This Annual Report and other publicly available documents may include, and Transatlantic Holdings, Inc. and its subsidiaries (collectively, TRH) officers and representatives may from time to time make, statements which may constitute 'forward-looking statements' within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only TRH's belief regarding future events and financial performance, many of which, by their nature, are inherently uncertain and outside of TRH's control. These statements may address, among other things, TRH's strategy and expectations for growth, product development, government and industry regulatory actions, market conditions, financial results and reserves, as well as the expected impact on TRH of natural and man-made (e.g., terrorist attacks) catastrophic events and political, economic, legal and social conditions. It is possible that TRH's actual results, financial condition and expected outcomes may differ, possibly materially, from those anticipated in these forward-looking statements. Important factors that could cause TRH's actual results to differ, possibly materially, from those discussed in the specific forward-looking statements may include, but are not limited to, uncertainties relating to economic conditions and cyclical industry conditions, credit quality, government and regulatory policies, volatile and unpredictable developments (including natural and man-made catastrophes), the legal environment, the reserving process, the competitive environment in which TRH operates, interest rate and foreign currency exchange rate fluctuations, and the uncertainties inherent in international operations, and are further discussed throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. TRH is not under any obligation to (and expressly disclaims any such obligations to) update or alter any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise.
We believe the following critical accounting policies contain the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Loss Reserves -- TRH's unpaid losses and loss adjustment expenses, net of reinsurance recoverable thereon, represent estimates of 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
Loss and loss adjustment expense reserves, net of related reinsurance recoverables, include amounts for risks related to environmental impairment and asbestos-related illnesses totaling $81 million and $71 million at December 31, 2001 and 2000, 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 IBNR, are based upon known facts and current law. However, significant uncertainty exists as, among other things, there are inconsistent court resolutions and judicial interpretations with respect to underlying policy intent and coverage and uncertainties as to the allocation of responsibility for resultant damages.
Because the reserving process is inherently difficult and subjective, actual net losses and loss adjustment expenses may materially differ from reserves and related reinsurance recoverables reflected in TRH's consolidated financial statements, and accordingly, may have a material effect on future results of operations. And while there is also the possibility of changes in statutes, laws, regulations and other factors that could have a material effect on these liabilities and, accordingly, future earnings, TRH believes that its claims reserves carried at December 31, 2001 are adequate.
TRH derives its revenue from two principal sources: premiums from reinsurance assumed net of reinsurance ceded (i.e., net premiums earned) and income from investments. Premiums are earned primarily on a pro rata basis over the term of the related coverages. Unearned premiums and prepaid
For the period under discussion, the reinsurance market has been characterized by significant competition worldwide in most classes. During 2000 and continuing through 2001, rate increases were achieved in many classes, particularly after the net industry surplus drain occurring as a result of the September 11, 2001 attacks. The majority of the impact resulting from the improving market conditions in 2001, particularly subsequent to September 11, will not be reflected in results until at least 2002.
Of the total increase in net premiums written in 2000 compared to 1999, domestic net premiums written increased by $94.9 million, or 12.6%, to $845.5 million, with significant increases recorded in certain specialty casualty classes (particularly accident and health and medical malpractice lines) and in aviation and property catastrophe excess-of-loss lines.
Net premiums written by international offices increased in 2000 by $65.2 million, or 8.7%, over the prior year, to $813.1 million. The majority of international offices recorded increases in net premiums written, led by London and TRZ. International net premiums written increased significantly in auto
Generally, reasons for increases in gross premiums written between years are similar to those for net premiums written. Ceded premiums written and earned for 2001 increased over 2000. A significant portion of the increases resulted from certain domestic contracts in the specialty casualty area wherein a substantial portion of premiums assumed under those agreements were retroceded to non-affiliates. The ceded premiums written increase also resulted from the higher cost of reinsurance protection as well as certain additional coverages purchased. The increase in ceded premiums written and earned in 2000 compared to 1999 was generally proportional to the increase in gross premiums written in 2000 versus 1999.
As further discussed in Notes 12 and 14 of Notes to Consolidated Financial Statements, TRH transacts a significant amount of business assumed and ceded with AIG Group companies. TRH either accepts or rejects the proposed transactions with such companies based on its assessment of risk selection, pricing, terms and conditions.
