Includes pre-tax net catastrophe costs of $544 million in 2005, pre-tax net catastrophe losses of $215 million in 2004, pre-tax net losses and loss adjustment expenses of $100 million related to the fourth quarter increase in net loss reserves in certain casualty lines in 2002, and, in 2001, pre-tax net catastrophe losses of $215 million principally related to the September 11, 2001 terrorist attack on the United States and $60 million related to Enron reinsurance exposure. There were no significant catastrophe losses occurring in 2003 and 2002.
The following discussion refers to the consolidated financial statements of TRH as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005, which are presented elsewhere herein. Financial data discussed below have been affected by certain transactions between TRH and related parties. (See Notes 11, 13 and 15 of Notes to Consolidated Financial Statements.)
TRH conducts its business and assesses performance through segments organized along geographic lines. Financial data from branches in the United States that underwrite primarily domestic business, as well as stock compensation expense and general corporate expenses, are reported in the Domestic segment. 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, (i.e., the Toronto branch and the Miami branch (which serves Latin America and the Caribbean)) and from branches in the Asia Pacific region are grouped as International-Other and represent the aggregation of non-material segments.
American International Group, Inc. (AIG), which through its subsidiaries is one of the largest providers of insurance and investment products and services to businesses and individuals around the world, beneficially owned approximately 60% of the common stock of the Company as of December 31, 2005, 2004 and 2003.
TRH's major sources of revenues are net premiums earned for reinsurance risks undertaken and net investment income earned on investments made. The great majority of TRH's investments are in fixed maturity securities with an average duration of 4.7 years as of December 31, 2005. In general,
premiums are received significantly in advance of related claims payments. The following table summarizes TRH's revenues, (loss) income before income taxes and net income for the periods indicated:
Results for 2005 and 2004 were materially affected by catastrophe losses. Results for 2005 include net pre-tax catastrophe costs of $544 million, or $354 million after tax, principally arising from Hurricanes Katrina ($304 million on a pre-tax basis), Rita ($44 million on a pre-tax basis) and Wilma ($111 million on a pre-tax basis) and, to a lesser extent, from Central European floods and European Windstorm Erwin. Such catastrophe costs consist of pre-tax net catastrophe losses of $483 million (gross $870 million; ceded $387 million) and net ceded reinstatement premiums of $61 million (gross $72 million; ceded $133 million). Reinstatement premiums may arise on both assumed and ceded business as a result of contractual provisions found in many excess-of-loss catastrophe contracts that require additional premium to be paid in the event of a loss to reinstate coverage for the remaining portion of the contract period in the amount of the loss.
(Loss) income before income taxes and net income decreased in 2005 as compared to 2004 due primarily to decreased underwriting profit (loss) resulting primarily from significantly higher net catastrophe losses and the impact of related net ceded reinstatement premiums. (See Note 16 of Notes to Consolidated Financial Statements for underwriting profit (loss) by segment.) Significant tax savings have been recognized as a result of catastrophe costs, and considers the fact that TRH is able to carry back tax-basis net operating losses to prior years and carry forward minimum tax credits indefinitely.
(See Note 4 of Notes to Consolidated Financial Statements.) These tax savings somewhat tempered the impact of catastrophe losses on net income in 2005 compared to 2004. Underwriting profit (loss) is defined as net premiums earned less net losses and LAE incurred, net commissions and other underwriting expenses, plus (minus) the increase (decrease) in deferred acquisition costs.
Income before income taxes and net income decreased in 2004 as compared to 2003 due primarily to the above mentioned catastrophe losses. The impact of these losses was partially offset by increased underwriting profit from International-Europe and increased net investment income from all segments in 2004 as compared to 2003. Tax saving associated with the catastrophe losses somewhat tempered the impact of the catastrophe losses on net income in 2004. (See Operational Review.)
The markets in which TRH operates have historically been cyclical. For the period under discussion, the reinsurance market has been characterized by significant competition worldwide in most lines of business. In late 2000 and continuing through 2001, rate increases, which were achieved in many lines, intensified after the net industry surplus drain occurring as a result of the September 11, 2001 terrorist attack.
Attracted by improved market conditions, additional capital entered the market starting in late 2001, through the formation of new companies, principally in Bermuda, and the addition of capital to certain existing companies. The newer reinsurance capacity spurred additional competition, most significantly in shorter tail, catastrophe related lines, both domestically and internationally. Despite the new capacity, market conditions for reinsurers generally improved throughout 2002 and 2003 as rates increased and terms and conditions generally became more restrictive.
In 2004, property lines experienced meaningful rate decreases on both primary and reinsurance contracts during the year, but remained generally favorable with respect to catastrophe business. Despite the prevalence of modest rate reductions on primary business, casualty rates generally remained firm on the treaty reinsurance side. Rates, terms and conditions were generally stronger for longer tail casualty lines due, in part, to elevated industry-wide loss activity in recent years (that also materially affected TRH) experienced in certain of those lines related principally to losses occurring in 1997 through 2001. Overall, market conditions in the reinsurance sector for 2004 generally remained favorable for most classes.
environments and is able to blend effectively both transactional and relationship underwriting via its network of established overseas offices throughout the international arena.
In addition to new company formations, capital markets, including hedge funds, have become more active in assuming more reinsurance risk other than from investing in various companies. Numerous hedge funds have provided both pro rata and excess-of-loss reinsurance and retrocessional protections through captive companies or other alternative transactions on a fully collateralized basis for property and energy catastrophe business.
