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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________
Commission File Number 1-10545
-------
TRANSATLANTIC HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3355897
- ---------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
80 Pine Street, New York, New York 10005
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 770-2000
-------------------
NONE
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------------ ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 2002 52,299,497
----------
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001............................................... 1
Consolidated Statements of Operations for the three and six months
ended June 30, 2002 and 2001 (unaudited)............................ 2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 (unaudited)............................ 3
Consolidated Statements of Comprehensive Income for the three and
six months ended June 30, 2002 and 2001 (unaudited)................. 4
Notes to Condensed Consolidated Financial Statements (unaudited)......... 5
Cautionary Statement Regarding Forward-Looking Information.............................. 9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................... 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk............... 15
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders...................... 16
ITEM 6. Exhibits and Reports on Form 8-K......................................... 17
Signatures ......................................................................... 17
Part I - Item 1
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 2002 and December 31, 2001
(Unaudited)
2002 2001
----------- ------------
ASSETS (in thousands, except share data)
Investments and cash:
Fixed maturities available for sale, at market value (amortized cost:
2002-$3,855,105; 2001-$3,550,914) (fixed maturities pledged, at market
value: 2002-$360,785; 2001-$385,542) $3,991,743 $3,653,941
Equities:
Common stocks available for sale, at market value (cost: 2002-$511,787;
2001-$496,407) (common stocks pledged, at market value: 2002-$6,345;
2001-$37,239) 460,035 512,631
Nonredeemable preferred stocks available for sale, at market value
(cost: 2002-$28,042; 2001-$30,589) 26,085 30,050
Other invested assets 294,657 248,275
Short-term investment of funds received under securities loan agreements 374,281 432,758
Short-term investments, at cost which approximates market value 356 2,562
Cash and cash equivalents 136,849 124,214
---------- ----------
Total investments and cash 5,284,006 5,004,431
Accrued investment income 67,787 66,850
Premium balances receivable, net 400,686 379,778
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses:
Affiliates 236,412 253,919
Other 612,000 620,519
Deferred acquisition costs 112,760 101,146
Prepaid reinsurance premiums 61,161 51,226
Federal income tax recoverable 38,420 43,178
Deferred income taxes 170,379 184,982
Other assets 40,373 35,274
---------- ----------
Total assets $7,023,984 $6,741,303
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $3,860,430 $3,747,583
Unearned premiums 616,622 553,734
Reinsurance balances payable 119,054 84,815
Payable under securities loan agreements 374,281 432,758
Other liabilities 102,110 76,403
---------- ----------
Total liabilities 5,072,497 4,895,293
---------- ----------
Preferred Stock, $1.00 par value; shares authorized: 5,000,000 - -
Common Stock, $1.00 par value; shares authorized: 100,000,000;
shares issued: 2002-53,163,697; 2001-53,119,945 53,164 53,120
Additional paid-in capital 190,865 189,243
Accumulated other comprehensive income 27,122 27,603
Retained earnings 1,694,779 1,590,487
Treasury Stock, at cost; 864,200 shares of common stock (14,443) (14,443)
---------- ----------
Total stockholders' equity 1,951,487 1,846,010
---------- ----------
Total liabilities and stockholders' equity $7,023,984 $6,741,303
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-1-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- ---------- ---------- ----------
(in thousands, except per share data)
Revenues:
Net premiums written $592,026 $460,899 $1,155,581 $906,578
Increase in net unearned premiums (40,198) (17,261) (47,750) (38,633)
--------- ---------- ---------- ---------
Net premiums earned 551,828 443,638 1,107,831 867,945
Net investment income 64,354 59,897 126,386 119,533
Realized net capital gains (losses) 3,369 2,251 (1,546) 5,132
--------- ---------- ---------- ---------
619,551 505,786 1,232,671 992,610
--------- ---------- ---------- ---------
Expenses:
Net losses and loss adjustment expenses 400,944 334,048 798,817 645,466
