* Share and per share data have been retroactively adjusted, as appropriate, to reflect common stock splits.
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 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.
The following discussion refers to the consolidated financial statements of Transatlantic Holdings, Inc. and its subsidiaries (collectively, TRH) as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002, which are presented elsewhere herein. TRH's principal operating subsidiaries are Transatlantic Reinsurance Company (TRC), Trans Re Zurich (TRZ) and Putnam Reinsurance Company (Putnam).
We believe the following represent our most important accounting policies as they require management's most significant exercise of judgment on both a quantitative and qualitative basis used in the preparation of TRH's consolidated financial statements and footnotes. The accounting estimates that result from the application of these policies require the use of assumptions about certain matters that are highly uncertain at the time of estimation.
Loss and loss adjustment expense reserves, net of related reinsurance recoverables, include amounts for risks related to environmental impairment and asbestos-related illnesses totaling $89 million and $81 million at December 31, 2002 and 2001, 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.
Additionally, loss and loss adjustment expense reserves, net of related reinsurance recoverables, include amounts resulting from the September 11, 2001 terrorist attack which are principally related to property (including business interruption), other liability, workers' compensation and aviation
coverages. These amounts are subject to significant uncertainty due to a variety of issues such as coverage disputes, the assignment of liability and a potentially long latency period for claims due to respiratory disorders and stress. As of December 31, 2002, unpaid loss and loss adjustment expenses, net of reinsurance recoverable, related to this event totaled $170 million.
For the period under discussion, the reinsurance market has been characterized by significant competition worldwide in most lines of business. In late 2000 and continuing through 2001, rate increases, which were achieved in many lines, intensified after the net industry surplus drain occurring as a result of
the September 11, 2001 terrorist attack. Market conditions for reinsurers generally continued to improve throughout 2002 as rates increased and terms and conditions generally became more restrictive.
Generally, reasons for increases in gross premiums written between years are similar to those for net premiums written. In 2002, ceded premiums written and earned increased over 2001. Such increase was caused by the higher cost of reinsurance coverage and additional coverage purchased (including catastrophe coverage) in 2002 over the prior year offset, in part, by a reduction in ceded premiums written resulting from certain domestic contracts in the specialty casualty area wherein a portion of premiums assumed under those agreements were retroceded to non-affiliates. In 2001 over 2000, ceded premiums written and earned increased dramatically over the prior year due also to the higher cost of reinsurance coverage and additional coverage purchased as well as increases related to the aforementioned domestic specialty casualty contracts.
Net investment income increased in 2002 compared to 2001, due principally to an increase in interest from fixed maturities. This increase resulted primarily from the increased level of operating cash flow in 2002 compared to 2001 and, to a lesser extent, the positive impact of foreign exchange from investment income earned in certain of our international locations, offset, in part, by the impact of lower interest rates on fixed maturities purchased compared to interest rates on fixed maturities sold or matured. (See cash flow discussion under Financial Condition and Liquidity). Net investment income increased in 2001 compared to 2000 due to an increase in income from equities and in other interest income, offset, in part, by a reduction in interest income from fixed maturities, due principally to lower interest rates on fixed maturities purchased compared to interest rates on fixed maturities sold or matured. (See Note 3 of Notes to Consolidated Financial Statements.)
With respect to ceded incurred losses, 2001 amounts are significantly higher than comparable 2002 or 2000 amounts due largely to ceded losses in 2001 related to the September terrorist attack.
Pre-tax realized net capital (losses) gains totaled ($6.0) million in 2002, ($0.2) million in 2001 and $33.1 million in 2000. Such gains and losses are generally the result of investment dispositions which reflect TRH's investment and tax planning strategies to maximize after-tax income. In 2002 only, realized net capital losses include write-downs totaling $12.1 million and $1.8 million of equities available for sale and fixed maturities available for sale, respectively, related to certain of such securities that, in the opinion of management, had experienced a decline in market value that was other than
Federal and foreign income tax expense (benefit) of $19.0 million, ($53.0) million and $56.3 million were recorded in 2002, 2001 and 2000, respectively. The Company and its domestic subsidiaries, TRC (which includes foreign operations) and Putnam, filed consolidated federal income tax returns for the years under discussion, except those for 2002 which are not yet due. The tax burden among the companies is allocated in accordance with a tax sharing agreement. TRC will also include as part of its taxable income or loss 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.