TRH anticipates a continued firming of terms and conditions through 2006 as the weight of hurricane related claims continue to weigh on the reinsurance industry as a whole. Most reinsurers have been impacted, some substantially and as claims become payable, liquidity could see pressures which drive pricing to firm up more quickly than capacity would suggest. Catastrophe exposed coverages will face the most difficulty as reinsurers will need to alter pricing, as models are adjusted to account for an increase in catastrophe activity and the resultant magnitude of losses. In addition, it is likely that TRH will face more difficulty than in the past to obtain certain retrocession protection, and will also be required to pay higher prices for such protections than in the recent past.
under the circumstances, to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.
TRH believes its most critical accounting estimates are those with respect to loss reserves, premium revenues and deferred acquisition costs, as they require management's most significant exercise of judgment on both a quantitative and qualitative basis used in the preparation of TRH's consolidated financial statements and footnotes. The accounting estimates that result require the use of assumptions about certain matters that are highly uncertain at the time of estimation. A discussion of the most critical accounting estimates follows:
The reserving process is inherently difficult and subjective, especially in view of changes in the legal and tort environment which impact the development of loss reserves, and therefore quantitative techniques frequently have to be supplemented by subjective considerations and managerial judgment. Trends that have affected development of liabilities in the past may not necessarily occur or affect development to the same degree in the future.
Standard actuarial methodologies employed to estimate ultimate losses incorporate the inherent “lag” from the time claims are reported to the cedant to when the cedant reports the claims to the reinsurer. Certain actuarial methodologies may be more appropriate than others in instances where this “lag” may not be consistent from period to period, so additional actuarial judgment is employed in the selection of methodologies to best incorporate the potential impact of this situation.
• Loss trend factors are used to establish expected loss and LAE ratios for subsequent accident years based on the projected loss and LAE ratios for prior accident years. 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) and trends in court interpretations of coverage are among the factors which must be considered.
A comprehensive annual loss reserve review is conducted in the fourth quarter of each year. These reviews are conducted in full detail for each class or line of business for each underwriting office. The purpose of these reviews is to confirm the reasonableness of the carried loss reserve. In the course of the analysis, the indicated loss reserve need for a class of business (or an underwriting year within a class of business) is determined either by utilizing a single best estimate that TRH believes is a reasonable estimate of the required loss reserve or by selecting a range based on ultimate loss indications from methodologies that are considered to be most appropriate. The addition of these point estimates and ranges (where they exist) across all years, classes of business and underwriting offices create a range of estimated loss reserve needs for TRH. This range, determined in the fashion described above, does not represent all reasonable outcomes. The potential exists for significant variation in the actual results versus the assumptions used to test loss reserves, particularly for longer tail casualty reinsurance lines such as excess casualty, including D&O and medical malpractice. The usefulness of the indicated range is that, generally, reserve amounts within the range are likely to be considered a reasonable estimate of the required reserve. The range of estimates is compared to the carried loss reserve. If the carried reserve is supported by actuarial methods and assumptions which are believed to be reasonable, then the carried loss reserve would generally be considered reasonable and no adjustment would be considered.
As shown in the comparison below, the carried gross loss reserves as of December 31, 2005 fall well within the indicated range of gross loss reserves estimates.
Net loss reserves include amounts for risks related to environmental impairment and asbestos-related illnesses. The majority of TRH's environmental and asbestos-related liabilities arose from contracts entered into after 1985 that were underwritten specifically as environmental or asbestos-
See discussion of net adverse development on losses occurring in prior years (which includes a discussion of the causative factors of such net adverse development) under Results of Operations and further discussion and detail information about gross loss reserves under Financial Condition and Liquidity.
Estimates of gross premiums written less related ceding commission by major class of business included in the appropriate components of the Consolidated Statement of Operations for the years ended December 31, 2005 and 2004 and the Consolidated Balance Sheet as of December 31, 2005 and 2004 were as follows:
The decrease in net premiums written in 2005 compared to 2004 resulted largely from softer market conditions, including certain pricing decreases, and higher ceding company retentions. The increase in net premiums written in 2004 compared to 2003 resulted largely from pricing increases and increased coverage provided. In 2005 and 2004, as compared to the respective immediately prior year, premium changes were primarily from treaty business. On a worldwide basis, casualty lines business represented 70.2% of net premiums written in 2005 versus 72.4% and 73.5% in 2004 and 2003, respectively. The balance represented property lines. Treaty business represented 95.5% of net premiums written in 2005 versus 96.4% in each of 2004 and 2003. The balance represented facultative accounts.
Domestic net premiums written decreased in 2005 by $271.7 million, or 14.8%, from the prior year to $1,568.3 million due to higher ceding company retentions in recent periods and the softening of primary and reinsurance rates in most classes prior to the occurrence of significant catastrophe loss events in the latter half of 2005. Significant decreases in domestic net premiums written were recorded in the auto liability, medical malpractice and accident and health (A&H) lines of $127.6 million, $94.2 million and $26.3 million, respectively. The decreases were slightly offset by a significant increase in the fidelity line of $29.7 million.
Domestic net premiums written totaled $1,840.0 million in 2004, remaining level with 2003 due generally to softer market conditions in many sectors and greater retention levels by cedants. Significant domestic increases in net premiums written were recorded in the medical malpractice, other liability (principally general casualty) and A&H lines of $41.2 million, $29.6 million and $25.1 million,
Net premiums written and earned in 2005 include net ceded reinstatement premiums (related to catastrophe losses) of $61.1 million (gross $72.3 million; ceded $133.4 million), principally related to domestic operations, of which $19.1 million relates to gross adverse development on catastrophe events occurring in 2004. Reinstatement premiums were not significant in 2004 and 2003.
As premiums written are primarily earned ratably over the terms of the related coverages, the reasons for changes in net premiums earned are generally similar to the reasons for changes in net premiums written over time.
