(3) Share and per share data have been retroactively adjusted to reflect a 3-for-2 common stock split effected in the form of a 50% stock dividend, paid July 18, 1997.
The following discussion refers to the consolidated financial statements of Transatlantic Holdings, Inc. and its subsidiaries (TRH) as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, which are presented elsewhere herein.
American International Group, Inc. and subsidiaries (the "AIG Group") own approximately 49% of the Company's outstanding common stock. Financial data discussed below have been affected by certain transactions between TRH and the AIG Group. (See Notes 9 and 11 of Notes to Consolidated Financial Statements.)
in 1997 and $78.2 million in 1996. Increasingly in recent years, the reinsurance market has been characterized by significant competition worldwide in most classes.
Net premiums written by international offices increased by $161.5 million, or 34.9%, to $624.2 million in 1997. Nearly all such offices recorded premium increases, led by TRZ, which reported an increase of $94.1 million as discussed in the paragraph immediately above. International net premiums written increased significantly in auto liability, auto physical damage, fire and allied lines. International business represented 48.2% of total net premiums written in 1997 as compared to 40.5% in 1996. Domestic net premiums written decreased 1.5% to $669.9 million. Significant decreases in general casualty, property and auto liability lines (including nonstandard risks) were partially offset by increases in homeowners' multi-peril, aircraft, and accident and health lines. On a worldwide basis, casualty lines business represented 67.1% of net premiums written in 1997 compared to 66.5% in the prior year. The balance represented property lines. Treaty business represented 93.8% of net premiums written compared to 90.5% in 1996. The balance represented facultative accounts. The net increases noted above were primarily from treaty business and resulted from increased coverage provided.
The increase in net premiums earned in each of 1997 and 1996 compared to the respective prior year amounts resulted primarily from the significant growth in net premiums written in both years. Net investment income grew each year due to significant cash flow available for investment which was generated by operating activities. Each year the growth was offset, in part, by generally lower available yields on bonds purchased as compared to yields on bonds disposed of in recent periods. In 1997, these lower yields are also due to the fact that TRH has primarily been purchasing tax-exempt bonds for its domestic portfolio to benefit its after-tax results. Tax-exempt bonds carry lower pre-tax yields than taxable bonds that are comparable in risk and term to maturity due to their tax-advantaged status. In 1997 and 1996, TRZ added $17.9 million and $8.4 million, respectively, to net investment income. (See Note 3 of Notes to Consolidated Financial Statements.)
At December 31, 1997, reserves for unpaid losses and loss adjustment expenses totaled $2.92 billion, an increase of $185.7 million, or 6.8%, over the prior year. Also at December 31, 1997, reinsurance recoverable on unpaid losses and loss adjustment expenses totaled $382.8 million, an increase of $46.5 million, or 13.8%, from the prior year. (See Note 11 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.
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.
TRH's operating cash flow in 1997 declined compared to 1996. This decrease was due to a significant increase in paid losses and lesser increases in net commissions, operating expenses and taxes paid, offset in part by increased net premiums and net investment income received. Operating cash flow in 1996 surpassed the prior year amount due, in part, to an increase in net premium volume and increased net investment income received, partially offset by increased net commissions and paid losses. In each of 1997 and 1996 as compared to the respective prior year, the increase in paid losses was principally due to increases in premium volume and a shift in the business mix in recent years towards lines with shorter loss payment patterns. International operations, most significantly London, accounted for approximately 43%, 41% and 36% of operating cash flow in 1997, 1996 and 1995, respectively.
TRH believes that its balance of cash and short-term investments of $87.5 million as of December 31, 1997 and its future cash flows will be sufficient to meet TRH's cash requirements through the end of 1998 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, 1997, 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. During 1997, the Company has primarily been purchasing tax-exempt bonds for its domestic bond portfolio, gradually increasing the proportion of tax-exempt bonds to total bonds. As of December 31, 1997, bonds held to maturity had gross unrealized gains of $83.4 million and no gross unrealized losses. Gross unrealized gains and losses on bonds available for sale as of December 31, 1997 amounted to $66.4 million and $1.2 million, respectively.
As of December 31, 1997, 89.7% of the bond portfolio were rated Aaa or Aa by Moody's, an additional 9.8% were also rated investment grade or better by Moody's or similar foreign or domestic services and 0.5% were not rated. Also, as of December 31, 1997, TRH had no derivative financial instruments. (See Note 3 of Notes to Consolidated Financial Statements.)