TRH's 1999 results included net pre-tax catastrophe losses of $85 million, which added 5.7 to each of the loss and loss adjustment expense ratio and combined ratio. More than one-half of those losses were from European storms occurring late in the year. Two of those storms, Lothar and Martin, occurred within a day of each other in late December and caused extensive property damage in Western Europe, most severely in France. These two storms collectively are considered among the worst natural catastrophes ever to strike France.
income tax currently, pursuant to Subpart F income rules of the Internal Revenue Code, and included, as appropriate, in the consolidated federal income tax return.
The effective tax rates were 155.4% in 2001, 21.0% in 2000 and 20.6% in 1999. With respect to the effective tax rate in 2001 as compared to the prior years, the adjustments reconciling the 'expected' tax benefit to the actual tax benefit (as detailed in Note 4 of Notes to Consolidated Financial Statements) are similar in terms of their nature and size when compared to prior years. However, the tax benefit, which exceeds the amount of pre-tax loss in 2001, results from TRH carrying its current year tax net operating loss back to prior years ($17.7 million current tax benefit and a component of federal income tax recoverable on the balance sheet) and recording a deferred tax benefit (included on the balance sheet as a deferred income tax asset) of $19.6 million for a minimum tax credit carryforward which, by law, may be carried forward indefinitely. The effective tax rate in 2000 increased slightly compared to 1999.
In 2001, 2000 and 1999, the after-tax charges included in net income for catastrophe losses were $139.8 million (including $130 million related to September 11), nil and $55.3 million, respectively. Net income in 2001 also includes an after-tax charge of $39 million for the estimated reinsurance exposure related to Enron Corporation. After-tax net realized capital (losses) gains included in net income amounted to ($0.2) million in 2001, $21.5 million in 2000 and $53.8 million in 1999.
2001 compared to 2000 -- Revenues were higher in 2001 compared to 2000 due principally to increases in net premiums written in London and TRZ related, in large part, to auto liability lines. The difference between the loss before income taxes in 2001 compared to income before income taxes in 2000 was primarily due to $100 million of net pre-tax catastrophe losses related to September 11
incurred primarily through the London market and increased acquisition costs, offset, in part, by improved experience in other loss activity.
Segment assets in 2001 significantly exceeded the 2000 amount due to the short-term investment of funds received under securities loan agreements, an increase in bonds available for sale, and an increase in reinsurance recoverable on paid and unpaid losses and loss adjustment expenses, related principally to 2001 catastrophe losses from the London market related to September 11.
At December 31, 2001, total investments and cash were $5,004.4 million compared to $4,391.2 million at December 31, 2000. The increase was caused, in large part, by $408.3 million of cash flows from financing activities (principally net funds received as collateral under securities loan agreements less cash dividends paid to stockholders) and $242.1 million of cash provided by operating activities. A liability equal to the net funds received under securities loan agreements was recorded to reflect the obligation to return such funds to the borrowers of securities under such agreements.
in paid losses offset partially by increased net premiums written, net of commissions. Paid loss levels in 2000 were significantly elevated due to payments related to previously reserved claims, including 1999 catastrophe losses, an increase in premium volume and the continued shift in the business mix towards lines with shorter payment patterns.
Fixed maturities are carried at amortized cost when it is TRH's positive intent to hold the securities to maturity and TRH has the ability to do so. As of December 31, 2000, 27% of the bond portfolio was classified as held-to-maturity and the balance of the bond portfolio was classified as available-for-sale and carried at market value. During the first quarter of 2001, TRH transferred all of the bonds in its held-to-maturity classification to the bonds available-for-sale classification to enhance TRH's flexibility with respect to future portfolio management. (See discussion below of change in classification of certain bonds under Accounting Standards (a)). As of December 31, 2001, the entire bond portfolio was classified as available for sale.
