One-half of the office space of TRH's New York headquarters, and its Hong Kong and Toronto offices are rented from AIG, which either owns the property or leases it from others. The remaining office space of TRH's headquarters and the Chicago, Miami, Buenos Aires, Tokyo, London, Paris and Zurich offices, are rented from third parties. The leases for the office space occupied by TRH's New York headquarters expire in 2005.
The following discussion refers to the consolidated financial statements of Transatlantic Holdings, Inc. and its subsidiaries (TRH) as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, which are presented elsewhere herein.
This acquisition was accounted for as a purchase. Accordingly, TRZ's results for the second half of 1996 are included in the consolidated results of the Company for 1996. This acquisition has not had a material effect on financial position or net income.
and other liability lines, aided by $78.2 million of net premiums written by newly-acquired TRZ. The decrease in domestic net premiums written was due to significant market competition. Decreases in domestic property lines and certain specialty and general casualty classes other than medical malpractice were partially offset by increases in treaty workers' compensation, motor (including nonstandard risks), medical malpractice, surety and marine lines. On a worldwide basis, property lines business represented 33.5% of net premiums written in 1996 compared to 33.0% in 1995. The balance represented casualty lines. The increased amount of property business increases the potential for volatile underwriting results caused by major natural disasters. Treaty volume represented 90.5% of net premiums written in 1996 compared to 87.2% in 1995. The balance represented facultative accounts. The net increases noted above were primarily from treaty business and generally resulted from increased coverage provided.
The property and casualty insurance and reinsurance industries use the combined ratio as a measure of underwriting profitability. The combined ratio reflects only underwriting results, and does not include income from investments. Generally, a combined ratio under 100 indicates an underwriting profit and a combined ratio exceeding 100 indicates an underwriting loss.
years. In 1994, TRH's results included $20 million of losses from the Northridge, California earthquake and $10 million from USAir's Pittsburgh accident. 1994 results also included $15.0 million of losses resulting from net adverse development of losses occurring in prior years. Adverse development from casualty treaties prior to 1984 and property treaties in 1992 was partially offset by favorable development on 1992 and prior fidelity treaty losses.
At December 31, 1996, reserves for unpaid losses and loss adjustment expenses totaled $2.73 billion, an increase of $344.9 million over the prior year. This increase included reserves acquired of $176.3 million upon the purchase of TRZ in the third quarter of 1996. Also at December 31, 1996, reinsurance recoverable on unpaid losses and loss adjustment expenses totaled $336.2 million, a decrease of $53.8 million, or 13.8%, from the prior year. (See Note 10 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.
Other deductions generally include currency translation gains and losses and other miscellaneous income and expenses. 1994 includes a provision for unrecoverable reinsurance receivables of $2.8 million.
from increased net investment income and realized net capital gains, and improved underwriting results. The increase in income before income taxes in 1995 compared to 1994 was due to an improvement in underwriting results, caused, in large part, by reduced catastrophe loss activity, and increased net investment income, partially offset by a reduction in realized net capital gains.
On a consolidated basis, the effective tax rates were 21.1% in 1996, 19.5% in 1995 and 14.8% in 1994. The increase in the effective tax rate in each of 1996 and 1995 as compared to the respective prior year rates is due, in large part, to higher earnings and a lower proportion of tax-exempt investment income to income before income taxes in each of 1996 and 1995 as compared to the respective prior year.
Net income for 1996 was $154.9 million, or $6.74 per common share, versus $131.9 million, or $5.75 per common share in 1995 and $101.6 million, or $4.44 per common share in 1994. Reasons for these changes are as discussed above.
As a holding company, the Company's assets consist primarily of the stock of TRC and the Company's future cash flows depend on the availability of dividends or other statutorily permissible payments from TRC and its wholly-owned operating subsidiaries, TRZ and Putnam. (See Note 9 of Notes to Consolidated Financial Statements for a discussion of restrictions on dividend payment.) Sources of funds for the operating subsidiaries consist primarily of premiums, reinsurance recoverables, investment income and proceeds from sales, redemptions and the maturing of investments. Funds are applied primarily to payments of claims, ceded reinsurance premiums, insurance operating expenses, income taxes and investments in fixed income and equity securities. Premiums are generally received substantially in advance of related claims payments. Cash and short-term investments 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.
and thereafter for a period the length of which is difficult to predict, but which TRH believes will be at least one year.