Net commissions 137,670 114,251 274,480 218,593
Other operating expenses 13,636 13,146 26,902 25,730
Increase in deferred acquisition costs (9,651) (4,230) (11,614) (8,504)
--------- ---------- ---------- ---------
542,599 457,215 1,088,585 881,285
--------- ---------- ---------- ---------
Operating income 76,952 48,571 144,086 111,325
Other income (deductions) 517 25 37 (83)
--------- ---------- ---------- ---------
Income before income taxes 77,469 48,596 144,123 111,242
Income taxes 15,960 8,750 29,691 20,980
--------- ---------- ---------- ---------
Net income $ 61,509 $ 39,846 $ 114,432 $ 90,262
========= ========== ========== =========
Net income per common share:
Basic $1.18 $0.76 $2.19 $1.73
Diluted 1.16 0.76 2.17 1.71
Dividends per common share 0.100 0.096 0.196 0.186
Weighted average common shares outstanding:
Basic 52,291 52,223 52,282 52,199
Diluted 52,801 52,745 52,808 52,687
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-2-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2002 and 2001
(Unaudited)
2002 2001
--------- ---------
(in thousands)
Net cash provided by operating activities $ 304,756 $ 116,970
--------- ---------
Cash flows from investing activities:
Proceeds of fixed maturities available for sale sold 343,600 215,717
Proceeds of fixed maturities available for sale redeemed or matured 169,365 103,914
Proceeds of equities sold 345,897 378,527
Purchase of fixed maturities available for sale (763,654) (448,023)
Purchase of equities (370,854) (399,497)
Net (purchase) sale of other invested assets (45,185) 42,724
Net sale (purchase) of short-term investment of funds
received under securities loan agreements 58,477 (421,188)
Net sale of short-term investments 2,279 28,559
Change in other liabilities for securities in course of settlement 30,527 (28,774)
Other, net 3,438 (3,454)
--------- ---------
Net cash used in investing activities (226,110) (531,495)
--------- ---------
Cash flows from financing activities:
Net disbursements from reinsurance deposits (1,717) (2,950)
Net funds (disbursed) received under securities loan agreements (58,477) 421,188
Dividends to stockholders (10,039) (9,396)
Proceeds from common stock issued 1,666 2,532
--------- ---------
Net cash (used in) provided by financing activities (68,567) 411,374
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 2,556 (900)
--------- ---------
Change in cash and cash equivalents 12,635 (4,051)
Cash and cash equivalents, beginning of period 124,214 129,246
--------- ---------
Cash and cash equivalents, end of period $ 136,849 $ 125,195
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------- -------- -------- ---------
(in thousands)
Net income $61,509 $ 39,846 $114,432 $ 90,262
------- -------- -------- ---------
Other comprehensive income (loss):
Net unrealized appreciation (depreciation) of investments:
Net unrealized holding gains (losses) arising during period 5,327 (14,217) (37,178) (18,894)
Related income tax effect (1,864) 4,976 13,012 6,613
Reclassification adjustment for (gains) losses included in
net income (3,369) (2,251) 1,546 (5,132)
Related income tax effect 1,179 788 (541) 1,796
------- -------- -------- ---------
1,273 (10,704) (23,161) (15,617)
------- -------- -------- ---------
Net unrealized currency translation gain (loss) 19,696 (2,047) 34,612 (14,711)
Related income tax effect (6,894) 717 (11,932) 5,149
------- -------- -------- ---------
12,802 (1,330) 22,680 (9,562)
------- -------- -------- ---------
Cumulative effect of an accounting change, net of
related income tax effect - - - 32,406
------- -------- -------- ---------
Other comprehensive income (loss) 14,075 (12,034) (481) 7,227
------- -------- -------- ---------
Comprehensive income $75,584 $ 27,812 $113,951 $ 97,489
======= ======== ======== =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
1. General
The condensed consolidated financial statements are unaudited, but have been
prepared on the basis of accounting principles generally accepted in the United
States of America and, in the opinion of management, reflect all adjustments
(consisting of normal accruals) necessary for a fair presentation of results for
such periods. The results of operations and cash flows for any interim period
are not necessarily indicative of results for the full year. These financial
statements include the accounts of Transatlantic Holdings, Inc. and its
subsidiaries (collectively, TRH). All material intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made to
conform the prior year's presentation with 2002.
For further information, refer to the Transatlantic Holdings, Inc. Form 10-K
for the year ended December 31, 2001 and Form 10-Q for the quarter ended March
31, 2002.