Most activity within the bonds available for sale portfolio for the years under discussion represented strategic portfolio realignments to maximize after-tax income. TRH adjusts its mix of taxable and tax-exempt investments, as appropriate, generally as a result of strategic investment and tax planning considerations. In addition, TRH engaged in securities lending transactions whereby certain securities (i.e., bonds and common stocks available for sale) from its portfolio were loaned to third parties (see Note 2(b) of Notes to Consolidated Financial Statements). The market values of bonds and common stocks available for sale that are on loan are reflected parenthetically as pledged on the balance sheet and totaled $385.5 million and $37.2 million, respectively, as of December 31, 2001.
As of December 31, 2001, 94.7% of the bond portfolio was rated Aaa or Aa, an additional 3.6% was also rated investment grade or better, 1.5% was rated below investment grade and 0.2% was not rated. Also, as of December 31, 2001, TRH had no derivative instruments. (See Note 3 of Notes to Consolidated Financial Statements.)
At December 31, 2001, reserves for unpaid losses and loss adjustment expenses totaled $3.75 billion, an increase of $670.4 million, or 21.8%, as compared to the prior year. The increase in reserves was largely due to the occurrence of catastrophe losses (including approximately $500 million (before reinsurance) from the terrorist attacks of September 11) and to the loss provision for the estimated reinsurance exposure related to Enron Corporation. Also at December 31, 2001, reinsurance
The following table presents the VaR on a combined basis and of each component of market risk for 2001 and as of December 31, 2000. VaR with respect to combined operations cannot be derived by aggregating the individual risk amounts presented herein.
TRH's stockholders' equity totaled $1.85 billion at December 31, 2001, a decrease of $10.4 million from year-end 2000. The net decrease consisted principally of decreases from cash dividends declared of $19.8 million, a reduction of accumulated other comprehensive income of $9.2 million, and a reduction of $4.4 million for the cost of acquiring 64,200 shares of treasury stock for general corporate purposes, partially offset by an increase from 2001 net income of $18.9 million.
Risk-based capital (RBC) standards, promulgated by the National Association of Insurance Commissioners (NAIC), relate an individual company's statutory policyholders' surplus to the risk inherent in its overall operations and sets thresholds at which certain company and regulatory corrective actions are mandated. At December 31, 2001, the statutory surpluses of TRC and Putnam each significantly exceeded the level of surplus required under RBC requirements for regulatory attention.
(a) ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 133 AND CHANGE IN CLASSIFICATION OF CERTAIN BONDS:
and supersedes Accounting Principles Board Opinion No. 17, 'Intangible Assets.' The new standard addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Among other things, goodwill and some intangible assets will no longer be amortized, but will be subject to impairment tests at least annually. In accordance with the statement, TRH will implement SFAS No. 142 on January 1, 2002. Management believes that the implementation of this standard will not have a material effect on TRH's results of operations, financial position or cash flows.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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), medical malpractice, marine and aviation, accident and health and surety, credit and financial guaranty in the casualty lines, and fire, homeowners and allied lines in the property lines (which include property catastrophe risks). Casualty lines represented 79.2%, 76.7% and 74.8% of net premiums written in 2001, 2000 and 1999, respectively. The balance represented property lines.
(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. As of December 31, 2001, however, all of TRH's bonds are classified as available-for-sale. (See discussion on Adoption of Statement of Financial Accounting Standards (SFAS) No. 133 and Change in Classification of Certain Bonds in Note 2(j).) Common and nonredeemable preferred stocks are carried principally at market value. Market values for fixed maturity securities and equities are generally based upon quoted market prices. For certain fixed maturity securities, for which market prices were not readily available, market values were estimated using values obtained from independent pricing services. Other invested assets consist of investments in partnerships, a short duration bond fund managed by an AIG subsidiary and other investments which are carried primarily at market value. Short-term investments are carried at cost, which approximates market value.
