As of December 31, 1999, 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, 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.
(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.
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, 1999, AIG beneficially owned approximately 59% of the Company's outstanding shares. Financial data discussed below have been affected by certain transactions between TRH and the AIG Group. (See Notes 10 and 12 of Notes to Consolidated Financial Statements.)
Domestic net premiums written increased by $38.9 million, or 5.5%, over 1998, to $750.6 million, with significant increases recorded in certain specialty casualty classes (particularly accident and health and medical malpractice lines), and significant decreases recorded in property and aviation lines. The
majority of the reduction in property net premiums written was due to an increase in premiums for reinsurance ceded.
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 their business to certain other TRH offices, closer to source, and the selective retention of business in core areas. International net premiums written increased significantly in specialty casualty classes (particularly other professional liability), auto physical damage, auto liability and aircraft lines, and decreased significantly in the fire line. International business represented 48.9% of 1998 net premiums written compared to 48.2% in 1997.
The increase in net premiums earned in each of 1999 and 1998 compared to the respective prior year amounts resulted primarily from the 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, reduced operating cash flow in each of 1999 and 1998 compared to the immediately preceding year and, in 1999, the impact of the strengthening U.S. dollar against certain foreign currencies in which investment income is earned. (See Note 3 of Notes to Consolidated Financial Statements.)
TRH's 1999 results include catastrophe losses incurred of $85 million, which add 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. Estimates suggest that these two storms, which collectively are considered among the worst natural catastrophes ever to strike France, will ultimately cost the global insurance industry over $6 billion.
TRH's 1998 results include catastrophe losses incurred of $20 million related to Hurricane Georges, which add 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
TRH's 1997 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 were reduced by $14.6 million in 1997. Significant favorable development was recorded in 1997 on losses occurring in years subsequent to 1986 in the other liability line, in 1996 in the medical malpractice line and in 1994 and 1995 in certain property lines. These reductions to incurred losses were partially offset by adverse development in 1997 on losses occurring in 1996 in aircraft and surety lines, in 1994 and 1995 in the medical malpractice line and in 1983 and prior in the other liability line.
At December 31, 1999, reserves for unpaid losses and loss adjustment expenses totaled $3.30 billion, an increase of $188.9 million, or 6.1%, over the prior year. Also at December 31, 1999, reinsurance recoverable on unpaid losses and loss adjustment expenses totaled $529.7 million, an increase of $82.8 million, or 18.5%, from the prior year. (See Note 12 of Notes to Consolidated Financial Statements.) A significant portion of the increase in unpaid losses and loss adjustment expenses and related reinsurance recoverable relates to catastrophe losses occurring in the latter portion of 1999. 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.
The underwriting expense ratio, which represents the sum of net commissions and other operating expenses expressed as a percentage of net premiums written, increased modestly in 1999 over 1998. The increase in the underwriting expense ratio in 1998 compared to 1997 was due to an increase in the ratio of net commissions to net premiums written caused, in large part, by a slight shift in the mix of business between years.
early in the year generally into fixed income investments, and in 1998, by the strategic realignment of the equity portfolio.
Income before income taxes was $236.1 million in 1999, $323.4 million in 1998 and $234.7 million in 1997. 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 increase in income before income taxes in 1998 over 1997 resulted from increased realized net capital gains and net investment income partially offset by a deterioration in underwriting results caused by losses from Hurricane Georges.
Net income and net income per common share on a diluted basis, respectively, were as follows: 1999 -- $187.4 million, $5.37; 1998 -- $247.5 million, $7.10; 1997 -- $185.5 million, $5.34. Reasons for the changes between years are as discussed earlier. 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.)
TRH's operating cash flow in 1999 declined compared to 1998. This decrease was due to significant increases in paid losses and net commissions, offset, in part, by increased net premiums and a significant reduction in taxes paid. In addition, TRH's operating cash flow in 1998 declined compared to 1997. This decrease was due to significant increases in paid losses and taxes paid and lesser increases in net commissions and operating expenses, offset, in part, by increased net premiums and net investment income received. In each of 1999 and 1998 as compared to the respective prior year, the increase in paid losses was principally due to increases in premium volume, a shift in the business mix in more recent years towards lines with shorter loss payment patterns, and in 1998 compared to 1997, increased
catastrophe losses paid. International operations, most significantly London, accounted for approximately 53% of operating cash flow in 1999 and 43% in each of 1998 and 1997.