Net investment income increased in 2005 and 2004, each as compared to the immediately prior year, due to the investment (principally in fixed maturities) of significant positive cash flows from operating activities generated in recent periods. (See Note 3 of Notes to Consolidated Financial Statements and cash flow discussion under Financial Condition and Liquidity.) For 2005, 2004 and 2003, the pre-tax effective yields on investments were 3.9%, 4.1% and 4.4%, respectively. A substantial portion of the decline in investment yield in 2005 compared to 2004 relates to the investment in December 2005 of significant net proceeds from the issuance of senior notes. Such investments generated limited investment income in 2005, due to the minimal amount of time that they were owned, but are expected to generate a higher investment income in 2006 and going forward. A substantial portion of the decline in investment yield in 2004 compared to 2003 relates to the significant increase in 2004 in the asset amount of short-term investment of funds received under securities loan agreements, which asset produces minimal net investment income. (See Note 2(b) of Notes to Consolidated Financial Statements.) The pre-tax effective yield on investments represents pre-tax net investment income for the periods indicated divided by the average balance sheet carrying value of investments and interest-bearing cash for such periods.
TRH's 2005 results include pre-tax net catastrophe losses of $482.8 million (domestic $329.6 million; international $153.2 million) principally related to Hurricanes Katrina, Rita and Wilma and, to a lesser extent, to Central European floods and European Windstorm Erwin. In addition, 2005 includes net ceded reinstatement premiums of $61.1 million (domestic $56.2 million; international $4.9 million). Approximately $120.8 million of catastrophe losses and $3.1 million of net ceded reinstatement premiums included in international operations relate to hurricanes occurring in the Americas. Net catastrophe losses and net ceded reinstatement premiums in the aggregate added 16.0, 26.3 and 8.2 to the combined ratios for consolidated TRH, domestic and international, respectively. (See discussion under Segment Results for the amount of pre-tax net catastrophe losses and net ceded reinstatement premiums by segment.)
There were no significant catastrophe losses occurring during 2003. However, as a result of net increases in estimates of losses occurring in prior years, net losses and LAE incurred was increased by
The underwriting expense ratio for consolidated TRH increased in 2005 compared to 2004 due to an increase of 0.4 in each of the net commission and other underwriting expense components of the ratio.
Deferred acquisition costs vary as the components of net unearned premiums change and the deferral rate changes. Acquisition costs (consisting primarily of net commissions incurred) are charged to earnings over the period in which the related premiums are earned.
In December 2005, the Company completed a public offering of $750 million principal amount of its 5.75% senior notes due in 2015 (the Senior Notes). Interest expense incurred in connection with the Senior Notes was $2.1 million in 2005. Interest expense is expected to approximate $44 million in 2006.
Other, net, in the Consolidated Statements of Operations, includes pre-tax stock compensation expenses of $9.6 million, $2.9 million and $1.1 million for stock-based compensation, in 2005, 2004 and 2003, respectively. (See Other Matters herein for a discussion of the Change in Accounting Principle and Disclosure of Stock-Based Compensation.) A component of such compensation expense, namely, $3.3 million in 2005 relates to TRH employees' participation in past Starr International Company (SICO) Deferred Compensation Profit Participation Plans (the SICO Plans). No stock compensation expense was recorded by TRH relative to the SICO Plans in 2004 or 2003. Other, net, also contains currency transaction gains and losses, general corporate expenses and other miscellaneous income and expense items.
A federal and foreign income tax benefit of $84.0 million was recorded in 2005, compared to federal and foreign income tax expense of $21.6 million and $83.0 million recorded in 2004 and 2003, respectively. The tax benefit, which exceeds the amount of pre-tax loss in 2005, results from TRH carrying its current year tax net operating loss back to prior years ($61.2 million current tax benefit on the Consolidated Statement of Operations and a current tax recoverable in the same amount included in other assets on the Consolidated Balance Sheet) and recording a deferred tax benefit on the Consolidated Statement of Operations (also included on the Consolidated Balance Sheet as a deferred tax asset) of $20.9 million for a minimum tax credit carryforward which, by law, may be carried forward indefinitely.
The lower effective tax rate in 2004 compared to 2003 resulted primarily from the impact of catastrophe losses occurring in 2004. As a result, tax-exempt income was a larger percentage of income before income taxes in 2004 compared to 2003.
medical malpractice, other liability and property lines, partially offset by decreases in the auto liability line. Income before income taxes for 2004 decreased compared to the prior year due primarily to a decrease in underwriting profit (loss) caused principally by $98.1 million of net pre-tax catastrophe losses, principally related to hurricanes, that occurred in 2004. Both years included significant adverse development of losses occurring in 1998 through 2000 in certain more volatile casualty classes as discussed earlier under Results of Operations.
2005 compared to 2004-Net premiums written decreased due to decreases in the auto liability line, mostly in London and TRZ, offset by increases in the other liability, A&H, boiler and machinery and ocean marine lines. European revenues increased compared to the prior year primarily due to increases in net investment income in each location. The increase in net investment income is due, in part, to the investment of positive operating cash flows in recent periods. Income before income taxes for 2005 decreased compared to the prior year due primarily to a decrease in underwriting profit (loss) in each of the locations, offset, in part, by increases in net investment income in each location. The decrease in underwriting profit (loss) is caused principally by increased net pre-tax catastrophe losses of $124.7 million in 2005, principally from Hurricanes Katrina and Rita, Central European floods and European Windstorm Erwin, compared to $26.3 million in 2004. 2005 underwriting profit (loss) and net premiums written and earned benefited slightly from $5.1 million of net assumed reinstatement premiums related to catastrophe loss events.
The significant increase in assets in 2004 as compared to 2003 is primarily due to significant operating cash flows in 2004 and, to a lesser extent, the impact of foreign exchange on investments held, as the U.S. dollar weakened during the year compared to currencies in which the investments were held.
