office space of TRH's headquarters and the Chicago, Miami, Buenos Aires, Rio de Janeiro, Zurich, London, Paris, 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 generally accepted accounting principles. This data should be read in conjunction with the Consolidated Financial Statements and accompanying notes included elsewhere herein.
- ------------ (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.
During 1998, American International Group, Inc. (AIG, and collectively, with its subsidiaries, the AIG Group) increased its 49% beneficial ownership of Transatlantic Holdings, Inc. (the 'Company') outstanding common stock to 52% as of year end. 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.)
In the third quarter of 1996, the Company, through its wholly-owned subsidiary, Transatlantic Reinsurance Company (TRC), acquired all of the outstanding shares of Trans Re Zurich (TRZ), formerly known as Guardian Ruckversicherungs-Gesellschaft (Guardian Re), an international reinsurance company based in Zurich, Switzerland, for approximately $105 million in cash. Assets of TRZ totaled $366.8 million at the date of acquisition.
This acquisition was accounted for as a purchase. Accordingly, TRZ's results for the second half of 1996 and thereafter are included in the consolidated results of the Company. This acquisition has not had a material effect on financial position or net income.
The following table shows net premiums written, net premiums earned and net investment income of TRH for the periods indicated:
their business to certain other TRH offices, closer to source, and the selective retention of business in its core areas. International net premiums written increased significantly in specialty casualty classes (particularly other professional liability), automobile physical damage, automobile 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.
Net premiums written by international offices increased by $161.5 million, or 34.9%, to $624.2 million in 1997. Nearly all such offices recorded premium increases, led by TRZ, which reported an increase of $94.1 million as discussed in the paragraph immediately above. International net premiums written increased significantly in automobile liability, automobile physical damage, fire and allied lines. International business represented 48.2% of total net premiums written in 1997 as compared to 40.5% in 1996. Domestic net premiums written decreased 1.5% to $669.9 million. Significant decreases in general casualty, property and automobile liability lines (including nonstandard risks) were partially offset by increases in homeowners' multi-peril, aircraft and accident and health lines. On a worldwide basis, casualty lines business represented 67.1% of net premiums written in 1997 compared to 66.5% in the prior year. The balance represented property lines. Treaty business represented 93.8% of net premiums written compared to 90.5% in 1996. The balance represented facultative accounts. The net increases noted above were primarily from treaty business and resulted from increased coverage provided.
TRH's 1998 results included losses incurred of $20 million related to Hurricane Georges. 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, 1998, reserves for unpaid losses and loss adjustment expenses totaled $3.12 billion, an increase of $197.3 million, or 6.8%, over the prior year. Also at December 31, 1998, reinsurance recoverable on unpaid losses and loss adjustment expenses totaled $446.9 million, an increase of $64.1 million, or 16.8%, from the prior year. (See Note 12 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.
Reserves for the reinsurance of risks related to environmental impairment and asbestos-related illnesses amounted to $69 million and $74 million at December 31, 1998 and 1997, 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 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 threat 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, 1998, are adequate.
The increase of the underwriting expense ratio in 1998 compared to 1997 and the decrease of the underwriting expense ratio in 1997 compared to 1996 were both due to changes in the ratio of net commissions to net premiums written, caused, in large part, by slight shifts in the mix of business between years.
Realized net capital gains on the disposition of investments totaled $120.9 million in 1998, $32.9 million in 1997 and $18.7 million in 1996. The high level of realized capital gains in 1998 compared to the other years presented resulted principally from the strategic realignment of the equity portfolio.
The effective tax rates were 23.5% in 1998, 21.0% in 1997 and 21.1% in 1996. The increased effective tax rate in 1998 is due to the fact that while tax-exempt income remained relatively level compared to the prior year, income subject to tax increased significantly, principally as a result of the increase in realized net capital gains.
TRH's operating cash flow in 1998 declined compared to 1997. This decrease was due to a significant increase 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 addition, TRH's operating cash flow in 1997 declined compared to 1996. This decrease was due to a significant increase in paid losses and lesser increases in net commissions, operating expenses and taxes paid, offset in part by increased net premiums and net investment income received. In each of 1998 and 1997 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, increased catastrophe losses paid. International operations, most significantly London, accounted for approximately 43%, 43% and 41% of operating cash flow in 1998, 1997 and 1996, respectively.
TRH's operations are exposed to market risk. Market risk is the risk of loss of fair market value resulting from adverse fluctuations in interest and foreign currency exchange rates and equity prices.
investments and cash and accrued investment income. Financial instrument liabilities include unpaid losses and loss adjustment expenses, net of reinsurance, and unearned premiums.
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.'
FRR No. 48 amends rules and forms for registrants and requires clarification and expansion of existing disclosures for derivative financial instruments, other financial instruments and derivative commodity instruments, as defined therein. The amendments require enhanced disclosure with respect to these derivative instruments in the notes to financial statements. During the three year period ending December 31, 1998, TRH has had no derivative instruments.
(revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Comprehensive income is defined as the change in stockholders' equity during a period from transactions and other events and circumstances from non-owner sources and includes net income and all changes in stockholders' equity except those resulting from investments by owners and distribution to owners.
Also in June 1997, the FASB adopted SFAS No. 131, 'Disclosure about Segments of an Enterprise and Related Information.' This statement establishes standards for the way that public business enterprises report information about operating segments in annual and interim financial statements and requires presentation of a measure of profit or loss, certain specific revenue and expense items and segment assets. It also establishes standards for related disclosures about products and services, geographic areas and major customers, superseding most of SFAS No. 14, 'Financial Reporting for Segments of a Business Enterprise.'