2. Net Income Per Common Share
Net income per common share for the periods presented has been computed below
based upon weighted average common shares outstanding.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------- ------- -------- ------------
(in thousands, except per share data)
Net income (numerator) $61,509 $39,846 $114,432 $90,262
======= ======= ======== =======
Weighted average common shares outstanding
used in the computation of net income per share:
Average shares issued 53,155 53,023 53,146 52,999
Less: Average shares in treasury 864 800 864 800
------- ------- -------- -------
Average outstanding shares - basic (denominator) 52,291 52,223 52,282 52,199
Average potential shares, principally stock options 510 522 526 488
------- ------- -------- -------
Average outstanding shares - diluted (denominator) 52,801 52,745 52,808 52,687
======= ======= ======== =======
Net income per common share:
Basic $1.18 $0.76 $2.19 $1.73
Diluted 1.16 0.76 2.17 1.71
-5-
3. Reinsurance
Premiums written and earned and losses and loss adjustment expenses incurred
were comprised of the following:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- -------- ---------- ----------
(in thousands)
Gross premiums written $ 691,883 $543,855 $1,353,754 $1,089,156
Reinsurance ceded (99,857) (82,956) (198,173) (182,578)
--------- -------- ---------- ----------
Net premiums written $ 592,026 $460,899 $1,155,581 $ 906,578
========= ======== ========== ==========
Gross premiums earned $ 660,055 $518,873 $1,296,069 $1,022,958
Reinsurance ceded (108,227) (75,235) (188,238) (155,013)
--------- -------- ---------- ----------
Net premiums earned $ 551,828 $443,638 $1,107,831 $ 867,945
========= ======== ========== ==========
Gross incurred losses and
loss adjustment expenses $ 449,686 $392,724 $ 908,755 $ 748,093
Reinsurance ceded (48,742) (58,676) (109,938) (102,627)
--------- -------- ---------- ----------
Net losses and loss
adjustment expenses $ 400,944 $334,048 $ 798,817 $ 645,466
========= ======== ========== ==========
4. Cash Dividends
During the second quarter of 2002, the Board of Directors of Transatlantic
Holdings, Inc. declared a dividend of $0.10 per common share, or approximately
$5,200,000 in the aggregate.
5. Income Taxes
In the first quarter of 2002, a change in the U.S. federal income tax law
extended the net operating loss carry back period to five years. As a result,
TRH may now fully utilize its tax basis net operating loss for 2001 by carrying
it back to prior years. Therefore, TRH will no longer need to carry forward a
minimum tax credit, as disclosed in the year-end 2001 consolidated financial
statements, that resulted in a deferred tax benefit in that year. Instead, to
reflect TRH's intent under the new tax law, federal income tax recoverable has
been increased by $19.6 million and deferred income taxes (asset) has been
reduced by $19.6 million in the first quarter of 2002 and remains unchanged
through June 30, 2002.
In addition, income taxes paid, net, in the second quarter totaled
$31,967,000 and $24,984,000 in 2002 and 2001, respectively. For the 2002 and
2001 six month periods, income taxes paid, net, totaled $9,767,000 and
$27,506,000, respectively.
-6-
6. Segment Information
The following table presents a summary of comparative financial data by
segment:
International
------------------------
Domestic Europe(3) Other Consolidated
-------- -------- ------- ---------
(in thousands)
Three Months Ended June 30, 2002:
Revenues(1)(2) $342,787 $217,693 $59,071 $619,551
Income (loss) before income taxes(1) 70,403 15,213 (8,147) 77,469
Three Months Ended June 30, 2001:
Revenues(1)(2) $259,896 $195,496 $50,394 $505,786
Income (loss) before income taxes(1) 30,932 18,923 (1,259) 48,596
International
------------------------
Domestic Europe(3) Other Consolidated
-------- -------- ------- ---------
(in thousands)
Six Months Ended June 30, 2002:
Revenues(1)(2) $689,610 $421,319 $121,742 $1,232,671
Income (loss) before income taxes(1) 122,246 30,038 (8,161) 144,123
Six Months Ended June 30, 2001:
Revenues(1)(2) $538,363 $352,378 $101,869 $ 992,610
Income (loss) before income taxes(1) 96,380 28,361 (13,499) 111,242
- ---------------------------
(1) Domestic revenues and income before income taxes include realized net
capital gains (losses) of $4,237 and $2,164 for the three months ended
June 30, 2002 and 2001, respectively, and ($1,185) and $5,858 for the six
months ended June 30, 2002 and 2001, respectively. Realized net capital
gains (losses) for other segments in each of the periods presented is not
material.