2005 compared to 2004-Revenues increased in 2005 versus the prior year due primarily to increases in net premiums earned in most offices, with the largest increases in Miami and Hong Kong. These increases generally occurred in the auto liability and property lines. Income before income taxes increased in 2005 compared to the prior year due to increases in underwriting profit (loss). The increase in underwriting profit (loss) is caused in part by decreased net pre-tax catastrophe losses, which totaled $28.5 million in 2005, principally from Hurricane Wilma, compared to $90.6 million in 2004. 2005 underwriting profit (loss) and net premiums written and earned were also adversely impacted by net ceded reinstatement premiums of $10.0 million related to catastrophe loss events.
2004 compared to 2003-Revenues increased in 2004 versus the prior year due primarily to increases in net premiums written, net of the change in unearned premiums, in Miami and Tokyo. These increases generally occurred in the property line. 2004 income before income taxes decreased compared to the prior year, due principally to $90.6 million of net pre-tax catastrophe losses primarily from hurricanes in the Caribbean, typhoons which affected Japan and the tsunami which affected South Asia.
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 by the operating subsidiaries 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.
At December 31, 2005, total investments and cash were $9,241.8 million compared to $8,287.0 million at December 31, 2004. The increase was caused, in large part, by $744.7 million of net proceeds from the issuance of senior notes and $630.3 million of cash provided by operating activities, offset, in part, by a reduction of approximately $250 million due to the foreign exchange impact caused by the strengthening U.S. dollar against the currencies in which the investments are denominated during 2005 and $192.8 million of net funds disbursed under securities loan agreements.
value of the loaned security and is invested in a pooled account (shown on the balance sheet at cost, which approximates market value) of the lending agent, an AIG subsidiary, in these transactions. A liability is recorded in an amount equal to the collateral received to recognize TRH's obligation to return such funds when the related loaned securities are returned. The market values of fixed maturities and common stocks available for sale that are on loan are reflected parenthetically as pledged on the balance sheet and totaled $562.0 million and $23.1 million, respectively, as of December 31, 2005.
At December 31, 2005, gross unrealized gains and losses on all fixed maturities (including those held to maturity and carried at amortized cost) amounted to $228.6 million and $47.1 million, respectively. The increase in gross unrealized losses on such fixed maturities from 2004 is due primarily to an increase in market interest rates in 2005. At December 31, 2005, gross unrealized gains and losses on equities available for sale amounted to $40.7 million and $8.7 million, respectively. The reduction of gross unrealized gains and increase in gross unrealized losses on such equities from 2004 is due primarily to some weakness in the United States equity markets in 2005.
Management reviews TRH's investments on a continual basis for evidence of other than temporary declines in market value, exercising its judgment in making such a determination, and calculating the amount of loss recognition (as a realized capital loss) resulting from investment write-downs.
At December 31, 2005, gross loss reserves totaled $7.11 billion, an increase of $1.17 billion, or 19.7% over 2004. A significant portion of the increase in gross loss reserves is due to catastrophe losses occurring in 2005, principally in the property and ocean marine lines, and adverse development of losses occurring in prior years, principally in the other liability, A&H and medical malpractice lines. The components of gross loss reserves as of December 31, 2005 and 2004 by major class of business, split between reported (case) amounts and IBNR amounts is presented below:
establish the resulting reserves are continually reviewed and updated. Any adjustments are reflected in income currently.
Also at December 31, 2005, reinsurance recoverable on gross loss reserves totaled $1,409.8 million, an increase of $462.0 million, or 48.7%, from the prior year end. The increase in reinsurance recoverable on gross loss reserves in 2005 was due, in part, to catastrophe losses occurring in 2005. Of the amount of reinsurance recoverable on paid and unpaid losses and LAE, which totaled $1,491.5 million as of December 31, 2005, $958.5 million represented balances that were unsecured. Of such unsecured balances, $235.3 million was due from affiliates (which are rated AA+) and 86.7% of the remaining balance was due from companies rated A- or better. (See Note 15 of Notes to Consolidated Financial Statements.)
Net loss reserves are charged to income as incurred. An analysis of the change in net loss reserves from year-end 2004 to year-end 2005 is included in Note 5 of Notes to Consolidated Financial Statements. A significant portion of the increase in net loss reserves is due to catastrophe losses occurring in 2005, principally in the property and ocean marine lines, and net adverse development of losses occurring in prior years, principally in the other liability and medical malpractice lines.
Net loss reserves include amounts for risks related to environmental impairment and asbestos-related illnesses totaling $99 million and $85 million at December 31, 2005 and 2004, respectively, including $27 million and $23 million at the aforementioned dates, respectively, related to losses occurring in 1985 and prior. As TRC, the major operating subsidiary of the Company, commenced operations in 1978, the great majority of TRH's environmental and asbestos-related liabilities arose from contracts entered into after 1985 that were underwritten specifically as environmental or asbestos-related coverages rather than as standard general liability coverages, where the environmental or asbestos-related liabilities were neither clearly defined nor specifically excluded. The reserves carried for these claims, including IBNR, are based upon known facts and current law. However, significant uncertainty exists in determining the amount of ultimate liability for environmental impairment and asbestos-related losses, particularly for those occurring in 1985 and prior. This uncertainty is due to 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, among other things.
Net loss reserves also include amounts resulting from the September 11, 2001 terrorist attack, which are principally related to property (including business interruption), other liability, workers' compensation and aviation coverages. These amounts are subject to significant uncertainty due to a variety of issues such as coverage disputes, the assignment of liability and a potentially long latency period for claims due to respiratory disorders and stress. As of December 31, 2005, net loss reserves related to this event totaled $65 million.
