The following Selected Consolidated Financial Data is prepared in accordance with accounting principles generally accepted in the United States. This data should be read in conjunction with the Consolidated Financial Statements and accompanying notes included elsewhere herein.
(3) All periods reflect the adoption of the accounting standard related to earnings per share (SFAS No. 128).
The following discussion refers to the consolidated financial statements of Transatlantic Holdings, Inc. and its subsidiaries (collectively, TRH) as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, which are presented elsewhere herein. TRH's principal operating subsidiaries are Transatlantic Reinsurance Company (TRC), Trans Re Zurich (TRZ) and Putnam Reinsurance Company (Putnam).
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. Gross premiums assumed and reinsurance ceded are initially deferred and then are credited or charged to income, respectively, over the terms of the underlying contracts or certificates in force. The deferred amounts constitute the unearned premium reserve or prepaid reinsurance premium and are generally ratably credited or charged, respectively, to income over the contract periods. The relationship between net premiums written and net premiums earned will, therefore, vary depending generally on the volume and inception dates of the business assumed and ceded and the mix of such business between pro rata and excess-of-loss reinsurance.
For the period under discussion, the reinsurance market has been characterized by significant competition worldwide in most classes. The increases in net premiums written were primarily from treaty business and resulted from increased coverage provided. On a worldwide basis, casualty lines business represented 74.8% of net premiums written in 1999 versus 71.0% and 67.1% in 1998 and 1997, respectively. The balance represented property lines. Treaty business represented 96.6% of net premiums written in 1999 versus 94.7% in 1998 and 93.8% in 1997. The balance represented facultative accounts.
Net premiums written by international offices increased in 1999 by $65.9 million, or 9.7%, over the prior year, to $747.9 million. Most international offices recorded increases in net premiums written, led by Paris and London. In addition, net premiums written by the Asia Pacific offices (Hong Kong and Tokyo) increased 44% to $83.0 million. TRZ recorded a significant decrease compared to 1998 as a result of the shift of their business to certain other TRH offices, closer to source, and the selective retention of business in core areas. International net premiums written increased significantly in auto liability, accident and health and property lines, and decreased significantly in the ocean marine line. International business represented 49.9% of 1999 net premiums written compared to 48.9% in 1998.
Domestic net premiums written increased by $41.7 million, or 6.2%, over 1997, to $711.7 million, with significant increases recorded in the auto liability line (including nonstandard risks) and certain specialty casualty classes (particularly other professional liability and accident and health lines), and a significant decrease recorded in the medical malpractice line.
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 $67.5 million in 1999. Significant favorable development was recorded in 1999 on losses occurring in 1987 through 1996 in the other liability line and in 1994 through 1998 in the aircraft line. These reductions to incurred losses were partially offset by adverse development in 1999 on losses occurring in 1997 and 1998, principally in fire, allied lines, auto liability and ocean marine lines, and prior to 1984 in the other liability line.
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.
Loss and loss adjustment expense reserves, net of related reinsurance recoverables, for risks related to environmental impairment and asbestos-related illnesses amounted to $75 million and $69 million at December 31, 1999 and 1998, 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, 1999, are adequate.
The provisions for federal and foreign income taxes were $48.7 million in 1999, $75.8 million in 1998 and $49.2 million in 1997. The Company and its domestic subsidiaries, TRC and Putnam, filed consolidated federal income tax returns for the years under discussion, except those for 1999 which are not yet due. The tax burden among the companies is allocated in accordance with a tax sharing agreement. 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.
The effective tax rates were 20.6% in 1999, 23.5% in 1998 and 21.0% in 1997. The decrease in the effective tax rate in 1999 versus 1998 is due principally to the fact that tax-exempt interest represented a greater percentage of income before income taxes in 1999 than in the previous year. While tax-exempt interest remained relatively level compared to 1998, income before income taxes declined significantly for the reasons discussed earlier. The increased effective tax rate in 1998 compared to 1997 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.