(2) Net revenues from affiliates approximate $69,000 and $28,000 for the three
months ended June 30, 2002 and 2001, respectively, and $112,000 and
$57,000 for the six months ended June 30, 2002 and 2001, respectively, and
are included primarily in Domestic and International-Europe revenues.
(3) Includes revenues from the London, England office of $120,688 and $101,711
for the three months ended June 30, 2002 and 2001, respectively, and
$249,026 and $207,945 for the six months ended June 30, 2002 and 2001,
respectively.
-7-
7. Adoption of Statement of Financial Accounting Standards (SFAS) No. 133 and
Change in Classification of Certain Fixed Maturities
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
issued by the Financial Accounting Standards Board (FASB) in June 1998, as
amended, established accounting and 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 (with an amortized cost of $932.3 million and
market value of $982.1 million at the date of transfer) to the fixed maturities
available-for-sale classification (on the balance sheet) to enhance TRH's
flexibility with respect to future portfolio management. The resulting increase
in unrealized appreciation of investments, net of income taxes (a component of
accumulated other comprehensive income), of $32.4 million (net of a tax effect
of $17.4 million) has been recorded as the cumulative effect of an accounting
change in the Consolidated Statement of Comprehensive Income for the six months
ended June 30, 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.
-8-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q and other publicly available
documents may include, and Transatlantic Holdings, Inc. and its subsidiaries
(collectively, TRH) officers and representatives may from time to time make,
statements which may constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
not historical facts but instead represent only TRH's belief regarding future
events and financial performance, many of which, by their nature, are inherently
uncertain and outside of TRH's control. These statements may address, among
other things, TRH's strategy and expectations for growth, product development,
government and industry regulatory actions, market conditions, financial results
and reserves, as well as the expected impact on TRH of natural and man-made
(e.g., terrorist attacks) catastrophic events and political, economic, legal and
social conditions. It is possible that TRH's actual results, financial condition
and expected outcomes may differ, possibly materially, from those anticipated in
these forward-looking statements. Important factors that could cause TRH's
actual results to differ, possibly materially, from those discussed in the
specific forward-looking statements may include, but are not limited to,
uncertainties relating to economic conditions and cyclical industry conditions,
credit quality, government and regulatory policies, volatile and unpredictable
developments (including natural and man-made catastrophes), the legal
environment, the reserving process, the competitive environment in which TRH
operates, interest rate and foreign currency exchange rate fluctuations, and the
uncertainties inherent in international operations, and are further discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations. TRH is not under any obligation to (and expressly
disclaims any such obligations to) update or alter any forward-looking
statement, whether written or oral, that may be made from time to time, whether
as a result of new information, future events or otherwise.
-9-
Part I - Item 2
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2002
OPERATIONAL REVIEW
RESULTS OF OPERATIONS. The following table presents net premiums
written, net premiums earned and net investment income for the periods
indicated:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ --------------------------------
2002 2001 Change 2002 2001 Change
------------------------------ --------------------------------
(dollars in millions)
Net premiums written $592.0 $460.9 28.5% $1,155.6 $906.6 27.5%
Net premiums earned 551.8 443.6 24.4 1,107.8 867.9 27.6
Net investment income 64.4 59.9 7.4 126.4 119.5 5.7
Net premiums written for the second quarter and first six months of
2002 significantly exceeded the comparable 2001 periods principally as a result
of increases in both domestic and international treaty business. Significant
domestic treaty net premiums written growth in the second quarter of 2002
compared to the second quarter of 2001 occurred in specialty casualty
(principally medical malpractice, directors' and officers' and professional
liability), private passenger automobile liability, general casualty and
property lines. The increase in second quarter 2002 versus second quarter 2001
international treaty net premiums written (principally in Europe) was primarily
caused by significant increases in property and commercial automobile liability
lines. With respect to comparative six month net premiums written, significant
domestic increases in the 2002 period compared to the same prior year period
occurred in specialty casualty (principally directors' and officers',
professional liability and medical malpractice), private passenger automobile
liability and general casualty lines. Significant increases in international
business occurred in commercial automobile liability, property and professional
liability lines. Increases in net premiums written in the 2002 periods as
compared to the same prior year periods resulted from significant rate increases
and, to a lesser extent, increased capacity provided.