TRH believes that its balance of cash and cash equivalents of $104.0 million as of December 31, 1999 and its future cash flows will be sufficient to meet TRH's cash requirements through the end of 2000 and thereafter for a period the length of which is difficult to predict, but which TRH believes will be at least one year.
To manage these risks, TRH invests in high quality bonds in varying maturities and maintains diversification to avoid significant exposure to issuer, industry and/or country concentrations. In addition, TRH invests in limited amounts of equities to further diversify its investment exposures. With respect to foreign exchange risk, TRH seeks to limit exposure by controlling the amounts of assets and liabilities in foreign currencies.
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 historical interest and foreign currency exchange rates and equity prices and estimates the volatility and correlation of each of these rates and prices to calculate the maximum loss that could occur over a defined period of time given a certain probability.
TRH believes that statistical models alone do not provide a reliable method of monitoring and controlling market risk. While VaR models are relatively sophisticated, the quantitative market risk information generated is limited by the assumptions and parameters established in creating the related models. Therefore, such models are tools and do not substitute for the experience or judgment of senior management.
TRH has performed a VaR analysis 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, net of reinsurance, and unearned premiums.
TRH's stockholders' equity increased to $1.64 billion at December 31, 1999, an increase of $32.4 million over year-end 1998. The net increase was comprised principally of net income of $187.4 million offset, in large part, by a decrease in accumulated other comprehensive income of $140.3 million (principally unrealized depreciation of investments, net of deferred taxes) and dividends declared of $16.8 million. Interest rate increases caused significant unrealized depreciation of bonds at December 31, 1999. 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.
In accordance with SFAS No. 131, TRH adopted this standard for the 1998 annual financial statements and provided comparable data for 1997.
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 was amended in June 1999 by SFAS No. 137, which deferred the effective date for TRH for one year to January 1, 2001. SFAS No. 133 may not be applied retroactively. As of December 31, 1999, TRH had no derivative instruments.
As a result of such efforts, we have not experienced any significant disruption to our critical IT or non-IT systems and believe that those systems have responded successfully to the Y2K date change. In addition, we are not aware of any material problems resulting from Y2K issues related to TRH's ceding companies, brokers, reinsurers, vendors or other business partners (collectively, 'third parties'). Although TRH continues to monitor activities with third parties, it cannot provide assurance that unresolved Y2K issues of such third parties will not have a material adverse impact on TRH's operations or financial results. TRH has considered the effects of potential unresolved Y2K issues of third parties on its business and developed contingency plans, as necessary. Such plans may include the selection of alternate third parties, instituting alternative processes on a temporary basis or other actions designed to mitigate the effects of a third party's lack of preparedness.
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.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Transatlantic Holdings, Inc. and its subsidiaries (collectively, TRH), through its operating subsidiaries TRC, TRZ and Putnam, offers reinsurance capacity for a full range of property and casualty products to insurers and reinsurers on a treaty and facultative basis, with an emphasis on specialty classes. Including domestic as well as international risks, TRH's principal lines of business are auto liability (including nonstandard risks), other liability (including directors' and officers' liability and other professional liability), accident and health, medical malpractice and marine and aviation in the casualty lines, and fire and allied lines in the property lines (which include property catastrophe risks). Casualty lines represent 74.8%, 71.0% and 67.1% of net premiums written in 1999, 1998 and 1997, respectively. The balance represents property lines.
(c) CASH AND CASH EQUIVALENTS: Cash and cash equivalents generally include cash deposited in demand deposits at banks and highly liquid investments with original maturities of 90 days or less. A portion of cash equivalents consists of a money market fund managed by an AIG subsidiary. (See Note 10.)
(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.
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, 1999 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 with respect to underlying policy intent and coverage and uncertainties as to the allocation of responsibility for resultant damages. Further, there is always the threat of changes in statutes, laws, regulations and other factors that could have a material effect on these liabilities and, accordingly, future earnings.
