As of December 31, 2000, one-half of the office space of TRH's New York headquarters and its Toronto office 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, London, Paris, Warsaw, Zurich, 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 Selected Consolidated Financial Data is prepared in accordance with accounting principles generally accepted in the United States of America. Such data include the results of TRZ subsequent to the date of its acquisition by TRH (through its wholly owned subsidiary TRC) in mid-1996 accounted for as a purchase. In addition, this data should be read in conjunction with the Consolidated Financial Statements and accompanying notes included elsewhere herein.
(1) 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.
(2) All periods reflect the adoption of the accounting standard related to earnings per share (SFAS No. 128).
In August 1998, American International Group, Inc. (AIG, and collectively, with its subsidiaries, the AIG Group) increased its beneficial ownership of Transatlantic Holdings, Inc. (the 'Company') outstanding common stock from 49% to over 50%. As of December 31, 2000, AIG beneficially owned approximately 60% of the Company's outstanding shares. Financial data discussed below have been affected by certain transactions between TRH and the AIG Group. (See Notes 11 and 13 of Notes to Consolidated Financial Statements.)
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. Premiums are earned primarily on a pro rata basis over the term of the related coverages. Unearned premiums and prepaid 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.
For the period under discussion, the reinsurance market has been characterized by significant competition worldwide in most classes, although rate increases were achieved in many classes as 2000 progressed. The increases in net premiums written resulted generally from increased coverage provided and were primarily from treaty business. On a worldwide basis, casualty lines business represented 76.7% of net premiums written in 2000 versus 74.8% and 71.0% in 1999 and 1998, respectively. The balance represented property lines. Treaty business represented 96.3% of net premiums written in 2000 versus 96.6% in 1999 and 94.7% in 1998. The balance represented facultative accounts.
Net premiums written by international offices increased in 2000 by $65.2 million, or 8.7%, over the prior year, to $813.1 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, 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.
Net premiums written by international offices increased in 1999 by $65.9 million, or 9.7%, over the prior year, to $747.9 million. Most international offices recorded increases in net premiums written, led by Paris and London. In addition, net premiums written by the Asia Pacific offices (Hong Kong and
The increase in net premiums earned in each of 2000 and 1999 compared to the respective prior year amounts resulted primarily from the growth in net premiums written in both years. 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. Net investment income grew in 1999 versus 1998 due to significant cash flow available for investment which was generated by operating activities. The percentage increase in net investment income is less in 2000 versus 1999, than in 1999 and 1998 compared to the respective prior years, due to the impact of negative operating cash flow in the first two quarters of 2000, due largely to a high level of paid losses (see discussion of operating cash flow under Financial Condition and Liquidity) and to the negative impact of foreign exchange on investment income earned by certain of our international locations in 2000. (See Note 3 of Notes to Consolidated Financial Statements.)
TRH's 1999 results included catastrophe losses incurred of $85 million, which added 5.7 to each of the loss and loss adjustment expense ratio and combined ratio. More than one-half of those losses were from European storms occurring late in the year. Two of those storms, Lothar and Martin, occurred within a day of each other in late December and caused extensive property damage in Western Europe, most severely in France. These two storms collectively are considered among the worst natural catastrophes ever to strike France.
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
TRH's 1998 results included catastrophe losses incurred of $20 million related to Hurricane Georges, which added 1.4 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 $59.5 million in 1998. Significant favorable development was recorded in 1998 on losses occurring in years subsequent to 1986 in the other liability line, in 1996 and 1997 in the medical malpractice line and in 1993 through 1996 in the fire and allied lines. These reductions to incurred losses were partially offset by adverse development in 1998 on losses occurring in 1996 and 1997 in the ocean marine line, prior to 1984 in the other liability line and in 1997 in the fire line.