As of December 31, 1996, a significant portion of the bond portfolio was classified as available-for-sale and carried at market value. Fixed maturity investments are carried at amortized cost when it is TRH's positive intent to hold these securities to maturity and TRH has the ability to do so. Most activity within the bonds available for sale portfolio for the years under discussion represented strategic portfolio realignments, partially for tax purposes. TRH adjusts its mix of taxable and tax-exempt investments, as appropriate, generally as a result of strategic investment and tax planning considerations. As of December 31, 1996, bonds held to maturity had gross unrealized gains of $58.9 million and gross unrealized losses of $1.3 million. Gross unrealized gains and losses on bonds available for sale as of December 31, 1996 amounted to $56.3 million and $4.9 million, respectively.
TRH's stockholders' equity increased to $1,137.3 million at December 31, 1996, an increase of $148.8 million over year-end 1995. The net increase was comprised principally of net income of $154.9 million and a $2.4 million net increase in unrealized appreciation of investments, net of deferred income taxes, which consists of an increase of $25.8 million from equities and a decrease of $23.4 million from bonds available for sale. Unrealized appreciation (depreciation) of investments, net of deferred income taxes, is subject to significant volatility resulting from changes in the market value of bonds and equities available for sale. Market values may fluctuate due to changes in general economic conditions, market interest rates and other factors. Stockholders' equity was reduced during the year by dividends declared of $11.4 million.
1996 ACCOUNTING STANDARD: In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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.
1995 ACCOUNTING STANDARD: In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes new financial accounting and reporting standards for stock-based employee compensation plans, including stock option and stock purchase plans. Compensation resulting from the award of stock-based compensation must be determined based on the fair value of consideration received or fair value of the equity instrument issued, whichever is more reliably measurable. Such compensation expense, net of income taxes, may be recognized in the Statement of Operations over the service period of the employee (generally the vesting period). In lieu of recording such compensation expense, entities are permitted to disclose its pro forma impact, net of income taxes, on reported net income and earnings per share. Entities choosing such disclosure will continue to measure compensation expense from stock-based compensation in the Statement of Operations based on the intrinsic value method prescribed in Statement of the Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees."
We have audited the consolidated financial statements and the financial statement schedules of Transatlantic Holdings, Inc. and Subsidiaries listed in the index on page 29 of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 66.5%, 67.0% and 65.2% of net premiums written in 1996, 1995 and 1994, respectively. The balance represents property lines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) directly to stockholders' equity. Investment income is recorded as earned. Amortization of bond premium and the accrual of bond discount are charged or credited to net investment income.
(c) CASH EQUIVALENTS: A significant portion of cash equivalents is invested in a money market fund managed by an American International Group, Inc. (AIG, and collectively, with its subsidiaries, the AIG Group) subsidiary. (See Note 8.)
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, 1996 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, an increasing number of new claims and uncertainties as to the allocation of responsibility for clean up costs of hazardous waste dump sites. The government's refusal to release parties from liability and the possibility of dramatic changes from the Congressional re-evaluation of Superfund add to this uncertainty. Additional liabilities which cannot be currently measured may emerge in the future and this emergence may have a material adverse effect on future earnings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) CURRENCY TRANSLATION: Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at year-end exchange rates. Income and expense accounts are translated at average exchange rates for the year. The resulting net translation adjustment for functional currencies is reflected as a separate component of stockholders' equity.
i. 1996 ACCOUNTING STANDARD: In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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.
ii. 1995 ACCOUNTING STANDARD: In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes new financial accounting and reporting standards for stock-based employee compensation plans, including stock option and stock purchase plans. Compensation resulting from the award of stock-based compensation must be determined based on the fair value of consideration received or fair value of the equity instrument issued, whichever is more reliably measurable. Such compensation expense, net of income taxes, may be recognized in the Statement of Operations over the service period of the employee (generally the vesting period). In lieu of recording such compensation expense, entities are permitted to disclose its pro forma impact, net of income taxes, on reported net income and earnings per share. Entities choosing such disclosure will continue to measure compensation expense from stock-based compensation in the Statement of Operations based on the intrinsic value method prescribed in Statement of the Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees."