In 2001, the unusual effective tax rate results from the fact that the tax benefit exceeds the amount of pre-tax loss due to the ability of TRH to reflect the current benefit of 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 record 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 at that time, could be carried forward indefinitely. However, a change in the U.S. federal tax law extended the net operating loss carryback period to five years enabling TRH to utilize its tax net operating loss for 2001 currently. (See Note 4 of Notes to Consolidated Financial Statements.)
In the years under discussion, the after-tax impact of certain significant items included in net income are as follows: 2002 -- fourth quarter increase in net loss and loss adjustment expense reserves -- $65.0 million; 2001 -- catastrophe losses -- $139.8 million (including $130.0 million related to the terrorist attack); losses related to Enron reinsurance exposure -- $39.0 million. After-tax realized net capital (losses) gains included in net income amounted to ($3.9) million in 2002, ($0.2) million in 2001 and $21.5 million in 2000.
2002 compared to 2001 -- Domestic revenues increased over the prior year due primarily to increases in net premiums earned for reasons discussed earlier in the Operational Review. Income before income taxes for 2002 far exceeded the prior year amount due to improved underwriting results in 2002 resulting principally from reduced loss activity and, to a lesser extent, a reduction of the relationship of underwriting expenses to net premiums written, each as compared to 2001. (Also see combined ratio table earlier in Operational Review for relationships of elements of adjusted underwriting loss with net premiums written and earned.) Loss activity in 2002 includes a $55 million fourth quarter charge to net losses and loss adjustment expenses related to an increase in loss reserves as discussed earlier in the Operational Review. 2001 loss activity includes significant catastrophe losses and a charge related to Enron which are further discussed in the comparison of 2001 to 2000 below.
Assets in 2001 significantly exceeded the 2000 amount due to the short-term investment of funds received under securities loan agreements, an increase in fixed maturities available for sale (see Accounting Standards (a) below discussing change in classification of certain fixed maturities) and an increase in reinsurance recoverable on paid and unpaid losses and loss adjustment expenses, related principally to 2001 catastrophe losses.
The significant increase in assets in 2002 as compared to 2001 is primarily due to significant operating cash flow in 2002 and, to a lesser extent, the impact of foreign exchange on investments held, as the U.S. dollar weakened during the year compared to currencies in which the investments were held.
2002 compared to 2001 -- Revenues increased in 2002 compared to 2001 due to increases in net premiums earned in each of the offices in this grouping, led by Miami and Toronto. Loss before income taxes in 2002 worsened compared to a year ago, due principally to a deterioration of underwriting results caused by increased loss activity. Loss activity in 2002 includes a $15 million fourth quarter charge (related to the Miami branch) to net losses and loss adjustment expenses related to an increase in loss reserves as discussed earlier in the Operational Review. The underwriting expense ratio improved in 2002 compared to the prior year.
As of December 31, 2002, 94.8% of the fixed maturity portfolio was rated Aaa or Aa, an additional 4.5% was also rated investment grade or better, 0.7% was rated below investment grade and less than 0.1% was not rated. Also, as of December 31, 2002, TRH had no derivative instruments. (See Note 3 of Notes to Consolidated Financial Statements.)
At December 31, 2002, reserves for unpaid losses and loss adjustment expenses totaled $4.03 billion, an increase of $285.0 million, or 7.6%, as compared to the prior year. A portion of such increase ($100 million) relates to a fourth quarter increase in net loss reserves in certain casualty lines which was based primarily on an unexpected increase in the frequency and severity of reported claims late in the
Measuring potential losses in fair values is a major focus of risk management efforts by many companies. Such measurements are performed through the application of various statistical techniques. One such technique is Value at Risk (VaR). VaR is a summary statistical measure that uses changes in historical interest rates, equity prices and foreign currency exchange rates to calculate the maximum loss that could occur over a defined period of time given a certain probability.
The following table presents the VaR on a combined basis and of each component of market risk for 2002 and 2001. VaR with respect to combined operations cannot be derived by aggregating the individual risk amounts presented herein.
