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 U.S. federal securities laws. These forward-looking statements are identified, including without limitation, by their use of such terms and phrases as 'intends,' 'intend,' 'intended,' 'goal,' 'estimate,' 'estimates,' 'expects,' 'expect,' 'expected,' 'project,' 'projects,' 'projected,' 'projections,' 'plans,' 'anticipates,' 'anticipated,' 'should,' 'think,' 'thinks,' 'designed to,' 'foreseeable future,' 'believe,' 'believes' and 'scheduled' and similar expressions. 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, regulatory and accounting 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.
Throughout this Annual Report on Form 10-K, Transatlantic Holdings, Inc. and its subsidiaries (TRH) presents its operations in the way it believes will be most meaningful. TRH's net unpaid losses and loss adjustment expenses and TRH's combined ratio and its components are included herein and presented in accordance with principles prescribed or permitted by insurance regulatory authorities as these are standard measures in the insurance and reinsurance industries.
The operations of Transatlantic Holdings, Inc. (the Company) are conducted principally by its three major operating subsidiaries -- Transatlantic Reinsurance Company (TRC), Trans Re Zurich (TRZ) and Putnam Reinsurance Company (Putnam) -- and managed based on its geographic segments which are presented in this Form 10-K as Domestic, International-Europe and International-Other. Through its operations on six continents, TRH offers reinsurance capacity on both a treaty and facultative basis -- structuring programs for a full range of property and casualty products, with an emphasis on specialty lines, which may exhibit greater volatility of results over time than most other lines. TRH's operating strategy emphasizes product and geographic diversification as key elements in controlling its level of risk concentration. TRH also adjusts its mix of business to take advantage of market opportunities. Over time, TRH has also capitalized on market opportunities when they arise by strategically expanding operations in an existing location or opening a branch or representative office in new locations (except for the acquisition of TRZ in 1996). TRH's operations that serve international markets grow by leveraging TRH's product knowledge, worldwide resources and financial strength, typically utilizing indigenous management and staff with a thorough knowledge of local markets and product characteristics.
In 2003, casualty lines comprised 74% of TRH's net premiums written, while property lines totaled 26%. Treaty reinsurance totaled 96% of net premiums written, with the balance representing facultative accounts. Moreover, reinsurance assumed by international offices represented 45% of net premiums written in 2003. American International Group, Inc. (AIG), which through its subsidiaries is one of the largest providers of insurance and investment products and services to businesses and individuals around the world, beneficially owned 60% of the common stock of the Company as of December 31, 2003, 2002 and 2001.
Revenues during the period under discussion grew significantly, principally due to increases in net premiums earned which increasingly resulted from rate increases across virtually all lines and regions in which TRH does business, as well as the greater number of favorable underwriting opportunities for global reinsurers with superior financial strength ratings and a full range of products, such as TRH. The markets in which we operate have historically been cyclical. During most of the period under discussion, the market was characterized by declining capacity in certain classes and rating downgrades of many major reinsurers. These occurrences generally resulted from years of rate declines, high levels of industry loss activity, exacerbated by losses from the major European storms of late 1999, the tragic event of September 11, 2001, losses related to major corporate collapses such as Enron Corporation, and adverse development in 2002 and 2003 on losses occurring in 1998 through 2000 in certain specialty casualty classes such as directors' and officers' liability (included in the other liability line) and medical malpractice. These events also materially affected TRH's results in those years.
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. Insurance industry estimates of losses from that attack originally ranged from $30 billion to $70 billion and made this event the most costly insured catastrophe ever. The range of expected industry loss was necessarily broad due to the unprecedented nature of this event and the many lines of business affected.
TRH believes its most critical accounting estimates are those with respect to unpaid losses and loss adjustment expenses, net of reinsurance recoverable thereon ('loss reserves'), and deferred acquisition costs, 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 require the use of assumptions about certain matters that are highly uncertain at the time of estimation.
The major categories for which assumptions are developed and used to establish each critical accounting estimate are highlighted below:
Loss cost trend factors by class of business -- These factors are used to establish expected loss and loss adjustment expense ratios for future accident years based on the projected loss and loss adjustment expense ratios with respect to prior accident years. These factors take into account, among other things, loss cost inflation, changes in amounts of jury awards, social inflation (e.g., awards by judges and juries which progressively increase in size at a rate exceeding that of general inflation) and trends in court interpretations of coverages.