In the ordinary course of business, TRH is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine TRH's rights and obligations under reinsurance agreements and other more general contracts. In some disputes, TRH seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, TRH is
For 2004, TRH's operating cash flows totaled $904.9 million, a slight decrease from 2003. The decrease was caused largely by increased losses and LAE paid, including 2004 catastrophe losses, and income taxes paid offset, in part, by increased premiums received, net of commissions, and increased investment income collected.
As significant losses from catastrophes occurring in 2005 and 2004, the September 11, 2001 terrorist attack (see Operational Review above) and Enron reinsurance exposure remain unpaid, TRH expects that payments related to these events will have a material adverse impact on operating cash flows in 2006 and perhaps thereafter.
TRH believes that its balance of cash and cash equivalents of $198.1 million as of December 31, 2005 and its future cash flows will be sufficient to meet TRH's cash requirements through the end of 2006 and thereafter for a period the length of which is difficult to predict, but which TRH believes will be at least one year.
models. Therefore, such models are tools and do not substitute for the experience or judgment of senior management.
In addition, in 2005, TRH has recorded a reduction of retained earnings of $8.3 million (which is net of a tax benefit that TRH expects to realize of $3.0 million) and an increase to additional paid-in capital of $11.3 million related to compensation to certain TRH employees from SICO for all prior periods through December 31, 2004 as discussed in Note 13(d) of Notes to Consolidated Financial Statements.
In 2005, the Company repurchased 104,800 shares of its common stock, pursuant to a previously announced buyback program, at an aggregate cost of $6.3 million.
Prior to 2003, TRH had accounted for stock-based compensation based on the intrinsic-value method prescribed in Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees” and related Interpretations, as permitted under Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.”
On January 1, 2003, TRH adopted the recognition provisions of SFAS No. 123, using the prospective method of transition. That method requires application of such recognition provisions under the fair value method to all stock-based compensation awards granted, modified, or settled on or after the date of adoption of the standard. Accordingly, net income for 2005, 2004 and 2003 reflects compensation expenses, primarily related to stock options, for stock-based compensation awards granted in 2003 and thereafter and, in 2005 only, to TRH employees' participation in past SICO Plans. Such expenses are included in the Statement of Operations as a component of Other, net, with a corresponding increase to additional paid-in capital. The impact of adopting the recognition provisions of SFAS No. 123 are presented in Note 2(i) of Notes to Consolidated Financial Statements.
As issued by the FASB, SFAS No. 123R would have been effective for TRH in the third quarter of 2005. However, in April 2005, the Securities and Exchange Commission issued Release No. 34-51558, which delayed the effective date of SFAS No. 123R for TRH to the first quarter of 2006. TRH currently believes that the adoption of SFAS No. 123R and its associated FASB Staff Positions (FSP) will not have a material effect on its financial condition, results of operations or cash flows.
- Summary of Investments-Other than Investments in Related Parties As of
and For the Years Ended December 31, 2005, 2004 and 2003
- Reinsurance For the Years Ended December 31, 2005, 2004 and 2003
of December 31, 2005, 2004 and 2003 and For the Years Then Ended
TRH's internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of TRH; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of TRH's assets that could have a material effect on TRH's financial statements.
We have completed integrated audits of Transatlantic Holdings, Inc.'s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
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 other liability (including directors' and officers' liability (D&O) and other professional liability (errors and omissions coverages (E&O))), auto liability (including non-standard risks), medical malpractice, ocean marine and aviation, accident and health (A&H) and surety and credit in the casualty lines, and fire, homeowners multiple peril, auto physical damage and allied lines in the property lines (which include property catastrophe risks). Casualty lines represented 70.2%, 72.4% and 73.5% of net premiums written in 2005, 2004 and 2003, respectively. The balance represented property lines.
(b) Investments: Fixed maturities 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 fixed maturity securities is classified as available-for-sale and carried at market value. Common stocks (including the trading portfolio, which is held to meet short-term investment objectives) 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 principally estimated using values obtained from independent pricing services. Other invested assets consist of investments in limited partnerships, certain of which (those in which TRH holds a 5% or greater interest) are accounted for under the equity method. Short-term investments are carried at cost, which approximates market value.
(e) Premium Revenues: In recent years, premiums from treaty contracts have approximated 95% of net premiums written, while facultative contracts have approximated 5%. For pro rata treaty contracts, premiums written and earned are based on reports received from ceding companies. Generally, for excess-of-loss treaty contracts, premiums are recorded as written based on contract terms. Premiums are earned ratably 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. Premiums written and earned, along with related costs, for which data has not been reported by the ceding companies, are estimated based on historical patterns and other relevant information. These estimates are subject to change when actual data for such items estimated becomes available. In the Consolidated Statements of Operations, premiums written and earned and the change in unearned premiums are presented net of reinsurance ceded.
(f) Losses and LAE: Unpaid losses and LAE (gross loss reserves) are principally based on reports and individual case estimates received from ceding companies. An amount is included for losses and LAE incurred but not reported (IBNR) on the basis of past experience. The methods of making such estimates and for establishing the resulting reserves are continually reviewed and updated, and any resulting adjustments are reflected in income currently. Losses and loss adjustment expenses net of related reinsurance recoverable (net loss reserves) are charged to income as incurred.
of reinsurance treaties or facultative contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing reserving practices among ceding companies, which are subject to change without notice. TRH writes a significant amount of non-proportional assumed casualty reinsurance as well as proportional assumed reinsurance of excess casualty business for classes such as medical malpractice and D&O. Claims from such classes can exhibit greater volatility over time than most other classes due to their low frequency, high severity nature and loss cost trends that are more difficult to predict.
