succeeding year due to generally lower available yields on bonds purchased as compared to yields on bonds disposed of in recent years and reduced operating cash flow in 1998 and 1997 compared to the immediately preceding year. In 1997, the lower yields are also due to the fact that TRH had primarily been purchasing tax- exempt bonds for its domestic portfolio to benefit its after-tax results. Tax-exempt bonds carry lower pre-tax yields than taxable bonds that are comparable in risk and term to maturity due to their tax-advantaged status. In addition, in 1997 compared to 1996, $9.5 million of the increase in net investment income emanated from TRZ, due to the inclusion of its net investment income in 1996 only subsequent to its mid-year acquisition date. (See Note 3 of Notes to Consolidated Financial Statements.)
TRH's 1996 results did not include any significant catastrophe loss activity. In addition, 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 automobile liability line.
Income before income taxes was $323.4 million in 1998, $234.7 million in 1997 and $196.3 million in 1996. The increase in income before income taxes in 1998 over 1997 resulted from increased realized capital gains and net investment income partially offset by a deterioration in underwriting results caused by losses from Hurricane Georges. The increase in income before income taxes in 1997 over the prior year resulted from increased net investment income and realized net capital gains, and improved underwriting results.
The provisions for federal and foreign income taxes were $75.8 million in 1998, $49.2 million in 1997 and $41.5 million in 1996. 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 1998 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.
Net income and net income per common share on a diluted basis, respectively, were as follows: 1998 -- $247.5 million, $7.10; 1997 -- $185.5 million, $5.34; 1996 -- $154.9 million, $4.48. 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.)
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 11 of Notes to Consolidated Financial Statements for a discussion of restrictions on dividend payment.) During 1998, the Company received cash dividends of $14.9 million from TRC. Sources of funds for the operating subsidiaries consist primarily of premiums, reinsurance recoverables, investment income and proceeds from sales, redemptions and the maturing of investments. 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 of December 31, 1998, a significant portion of the bond portfolio was classified as available-for-sale and carried at market value. Fixed maturity investments are carried at amortized cost when it is TRH's positive intent to hold these securities to maturity and TRH has the ability to do so. Most activity within the bonds available for sale portfolio for the years under discussion represented strategic portfolio realignments, partially for tax purposes. TRH adjusts its mix of taxable and tax-exempt investments, as appropriate, generally as a result of strategic investment and tax planning considerations. As of December 31, 1998, bonds held to maturity had gross unrealized gains of $86.1 million and no gross unrealized losses. Gross unrealized gains and losses on bonds available for sale as of December 31, 1998 amounted to $92.9 million and $6.5 million, respectively.
As of December 31, 1998, 92.3% of the bond portfolio were rated Aaa or Aa, an additional 4.0% were also rated investment grade or better, 2.8% were rated below investment grade and 0.9% were not rated. Also, as of December 31, 1998, TRH had no derivative instruments. (See Note 3 of Notes to Consolidated Financial Statements.)
Each sensitivity was then applied to a database which contained both historical ranges of movements in all market factors and the correlations among them. The results were aggregated to provide a single amount that depicts the maximum potential loss in fair value at a confidence level of 95 percent for a time period of one month. VaR with respect to the aggregate of the three components of market risk cannot be derived by summing the individual risk amounts in the table above. At December 31, 1998, the VaR for TRH's financial instruments was approximately $69 million.
TRH's stockholders' equity increased to $1.61 billion at December 31, 1998, an increase of $253.5 million over year-end 1997. The net increase was comprised principally of net income of $247.5 million and an increase in accumulated other comprehensive income of $17.8 million (principally unrealized currency translation gain, net of income taxes), partially offset by dividends declared of $14.9 million. Unrealized appreciation (depreciation) of investments, net of deferred income taxes, a component of accumulated other comprehensive income, 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 conditions, market interest rates and other factors.
Risk-based capital (RBC) standards, promulgated by the National Association of Insurance Commissioners (NAIC), relate an individual company's statutory policyholders' surplus to the risk inherent in its overall operations and sets thresholds at which certain company and regulatory corrective actions are mandated. At December 31, 1998, the statutory surpluses of TRC and Putnam each significantly exceeded RBC requirements.
In accordance with the standard, TRH adopted SFAS No. 123 beginning with the 1996 annual financial statements and chose the pro forma disclosure option of implementation. (See Note 9 of Notes to Consolidated Financial Statements.)
In February 1997, the FASB issued SFAS No. 128, 'Earnings Per Share.' As compared to the prior standard, SFAS No. 128 simplifies computational guidelines, revises disclosure requirements and increases earnings per share (EPS) comparability on an international basis.
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) of Notes to Consolidated Financial Statements.)
In June 1997, the FASB adopted SFAS No. 130, 'Reporting Comprehensive Income.' This statement established standards for reporting and display of comprehensive income and its components
In June 1998, the FASB issued SFAS 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. All derivatives must be recognized as either assets or liabilities in the balance sheet and measured at fair value. The accounting recognition for the change in the fair value of a derivative depends on a number of factors, including the intended use of the derivative. SFAS No. 133 is effective for TRH as of January 1, 2000 and may not be applied retroactively. TRH presently has no derivative instruments.
In October 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-7, 'Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk.' This statement provides guidance on how to account for insurance and reinsurance contracts that do not transfer both required elements of insurance risk (i.e., underwriting risk and timing risk). SOP 98-7 will be effective for TRH on January 1, 2000. Restatement of previously issued annual financial statements is not permitted. Management believes that the impact of applying this statement will not be material to results of operations, financial position or cash flows.
in, among other things, an inability to process transactions, collect premiums, pay invoices or engage in similar normal business activities.