Expected loss and loss adjustment expense ratio for the latest accident year by class of business -- These ratios are determined based on the significant body of knowledge that TRH has gathered with respect to current and historical loss trends by class of business. Since certain longer-tail casualty lines such as excess-of-loss medical malpractice and directors' and officers' liability tend to settle claims over an extended number of years, loss experience for recent accident years may not constitute statistically reliable data to use to project ultimate losses for current year business. Therefore, the results of more fully developed accident years modified for current trends need to be considered in the determination of these ratios.
Variability of reserving practices and reporting patterns affecting premiums and losses -- These practices govern the information reported to us, which is the single most important factor used in estimating reserves, and may vary by country, class of business and ceding company and are subject to significant variability and change over time.
Premium trends and rate sufficiency considerations -- As the various factors discussed above are used to generate a loss and loss adjustment expense ratio or factor that is often based upon premiums earned, the changing relationships of premium rates to related exposures must be factored into the analyses used to arrive at appropriate reserve estimates.
Results for 2001 include pre-tax net losses and loss adjustment expenses of $200 million from the September 11th terrorist attack, or $130 million after tax. The pre-tax net loss estimate is comprised of gross incurred losses and loss adjustment expenses of approximately $500 million less related reinsurance ceded of approximately $300 million. The losses recorded for this event represent TRH's estimate of ultimate losses based upon information presently available. Net loss payments related to this event were not material to 2003, 2002 or 2001 operating cash flow.
The increase in net premiums written in 2003 compared to 2002 resulted from rate increases and, to a lesser extent, increased coverage provided, as well as the impact of the weakened U.S. dollar in 2003 compared to the currencies in which TRH does business, particularly in TRH's European locations. In 2002 compared to 2001, the net premiums written increase resulted from significant rate increases and,
As further discussed in Notes 12 and 14 of Notes to Consolidated Financial Statements, TRH transacts a significant amount of business assumed and ceded with other subsidiaries of AIG. TRH either accepts or rejects the proposed transactions with such companies based on its assessment of risk selection, pricing, terms and conditions.
As premiums written are earned on a pro rata basis over the terms of the related coverages, the reasons for increases in net premiums earned are generally similar to the reasons for increases in net premiums written.
Net investment income increased in 2003 and 2002, each as compared to the immediately prior year, due to the investment (principally in fixed maturities) of significant positive cash flow from operating activities generated in recent periods and, to a lesser extent, the impact of the weakening U.S.
jury awards, social inflation, medical inflation, tort reforms and court interpretations of coverage. In addition, as a reinsurer, TRH is also highly dependent upon the claims reserving and reporting practices of its cedants, which vary greatly by size, specialization and country of origin and whose practices are subject to change without notice. In particular, an unexpected increase in the frequency and severity of large claims beginning towards the end of 2002 and continuing into 2003 which has increased expected loss and loss adjustment expense ratio factors, reflecting industry wide trends, resulted in material adverse development in TRH's loss reserves in these years. While based on information presently available, TRH believes its loss reserves are adequate, there can be no assurance that TRH's loss reserves will not develop adversely due to the inherent volatility in loss cost trends and variability of reporting practices for these classes, among others, and materially exceed the carried reserves as of December 31, 2003.