Net loss reserves 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 1985. 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, 2005 for such claims, including IBNR, are based upon known facts and current law. However, significant uncertainty exists in determining the amount of ultimate liability for environment impairment and asbestos-related losses, particularly for those occurring in 1985 and prior. This uncertainty is due to 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, among other things. 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.
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No. 123,” to provide alternative methods (in addition to the prospective method already provided in
SFAS No. 123) of transition for a voluntary change to the recognition provisions of SFAS No. 123, as well as to amend certain of its disclosure requirements as reflected in the table below.
(i) In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payments” (SFAS No. 123R). SFAS No. 123R and its related interpretive guidance replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supercedes APB No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123 as originally issued in 1995, established as preferable a fair-value method of accounting for share based payment transactions with employees. On January 1, 2003, TRH adopted the recognition provisions of SFAS No. 123. SFAS No. 123R requires share based payment transactions with employees to be accounted for using a fair-value based method and broadens the recognition provisions to include share based payments awarded to an employee by related parties or other holders of an economic interest in the reporting entity.
As issued by the FASB, SFAS No. 123R would have been effective for TRH in the third quarter of 2005. However, in April 2005, the Securities and Exchange Commission (SEC) issued Release No. 34-51558, which delayed the effective date of SFAS No. 123R for TRH to the first quarter of 2006. TRH currently believes that the adoption of SFAS No. 123R and its associated FASB Staff Positions (FSP) will not have a material effect on its financial condition, results of operations or cash flows.
(ii) In November 2005, the FASB issued FSP No. FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” FSP No. FAS 115-1 replaces the measurement and recognition guidance set forth in FASB Emerging Issue Task Force (EITF) Issue No. 03-1 and codifies certain existing guidance on impairment. FSP No. FAS 115-1 is effective for reporting periods beginning after December 15, 2005. TRH does not expect the adoption of FSP No. FAS 115-1 to have a material effect on TRH's financial condition or results of operations.
(a) Statutory Deposits: Investments, the substantial majority of which are fixed maturities and common stocks available for sale, were deposited with governmental authorities as required by law and amounted to approximately $277 million and $239 million at December 31, 2005 and 2004, respectively.
Includes write-downs for other than temporary declines in market value of $1,717,000 and $6,092,000 for 2005 and 2003, respectively. There were no write-downs for other than temporary declines in market value in 2004.
Includes write-downs for other than temporary declines in market value of $6,241,000 for 2004. There were no write-downs for other than temporary declines in market value in 2005 or 2003.
See Note 3(f) for additional information about gross unrealized losses as of December 31, 2005 and 2004.
Gross gains of $4,122,000, $8,254,000 and $39,999,000 and gross losses of $5,021,000, $5,085,000 and $6,289,000 were realized on sales of investments in fixed maturities available for sale in 2005, 2004 and 2003, respectively.
(e) Equities: Gross gains of $70,944,000, $58,345,000 and $39,784,000 and gross losses of $31,029,000, $33,338,000 and $53,437,000 were realized on sales of equities available for sale in 2005, 2004 and 2003, respectively. At December 31, 2005 and 2004, net unrealized appreciation of equities available for sale (before applicable income taxes) included gross gains of $40,726,000 and $52,379,000 and gross losses of $8,734,000 and $3,323,000, respectively. (See Note 3(f) for additional information about gross unrealized losses as of December 31, 2005 and 2004.)
(f) Additional Information on Gross Unrealized Losses on All Fixed Maturities and on Equities Available for Sale: As of December 31, 2005 and 2004, TRH's aggregate gross unrealized losses on all fixed maturities and on equities available for sale totaled $55,826,000 and $10,638,000, respectively. As of December 31, 2005 and 2004, no single issuer accounted for more than 5% and 15%, respectively, of the aggregate gross unrealized losses. Management reviews TRH's investments on a continual basis for evidence of other than temporary declines in market value and exercises its judgment in making such a determination and calculating the amount of loss recognition (as a realized capital loss) resulting from investment write-downs.
At December 31, 2005 and 2004, the gross unrealized losses for all fixed maturities and equities available for sale included the following concentrations:
The U.S. federal income tax rate was 35% for 2005, 2004 and 2003. 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:
The domestic current tax benefit for 2005 includes $61.2 million resulting from a tax net operating loss carryback to prior years. In addition, the 2005 domestic deferred tax benefit includes $20.9 million resulting from a minimum tax credit carryforward which, by law, may be carried forward indefinitely.
Deferred income taxes include a benefit for tax refund claims from amended tax returns totaling $10.9 million arising in 2004. These claims primarily resulted from TRH's ability to recover taxes through the utilization of foreign tax credit carry backs.
(b) The components of the net deferred income tax asset at December 31, 2005 and 2004 were as follows:
(c) Income tax payments, net of recoveries of income taxes previously paid, as applicable, totaled $39,637,000, $105,315,000 and $66,168,000 in 2005, 2004 and 2003, respectively.
The year 2005 included $482.8 million of catastrophe losses principally related to Hurricanes Katrina, Rita and Wilma, and, to a lesser extent, to Central European floods and European Windstorm Erwin. (See Note 9.) In addition, in 2005, TRH determined that its estimates of the ultimate amounts of net losses occurring in 2004 and prior years needed to be increased as a result of greater than expected loss activity in 2005. As a result of that determination, TRH increased net losses and LAE incurred by $268.8 million, representing significant net adverse development in 2005 of losses occurring in all prior years. This net adverse development was comprised of $524.9 million related to losses occurring in 2002 and prior, partially offset by favorable development of $256.1 million related primarily to 2004 and, to a lesser extent, to 2003. The lines of business with the most significant net adverse development recorded in 2005 were the other liability line ($366 million), which includes certain specialty casualty classes such as D&O and E&O, arising principally from losses occurring in 1996 to 2002, and the medical malpractice line ($64 million), arising primarily from losses occurring between 1997 and 2001. The large majority of such net adverse development related to domestic operations. These increases to incurred losses were offset, in part, by net favorable development occurring most significantly in the fire line ($99 million), which arose principally from losses occurring in 2004, and in the ocean marine and aviation lines ($42 million, mostly related to aviation), which arose principally from losses occurring in 2001 through 2004.