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 11 of Notes to Consolidated Financial Statements for a discussion of restrictions on dividend payment.) In 1999 and 1998, the Company received cash dividends from TRC of $16.9 million and $14.9 million, respectively. 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 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, 1999, total investments and cash were $4,333.5 million compared to $4,328.8 million at December 31, 1998. Increases to investments and cash, namely, net cash provided by operating activities and realized net capital gains, were offset by pre-tax unrealized depreciation of investments available for sale (primarily from bonds) and outward cash flows from financing activities. (See Note 3 of Notes to Consolidated Financial Statements.)
TRH's fixed maturity investments, approximately 81.9% of total investments as of December 31, 1999, are predominantly investment grade, liquid securities, approximately 60% of which will mature in less than 10 years. Also as of that date, approximately 13.9% of total investments were in common and nonredeemable preferred stocks, approximately 4.1% of total investments were in other invested assets, including investments in partnerships, and the remaining 0.1% consisted of short-term investments. Based on the foregoing, TRH considers its liquidity to be adequate through the end of 2000 and thereafter for a period the length of which is difficult to predict, but which TRH believes will be at least one year.
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. As of December 31, 1999, a significant portion of the bond portfolio was classified as available-for-sale and carried at market value. 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. As of December 31, 1999, bonds held to maturity had gross unrealized gains of $25.9 million and $5.1 million of gross unrealized losses. Gross unrealized gains and losses on bonds available for sale as of December 31, 1999 amounted to $17.1 million and $97.9 million, respectively.
As of December 31, 1999, 91.5% of the bond portfolio was rated Aaa or Aa, an additional 3.9% was also rated investment grade or better, 3.8% was rated below investment grade and 0.8% was not rated. Also, as of December 31, 1999, TRH had no derivative instruments. (See Note 3 of Notes to Consolidated Financial Statements.)
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 rates, equity prices and foreign currency exchange rates.
TRH calculated the VaR as of December 31, 1999 and 1998. These calculations used the variance-covariance (delta-normal) methodology. The calculation also used daily historical interest and foreign currency exchange rates and equity prices in the two years ending December 31, 1999 and 1998, as applicable. The VaR model estimated the volatility of each of these rates and equity prices and the
Each sensitivity was then applied to a database which contained both historical ranges of movements in all market factors and the correlations among them. The results were aggregated to provide a single amount that depicts the maximum potential loss in fair value at a confidence level of 95% for a time period of one month. VaR, with respect to the aggregate of the three components of market risk, cannot be derived by summing the individual risk amounts in the table above. At December 31, 1999 and 1998, the VaR amounts for TRH's financial instruments were approximately $76 million and $69 million, respectively.
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.
Basic EPS, which is calculated by dividing net income by the weighted average number of common shares outstanding, replaced primary EPS from the prior standard. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or
Also in June 1997, the FASB adopted SFAS No. 131, 'Disclosure about Segments of an Enterprise and Related Information.' This statement established standards for the way that public business enterprises report information about operating segments in annual and interim financial statements and required presentation of a measure of profit or loss, certain specific revenue and expense items and segment assets. Generally, financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The standard 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.'
In June 1998, the FASB issued SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities.' This statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging
TRH has effected remedial changes, where necessary, and conducted appropriate testing of significant information technology (IT) as well as non-IT systems (e.g., telephone systems, fax machines, copiers) where Y2K failures could occur. The cost of such activities has not had a material effect on net income, financial position, cash flows or other non-Y2K projects and initiatives in any of the years presented herein.
Any statements contained in this discussion that are not historical facts, or that might be considered an opinion or projection, whether expressed or implied, are meant as, and should be considered, forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on assumptions and opinions concerning a variety of known and unknown risks. If any assumptions or opinions prove incorrect, any forward-looking statements made on that basis may also prove materially incorrect.
To the Board of Directors and Stockholders of TRANSATLANTIC HOLDINGS, INC.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Transatlantic Holdings, Inc. and Subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Transatlantic Holdings, Inc. (the 'Company') is a holding company, incorporated in the state of Delaware, which owns all of the common stock of Transatlantic Reinsurance Company (TRC). TRC owns all of the common stock of Trans Re Zurich (TRZ) and Putnam Reinsurance Company (Putnam).
(a) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States (GAAP).
(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.