There were no significant catastrophe losses occurring during 2002. In addition, as a result of net increases in estimates of losses occurring in prior years, net losses and loss adjustment expenses were increased by $339.1 million in 2002. Of this amount, in the fourth quarter of 2002, TRH recorded an increase to net loss and loss adjustment expense reserves of $100 million ($55 million domestic and $45 million international), resulting in a $65 million after-tax charge to net income. Such net reserve increase was largely caused by the impact of losses principally occurring between 1998 and 2000 in certain casualty lines. Such lines include other liability (a portion of which represents certain specialty casualty classes such as directors' and officers' liability and professional liability other than medical malpractice), medical malpractice and surety. This fourth quarter reserve adjustment was based primarily on an unexpected increase in the frequency and severity of reported claims late in the year reflecting industry-wide trends. (See further discussion of adverse development related to these specialty classes in the preceeding paragraph). The aforementioned fourth quarter increase to net loss and loss adjustment expense reserves added 4.2 to each of the loss and loss adjustment expense and combined ratios for consolidated, domestic and international operations. In addition, as a result of greater than expected reported loss activity in 2002 indicating that TRH's estimates as of the end of 2001 of the ultimate amounts of losses occurring in 2001 and prior years required a further net increase, significant adverse development was also recorded in 2002 on losses occurring in 1998 through 2001 in the auto liability and aviation lines and in 1999 through 2001 in the accident and health line. These increases to incurred losses were partially offset by favorable development on losses occurring in 2001, principally in fire and allied lines and other liability lines.
With respect to ceded incurred losses, 2003 and 2002 amounts were significantly lower than the 2001 amount due principally to the fact that 2001 amounts include ceded losses incurred related to the September terrorist attack.
The underwriting expense ratio for consolidated TRH decreased in 2003 compared to 2002 due to decreases of 0.2 in each of the net commission component and the other underwriting expense component of the ratio. With respect to the net commission component, the decrease between years result from a decrease in such components related to Domestic and International-Other, offset, in part, by an increase in International-Europe, all due largely to slight changes in the mix of business between periods. With respect to the other underwriting expense component, the decreases between years are primarily due to the fact that the rates of increase in other underwriting expenses, for Domestic and International-Europe, are exceeded by the rates of increase of net premiums written for the respective periods. The underwriting expense ratio for consolidated TRH decreased in 2002 compared to 2001 due to decreases of 0.6 in each of the net commission component and the other underwriting expense component of the ratio. With respect to the net commission component, the decreases between years resulted from a decrease in such components related to Domestic and International-Other, offset, in part, by an increase in International-Europe, all due largely to slight changes in the mix of business, including amounts ceded, between periods. With respect to the other underwriting expense component, the decreases between years are due to the fact that the rates of increase in other underwriting expenses, spread through all segments, are significantly exceeded by the rates of increase of net premiums written for the respective periods.
Pre-tax realized net capital gains (losses) totaled $9.9 million in 2003, ($6.0) million in 2002 and ($0.2) million in 2001. Realized capital 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 addition, pre-tax realized net capital gains (losses) include charges for write-downs related to certain of such securities that, in the opinion of management, had experienced a decline in market value that was other than temporary. In 2003, pre-tax realized net capital gains include charges for write-downs for other than temporary declines in market value totaling $6.1 million and $4.6 million of equities available for sale and fixed maturities available for sale, respectively, and for 2002, write-downs totaling $12.1 million and $1.8 million of equities available for sale and fixed maturities available for sale, respectively. There were no write-downs for other than temporary declines in market value in 2001. Upon the ultimate disposition of securities which have recorded write-downs, a portion of the write-downs may be recoverable depending on market conditions. (See discussion under Financial Condition and Liquidity for criteria used in determination of such write-downs.)
Federal and foreign income tax expense (benefit) of $83.0 million, $19.0 million and ($53.0) million were recorded in 2003, 2002 and 2001, 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 2003 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
The increased effective tax rate in 2003 compared to 2002 resulted primarily from the fact that income before income taxes is increasing at a greater rate than tax-exempt investment income.
2003 compared to 2002 -- Domestic revenues increased over the prior year due primarily to increases in net premiums written for reasons discussed earlier in the Operational Review. Income before income taxes for 2003 increased compared to the prior year due primarily to improved underwriting profit (loss) caused principally by a lower net loss and loss adjustment expense ratio resulting from improving market conditions in recent years. Both years included significant adverse development of losses occurring in 1998 through 2000 in certain more volatile casualty classes as further discussed earlier under Results of Operations. Loss activity in 2002 includes a $55 million fourth quarter pre-tax charge to net losses and loss adjustment expenses related to an increase in loss reserves, comprising part of the adverse development as discussed earlier in this paragraph.
The significant increase in assets in 2002 as compared to 2001 is primarily due to significant operating cash flows 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.