TRH writes a significant amount of non-proportional assumed casualty reinsurance as well as proportional assumed reinsurance of excess casualty business for such volatile classes as medical malpractice and D&O. At the primary level, there are significant risk factors which contribute to the variability and unpredictability of the loss trend factors for this business such as jury awards, social
The year 2004 included $215.0 million of catastrophe losses related to Hurricanes Charley, Frances, Ivan and Jeanne, that affected the Southeastern United States and the Caribbean, typhoons that affected Japan and the tsunami which principally affected South Asia. In addition, as a result of net increases in estimates of losses occurring in prior years, net losses and LAE incurred was increased by $317.4 million in 2004. As a result of greater than expected reported loss activity in 2004, indicating that TRH's estimates as of the end of 2003 of the ultimate amounts of losses occurring in 2003 and prior required a net increase, significant net adverse development was recorded in 2004. The vast majority of such adverse development relates to other liability, including certain specialty casualty classes such as D&O and E&O, and medical malpractice lines for losses occurring between 1998 and 2001, principally in domestic and, to a lesser extent, London operations. These increases to incurred losses were offset, in part, by favorable development across most lines on losses occurring in 2003 and, to a lesser extent, on losses occurring during 2002 in the other liability, aircraft and fire lines.
There were no significant catastrophe losses occurring during 2003. However, as a result of net increases in estimates of losses occurring in prior years, net losses and LAE incurred was increased by $322.6 million in 2003. As a result of greater than expected reported loss activity in 2003, indicating that TRH's estimates as of the end of 2002 of the ultimate amounts of losses occurring in 2002 and prior years required a net increase, significant adverse development was recorded in 2003 on losses occurring between 1998 and 2000 in certain casualty lines, principally in domestic and, to a lesser extent, London branch operations. Such lines included other liability (a portion of which represents certain specialty casualty classes such as D&O and E&O), medical malpractice and, to a lesser extent, surety and fidelity lines. These increases to incurred losses were offset, in small part, by favorable development on losses occurring in 2001 and 2002 in fire and allied lines and, in 2002 only, in other liability lines.
Net income for 2004 includes aggregate estimated pre-tax catastrophe losses of $215.0 million (gross $270 million; ceded $55 million), or $139.7 million after tax, arising principally from hurricanes in the United States and the Caribbean, typhoons in Japan, and the tsunami primarily affecting South
The charges made to operations for these plans for 2005, 2004 and 2003 were $3,433,000, $3,257,000 and $4,158,000, respectively.
In 1994, the Stock Option Plan Committee granted 56,250 options to certain non-employee directors of the Company, who were directors, officers and employees of AIG, to purchase shares of the Company's common stock at $18.13 per share. Such options were granted outside of, but on
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, 2005, 2004 and 2003 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, 2005:
(b) 2003 Stock Incentive Plan: In 2003, the Company's Board of Directors adopted and the stockholders approved the “2003 Stock Incentive Plan” (the TRH Stock Incentive Plan). This plan provides that equity-based or equity-related awards with respect to up to a maximum of 625,000 shares of the Company's common stock can be granted to officers, directors, employees, and other individuals as determined by the Company's Board of Directors, except that no award may be made to directors who are not employees of the Company without stockholder approval. Pursuant to the TRH Stock Incentive Plan, no grantee may receive awards covering more than 31,250 shares of the Company's common stock in any one year. During 2005, 2004 and 2003, the Company granted restricted stock units (RSU) as detailed in the following table. With minor exceptions, RSUs will vest on the fourth anniversary of the date of grant for those grantees with continued employment through such date. The Company reserves the right to make payment for the RSUs in shares of common stock or the cash equivalent of the market value of such shares on the date of vesting. At December 31, 2005, there were
Approximately $575 million (15%), $639 million (15%) and $633 million (17%) of gross premiums written by TRH in 2005, 2004 and 2003, respectively, were attributable to reinsurance purchased by other subsidiaries of AIG, for the production of which TRH paid ceding commissions totaling $122 million, $122 million and $167 million, respectively, in such years. (The amounts discussed in the preceding sentence include transactions with C.V. Starr & Co., Inc. (Starr) as described in Note 13(c).) In 2005, the great majority of such gross premiums written were recorded in the property, other liability, medical malpractice and ocean marine and aviation lines. In 2004, the great majority of such gross premiums written were recorded in the property, other liability, auto liability, medical malpractice and ocean marine and aviation lines. In 2003, the great majority of such gross premiums written were
Throughout 2005, 2004 and 2003 of Starr's subsidiaries operated as insurance agencies or brokers for insurance subsidiaries of AIG and, in such capacity, produced reinsurance business for TRH. TRH paid commissions to Starr subsidiaries of $11 million, $13 million and $9 million in 2005, 2004 and 2003, respectively, for such reinsurance purchased by subsidiaries of AIG totaling $59 million, $77 million and $46 million, respectively, in such years. From these commissions, Starr is required to pay its operating and acquisition expenses.
In May 2005, AIG included, for the first time, in its restated financial statements for 2000 through 2003 and in its financial statements for 2004 (as included in AIG's Annual Report on Form 10-K for the year ended December 31, 2004) adjustments attributable to compensation expense related to past SICO Plans. TRH determined that, as a subsidiary of AIG, it is appropriate to record the compensation expense related to its employees participation in past SICO Plans.