At December 31, 2000, reserves for unpaid losses and loss adjustment expenses totaled $3.08 billion, a decrease of $227.8 million, or 6.9%, as compared to the prior year. The decrease in reserves was largely due to the payment of previously reserved claims, including those related to catastrophe losses occurring in prior years, and to favorable development in 2000 on losses occurring in prior years in the other liability line. Also at December 31, 2000, reinsurance recoverable on unpaid losses and loss adjustment expenses totaled $449.2 million, a decrease of $80.5 million, or 15.2%, from the prior year. This decrease was due, in part, to amounts recovered by TRH on ceded reinsurance related to catastrophe losses in prior years. (See Note 13 of Notes to Consolidated Financial Statements.) TRH's reserves and related recoverables represent estimates of all future liability and reinsurance recoverable thereon for losses occurring on or prior to the balance sheet date. Net losses and loss adjustment expenses 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. A provision is included for losses and loss adjustment expenses incurred but not reported 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. Because the reserving process is inherently difficult and subjective, actual net losses and loss adjustment expenses may deviate, perhaps substantially, from estimates of reserves and reinsurance recoverable on such amounts reflected in TRH's consolidated financial statements.
Loss and loss adjustment expense reserves, net of related reinsurance recoverables, for risks related to environmental impairment and asbestos-related illnesses amounted to $71 million and $75 million at December 31, 2000 and 1999, 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 or asbestos-related liabilities were neither clearly defined nor specifically excluded. The reserves carried for such claims, including incurred but not reported claims (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, while 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, TRH believes that these claims reserves, as well as all other claims reserves carried at December 31, 2000, are adequate.
The underwriting expense ratio, which represents the sum of net commissions and other operating expenses expressed as a percentage of net premiums written, 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. The underwriting expense ratio increased modestly in 1999 over 1998.
Income before income taxes was $268.0 million in 2000, $236.1 million in 1999 and $323.4 million in 1998. The increase in income before income taxes in 2000 over 1999 was primarily due to the absence of significant catastrophe losses occurring in 2000, partially offset by a decrease in realized net capital gains as compared to 1999. The decrease in income before income taxes in 1999 resulted principally from a high level of catastrophe losses and a decline in realized net capital gains in 1999 compared to 1998.
The provisions for federal and foreign income taxes were $56.3 million in 2000, $48.7 million in 1999 and $75.8 million in 1998. The Company and its domestic subsidiaries, TRC and Putnam, filed consolidated federal income tax returns for the years under discussion, except those for 2000 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 2000, 20.6% in 1999 and 23.5% in 1998. The effective tax rate in 2000 increased slightly compared to 1999. The decrease in the effective tax rate in 1999 versus 1998 is due principally to the fact that tax-exempt interest represented a greater percentage of income before income taxes in 1999 than in the previous year. While tax-exempt interest remained relatively level compared to 1998, income before income taxes declined significantly for the reasons discussed earlier.
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 12 of Notes to Consolidated Financial Statements for a discussion of restrictions on dividend payment.) In 2000 and 1999, the Company received cash dividends from TRC of $18.1 million and $16.3 million, respectively. 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.
reduction in taxes paid. In 1999, the increase in paid losses was principally due to increases in premium volume and a shift in the business mix in more recent years towards lines with shorter loss payment patterns.
A portion of consolidated operating cash flow, namely, -$5.0 million, $104.6 million and $91.4 million, was derived from international operations in 2000, 1999 and 1998, respectively.
Measuring potential losses in fair values is the focus of risk management efforts by many companies. Such measurements are performed through the application of various statistical techniques. One such technique is Value at Risk (VaR). VaR is a summary statistical measure that uses changes in historical interest and foreign currency exchange rates and equity prices to calculate the maximum loss that could occur over a defined period of time given a certain probability.
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. At December 31, 2000 and 1999, the VaR was approximately $80 million and $76 million, respectively.
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 will be 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. The difference in statutory surplus between those bases as of January 1, 2001 was not material. Future differences in statutory net income, financial position or cash flows are also not expected to be material.
On January 1, 1999, certain of the member nations of the European Economic and Monetary Union (EMU) adopted a common currency, the Euro. Once the national currencies are phased out, the
Euro will be the sole legal tender of each of these nations. During the transition period, commerce of these nations will be transacted in the Euro or in the currently existing national currency.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Transatlantic Holdings, Inc. and Subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index 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 auditing standards generally accepted in the United States of America, 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 our opinion.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(a) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (GAAP). Certain reclassifications have been made to conform prior years' presentations with 2000.