In 2001, TRH engaged in securities lending transactions whereby certain securities (i.e., bonds and common stocks available for sale) from its portfolio were loaned to third parties. In these transactions, initial collateral, principally cash, is received by TRH in an amount exceeding the market value of the loaned security. Such funds are held in a pooled account of the lending agent in these transactions (an AIG subsidiary) and are carried as an investment on the balance sheet (at cost, which approximates market value) in accordance with SFAS No. 140, 'Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a replacement of SFAS No. 125.' A liability is recorded in an amount equal to the collateral received to recognize TRH's obligation to return such funds when the
In accordance with the transition provisions of SFAS No. 133, as amended, in 2001, TRH transferred all of its bonds in the held-to-maturity classification (with an amortized cost of $932.3 million and market value of $982.1 million at the date of transfer) to the bonds available-for-sale classification (on the balance sheet) to enhance TRH's flexibility with respect to future portfolio management. The resulting increase in unrealized appreciation of investments, net of income taxes (a component of accumulated other comprehensive income), of $32.4 million (net of a tax effect of $17.4 million) has been recorded as the cumulative effect of an accounting change in the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Stockholders' Equity for the 2001 period. Under the provisions of SFAS No. 133, such a transfer does not affect TRH's intent nor its ability to hold bonds acquired in the future to their maturity.
In September 2000, the FASB issued SFAS No. 140, 'Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of SFAS No. 125.' SFAS No. 140 specifies the accounting and reporting requirements for securitizations and other transfers of financial assets and collateral, the recognition and measurement of servicing assets and liabilities and the extinguishment of liabilities. This statement is effective for the recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending
SFAS No. 142, 'Goodwill and Other Intangible Assets,' was issued by the FASB in June 2001. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No. 17, 'Intangible Assets.' The new standard addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Among other things, goodwill and some intangible assets will no longer be amortized, but will be subject to impairment tests at least annually. In accordance with the statement, TRH will implement SFAS No. 142 on January 1, 2002. Management believes that the implementation of this standard will not have a material effect on TRH's results of operations, financial position or cash flows.
The amortized cost and market value of bonds at December 31, 2001 by contractual maturity, are as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments in fixed maturities exclude short-term investments.
(e) EQUITIES: Gross gains of $90,698,000, $118,739,000 and $109,404,000 and gross losses of $90,956,000, $51,860,000 and $22,000,000 were realized on sales of equities in 2001, 2000 and 1999, respectively. At December 31, 2001 and 2000, net unrealized appreciation of equities (before applicable income taxes) included gross gains of $31,723,000 and $98,810,000 and gross losses of $16,038,000 and $41,216,000, respectively.
The domestic current tax benefit for 2001 includes $17.7 million resulting from a tax net operating loss carryback to prior years. In addition, the 2001 domestic deferred tax benefit includes $19.6 million resulting from a minimum tax credit carryforward which, by law, may be carried forward indefinitely.
Current year net losses and loss adjustment expenses incurred for 2001 include catastrophe losses of $215 million ($200 million of which represents the estimated cost of the September 11th attacks -- see Note 8) and a loss of $60 million for the estimated reinsurance exposure related to Enron Corporation.
1999 current year net losses and loss adjustment expenses incurred include catastrophe losses of $85 million. More than one-half of those losses were from European storms occurring late in the year. Two of those storms, Lothar and Martin, occurred within a day of each other in late December and caused extensive property damage in Western Europe, most severely in France. These two storms collectively are considered among the worst natural catastrophes ever to strike France.
8. IMPACT OF SEPTEMBER 11TH TERRORIST ATTACKS ON THE UNITED STATES
TRH's employees participate in benefit plans administered by AIG (See Note 11) 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.
In addition, under TRH's 1990 Employee Stock Purchase Plan, as amended, 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 1,125,000 shares of common stock has been authorized for subscription and 1,531 shares were purchased under the plan in 2001.
In 2000, the Company's Board of Directors adopted, and the stockholders approved, the 'Transatlantic Holdings, Inc. 2000 Stock Option Plan' (the 2000 Plan). This plan provides that options may be granted to certain key employees and non-employee directors to purchase a maximum of 2,250,000 shares of the Company's common stock at prices not less than their fair market value at the date of grant. At December 31, 2001, 1,762,725 shares were reserved for future grants under the 2000 Plan. The 2000 Plan also provides that 25% of the options granted become exercisable on the anniversary date of the grant in each of the four years following the grant and expire 10 years from the date of grant. The Company also maintains the 'Transatlantic Holdings, Inc. 1995 Stock Option Plan' (the 1995 Plan) and the 'Transatlantic Holdings, Inc. 1990 Stock Option Plan' (the 1990 Plan). The 1995 Plan and the 1990 Plan operate under substantially similar terms to the 2000 Plan, except that non-employee directors were not covered under the 1990 Plan. No further options can be granted under the 1995 Plan nor the 1990 Plan, although options outstanding continue in force until exercise, expiration or forfeiture.