International business represented 46.2 percent of worldwide net
premiums written for the first six months of 2002 compared to 48.3 percent for
the respective 2001 period. On a worldwide basis, casualty lines business
represented 79.2 percent of net premiums written for the first six months of
2002 versus 79.7 percent in the comparable 2001 period. The balance represented
property lines.
Generally, reasons for increases in gross premiums written between
years are similar to those for net premiums written as discussed above. Ceded
premiums written for the second quarter and first six months of 2002 increased
over comparable 2001 periods. A significant portion of the increases resulted
from the increased cost of catastrophe reinsurance as well as additional
coverage purchased, offset, in part, by a reduction in activity under certain
domestic contracts in the specialty casualty area wherein a substantial portion
of premiums assumed under those agreements were retroceded to non-affiliates.
With respect to the 2002 second quarter compared to the 2001 second
quarter, the difference in the percentage increase in net premiums written
compared to the percentage increase in net premiums earned is caused by
differences in earnings patterns related to variances in the inception dates of
business assumed and the mix of business between pro rata and excess-of-loss for
the respective periods.
-10-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONT'D
JUNE 30, 2002
With respect to the market environment, rates, terms and conditions
continued to improve in virtually all classes that Transatlantic Holdings, Inc.
and its subsidiaries (collectively, TRH) underwrites worldwide, augmenting
generally increasing rate levels experienced over at least the last twelve
months. Nevertheless, the reinsurance marketplace worldwide remains competitive,
with significant additional capital having entered the market, and TRH cannot
predict, with any reasonable certainty, future market conditions.
The increases in net investment income for the second quarter and first
six months of 2002 versus the comparable 2001 periods were due, in large part,
to the investment of significant positive operating cash flow generated in
recent periods and, to a lesser extent, to the impact of the weakening U.S.
dollar compared to certain currencies in which TRH's net investment income is
earned. (See discussion of cash flow under FINANCIAL CONDITION AND LIQUIDITY.)
The following table presents loss and loss adjustment expense ratios,
underwriting expense ratios and combined ratios for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------------------ ------------------
Loss and loss adjustment
expense ratio 72.7 75.3 72.1 74.4
Underwriting expense ratio 25.5 27.6 26.1 26.9
Combined ratio 98.2 102.9 98.2 101.3
TRH reported no significant catastrophe losses in the second quarter
and first six months of 2002. The loss and loss adjustment expense ratios, which
represent net losses and loss adjustment expenses divided by net premiums
earned, and the combined ratios for each of the second quarter and first six
months of 2001 include the impact of $15 million of pre-tax catastrophe losses
resulting from second quarter 2001 events. These losses added 3.3 and 1.7,
respectively, to the second quarter and first six months of 2001 loss and loss
adjustment expense ratios and combined ratios. The loss and loss adjustment
expense ratio improved during the second quarter and first six months of 2002
compared to the year ago periods principally as a result of the abovementioned
catastrophe losses.
While TRH believes that it has taken appropriate steps to control its
exposure to possible future catastrophe losses, the occurrence of one or more
catastrophic events of unanticipated frequency or severity, such as a terrorist
attack, earthquake or hurricane, that causes insured losses could have a
material adverse effect on TRH's results of operations, liquidity or financial
position. Current techniques and models may not accurately predict the
probability of catastrophic events in the future and the extent of the resulting
losses. Moreover, one or more catastrophe losses could weaken TRH's
retrocessionnaires and result in an inability of TRH to collect reinsurance
recoverables.
The underwriting expense ratio, which represents the sum of net
commissions and other operating expenses divided by net premiums written,
decreased in the 2002 second quarter compared to the year ago quarter as the
acquisition cost component decreased by 1.6 and the other operating expense
component declined by 0.5. For the comparable six month periods, the
underwriting expense ratio declined as the acquisition cost component decreased
by 0.3 and the operating expense component decreased by 0.5. With respect to the
acquisition cost component, the decreases between periods are generally due to a
slight change in the mix of business between periods. With respect to the
operating expense component, the decreases between the periods are due to the
fact that the rates of increase in operating expenses are being significantly
exceeded by the rates of increase of net premiums written for the respective
periods.