Most TRH systems and software packages were installed or purchased within the last five years, when the Y2K issue had already been identified and was usually a consideration in the development process. TRH has taken steps to identify its significant systems and programs, new and existing, hardware and software information technology (IT) as well as non-IT (e.g., telephone systems, fax machines and copiers), where Y2K failures could surface, and has effected remedial changes and conducted appropriate testing. This process is essentially complete for all critical systems. The costs associated with this process, which are expensed as incurred, have not had and are not expected to have a material effect on net income, financial position, cash flows or other non-Y2K IT projects and initiatives.
TRH does not presently believe that Y2K issues related to its internal IT and non-IT systems pose significant operational problems. Although TRH continues to monitor third party readiness, it cannot provide assurance that unresolved Y2K issues of such parties will not have a material adverse impact on TRH's operations or financial results. TRH will continue to consider the effects of potential unresolved Y2K issues of third parties on its business and develop contingency plans, as necessary. Such plans may include the selection of alternate third parties or other actions designed to mitigate the effects of a third party's lack of preparedness.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
In our opinion, the consolidated financial statements listed in the index on page 31 of this Form 10-K present fairly, in all material respects, the financial position of Transatlantic Holdings, Inc. and Subsidiaries at December 31, 1998 and 1997, and the 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. In addition, in our opinion, the financial statement schedules listed in the index on page 31 of this Form 10-K present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 Putnam Reinsurance Company (Putnam).
In addition, 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 1998.
(d) DEFERRED ACQUISITION COSTS: Acquisition costs, consisting primarily of net commissions incurred on business conducted through reinsurance contracts or certificates, are deferred, and then amortized over the period in which the related premiums are earned, generally one year. Anticipated losses and loss adjustment expenses and estimated remaining costs of servicing the contracts are considered in determining acquisition costs to be deferred. Anticipated investment income is not considered in the deferral of acquisition costs.
(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 2(k)), 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.
In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, 'Accounting for Stock-Based Compensation.' This statement established 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 intrinsic value method prescribed in Accounting Principles Board (APB) No. 25, 'Accounting for Stock Issued to Employees.'
Basic EPS, which is calculated by dividing net income by the weighted average number of common shares outstanding, replaced primary EPS from the prior standard. For all periods reported by TRH prior to implementation of the standard, basic EPS would have been 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.
SFAS No. 131 is effective for TRH's 1998 financial statements. This statement need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. TRH has adopted this standard for the 1998 annual financial statements and has provided comparable prior year data.
(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 $122,000,000 and $123,000,000 at December 31, 1998 and 1997, respectively.
(b) NET INVESTMENT INCOME: An analysis of net investment income of TRH follows:
(d) FIXED MATURITIES: The amortized cost and market value of bonds at December 31, 1998 and 1997 are summarized as follows:
Gross gains of $7,625,000, $2,930,000 and $6,771,000 and gross losses of $647,000, $1,325,000 and $6,903,000 were realized on sales of investments in fixed maturities available for sale in 1998, 1997 and 1996, respectively.
(e) EQUITIES: Gross gains of $122,685,000, $35,507,000 and $23,621,000 and gross losses of $10,874,000, $6,132,000 and $5,398,000 were realized on sales of equities in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, net unrealized appreciation of equities (before applicable income taxes) included gross gains of $160,160,000 and $171,130,000 and gross losses of $6,199,000 and $1,719,000, respectively.
(b) The components of the net deferred income tax asset at December 31, 1998 and 1997 were as follows:
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 automobile liability line.
Common stock activity for each of the three years in the period ended December 31, 1998 was as follows:
TRH's employees participate in benefit plans administered by AIG (See Note 9) including a noncontributory defined benefit pension plan and a voluntary savings plan (a 401(k) plan) which provides for certain matching contributions. These plans cover a substantial majority of TRH's employees. Certain of these plans do not separately identify plan benefits and plan assets attributable to employees of participating companies. In the opinion of management, no material additional liability would accrue to TRH were such plan benefits and plan assets identifiable.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998, 816,611 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.
The weighted average fair value of each option grant is estimated on the date of grant using the 'Binomial Option Price Model' with the following weighted average assumptions used for grants in 1998, 1997 and 1996, respectively: expected volatility of 18.0%, 15.0% and 22.5%; risk-free interest rates of 4.6%, 5.8% and 6.2%; and expected lives of six years for each grant. An increasing dividend schedule is used in the binomial model based on historical experience.
The following table summarizes information about the Company Plans' outstanding and exercisable options at December 31, 1998:
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 and cash management services, office space and payroll processing services. In 1998, 1997 and 1996, $9,800,000, $9,300,000 and $8,500,000, 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. 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, 1998, TRC had statutory earned surplus of $789,736,000 and, in 1999, could pay dividends of approximately $134,366,000 without such regulatory approval.
In the normal course of business, TRH purchases reinsurance from its retrocessionnaires to reduce the effect of individual or aggregate losses and to allow increased gross premium writings and afford greater risk capacity without necessarily requiring additional capital.
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, 1998 and 1997 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 $13.0 million and $13.3 million in 1998 and 1997, respectively. 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.
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, approximately 19% of consolidated revenues, with a significant portion in each segment, were obtained through a large international reinsurance broker.