2003 compared to 2002 -- Revenues increased in 2003 versus the prior year due to increases in net premiums written, net of the change in unearned premiums, in each location. These increases generally occurred in the property lines. 2003 income before income taxes improved significantly over the loss before income taxes reported in 2002, due principally to improved loss experience in each location. Loss activity in 2002 includes a $15 million fourth quarter pre-tax 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.
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 13 of Notes to Consolidated Financial Statements for a discussion of restrictions on dividend payment.) In 2003 and 2002, the Company received cash dividends from TRC of $21.9 million and $15.5 million,
TRH's fixed maturity investments, approximately 80.8% of total investments as of December 31, 2003, are predominantly investment grade, liquid securities, approximately 60% of which will mature in less than 10 years. Also as of that date, approximately 8.7% of total investments were in common and nonredeemable preferred stocks, approximately 2.8% of total investments were in other invested assets, including investments in partnerships, approximately 7.3% of total investments were in the short-term investment of funds received under securities loan agreements, and the remaining 0.4% consisted of short-term investments. Based on the foregoing, TRH considers its liquidity to be adequate through the end of 2004 and thereafter for a period the length of which is difficult to predict, but which TRH believes will be at least one year.
o Trading at a significant discount to par, amortized cost (if lower) or cost for an extended period of time;
o In the opinion of management, it is possible that TRH may not realize a full recovery on its investment, irrespective of the occurrence of one of the foregoing events.
At December 31, 2003, reserves for unpaid losses and loss adjustment expenses totaled $4.81 billion, an increase of $772.9 million, or 19.2%, as compared to the prior year. Also at December 31, 2003, reinsurance recoverable on unpaid losses and loss adjustment expenses totaled $836.0 million, an increase of $74.4 million, or 9.8%, from the prior year. Of the amount of reinsurance recoverable on paid and unpaid losses and loss adjustment expenses, which totaled $869.9 million as of December 31, 2003, $652.4 million represented balances that were unsecured. Of such unsecured balances, $178.5 million was due from affiliates (which are rated AAA) and 88.3% of the remaining balance was due from companies rated A or better. (See Note 14 of Notes to Consolidated Financial Statements.) An analysis of the change in net loss reserves from year-end 2002 to year-end 2003 is included in Note 5 of Notes to Consolidated Financial Statements and reflects the impact of adverse development of losses occurring in prior years, as further discussed earlier herein under Results of Operations, as well as the impact of the weakening U.S. dollar against most foreign currencies, particularly from Europe. Both of these factors served to increase net loss reserves in 2003.
TRH's loss reserves represent estimates of future liability and related reinsurance recoverable 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 (IBNR) 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.
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, 2003, unpaid loss and loss adjustment expenses, net of reinsurance recoverable, related to this event totaled $134 million.
Because the reserving process is inherently difficult and subjective, actual net losses and loss adjustment expenses may materially differ from reserves and related reinsurance recoverables reflected in TRH's consolidated financial statements, and accordingly, may have a material effect on future results of operations. And while there is also the possibility of changes in statutes, laws, regulations and other factors that could have a material effect on these liabilities and, accordingly, future earnings, TRH believes that its loss and loss adjustment expense reserves carried at December 31, 2003 are adequate.
As significant losses from the September 11, 2001 terrorist attack (see Operational Review above) and Enron reinsurance exposure remain unpaid, TRH expects that payments related to these events may negatively impact cash flows in 2004 and 2005.
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.
TRH has performed VaR analyses to estimate the maximum potential loss of fair value for financial instruments for each type of market risk. In this analysis, financial instrument assets include all investments and cash and accrued investment income. Financial instrument liabilities include unpaid losses and loss adjustment expenses and unearned premiums, each net of reinsurance. TRH has calculated the VaR for 2003 and 2002 using historical simulation. The historical simulation methodology entails re-pricing all assets and liabilities under explicit changes in market rates within a specific historical time period. In this case, the most recent three years of historical market information for interest rates, equity index prices and foreign currency exchange rates are used to construct the historical scenarios. For each scenario, each transaction is re-priced. Consolidated totals are calculated by netting the values of all the underlying assets and liabilities. The final VaR number represents the maximum potential loss incurred with 95% confidence (i.e., only 5% of historical scenarios show losses greater than the VaR figure). A one-month holding period is assumed in computing the VaR figure.
The following table presents the VaR on a combined basis and of each component of market risk for 2003 and 2002. VaR with respect to combined operations cannot be derived by aggregating the individual risk amounts presented herein.
The increase in the VaR in 2003 as compared to 2002 is due, in general, to increased volatility in the historical market information in the years used to construct the more recent historical scenarios.
TRH's stockholders' equity totaled $2.38 billion at December 31, 2003, an increase of $345.8 million from year-end 2002. The net increase consisted principally of net income of $303.6 million and an increase in accumulated other comprehensive income of $60.1 million, less cash dividends declared of $22.6 million.
As of December 31, 2003, the amounts of payment due under specified contractual obligations are as follows:
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, 2003, the statutory surpluses of TRC and Putnam each significantly exceeded the level of surplus required under RBC requirements for regulatory attention.
Prior to 2003, TRH had accounted for stock-based compensation based on the intrinsic-value method prescribed in Accounting Principles Board Opinion (APB) No. 25, 'Accounting for Stock Issued to Employees' and related Interpretations, as permitted under SFAS No. 123, 'Accounting for Stock-Based Compensation.'
On January 1, 2003, TRH adopted the recognition provisions of SFAS No. 123, using the prospective method of transition. That method requires application of such recognition provisions under the fair value method to all stock-based compensation awards granted, modified, or settled on or after the date of adoption of the standard. Accordingly, net income for 2003 reflects stock-based compensation expenses primarily related to stock options granted in 2003 only. Such expenses are included in the Statement of Operations as a component of other deductions, net. The impact of adopting the recognition provisions of SFAS No. 123 was not material to net income, financial condition or cash flows in 2003. Pursuant to APB No. 25, no stock-based compensation expenses were recognized in 2002 or 2001. (See Note 2(i) of Notes to Consolidated Financial Statements.)
While the pro forma impact of applying the recognition provisions to all award grants are disclosed, the charges to income in 2003 resulting from TRH adopting the recognition provisions of SFAS No. 123 may not be indicative of future amounts charged to income, as those charges to income under the prospective method of transition will not reflect costs associated with stock-based compensation issued or granted prior to January 1, 2003.
SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities,' issued by the FASB in June 1998, as amended, established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging
In November 2003, the FASB Emerging Issues Task Force (EITF) reached a consensus on, and the FASB ratified, a portion of EITF Issue 03-1, 'The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.' EITF Issue 03-1 addresses the meaning of the term 'other-than-temporary impairment' and its application to investments accounted for pursuant to SFAS No. 115, 'Accounting for Certain Investments in Debt and Equity Securities.' The consensus required disclosure of certain information concerning held-to-maturity and available-for-sale investments with market values that are less than their respective costs or amortized costs at the balance sheet date but for which a write-down has not been recognized. The EITF has not yet reached a consensus regarding the other issues in EITF Issue 03-1 including the recognition and measurement issues. In accordance with the consensus, TRH has provided the information required in Note 3(f) of Notes to Consolidated Financial Statements.
I -- Summary of Investments -- Other than Investments in Related Parties as of December 31, 2003................... S-1 II -- Condensed Financial Information of Registrant as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001.......................... S-2 III -- Supplementary Insurance Information as of December 31, 2003, 2002 and 2001 and for the years then ended.......... S-5 IV -- Reinsurance for the years ended December 31, 2003, 2002 and 2001.................................................. S-6 VI -- Supplementary Information Concerning Property/Casualty Insurance Operations as of December 31, 2003, 2002 and 2001 and for the years then ended......................... S-7
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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 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, 2003 AND 2002
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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 multiple peril and auto physical damage in the property lines (which include property catastrophe risks). Casualty lines represented 73.5%, 73.9% and 79.2% of net premiums written in 2003, 2002 and 2001, 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 2003.
(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. The balance of fixed maturity securities is classified as available-for-sale and carried at market value. In the first quarter of 2001, TRH transferred all of its fixed maturities then 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(j).) As of December 31, 2002 and 2001, all fixed maturities were 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 principally estimated using values obtained from independent pricing services. Other invested assets consist of investments in partnerships, certain of which are accounted for under the equity method, 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.
TRH engages in securities lending transactions whereby certain securities (i.e., fixed maturities and common stocks available for sale) from its portfolio are loaned to third parties. In these transactions, initial collateral, principally cash, is received by TRH in an amount exceeding the market value of the loaned security. Such funds are held in a pooled account of the lending agent in these transactions (an
(h) CURRENCY TRANSLATION: Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at year-end exchange rates. Income and expense accounts are translated at average exchange rates for the year. The resulting net unrealized currency translation gain (loss) for functional currencies is reflected in accumulated other comprehensive income, a component of stockholders' equity.
(j) 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 FASB in June 1998, as amended, established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In accordance with the standard, TRH adopted its provisions on January 1, 2001 with no resulting effect on net income or cash flows.
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 at that time (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 net 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) was recorded as the cumulative effect of an accounting change in the Consolidated Statement of Comprehensive Income and the Consolidated Statement of
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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.
(k) OTHER ACCOUNTING STANDARDS: In November 2003, the FASB Emerging Issues Task Force (EITF) reached a consensus on, and the FASB ratified, a portion of EITF Issue 03-1, 'The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.' EITF Issue 03-1 addresses the meaning of the term 'other-than-temporary impairment' and its application to investments accounted for pursuant to SFAS No. 115, 'Accounting for Certain Investments in Debt and Equity Securities.' The consensus required disclosure of certain information concerning held-to-maturity and available-for-sale investments with market values that are less than their respective costs or amortized costs at the balance sheet date but for which a write-down has not been recognized. The EITF has not yet reached a consensus regarding the other issues in EITF Issue 03-1 including the recognition and measurement issues. In accordance with the consensus, TRH has provided the information required in Note 3(f).
3. INVESTMENTS (CONTINUED) (b) NET INVESTMENT INCOME: An analysis of net investment income of TRH follows:
(c) INVESTMENT GAINS AND LOSSES: Realized net capital gains (losses) and the change in net unrealized appreciation (depreciation) of investments are summarized as follows:
(1) Includes write-downs for other than temporary declines in market value of $4,635,000 and $1,783,000 for 2003 and 2002, respectively. There were no write-downs for other than temporary declines in market value in 2001.
(1) See Note 3(f) for additional information about gross unrealized losses as of December 31, 2003.
The amortized cost and market value of fixed maturities at December 31, 2003 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 $39,999,000, $76,037,000 and $6,069,000 and gross losses of $6,289,000, $11,146,000 and $7,145,000 were realized on sales of investments in fixed maturities available for sale in 2003, 2002 and 2001, respectively.
(e) EQUITIES: Gross gains of $39,784,000, $45,978,000 and $90,698,000 and gross losses of $53,437,000, $103,644,000 and $90,956,000 were realized on sales of equities in 2003, 2002 and 2001, respectively. At December 31, 2003 and 2002, net unrealized appreciation (depreciation) of equities (before applicable income taxes) included gross gains of $61,521,000 and $12,100,000 and gross losses of $1,823,000 and $56,174,000, respectively. (See Note 3(f) for additional information about gross unrealized losses as of December 31, 2003.)
(f) ADDITIONAL INFORMATION ON GROSS UNREALIZED LOSSES ON FIXED MATURITIES AND EQUITIES: As of December 31, 2003, TRH's aggregate gross unrealized losses on all fixed maturities and equities totaled $11,027,000. No single issuer accounted for more than 9% of the aggregate gross unrealized losses. As of December 31, 2003, the aging of the gross unrealized losses with respect to fixed maturities and equities, grouped by percentage of gross unrealized loss (the extent by which the market value is less than amortized cost or cost) relative to cost, including the number of respective items, was as follows:
3. INVESTMENTS (CONTINUED) At December 31, 2003, the gross unrealized losses for fixed maturities and equities included the following concentrations:
The market value of fixed maturities in an unrealized loss position at December 31, 2003, by contractual maturity, is shown below:
The U.S. federal income tax rate was 35% for 2003, 2002 and 2001. Actual tax expense (benefit) on income (loss) before income taxes differs from the 'expected' amount computed by applying the U.S. federal income tax rate because of the following:
(c) Income tax payments by TRH totaled $66,168,000, $29,962,000 and $27,702,000 in 2003, 2002 and 2001, respectively.
As a result of a common stock split in the form of a 50% stock dividend, common stock increased by $17.4 million and additional paid-in capital decreased by $17.5 million in 2001. This stock split was paid on July 20, 2001, to holders of record on June 29, 2001.
Results for 2001 include pre-tax net losses and loss adjustment expenses of $200 million from the September 11th terrorist attack, or $130 million after tax. The pre-tax net loss estimate is comprised of gross incurred losses and loss adjustment expenses of approximately $500 million less related reinsurance ceded of approximately $300 million. The losses recorded for this event represent TRH's estimate of ultimate losses based upon information presently available.
In addition, under TRH's 1990 Employee Stock Purchase Plan, as amended, full-time employees with at least one year of employment with the Company or any of its subsidiaries are eligible to receive privileges to purchase shares of the Company's common stock at a price which is 85% of the fair market value of such stock on the date of subscription. An aggregate of 1,125,000 shares of common stock has been authorized for subscription and 1,178 shares were purchased under the plan in 2003.
In 2003, the Company's Board of Directors adopted and the stockholders approved the '2003 Stock Incentive Plan' (the TRH Stock Incentive Plan). This plan provides that equity-based or equity-related awards with respect to up to a maximum of 500,000 shares of the Company's common stock can be granted to officers, directors, employees, and other individuals as determined by the Company's Board of Directors, except that no award may be made to directors who are not employees of the Company without stockholder approval. Pursuant to the TRH Stock Incentive Plan, no grantee may receive awards covering more than 25,000 shares of the Company's common stock in any one year. During 2003, the Company granted restricted stock units (TRH RSU) relating to 6,900 shares of common stock. TRH RSUs will vest on the fourth anniversary of the date of grant for those grantees with continued employment through such date. The Company reserves the right to make payment for the TRH RSUs in shares of common stock or the cash equivalent of the market value of such shares on the date of vesting. At December 31, 2003, there were 493,100 shares of common stock reserved for issuance in connection with future grants of awards under the TRH Stock Incentive Plan.
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, 2003, 1,005,334 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(i) 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
A summary of the combined status of the 2000 Plan, the 1995 Plan and the 1990 Plan (collectively, the Company Plans) as of December 31, 2003, 2002 and 2001 and changes during the years ended on those dates is presented below:
The following table summarizes information about the Company Plans' outstanding and exercisable options at December 31, 2003:
Statutory surplus and net income (loss) as reported to the New York Insurance Department were 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 obligations 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 2003 and 2002. 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 affiliates, are considered material to the financial position of TRH.
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, respectively, accounted for non-affiliated business equal to 16% and 13% in 2003, 14% and 13% in 2002 and 14% and 15% in 2001, of consolidated revenues, with a significant portion in each segment. Further, one non-affiliated customer accounted for approximately 5%, 8% and 12% of consolidated revenues in 2003, 2002 and 2001, respectively. Revenues from such customer, a significant portion of which were obtained through the two large international brokers discussed above, are included principally in the International-Europe segment, for all periods discussed.
(1) Domestic revenues and income before income taxes include realized net capital gains (losses) of $3,277, ($7,325) and $241 in 2003, 2002 and 2001, respectively. International-Other revenues and income (loss) before income taxes include realized net capital gains (losses) of $5,388, $781 and ($511) in 2003, 2002 and 2001, respectively. Realized net capital gains (losses) for International-Europe in each of the years presented are not material.
(2) Net revenues from affiliates approximate $533,700, $230,900 and $100,300 in 2003, 2002 and 2001, respectively, and are included primarily in Domestic and, for 2003 and 2002 only, International-Europe revenues.
(3) Includes revenues from the London, England office of $711,876, $525,520 and $435,007 in 2003, 2002 and 2001, respectively.
(6) 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.
(1) A majority of the amounts within the other liability line relates to more complex risks such as professional liability (other than medical malpractice), directors' and officers' liability and, to a lesser extent, environmental impairment liability.
The following is a summary of unaudited quarterly financial data for each of the years ended December 31, 2003 and 2002. 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.