-11-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONT'D
JUNE 30, 2002
Income before income taxes increased 59.4 percent to $77.5 million in
the second quarter of 2002 versus $48.6 million in the second quarter of 2001.
The increase in income before income taxes in the 2002 second quarter versus the
comparable 2001 quarter resulted from improved underwriting results in 2002, due
largely to the absence of significant catastrophe losses in the 2002 period and
a reduction in the underwriting expense ratio, and increased net investment
income. Excluding pre-tax catastrophe losses and net realized capital gains,
second quarter 2002 income before income taxes would have increased 20.8 percent
to $74.1 million from $61.3 million reported in the comparable prior year
period. For the first six month periods, income before income taxes increased
29.6 percent to $144.1 million in 2002 versus $111.2 million in 2001. The
increase in income before income taxes in the first six months of 2002 versus
the same prior year period resulted from improved underwriting results in 2002,
including the absence of significant catastrophe losses in the 2002 period and
a reduction in the underwriting expense ratio, and increased net investment
income in the 2002 period, offset, in part, by the impact of realized net
capital losses in the first six months of 2002 versus realized net capital gains
in the comparable 2001 period. Excluding pre-tax catastrophe losses and net
realized capital gains (losses), income before income taxes for the first six
months of 2002 would have totaled $145.7 million versus $121.1 million in the
comparable prior year period, an increase of 20.3 percent.
The effective tax rate for both the second quarter and first six months
of 2002 was 20.6 percent versus 18.0 percent and 18.9 percent for the second
quarter and first six months of 2001, respectively. The increased effective tax
rates in the 2002 periods versus the comparable 2001 periods result primarily
from the fact that income before income taxes is increasing at a greater rate
than tax-exempt investment income year over year.
Net income for the second quarter of 2002 increased 54.4 percent to
$61.5 million, or $1.16 per common share (diluted), compared to $39.8 million,
or $0.76 per common share (diluted), in the 2001 second quarter. Net income
includes after-tax net realized capital gains of $2.2 million and $1.5 million
in the second quarters of 2002 and 2001, respectively. Net income for the second
quarter of 2001 also includes after-tax catastrophe losses of $12.3 million.
Second quarter 2002 income excluding after-tax net realized capital gains and
catastrophe losses increased 17.0 percent to $59.3 million, or $1.12 per common
share (diluted), compared to $50.7 million, or $0.96 per common share (diluted),
in the year ago quarter.
Net income for the first six months of 2002 increased 26.8 percent to
$114.4 million, or $2.17 per common share (diluted), compared to $90.3 million,
or $1.71 per common share (diluted), in the same prior year period. Net income
includes after-tax net realized capital (losses) gains of ($1.0) million and
$3.3 million for the first six months of 2002 and 2001, respectively. Net income
for the first six months of 2001 also includes after-tax catastrophe losses of
$12.3 million. For the first six months of 2002, income excluding after-tax net
realized capital (losses) gains and catastrophe losses totaled $115.4 million,
or $2.19 per common share (diluted), compared to $99.2 million, or $1.88 per
common share (diluted), in the first six months of 2001, an increase of 16.3
percent.
Reasons for the increases in net income between periods are as
discussed above.
In the second quarter of 2002, the Board of Directors of Transatlantic
Holdings, Inc. declared a dividend of $0.10 per common share to stockholders of
record as of September 6, 2002, payable on September 13, 2002. This represents a
4.2 percent increase over the prior quarterly dividend.
SEGMENT RESULTS
Domestic - Comparing each of the three and six month periods ending
June 30, 2002 with the same prior year periods, domestic revenues increased over
the prior year. This increase was caused principally by increased net premiums
written and earned, as discussed earlier in the OPERATIONAL REVIEW. Income
before income taxes for the three and six month periods ending June 30, 2002
increased compared to the same 2001 periods due principally to improved
underwriting results, which were reflected in lower loss and loss adjustment
expense ratios (including the absence of pre-tax catastrophe losses which
amounted to $15 million in each of the second quarter and first six months of
2001), and lower underwriting expense ratios in the 2002 periods.