For the year 2005, TRH recorded compensation expense related to such past SICO Plans of $3.3 million (included in the Consolidated Statement of Operations in Other, net) with a corresponding increase to additional paid-in capital. The tax benefit that TRH expects to realize related to this charge was recorded as a tax benefit in the current year. TRH will continue to record compensation expense and increases to additional paid-in capital related to past SICO Plans in future periods.
past SICO Plans that would have been recorded in all prior periods through December 31, 2004 as a reduction to retained earnings of $8.3 million, which is net of a tax benefit that TRH expects to realize of $3.0 million. The entire amount of such prior year compensation cost, before tax effect, of $11.3 million, is considered a contribution to capital, and was recorded as an increase to additional paid-in capital.
In addition, during 2005, AIG has initiated a 2005-2006 Deferred Compensation Profit Participation Plan (the AIG Plan) that has been modeled after past SICO Plans and will include certain TRH employees as participants. If share awards are made, pursuant to the AIG Plan terms, TRH will bear the costs related to TRH employees' participation in the AIG Plan and will begin to record compensation expense related to such costs in 2007. Compensation expense related to the AIG Plan is not expected to be material.
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. Such dividends are limited by statutory formula unless otherwise approved by the New York Insurance Department. 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, 2005, TRC had statutory earned surplus of $1,391,527,000, and, in 2006, in accordance with the statutory formula, could pay dividends of approximately $261,800,000 without regulatory approval.
TRC and Putnam each prepare statutory financial statements in accordance with accounting practices prescribed or permitted by New York-their state of domicile. Prescribed statutory accounting practices are discussed in a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as in state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. All material statutory accounting practices of TRC and Putnam are prescribed in the authoritative literature described above. As required by the state of New York, TRC and Putnam use the Codification of Statutory Accounting Principles (Codification) as primary guidance on statutory accounting.
Premiums written and earned that were ceded to affiliates include amounts which, by prearrangement with TRH, were assumed from an affiliate and then ceded in an equal amount to other affiliates. Ceded premiums written include $91 million, $138 million and $79 million in 2005, 2004 and 2003, respectively, and ceded premiums earned include $113 million, $109 million and $71 million in 2005, 2004 and 2003, respectively, related to such arrangements.
TRH conducts its business and assesses performance through segments organized along geographic lines. The Domestic segment includes financial data from branches located in the United States other than the Miami branch, as well as stock compensation expense and other general corporate expenses, which are included in the Statement of Operations in Other, net. In addition, the Domestic segment includes assets (primarily investments) purchased with the proceeds of the Senior Notes as well as related net investment income, which amount was not material. Interest expense related to the Senior Notes is also included in the Domestic segment loss before income taxes and amounted to $2.1 million (see Note 6).
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, (i.e., the Toronto branch and the Miami branch (which serves Latin America and the Caribbean)) and from branches in the Asia Pacific region are grouped as International-Other and 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-affiliated business equal to 15% and 15% in 2005, 17% and 14% in 2004 and 16% and 13% in 2003, of consolidated revenues, with a significant portion in each segment.
Includes revenues from the London, England office of $861,986, $900,328 and $711,876 in 2005, 2004 and 2003, respectively, and revenues from TRZ of $388,422, $383,410 and $270,641 in 2005, 2004 and 2003, respectively.
Net losses and LAE for 2005 include pre-tax net catastrophe losses of $482.8 million (representing $329.6 million, $124.7 million and $28.5 million from Domestic operations, International-Europe operations and International-Other operations, respectively). Net losses and LAE for 2004 include pre-tax net catastrophe losses of $215.0 million (representing $98.1 million, $26.3 million and $90.6 million from Domestic operations, International-Europe operations and International-Other operations, respectively). There were no significant catastrophe losses occurring in 2003. (See Note 5 of Notes to Consolidated Financial Statements.)
Underwriting expenses represent the sum of net commissions and other underwriting expenses.
As Hong Kong branch segment data is considered significant to segment data in 2005 only, certain key Hong Kong data elements which are included in International-Other in 2005 are as follows: Revenues-$99.3 million; Income before income taxes-$20.3 million; Assets-$100.9 million.
A majority of the amounts within the other liability line relates to more complex risks such as E&O, D&O and, to a lesser extent, environmental impairment liability.
In April 2005, TRH received subpoenas from the Insurance Departments of Florida and Georgia seeking information relating to finite insurance and reinsurance transactions. In addition, TRH has received a subpoena from the Insurance Department of New York seeking information relating to TRC's relationship and transactions with Sunrise Professional Indemnity, Ltd., a foreign reinsurer providing reinsurance to TRC, and Gallagher Healthcare Insurance Services, Inc., a provider of insurance and risk management services to healthcare providers and a wholly owned subsidiary of Arthur J. Gallagher & Co., Inc.
TRH has responded to these subpoenas and continues to cooperate with these regulatory requests. While TRH does not believe that any of these inquiries will have a material impact on TRH's business or financial results, it is not possible to predict with any certainty at this time what impact, if any, these inquiries may have on TRH's business or financial results.
(b) Commercial Commitments: In the normal course of business, TRH has issued letters of credit to ceding companies amounting to $114,349,000. 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.
The following is a summary of unaudited quarterly financial data for each of the years ended December 31, 2005 and 2004. 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.
As the impact of potential shares for the three-month periods ended September 30, 2005 and 2004 are antidilutive (i.e., reduces the loss per common share) because there is a loss from continuing operations, potential shares are not included in the diluted net loss per common share calculation for those periods.