The increase in accumulated other comprehensive income consisted principally of the following: net unrealized appreciation of fixed maturities available for sale, net of income tax, of $50.1 million, caused principally by a continued decrease in market interest rates; net unrealized currency translation gain, net of income tax, of $21.6 million, caused by a weakening of the U.S. dollar, particularly against
certain European currencies partially offset by net unrealized depreciation of equities, net of income tax, of $38.8 million, caused principally by a general weakening of the U.S. economy during the year.
In accordance with the transition provisions of SFAS No. 133, as amended, TRH transferred during the first quarter of 2001 all of its fixed maturities 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 fixed maturities 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 in 2001. Under the provisions of SFAS No. 133, such a transfer does not affect TRH's intent nor its ability to hold fixed maturities acquired in the future to their maturity.
In December 2002, the FASB issued SFAS No. 148, 'Accounting for Stock-Based Compensation -- Transition and Disclosure,' an amendment of SFAS No. 123, 'Accounting for Stock-Based Compensation,' to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual (see Note 2(j) of Notes to Consolidated Financial Statements) and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. In addition, if awards of stock-based employee compensation were outstanding and accounted for under the intrinsic value method of Accounting Principles Board Opinion (APB) No. 25 for any period for which an income statement is presented, TRH must present the stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value based method prescribed in SFAS No. 123 had been applied to all awards.
In accordance with the standard, TRH has adopted the disclosure provisions in these footnotes with comparable information provided for all years for which an income statement is presented. In addition, TRH expects to adopt the recognition provisions of SFAS No. 123 in the first quarter of 2003, and will report that change in accounting principle using the prospective method of transition. That method requires application of the recognition provisions of SFAS No. 123 to all employee awards
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 has also changed current statutory accounting in some areas. The New York Insurance Department (the state of domicile of TRC and Putnam) adopted most of the Codification guidance for implementation on January 1, 2001, but did not adopt certain 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 the fourth quarter of 2002, the guidance related to deferred income taxes was adopted. Accordingly, as of year-end 2002, statutory surplus of both TRC and Putnam include the impact of deferred tax assets of $88.3 million and $4.4 million, respectively, representing the cumulative benefit of adopting such provision in 2002. Statutory net income (loss) was not affected.
As one or both of TRC and Putnam is also licensed, accredited or otherwise permitted to serve as a reinsurer in all states and the District of Columbia in the United States, they are required to disclose the differences between implementing Codification guidance on a New York State basis and Codification guidance adopted by the NAIC in a footnote to their statutory filings. As of December 31, 2002, remaining differences between Codification and those Codification provisions adopted by the New York Insurance Department are not material to 2002 statutory surplus and net income of TRC or Putnam and are not expected to be material in the future.
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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
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, ocean marine and aviation, accident and health and surety and credit in the casualty lines, and fire, homeowners and auto physical damage in the property lines (which include property catastrophe risks). Casualty lines represented 73.9%, 79.2% and 76.7% of net premiums written in 2002, 2001 and 2000, respectively. The balance represented property lines.
(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 of America (GAAP). Certain reclassifications have been made to conform prior years' presentations with 2002.
(b) INVESTMENTS: Fixed maturities are classified as held-to-maturity and carried at amortized cost if TRH has the positive intent and ability to hold each of these securities to maturity. In the first quarter of 2001, TRH transferred all of its fixed maturities previously classified as held-to-maturity (and carried at amortized cost) to the available for sale classification. (See discussion on Adoption of Statement of Financial Accounting Standards (SFAS) No. 133 and Change in Classification of Certain Fixed Maturities in Note 2(k)(i).) As of December 31, 2002 and 2001, all fixed maturities 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 of investments in partnerships, a limited 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) liability is recorded in an amount equal to the collateral received to recognize TRH's obligation to return such funds when the related loaned securities are returned. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as such value fluctuates. Fees received net of fees paid related to these transactions are recorded in net investment income.
(c) CASH AND CASH EQUIVALENTS: Cash and cash equivalents generally include cash deposited in demand deposits at banks and highly liquid investments with original maturities of 90 days or less.
(f) LOSSES AND LOSS ADJUSTMENT EXPENSES: Losses and loss adjustment expenses, net of related reinsurance recoverable, 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. An amount is included for losses and loss adjustment expenses incurred but not reported (IBNR) on the basis of past experience. The methods of making such estimates and for establishing the resulting reserves are continually reviewed and updated, and any adjustments resulting therefrom are reflected in income currently.