In accordance with the standard, TRH adopted SFAS No. 123 for the 1996 annual financial statements and chose the pro forma disclosure option of implementation. (See Note 7.)
iii. 1994 ACCOUNTING STANDARD: In October 1994, the FASB issued SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." Among other things, this standard requires disclosure about the amounts, nature and terms of derivative financial instruments and is effective for fiscal years ending after December 15, 1994. In 1996, 1995 and 1994, TRH had no derivative financial instruments as defined in SFAS No. 119.
(a) STATUTORY DEPOSITS: Investments, the substantial majority of which are bonds and common stocks available for sale, were deposited with governmental authorities as required by law and amounted to approximately $119,000,000 and $97,000,000 at December 31, 1996 and 1995, respectively.
(c) INVESTMENT GAINS AND LOSSES: The realized net capital gains (losses) and change in net unrealized (depreciation) appreciation of investments are summarized as follows:
3. INVESTMENTS (Continued) (d) FIXED MATURITIES: The amortized cost and market value of bonds at December 31, 1996 and 1995 are summarized as follows:
(a) The Company files a U.S. consolidated federal income tax return with its domestic subsidiaries, TRC and Putnam. TRC will include as part of its taxable income those items of income of the non-U.S. subsidiary, TRZ, which are subject to U.S. income tax currently, pursuant to Subpart F income rules of the Internal Revenue Code, and included, as appropriate, in the consolidated federal income tax return.
Under TRH's 1990 Employee Stock Purchase Plan, as amended, all full time employees with at least two years 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 500,000 shares of Common Stock has been authorized for subscription and 2,893 shares were purchased under the plan in 1996.
The charges made to operations for these plans for 1996, 1995 and 1994 were $678,000, $555,000 and $336,000, respectively.
In each of 1994 and 1992, the Stock Option and Purchase Plan Committee granted 20,000 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 $51.00 per share and $52.50 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 "Transatlantic Holdings, Inc. 1990 Stock Option Plan" (the 1990 Plan). All of the 1992 options and 10,000 of the 1994 options were exercisable at December 31, 1996 and as of year-end, none were exercised or forfeited. The impact of the above options on the financial statements is not material.
In 1995, the Company's Board of Directors adopted, and the stockholders approved, the "1995 Stock Option Plan" (the 1995 Plan) which provides that options may be granted to certain key employees and non-employee directors to purchase a maximum of 1,000,000 shares of the Company's common stock at prices not less than their fair market value at the date of grant. At December 31, 1996, 750,750 shares were reserved for future grants under the 1995 Plan. Options granted under the plan may be used to purchase the Company's common stock at the fair market value of each share at the date of grant. The Company also maintains the 1990 Plan which operates under substantially the same terms as the 1995 Plan. The 1995 Plan and the 1990 Plan are together hereinafter referred to as the Company Plans.
7. STOCK OPTION PLANS (Continued) A summary of the status of the Company Plans as of December 31, 1996, 1995 and 1994 and changes during the years ended on those dates is presented below:
The weighted average fair value of each option grant is estimated on the date of grant using the "Binomial Option Price Model" with the following weighted average assumptions used for grants in 1996 and 1995, respectively: expected volatility of 22.5% in both years; risk-free interest rates of 6.2% and 5.6%; and expected lives of six years for each grant. An increasing dividend schedule is used in the binomial model based on historical experience.
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 reduction of the Company's net income and net income per share (on a pro forma basis) would not have been material.
11. SEGMENT INFORMATION (Continued) other regions of the world. Allocations among the segments have been made on the basis of location of operations and assets.
The following is a summary of unaudited quarterly financial data for each of the years ended December 31, 1996 and 1995. 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.