The Year 2000 (Y2K) issue arises from the historic usage of two, rather than four, digit date fields in computer equipment, software packages and other devices using embedded chip technology, causing a date field '00' to be recognized as the year 1900, rather than the year 2000. Failure to recognize, repair or replace affected devices and systems could cause systems failures or other disruptions resulting
In addition, TRH has identified those ceding companies, brokers, reinsurers, vendors and other business partners (collectively 'third parties') that are significant to its business and has asked each to advise on the steps they are taking to address the Y2K issue. Responses have been received from most and follow-up requests have been sent to those who failed to respond or whose responses were not satisfactory. The completion of these activities and corrective actions, where necessary, will continue during 1999.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Transatlantic Holdings, Inc. and subsidiaries (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 general liability (including directors' and officers' liability and other professional liability), automobile liability (including nonstandard risks), 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 71.0%, 67.1% and 66.5% of net premiums written in 1998, 1997 and 1996, respectively. The balance represents property lines.
These consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated.
(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 primarily of investments in partnerships and other investments which are carried primarily at market value. A portion of other invested assets consists of a short-term bond fund managed by an American International Group, Inc. (AIG, and collectively, with its subsidiaries, the AIG Group) subsidiary. (See Note 10.) Short-term investments are carried at cost, which approximates market value.
(c) CASH EQUIVALENTS: A portion of cash equivalents consists of a money market fund managed by an AIG subsidiary. (See Note 10.)
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, 1998 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.
In accordance with the standard, TRH adopted SFAS No. 123 beginning with the 1996 annual financial statements and chose the pro forma disclosure option of implementation. (See Note 9.)
In June 1996, the FASB issued SFAS No. 125, 'Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.' This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. In addition, it provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.
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 results of operations, financial position or cash flows.
For all entities with complex capital structures, basic and diluted EPS must be shown on the face of the income statement with equal prominence. In addition, a reconciliation of the numerator and denominator from the basic EPS computation to the diluted EPS computation is required. (See Note 2(j).)
Pursuant to the standard, TRH adopted SFAS No. 128 for the 1997 annual financial statements and restated all prior period EPS data presented.
In June 1997, the FASB adopted SFAS No. 130, 'Reporting Comprehensive Income.' This statement established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Comprehensive income is defined as the change in stockholders' equity during a period from transactions and other events and circumstances from non-owner sources and includes net income and all changes in stockholders' equity except those resulting from investments by owners and distribution to owners.
(c) INVESTMENT GAINS AND LOSSES: The realized net capital gains and change in net unrealized appreciation (depreciation) of investments are summarized as follows:
The amortized cost and market value of bonds at December 31, 1998 by contractual maturity, are summarized below. 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 is 35% for 1998, 1997 and 1996. 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:
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.
Under TRH's 1990 Employee Stock Purchase Plan, as amended, all full time employees with at least one year of employment with the Company or any of its subsidiaries are eligible to receive privileges to purchase shares of the Company's common stock at a price which is 85% of the fair market value of such stock on the date of subscription or the date of grant of the purchase privilege, whichever is greater. An aggregate of 750,000 shares of common stock has been authorized for subscription and 7,115 shares were purchased under the plan in 1998.
The charges made to operations for these plans for 1998, 1997 and 1996 were $676,000, $732,000 and $678,000, respectively.
In each of 1994 and 1992, the Stock Option and Purchase Plan Committee granted 30,000 options to certain non-employee directors of the Company who are also directors, officers and employees of AIG. These options may be used to purchase shares of the Company's common stock at $34.00 per share and $35.00 per share for the 1994 and 1992 options, respectively, representing the fair market value of a share of the Company's common stock at the date of grant. Such options were granted outside of, but on substantially the same terms and conditions as, the 1990 Plan. As of December 31, 1998, all of these options were exercisable as none have been exercised or forfeited. The impact of the above options on the financial statements is not material.
The Company accounts for its stock options based on the intrinsic value method prescribed in 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:
The effects of applying SFAS No. 123 in the immediately preceding pro forma data may not be indicative of future amounts as this standard does not apply to options granted prior to 1995. Additional grants in future years are anticipated.
In April 1996, AIG increased its beneficial ownership of the Company's outstanding common stock from 48% to 49%. In August 1998, AIG acquired additional shares, placing its beneficial ownership interest over 50%. As of December 31, 1998, AIG beneficially owned approximately 52% of the Company's outstanding shares.
Approximately $167 million (11%), $181 million (12%) and $232 million (18%) of gross premiums written by TRH in 1998, 1997 and 1996, respectively, were attributable to reinsurance purchased by the AIG Group, for the production of which TRH paid ceding commissions to the AIG Group of $31
million, $32 million and $33 million, respectively, in such years. (See Note 12 for information relating to reinsurance ceded to related parties.)
- ------------ (1) Revenues represent the sum of net premiums earned, net investment income and realized net capital gains.
(2) Domestic revenues and income before income taxes include realized net capital gains of $118,601, $31,727 and $15,913 in 1998, 1997 and 1996, respectively. Realized net capital gains for other segments in each of the years presented is not material.
(3) Includes revenues from the London, England office of $331,944, $298,523 and $279,617 in 1998, 1997 and 1996, respectively, and revenues from the Zurich, Switzerland office of $155,628, $186,780 and $87,954 in 1998, 1997 and 1996, respectively.
The following is a summary of unaudited quarterly financial data for each of the years ended December 31, 1998 and 1997. 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.