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 2001, 2000 and 1999, respectively: expected volatility of 20.0%, 18.0% and 18.0%; risk-free interest rates of 4.4%, 5.4%, and 6.4%; and expected lives of six years for each grant. An increasing dividend schedule is used in the binomial model based on historical experience.
11. STOCK OPTION PLANS (CONTINUED) method discussed in SFAS No. 123, the Company's net income and net income per share (on a pro forma basis) would have been as follows:
TRH has service and expense agreements and certain other agreements with the AIG Group which provide for the reimbursement to the AIG Group of certain administrative and operating expenses which include, but are not limited to, investment advisory and cash management services, office space and human resource related activities. Under the guidance of TRH's Finance Committee of the Board of Directors and senior management, certain AIG Group companies act as financial advisors and managers of TRH's investment portfolio. In 2001, 2000 and 1999, $7,900,000, $7,700,000 and $10,600,000, respectively, of operating and investment expenses relate to services and expenses provided by the AIG Group under these agreements.
Approximately $232 million (10%), $209 million (11%) and $184 million (11%) of gross premiums written by TRH in 2001, 2000 and 1999, respectively, were attributable to reinsurance purchased by the AIG Group, for the production of which TRH paid ceding commissions to the AIG Group of $50 million, $38 million and $34 million, respectively, in such years. (See Note 14 for information relating to reinsurance ceded to related parties.)
The payment of dividends by the Company is dependent on the ability of its subsidiaries to pay dividends. The payment of dividends by TRC and its wholly-owned subsidiaries, TRZ and Putnam, is restricted by insurance regulations. Under New York insurance law, TRC and Putnam may pay dividends only out of their statutory earned surplus. Generally, the maximum amount of dividends that a company may pay without regulatory approval in any twelve-month period is the lesser of adjusted net investment income or 10% of statutory policyholders' surplus as of the end of the most recently reported quarter unless the New York Insurance Department, upon prior application, approves a greater dividend distribution. Adjusted net investment income is defined for this purpose to include net investment income for the twelve months immediately preceding the declaration or distribution of the current dividend increased by the excess, if any, of net investment income over dividends declared or distributed during the period commencing thirty-six months prior to the declaration or distribution of the current dividend and ending twelve months prior thereto. The statutory surplus of TRC includes the statutory surplus of Putnam since all the capital stock of Putnam is owned by TRC. At December 31,
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles (Codification) as primary guidance on statutory accounting effective January 1, 2001. The Codification provides guidance for areas where previously statutory accounting had been silent and changes current statutory accounting in some areas. The New York Insurance Department adopted most of the Codification guidance for implementation on January 1, 2001, but did not adopt several key provisions including those on deferred income taxes. The cumulative effect of the implementation of Codification guidance (as adopted by the New York Insurance Department) on the statutory surplus of TRC and Putnam as of January 1, 2001 was not material. In addition, the Codification guidance is not expected to have a material effect on future statutory net income, financial position or cash flows.
14. REINSURANCE CEDED (CONTINUED) Premiums written and earned and losses and loss adjustment expenses incurred are comprised as follows:
Amounts recoverable from retrocessionnaires are recognized in a manner consistent with the claims liabilities associated with the retrocession and are presented on the balance sheet as reinsurance recoverable on paid and unpaid losses and loss adjustment expenses. Such balances at December 31, 2001 and 2000 are comprised as follows:
(4) Includes revenues from the London, England office of $435,007, $380,694 and $350,398 in 2001, 2000 and 1999, respectively.
* A significant portion of this product grouping includes more complex risks such as professional liability (other than medical malpractice), directors' and officers' liability, errors and omissions and environmental impairment liability.
(c) LEASES: As of December 31, 2001, the future minimum lease payments (principally for leased office space) under various long-term operating leases were as follows: