The following discussion refers to the consolidated financial statements of Transatlantic Holdings, Inc. and its subsidiaries (collectively, TRH) as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000, which are presented elsewhere herein. TRH's principal operating subsidiaries are Transatlantic Reinsurance Company (TRC), Trans Re Zurich (TRZ) and Putnam Reinsurance Company (Putnam).
In 2000, domestic net premiums written increased by $94.9 million, or 12.6%, over 1999, to $845.5 million, with significant increases recorded in certain specialty casualty classes (particularly accident and health and medical malpractice lines) and in aviation and property catastrophe excess-of-loss lines.
Tokyo) increased 44% to $83.0 million. TRZ recorded a significant decrease compared to 1998 as a result of the shift of their business to certain other TRH offices, closer to source, and the selective retention of business in core areas. International net premiums written increased significantly in auto liability, accident and health and property lines, and decreased significantly in the ocean marine line. International business represented 49.9% of 1999 net premiums written compared to 48.9% in 1998.
In 1999, domestic net premiums written increased by $38.9 million, or 5.5%, over 1998, to $750.6 million, with significant increases recorded in certain specialty casualty classes (particularly accident and health and medical malpractice lines), and significant decreases recorded in property and aviation lines. The majority of the reduction in property net premiums written was due to an increase in premiums for reinsurance ceded.
The property and casualty insurance and reinsurance industries use the combined ratio as a measure of underwriting profitability. The combined ratio reflects only underwriting results, and does not include income from investments. Generally, a combined ratio under 100 indicates an underwriting profit and a combined ratio exceeding 100 indicates an underwriting loss. Underwriting profitability is subject to significant fluctuations due to competition, catastrophic events, economic and social conditions, foreign currency rate fluctuations, interest rates and other factors.
development in 1999 on losses occurring in 1997 and 1998, principally in fire, allied lines, auto liability and ocean marine lines, and prior to 1984 in the other liability line.
Realized net capital gains on the disposition of investments totaled $33.1 million in 2000, $82.8 million in 1999 and $120.9 million in 1998. The high levels of realized net capital gains in 1999 and 1998 as compared to 2000 were caused, in 1999, by the redeployment of a portion of the equity portfolio early in the year generally into fixed income investments, and in 1998, by the strategic realignment of the equity portfolio.
Net income and net income per common share on a diluted basis, respectively, were as follows: 2000 -- $211.6 million, $6.05; 1999 -- $187.4 million, $5.37; 1998 -- $247.5 million, $7.10. Reasons for the changes between years are as discussed earlier. (See Note 7 of Notes to Consolidated Financial Statements.)
At December 31, 2000, total investments and cash were $4,391.2 million compared to $4,333.5 million at December 31, 1999. The increase was caused by pre-tax unrealized holding gains on investments, partially offset by modest negative operating cash flow and outward cash flow from financing activities. (See Note 3 of Notes to Consolidated Financial Statements.)
For 2000, TRH's operating cash flow was modestly negative, a substantial reduction from the positive amount reported in 1999. The reduction in cash flow was caused largely by a significant increase in paid losses offset partially by increased premium collections, net of commissions. Paid loss levels in 2000 were significantly elevated due to payments related to previously reserved claims, including 1999 catastrophe losses, an increase in premium volume and the continued shift in the business mix towards lines with shorter payment patterns.
TRH's operating cash flow in 1999 declined compared to 1998. This decrease was due to significant increases in paid losses and net commissions, offset, in part, by increased net premiums and a significant
TRH believes that its balance of cash and cash equivalents of $129.2 million as of December 31, 2000 and its future cash flows will be sufficient to meet TRH's cash requirements through the end of 2001 and thereafter for a period the length of which is difficult to predict, but which TRH believes will be at least one year.
Fixed maturity investments are carried at amortized cost when it is TRH's positive intent to hold these securities to maturity and TRH has the ability to do so. As of December 31, 2000, a significant portion of the bond portfolio was classified as available-for-sale and carried at market value. Most activity within the bonds available for sale portfolio for the years under discussion represented strategic portfolio realignments to maximize after-tax income. TRH adjusts its mix of taxable and tax-exempt investments, as appropriate, generally as a result of strategic investment and tax planning considerations. As of December 31, 2000, bonds held to maturity had gross unrealized gains of $50.0 million and $0.1 million of gross unrealized losses. Gross unrealized gains and losses on bonds available for sale as of December 31, 2000 amounted to $63.3 million and $15.6 million, respectively.
As of December 31, 2000, 93.6% of the bond portfolio was rated Aaa or Aa, an additional 4.0% was also rated investment grade or better, 2.2% was rated below investment grade and 0.2% was not rated. Also, as of December 31, 2000, TRH had no derivative instruments. (See Note 3 of Notes to Consolidated Financial Statements.)
TRH has performed VaR analyses to estimate the maximum potential loss of fair value for financial instruments for each type of market risk. TRH has refined its methodology for calculating VaR and the results of the calculations for 2000 were performed using historical simulation. Using historical simulation over the delta-normal approach (which was used for the 1999 information presented herein) does not significantly change the result of the VaR analysis. 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, foreign exchange rates and equity index prices 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
The following table presents the VaR of each component of market risk. VaR with respect to the aggregate of the three components of market risk cannot be derived by aggregating the individual risk amounts presented herein.
TRH's stockholders' equity increased to $1.86 billion at December 31, 2000, an increase of $213.8 million over year-end 1999. The net increase was comprised principally of net income of $211.6 million and an increase in accumulated other comprehensive income of $18.6 million, less cash dividends declared of $18.4 million. The increase in net unrealized appreciation of investments, net of income tax, a component of accumulated other comprehensive income, principally consisted of an increase in unrealized appreciation of bonds available for sale, net of income tax, of $83.5 million due principally to a reduction in market interest rates compared to a year ago, partially offset by a decrease in unrealized appreciation of common stocks available for sale, net of income tax, of $45.0 million, reflecting a general weakening of the U.S. economy. Net unrealized appreciation of investments, net of 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, prospects of investee companies 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, 2000, the statutory surpluses of TRC and Putnam each significantly exceeded RBC requirements.
In June 1997, the Financial Accounting Standards Board (FASB) adopted Statement of Financial Accounting Standards (SFAS) No. 130, 'Reporting Comprehensive Income.' This statement established 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.
This standard requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. In accordance with the standard, TRH adopted SFAS No. 130 in 1998.
In October 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-7, 'Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk.' This statement provides guidance on how to account for insurance and reinsurance contracts that do not transfer both required elements of insurance risk (i.e., underwriting risk and timing risk). SOP 98-7 was effective for TRH on January 1, 2000. Restatement of previously issued annual financial statements is not permitted. The impact of applying this statement was not material to TRH's results of operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 101, 'Revenue Recognition in Financial Statements.' SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. In accordance with the bulletin and subsequent guidance that deferred the implementation date, TRH adopted SAB 101 in the fourth quarter of 2000. With respect to results of operations, financial position and cash flows, SAB 101 did not have a material impact in 2000 and is not expected to have a material impact thereafter.
In September 2000, the FASB issued SFAS No. 140, 'Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a replacement of SFAS No. 125.' SFAS No. 140 specifies the accounting and reporting requirements for securitizations and other transfers of financial assets and collateral, the recognition and measurement of servicing assets and liabilities and the extinguishment of liabilities. This statement is effective for the recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is to be applied prospectively with certain exceptions. Adoption of the new requirements on their effective dates has not had and is not expected to have a material impact on TRH's results of operations, financial position or cash flows.
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 changes current statutory accounting in some areas. The New York Insurance Department (in the state of domicile of TRC and Putnam) recently adopted most of the Codification guidance for implementation on January 1, 2001, but did not adopt several 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 Codification guidance is not expected to have a material effect on future statutory net income, financial position or cash flows.
TRH has taken the necessary steps to transact business in the Euro, has identified the significant issues and will be prepared with respect to the continued phase in of and ultimate redenomination to the Euro. Any costs associated with the adoption of the Euro are expensed as incurred and are not material to TRH's results of operations, financial position or cash flows.
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Transatlantic Holdings, Inc. (the 'Company') is a holding company, incorporated in the state of Delaware, which owns all of the common stock of Transatlantic Reinsurance Company (TRC). TRC owns all of the common stock of Trans Re Zurich (TRZ) and Putnam Reinsurance Company (Putnam). As of December 31, 2000, American International Group, Inc. (AIG, and collectively, with its subsidiaries, the AIG Group) beneficially owned approximately 60% of the Company's outstanding shares.
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), accident and health, 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 represented 76.7%, 74.8% and 71.0% of net premiums written in 2000, 1999 and 1998, respectively. The balance represented property lines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) loss adjustment expenses and estimated remaining costs of servicing the contracts are considered in determining acquisition costs to be deferred. Anticipated investment income is not considered in the deferral of acquisition costs.
In June 1997, the Financial Accounting Standards Board (FASB) adopted Statement of Financial Accounting Standards (SFAS) No. 130, 'Reporting Comprehensive Income.' This statement established standards for reporting and display of comprehensive income and its components (revenues,
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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.
(c) INVESTMENT GAINS AND LOSSES: Realized net capital gains and the change in net unrealized appreciation (depreciation) of investments are summarized as follows:
Gross gains of $6,688,000, $4,961,000 and $7,625,000 and gross losses of $41,457,000, $9,273,000 and $647,000 were realized on sales of investments in fixed maturities available for sale in 2000, 1999 and 1998, respectively.
(e) EQUITIES: Gross gains of $118,739,000, $109,404,000 and $122,685,000 and gross losses of $51,860,000, $22,000,000 and $10,874,000 were realized on sales of equities in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, net unrealized appreciation of equities (before applicable income taxes) included gross gains of $98,810,000 and $150,576,000 and gross losses of $41,216,000 and $23,024,000, respectively.
(c) Income tax payments by TRH totaled $47,594,000, $61,861,000 and $110,884,000 in 2000, 1999 and 1998, respectively.
As a result of net increases in estimates of losses occurring in prior years, net losses and loss adjustment expenses were increased by $14.4 million in 2000. In particular, significant adverse development was recorded in 2000 on losses occurring in 1998 and 1999 in fire and allied lines. These increases to incurred losses were partially offset by favorable development in 2000 on losses occurring primarily in 1994 through 1999 in the other liability line.
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 or the date of grant of the purchase privilege, whichever
The charges made to operations for these plans for 2000, 1999 and 1998 were $583,000, $581,000 and $676,000, respectively.
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 directors, officers and employees of AIG, to purchase shares of the Company's common stock at $34.00 per share and $35.00 per share, respectively. Such options were granted outside of, but on substantially the same terms and conditions as, the 1990 Plan. As of December 31, 2000, all of these options were exercisable as none have been exercised or forfeited. The impact of the above options on the financial statements is not material.
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, 2000, 1999 and 1998 and changes during the years ended on those dates is presented below:
The weighted average fair value of each option grant is estimated on the date of grant using the 'Binomial Option Price Model' with the following weighted average assumptions used for grants in 2000, 1999 and 1998, respectively: expected volatility of 18.0% for each grant; risk-free interest rates of 5.4%, 6.4% and 4.6%; and expected lives of six years for each grant. An increasing dividend schedule is used in the binomial model based on historical experience.
In August 1998, AIG increased its beneficial ownership of the Company's outstanding common stock from 49% to over 50%. As of December 31, 2000, AIG beneficially owned approximately 60% of the Company's outstanding shares.
11. RELATED PARTY TRANSACTIONS (CONTINUED) $38 million, $34 million and $31 million, respectively, in such years. (See Note 13 for information relating to reinsurance ceded to related parties.)
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 changes current statutory accounting in some areas. The New York Insurance Department recently adopted most of the Codification guidance for implementation on January 1, 2001, but did not adopt several 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 Codification guidance is not expected to have a material effect on future statutory net income, financial position or cash flows.
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, 2000 and 1999 are comprised as follows:
TRH conducts its business and assesses performance through segments organized along geographic lines. Financial data from offices in London, Paris and Zurich are reported in the aggregate as Europe and considered as one segment due to operational and regional similarities. Data from offices in the Americas, other than those in the United States which underwrite primarily domestic business, and from offices in the Asia Pacific region are grouped as International -- Other and represent the aggregation of non-material segments. In each segment, property and casualty reinsurance is provided to insurers and reinsurers on a treaty and facultative basis, through brokers or directly to ceding companies.
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.
(2) Domestic revenues and income before income taxes include realized net capital gains of $29,668, $82,162 and $118,601 in 2000, 1999 and 1998, respectively. Realized net capital gains for other segments in each of the years presented is not material.
(4) Includes revenues from the London, England office of $380,694, $350,398 and $331,944 in 2000, 1999 and 1998, respectively.