Realized gains or losses on the sale of investments are determined on the basis of specific identification. Changes in unrealized appreciation (depreciation) of bonds available for sale, equity investments and other invested assets are charged or credited, net of deferred income taxes, directly to accumulated other comprehensive income (See Note 7), a component of 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.
(h) REINSURANCE DEPOSITS: Amounts received pursuant to reinsurance contracts that are not expected to indemnify the ceding company against loss or liability are recorded as deposits and included in the Consolidated Balance Sheet as 'reinsurance balances payable.' These deposits are treated as financing transactions and are credited with interest according to contract terms.
(j) NET INCOME PER COMMON SHARE: Net income per common share has been computed in the following table in accordance with Statement of Financial Accounting Standards No. 128, 'Earnings Per Share' (See Note 2(k)), based upon weighted average common shares outstanding. Share amounts have
Basic EPS, which is calculated by dividing net income by the weighted average number of common shares outstanding, replaced primary EPS from the prior standard. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS from the prior standard.
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, 1999, TRH has had no derivative instruments.
Additionally, the amendments expand existing disclosure requirements to include quantitative and qualitative discussions in Management's Discussion and Analysis of Financial Condition and Results of Operations (Management's Discussion) with respect to market risk inherent in market risk sensitive instruments such as equity and fixed maturity securities, as well as derivative instruments. These amendments are designed to provide additional information about market risk sensitive instruments which investors can use to better understand and evaluate market risk exposures of registrants. For TRH, these disclosures, which were first included in 1998, are presented in Management's Discussion which accompanies the financial statements and related notes.
In October 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-7, 'Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk.' This statement provides guidance on how to account for insurance and reinsurance contracts that do not transfer both required elements of insurance risk (i.e., underwriting risk and timing risk). SOP 98-7 is effective for TRH on January 1, 2000. Restatement of previously issued annual financial statements is not permitted. Management believes that the impact of applying this statement will not be material to TRH's results of operations, financial position or cash flows.
(d) FIXED MATURITIES: The amortized cost and market value of bonds at December 31, 1999 and 1998 are summarized as follows:
The amortized cost and market value of bonds at December 31, 1999 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.
Gross gains of $4,961,000, $7,625,000 and $2,930,000 and gross losses of $9,273,000, $647,000 and $1,325,000 were realized on sales of investments in fixed maturities available for sale in 1999, 1998 and 1997, respectively.
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.
(c) Income tax payments by TRH totaled $61,861,000, $110,884,000 and $48,744,000 in 1999, 1998 and 1997, respectively.
Common stock activity for each of the three years in the period ended December 31, 1999 was as follows:
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, 1999, 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 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, 1999, TRC had statutory earned surplus of $921,465,000 and, in 2000, could pay dividends of approximately $144,257,000 without such regulatory approval.
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, 1999 and 1998 are comprised as follows:
Ceded reinsurance arrangements do not relieve TRH from its obligations to the insurers and reinsurers from whom it assumes business. The failure of retrocessionnaires to honor their obligation could result in losses to TRH; consequently, an allowance has been established for estimated unrecoverable reinsurance on paid and unpaid losses totaling $13.0 million in both 1999 and 1998. TRH evaluates the financial condition of its retrocessionnaires through a security committee. With respect to reinsurance recoverable on paid and unpaid losses and prepaid reinsurance premiums, TRH holds substantial amounts of funds and letters of credit to collateralize these amounts. Such funds and letters of credit can be drawn on for amounts remaining unpaid beyond contract terms. No uncollateralized amounts recoverable from a single retrocessionnaire, other than amounts due from AIG affiliates, are considered material to the financial position of TRH.
TRH conducts its business and assesses performance through segments organized along geographic lines. Financial data from offices in London, Paris and Zurich are reported in the aggregate as Europe
and considered as one segment due to operational and regional similarities. Data from offices in the Americas, other than those in the United States which underwrite primarily domestic business, and from offices 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 each accounted for non-AIG business equal to 14% of consolidated revenues, with a significant portion in each segment.
(3) Includes revenues from the London, England office of $350,398, $331,944 and $298,523 in 1999, 1998 and 1997, respectively, and revenues from the Zurich, Switzerland office of $133,964, $155,628 and $186,780 in 1999, 1998 and 1997, respectively.