These increases were partially offset by net unrealized currency translation losses of $14.4 million and cash dividends declared of $13.5 million. 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.
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, 1997, the statutory surpluses of TRC and Putnam each significantly exceeded RBC requirements.
1997 ACCOUNTING STANDARDS: In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." As compared to the prior standard, SFAS No. 128 simplifies computational guidelines, revises disclosure requirements and increases earnings per share (EPS) comparability on an international basis.
Comprehensive income for TRH would presently consist of net income, the change in net unrealized appreciation of investments, net of deferred income taxes, and the change in net unrealized currency translation gain (loss). For the years ended December 31, 1997, 1996 and 1995, comprehensive income would amount to $227.7 million, $157.5 million and $234.1 million, respectively. The differences in comprehensive income between years are caused principally by significant fluctuations in the changes in unrealized appreciation of investments, net of deferred income taxes, combined with the impact of steadily increasing net income.
Also in June 1997, the FASB adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This statement establishes standards for the way that public business enterprises report information about operating segments in annual and interim financial statements and requires presentation of a measure of profit or loss, certain specific revenue and expense items and segment assets. It also establishes standards for related disclosures about products and services, geographic areas and major customers, superseding most of SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. This statement need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. TRH will adopt this standard for the 1998 annual financial statements.
securities lending and similar transactions. Management believes that the implementation of SFAS No. 125, as amended, will not have a material impact on results of operations, financial position or liquidity.
In accordance with the standard, TRH adopted SFAS No. 123 beginning with the 1996 annual financial statements and chose the pro forma disclosure option of implementation. (See Note 8 of Notes to Consolidated Financial Statements.)
In addition, TRH is in the process of contacting significant customers (i.e. brokers and ceding companies), reinsurers and vendors regarding the status of their remediation activities for material Y2K issues. Management believes that its actions, if any, necessitated by the responses to these Y2K inquiries will be ongoing through early 1999. However, the potential impact and related costs to TRH from the inability of such customers (or their customers' insureds), reinsurers or vendors to resolve their significant Y2K issues, if any, each in a timely manner, are not determinable at this time.
To the Board of Directors and Stockholders of Transatlantic Holdings, Inc.:
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transatlantic Holdings, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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). In addition to TRC, the Company owned 100% of Putnam Reinsurance Company (Putnam) until December 29, 1995, when the Company contributed all the stock of Putnam to TRC.
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 67.1%, 66.5% and 67.0% of net premiums written in 1997, 1996 and 1995, respectively. The balance represents 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. 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. 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 and in unrealized appreciation (depreciation) of equity investments are charged or credited, net of deferred income taxes,
(i) 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. 1997 ACCOUNTING STANDARDS: In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." As compared to the prior standard, SFAS No. 128 simplifies computational guidelines, revises disclosure requirements and increases earnings per share (EPS) comparability on an international basis.
Basic EPS, which is calculated by dividing net income by the weighted average number of common shares outstanding, replaces primary EPS from the prior standard. For all periods previously reported by TRH, basic EPS is the same as primary EPS, since the impact of the Company's common stock equivalents (principally stock options) for those periods did not reach the significance threshold prescribed to require adjustment under 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
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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.
Additionally, the amendments expand existing disclosure requirements to include quantitative and qualitative discussions 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 will be effective in 1998.
In June 1997, the FASB adopted SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Comprehensive income is defined as the change in stockholders' equity during a period from transactions and other events and circumstances from non-owner sources and includes net income and all changes in stockholders' equity except those resulting from investments by owners and distribution to owners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In accordance with the standard, TRH will adopt SFAS No. 130 in the first quarter of 1998. Reclassification of prior period financial statements provided for comparative purposes is required.
SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. 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 enterprise must report information about the revenues derived, countries in which it earns revenues and holds assets and major customers regardless of whether that information is used in making operating decisions. However, this statement does not require an enterprise to report information that is not prepared for internal use if reporting it would be impracticable.
SFAS No. 125 was effective as of January 1, 1997 and was to be applied prospectively. However, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," deferred for one year the effective date of certain provisions of SFAS No. 125 which affect repurchase agreements, dollar-rolls, securities lending and similar transactions. Management believes that the implementation of SFAS No. 125, as amended, will not have a material impact on results of operations, financial position or liquidity.
(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 $123,000,000 and $119,000,000 at December 31, 1997 and 1996, respectively.