(j) STOCK-BASED COMPENSATION: The Company accounts for its stock options based on the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25 and related interpretations, as permitted under SFAS No. 123. (See Notes 2(k)(ii) and 11 for a discussion of the Company's stock option plans.) 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:
(i) Adoption of SFAS No. 133 and Change in Classification of Certain Fixed Maturities:
SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities,' issued by the Financial Accounting Standards Board (FASB) in June 1998, as amended, established accounting and
In December 2002, the FASB issued SFAS No. 148, 'Accounting for Stock-Based Compensation -- Transition and Disclosure,' an amendment of SFAS No. 123, 'Accounting for Stock-Based Compensation,' to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual (see Note 2(j)) and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. In addition, if awards of stock-based employee compensation were outstanding and accounted for under the intrinsic value method of APB No. 25 for any period for which an income statement is presented, TRH must present the stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value based method prescribed in SFAS No. 123 had been applied to all awards.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the statement, TRH adopted SFAS No. 142 on January 1, 2002. The implementation of this standard did not have a material effect on TRH's results of operations, financial position or cash flows.
The amortized cost and market value of fixed maturities at December 31, 2002 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.
Gross gains of $76,037,000, $6,069,000 and $6,688,000 and gross losses of $11,146,000, $7,145,000 and $41,457,000 were realized on sales of investments in fixed maturities available for sale in 2002, 2001 and 2000, respectively.
(a) The Company files a U.S. consolidated federal income tax return with its domestic subsidiaries, TRC (which includes foreign operations) and Putnam. TRC will also 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.
4. FEDERAL AND FOREIGN INCOME TAXES (CONTINUED) (b) The components of the net deferred income tax asset at December 31, 2002 and 2001 were as follows:
Common stock activity for each of the three years in the period ended December 31, 2002 was as follows:
Net income per common share has been computed in the following table based upon weighted average common shares outstanding. Share and per share amounts have been retroactively adjusted, as appropriate, to reflect a 3-for-2 split of the common stock in the form of a 50% stock dividend, paid in July 2001.
10. PENSION, SAVINGS AND STOCK INCENTIVE PLANS (CONTINUED) 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 2002, certain TRH employees were granted restricted stock units (RSU) under the AIG 2002 Stock Incentive Plan. Four years after the grant date of RSUs, those RSU recipients who remain employed by TRH will receive shares of AIG common stock or equivalent compensation.
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, 2002, 1,523,557 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. (See Note 2(j) for the determination of pro forma net income had compensation cost been charged to income in accordance with the fair value method discussed in SFAS No. 123.)
In each of 1994 and 1992, the Stock Option Plan Committee granted 45,000 options to certain non-employee directors of the Company, who were directors, officers and employees of AIG, to purchase shares of the Company's common stock at $22.67 per share and $23.33 per share, respectively. Such options were granted outside of, but on substantially the same terms and conditions as, the 1990 Plan. During 2002, all such options granted in 1992 were exercised, and none remain outstanding. As of year-end 2002, those options granted in 1994 were exercisable, as none have been exercised or forfeited. The impact of these options on the financial statements is not material.
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 2002, 2001 and 2000, respectively: expected volatility of 20.0%, 20.0% and 18.0%; risk-free interest rates of 3.6%, 4.4%, and 5.4%; and expected lives of six years for each grant. An increasing dividend schedule is used in the binomial model based on historical experience.
The following table summarizes information about the Company Plans' outstanding and exercisable options at December 31, 2002:
Approximately $395 million (13%), $232 million (10%) and $209 million (11%) of gross premiums written by TRH in 2002, 2001 and 2000, respectively, were attributable to reinsurance purchased by
The payment of dividends by the Company is dependent on the ability of its subsidiaries to pay dividends. The payment of dividends by TRC and its wholly-owned subsidiaries, TRZ and Putnam, is restricted by insurance regulations. Under New York insurance law, TRC and Putnam may pay dividends only out of their statutory earned surplus. Such dividends are limited by statutory formula unless otherwise approved by the New York Insurance Department. The statutory surplus of TRC includes the statutory surplus of Putnam since all the capital stock of Putnam is owned by TRC. At December 31, 2002, TRC had statutory earned surplus of $1,150,140,000, and, in 2003, in accordance with the statutory formula, could pay dividends of approximately $154,594,000 without regulatory approval.