(f) UNEARNED PREMIUMS: Unearned premiums represent the portion of gross premiums written which is applicable to the unexpired terms of reinsurance contracts or certificates in force. Accordingly, premiums written are taken into income as earned. Unearned premiums are based on reports received from ceding companies or are calculated principally by the monthly pro rata method. In the Consolidated Statements of Operations, the change in unearned premiums is presented net of the change in prepaid reinsurance premiums.
(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.
(i) CURRENCY TRANSLATION: Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at year-end exchange rates. Income and expense accounts are translated at average exchange rates for the year. The resulting net unrealized currency translation gain (loss) for functional currencies is reflected in accumulated other comprehensive income, a component of stockholders' equity.
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.
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, securities lending and similar transactions. The implementation of these standards, which occurred on their respective effective dates, did not have a material impact on TRH's results of operations, financial position or cash flows.
Pursuant to the standard, TRH adopted SFAS No. 128 for the 1997 annual financial statements and restated all prior period EPS data.
Also in February 1997, the Securities and Exchange Commission (SEC) issued Financial Reporting Release (FRR) No. 48, 'Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments.'
In June 1998, the FASB issued SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities.' This statement established 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 was amended in June 1999 by SFAS No. 137, which deferred the effective date for TRH for one year to
January 1, 2001. SFAS No. 133 may not be applied retroactively. As of December 31, 1999, TRH had no derivative instruments.
(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 $119,000,000 and $122,000,000 at December 31, 1999 and 1998, respectively.
(c) INVESTMENT GAINS AND LOSSES: Realized net capital gains and the change in net unrealized (depreciation) appreciation of investments are summarized as follows:
(a) The Company files a U.S. consolidated federal income tax return with its domestic subsidiaries, TRC and Putnam. TRC will include as part of its taxable income those items of income of the non-U.S.
The U.S. federal income tax rate is 35% for 1999, 1998 and 1997. 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, 1999 and 1998 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 aircraft 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.
As a result of net decreases in estimates of losses occurring in prior years, net losses and loss adjustment expenses were reduced by $14.6 million in 1997. Significant favorable development was recorded in 1997 on losses occurring in years subsequent to 1986 in the other liability line, in 1996 in the medical malpractice line and in 1994 and 1995 in certain property lines. These reductions to incurred losses were partially offset by adverse development in 1997 on losses occurring in 1996 in aircraft and surety lines, in 1994 and 1995 in the medical malpractice line and in 1983 and prior in the other liability line.
TRH's employees participate in benefit plans administered by AIG (See Note 9) 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.
Each of the above plans provide that 25% of the options granted become exercisable on the anniversary date of the grant in each of the four years following the grant and expire 10 years from the date of grant. No further options can be granted under the 1990 Plan, although options outstanding continue in force until exercise, expiration or forfeiture.
A summary of the status of the Company Plans as of December 31, 1999, 1998 and 1997 and changes during the years ended on those dates is presented below:
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 1999, 1998 and 1997, respectively: expected volatility of 18.0%, 18.0% and 15.0%; risk-free interest rates of 6.4%, 4.6% and 5.8%; 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, 1999:
In August 1998, AIG increased its beneficial ownership of the Company's outstanding common stock from 49% to over 50%. As of December 31, 1999, AIG beneficially owned approximately 59% of the Company's outstanding shares.
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. In 1999, 1998 and 1997, $10,600,000, $9,800,000 and $9,300,000, respectively, of operating and investment expenses relate to services and expenses provided by the AIG Group under these agreements.
Approximately $184 million (11%), $167 million (11%) and $181 million (12%) of gross premiums written by TRH in 1999, 1998 and 1997, respectively, were attributable to reinsurance purchased by the AIG Group, for the production of which TRH paid ceding commissions to the AIG Group of $34 million, $31 million and $32 million, respectively, in such years. (See Note 12 for information relating to reinsurance ceded to related parties.)
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.
(2) Domestic revenues and income before income taxes include realized net capital gains of $82,162, $118,601 and $31,727 in 1999, 1998 and 1997, respectively. Realized net capital gains for other segments in each of the years presented is not material.
The following is a summary of unaudited quarterly financial data for each of the years ended December 31, 1999 and 1998. 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.