(b) INVESTMENTS: Bonds are classified as held-to-maturity and carried at amortized cost if TRH has the positive intent and ability to hold each of these securities to maturity. The balance of TRH's bonds are classified as available-for-sale and carried at market value. Common and nonredeemable preferred stocks are carried principally at market value. Market values for fixed maturity securities and equities are generally based upon quoted market prices. For certain fixed maturity securities, for which market prices were not readily available, market values were estimated using values obtained from independent pricing services. Other invested assets consist of investments in partnerships, a short 'duration' bond fund managed by an AIG subsidiary and other investments which are carried primarily at market value. Short-term investments are carried at cost, which approximates market value.
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 8), 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, 2000 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.
(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 Sheets as 'reinsurance balances payable.' These deposits are treated as financing transactions and are credited with interest according to contract terms.
In September 2000, the FASB issued SFAS No. 140, 'Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of SFAS No. 125.' SFAS No. 140 specifies the accounting and reporting requirements for securitizations and other transfers of financial assets and collateral, the recognition and measurement of servicing assets and liabilities and the extinguishment of liabilities. This statement is effective for the recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending 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
(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 $118,000,000 and $119,000,000 at December 31, 2000 and 1999, respectively.
3. INVESTMENTS (CONTINUED) (d) FIXED MATURITIES: The amortized cost and market value of bonds at December 31, 2000 and 1999 are summarized as follows:
The amortized cost and market value of bonds at December 31, 2000 by contractual maturity, are as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments in fixed maturities exclude short-term investments.
4. FEDERAL AND FOREIGN INCOME TAXES (CONTINUED) The U.S. federal income tax rate was 35% for 2000, 1999 and 1998. 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:
(b) The components of the net deferred income tax asset at December 31, 2000 and 1999 were as follows:
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.
Common stock activity for each of the three years in the period ended December 31, 2000 was as follows:
TRH's employees participate in benefit plans administered by AIG (See Note 10) including a noncontributory defined benefit pension plan, an employee stock purchase 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.
9. PENSION, SAVINGS AND STOCK PURCHASE PLANS (CONTINUED) is greater. An aggregate of 750,000 shares of common stock has been authorized for subscription and 1,768 shares were purchased under the plan in 2000.
In 2000, the Company's Board of Directors adopted, and the stockholders approved, the '2000 Stock Option Plan' (the 2000 Plan). This plan 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, 2000, 1,320,400 shares were reserved for future grants under the 2000 Plan. The 2000 Plan also provides 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. The Company also maintains the 'Transatlantic Holdings, Inc. 1995 Stock Option Plan' (the 1995 Plan) and the 'Transatlantic Holdings, Inc. 1990 Stock Option Plan' (the 1990 Plan). The 1995 Plan and the 1990 Plan operate under substantially similar terms to the 2000 Plan, except that non-employee directors were not covered under the 1990 Plan. No further options can be granted under the 1995 Plan nor the 1990 Plan, although options outstanding continue in force until exercise, expiration or forfeiture.
10. STOCK OPTION PLANS (CONTINUED) The following table summarizes information about the Company Plans' outstanding and exercisable options at December 31, 2000:
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 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:
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 human resource related activities. Under the guidance of TRH's Finance Committee of the Board of Directors and senior management, certain AIG Group companies act as financial advisors and managers of TRH's investment portfolio. In 2000, 1999 and 1998, $7,700,000, $10,600,000 and $9,800,000, respectively, of operating and investment expenses relate to services and expenses provided by the AIG Group under these agreements.
Approximately $209 million (11%), $184 million (11%) and $167 million (11%) of gross premiums written by TRH in 2000, 1999 and 1998, respectively, were attributable to reinsurance purchased by the AIG Group, for the production of which TRH paid ceding commissions to the AIG Group of
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, 2000, TRC had statutory earned surplus of $1,067,314,000 and, in 2001, could pay dividends of approximately $153,188,000 without such regulatory approval.
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 obligations 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 in both 2000 and 1999. 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
13. REINSURANCE CEDED (CONTINUED) 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, two large international brokers accounted for non-AIG business equal to 15% and 14%, respectively, of consolidated revenues, with a significant portion in each segment.
(1) Revenues represent the sum of net premiums earned, net investment income and realized net capital gains.
(3) Net revenues from affiliates of AIG approximate $110,038, $80,237 and $81,358 in 2000, 1999 and 1998, respectively, and are included primarily in domestic revenues.