Statutory surplus and net income as reported to the New York Insurance Department were as follows:
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 has also changed 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 certain 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 implementation of such Codification guidance did not have a material effect on statutory net income in 2002 or 2001. In the fourth quarter of 2002, the guidance related to deferred income taxes was adopted. Accordingly, as of year-end 2002, statutory surplus of both TRC and Putnam include the impact of deferred tax assets of $88.3 million and $4.4 million, respectively, representing the cumulative benefit of adopting such provision in 2002. Statutory net income (loss) was not affected.
Premiums written and earned and losses and loss adjustment expenses incurred are comprised as follows:
A significant portion of assets and liabilities of TRH's international operations relate to the countries where ceding companies and reinsurers are located. Most investments are located in the country of domicile of these operations. In addition to licensing requirements, TRH's international operations are regulated in various jurisdictions with respect to currency, amount and type of security deposits, amount and type of reserves and amount and type of local investment. Regulations governing constitution of technical reserves and remittance balances in some countries may hinder remittance of profits and repatriation of assets. International operations and assets held abroad may be adversely affected by political developments in foreign countries, including possibilities of tax changes, nationalization and changes in regulatory policy, as well as by consequence of hostilities and unrest. The risks of such occurrences and their overall effect upon TRH vary from country to country and cannot easily be predicted.
- --------- (1) Domestic revenues and income (loss) before income taxes include realized net capital (losses) gains of ($7,325), $241 and $29,668 in 2002, 2001 and 2000, respectively. Realized net capital gains (losses) for other segments in each of the years presented are not material. (2) Net revenues from affiliates approximate $230,900, $100,300 and $110,000 in 2002, 2001 and 2000, respectively, and are included primarily in Domestic and, for 2002 only, International -- Europe revenues. (3) Includes revenues from the London, England office of $525,520, $435,007 and $380,694 in 2002, 2001 and 2000, respectively. (4) Results for 2002 include pre-tax net losses and loss adjustment expenses of $100 million (representing $55 million, $30 million and $15 million from Domestic operations, International -- Europe operations and International -- Other operations, respectively) related to the fourth quarter increase in net loss reserves in certain casualty lines (see Note 5 of Notes to Consolidated Financial Statements). (5) Underwriting expenses represent the sum of net commissions and other operating expenses. (6) Adjusted underwriting profit (loss) represents net premiums earned less net losses and loss adjustment expenses and underwriting expenses, plus (minus) the increase (decrease) in deferred acquisition costs. (7) As of December 31. (8) Results for 2001 include pre-tax net losses and loss adjustment expenses of $200 million (representing $100 million from Domestic operations and $100 million from International -- Europe operations) from the September 11th terrorist attack (see Note 8 of Notes to Consolidated Financial Statements).
* A significant portion of this product line includes more complex risks such as professional liability (other than medical malpractice), directors' and officers' liability, errors and omissions and environmental impairment liability.
(a) LEGAL PROCEEDINGS: TRH, in common with the reinsurance industry in general, is subject to litigation in the normal course of its business. TRH does not believe that any pending litigation will have a material adverse effect on its results of operations, financial position or cash flows.
(c) LEASES: As of December 31, 2002, the future minimum lease payments (principally for leased office space) under various long-term operating leases were as follows:
The following is a summary of unaudited quarterly financial data for each of the years ended December 31, 2002 and 2001. 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. Per share amounts have been retroactively adjusted, as appropriate, to reflect the 3-for-2 common stock split paid in July 2001.
(1) Operating loss and net loss for the fourth quarter of 2002 include a charge of $100 million (pre-tax) and $65 million (after-tax), respectively, related to the increase in net loss reserves in certain casualty lines (see Note 5).
(2) As the impact of potential shares for each of the three-month periods ended December 31, 2002 and September 30, 2001 is antidilutive (i.e., reduces the loss per common share) because there is a loss from continuing operations, potential shares are not included in the diluted net loss per common share calculation for those periods.
(3) Operating loss and net loss for the third quarter of 2001 include $200 million (pre-tax) and $130 million (after-tax), respectively, related to the September 11th terrorist attack (see Note 8).