(d) FIXED MATURITIES: The amortized cost and market value of bonds at December 31, 1997 and 1996 are summarized as follows:
3. INVESTMENTS (Continued) The amortized cost and market value of bonds at December 31, 1997 by contractual maturity, are summarized 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 $2,930,000, $6,771,000 and $2,094,000 and gross losses of $1,325,000, $6,903,000 and $2,305,000 were realized on sales of investments in fixed maturities available for sale in 1997, 1996 and 1995, respectively.
(e) EQUITIES: Gross gains of $35,507,000, $23,621,000 and $15,830,000 and gross losses of $6,132,000, $5,398,000 and $5,370,000 were realized on sales of equities in 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, net unrealized appreciation of equities (before applicable income taxes) included gross gains of $171,130,000 and $98,316,000 and gross losses of $1,719,000 and $2,165,000, respectively.
4. FEDERAL AND FOREIGN INCOME TAXES (Continued) The U.S. Federal Income tax rate is 35% for 1997, 1996 and 1995. Actual tax expense on income before income taxes differs from the "expected" amount computed by applying the U.S. Federal income tax rate because of the following:
(b) The components of the net deferred income tax asset at December 31, 1997 and 1996 were as follows:
(c) Income tax payments by TRH totaled $48,744,000, $39,939,000 and $31,588,000 in 1997, 1996 and 1995, respectively.
As a result of net decreases in estimates of losses occurring in prior years, net losses and loss adjustment expenses were reduced by $14.6 million in 1997. Significant favorable development was recorded in 1997 on losses occurring in years subsequent to 1986 in the other liability line, in 1996 in the medical malpractice line and in 1995 and 1994 in certain property lines. These reductions to incurred losses were partially offset by adverse development in 1997 on losses occurring in 1996 in aircraft and surety lines, in 1995 and 1994 in the medical malpractice line and in 1983 and prior in the other liability line.
As a result of net decreases in estimates of losses occurring in prior years, net losses and loss adjustment expenses incurred were reduced by $3.5 million in 1995. Favorable development in 1995 from losses occurring in 1992 through 1994, particularly in the fire line in 1994, was partially offset by adverse development from casualty treaty losses occurring in 1982 and prior years.
Under TRH's 1990 Employee Stock Purchase Plan, as amended, all full time employees with at least one year of employment with the Company or any of its subsidiaries are eligible to receive privileges to purchase shares of the Company's common stock at a price which is 85% of the fair market value of such stock on the date of subscription or the date of grant of the purchase privilege, whichever is greater. An aggregate of 750,000 shares of common stock has been authorized for subscription and 5,690 shares were purchased under the plan in 1997.
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
8. STOCK OPTION PLANS (Continued) $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. All of the 1992 options and 22,500 of the 1994 options were exercisable at December 31, 1997 and as of year-end, none were exercised or forfeited. The impact of the above options on the financial statements is not material.
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 payroll processing services. In 1997, 1996 and 1995, $9,300,000, $8,500,000 and $7,700,000, respectively, of operating and investment expenses relate to services and expenses provided by the AIG Group under these agreements.
Approximately $181 million (12%), $232 million (18%) and $189 million (17%) of gross premiums written by TRH in 1997, 1996 and 1995, respectively, were attributable to reinsurance purchased by the AIG Group, for the production of which TRH paid ceding commissions to the AIG Group of $32 million, $33 million and $40 million, respectively, in such years. (See Note 11 for information relating to reinsurance ceded to related parties.)
11. REINSURANCE CEDED (Continued) Premiums written and earned and losses and loss adjustment expenses incurred are comprised as follows:
11. REINSURANCE CEDED (Continued) 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, 1997 and 1996 are comprised as follows:
A significant portion of TRH's business was conducted in countries other than the United States. A significant portion of assets and liabilities of TRH's international operations, other than investments, relate to the countries where ceding companies and reinsurers of the offices 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.
The following table is a summary of business by geographic segment. Premium revenues from certain international operations are derived from many countries, generally within their respective regions. With respect to London, while a majority of premium revenues are derived from ceding companies in the United Kingdom and continental Europe, a significant portion of premium revenues are also derived from other regions of the world. In addition, approximately 16% of consolidated revenues, with a significant
12. SEGMENT INFORMATION (Continued) portion in each geographic segment, were obtained through a large international reinsurance broker. Allocations among the segments have been made on the basis of location of operations and assets.
- ------------------------ (1) Revenues represent the sum of net premiums earned, net investment income and realized net capital gains.
The following is a summary of unaudited quarterly financial data for each of the years ended December 31, 1997 and 1996. 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.