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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONT'D
JUNE 30, 2002
International - Europe (London and Paris branches and Trans Re Zurich)
- - Comparing the results of each of the three and six month periods ending June
30, 2002 with the same prior year periods, European revenues increased compared
to the prior year primarily due to the increases in net premiums written and
earned in London and at Trans Re Zurich. Income before income taxes for the
second quarter of 2002 decreased compared to the same prior year period due to a
slight deterioration of underwriting results offset, in part, by increased net
investment income. For the first six months of 2002 versus the comparable 2001
period, income before income taxes increased due principally to an increase in
net investment income, offset, in part, by a slight deterioration of
underwriting results.
International - Other (Miami (serving Latin America and the Caribbean),
Toronto, Hong Kong and Tokyo branches) Comparing the results of each of the
three and six month periods ending June 30, 2002 with the same prior year
periods, International-Other revenues increased compared to the prior year
periods due, in large part, to increases in net premiums written and earned in
Miami and Hong Kong in the 2002 periods versus comparable 2001 periods. Loss
before income taxes for the second quarter of 2002 worsened compared to the year
ago period due to increased loss activity in the 2002 period (principally in
Miami and Tokyo) offset, in part, by a lower underwriting expense ratio. The
improvement in loss before income taxes for the first six months of 2002
compared to the same prior year period was principally due to improved
underwriting results reflected principally in a lower underwriting expense
ratio.
FINANCIAL CONDITION AND LIQUIDITY. The increase in cash and invested assets at
June 30, 2002 compared to December 31, 2001 was due, in large part, to positive
cash flow from operations during the first six months of 2002 and, to a lesser
extent, the foreign exchange impact of a weakened U.S. dollar at June 2002
compared principally to the primary European currencies in which TRH holds
investments, offset, in part, by funds disbursed under securities loan
agreements.
In the first quarter of 2002, a change in the U.S. federal income tax
law extended the net operating loss carry back period to five years. As a
result, TRH may now fully utilize its tax basis net operating loss for 2001 by
carrying it back to prior years. Therefore, TRH will no longer need to carry
forward a minimum tax credit, as disclosed in the year-end 2001 consolidated
financial statements, that resulted in a deferred tax benefit in that year.
Instead, to reflect TRH's intent under the new tax law, federal income tax
recoverable has been increased by $19.6 million and deferred income taxes
(asset) has been reduced by $19.6 million in the first quarter of 2002 and
remains unchanged through June 30, 2002.
Stockholders' equity totaled $1,951.5 million at June 30, 2002, a net
increase of $105.5 million from year-end 2001. The increase in stockholders'
equity during 2002 is primarily composed of net income of $114.4 million,
partially offset by a decrease in accumulated other comprehensive income of $0.5
million (See Consolidated Statements of Comprehensive Income) and dividends
declared of $10.3 million.
The abovementioned decrease in accumulated other comprehensive income
consisted of net unrealized depreciation of investments, net of income taxes, of
$23.2 million, offset, in large part, by a net unrealized currency translation
gain, net of income taxes, of $22.7 million. The net unrealized depreciation of
investments is composed principally of $45.1 million from unrealized
depreciation of equities, due to significant weakness in the equity markets,
partially offset by an increase of $21.8 million from unrealized appreciation of
fixed maturities available for sale.
Market values of invested assets may fluctuate due to changes in
general economic and political conditions, market interest rates, prospects of
investee companies and other factors.
-13-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONT'D
JUNE 30, 2002
Operating cash flow for first six months of 2002 was $304.8 million, an
increase of $187.8 million over the same 2001 period. This increase was caused
largely by increased net premiums written, net of commissions, increased
reinsurance recoveries and a reduction in tax payments in the 2002 period
compared to the 2001 period, offset, in part, by increased losses paid. The
increase in paid losses is generally due to an increase in premium volume and
the continued shift in the business mix towards lines with shorter payment
patterns. Management believes that the liquidity of TRH has not materially
changed since the end of 2001.
If paid losses accelerated significantly beyond TRH's ability to fund
such paid losses from current operating cash flows, TRH would be compelled to
liquidate a portion of its investment portfolio and/or arrange for financing.
Such events that may cause such a liquidity strain could be the result of
several catastrophic events occurring in a relatively short period of time.
Additional strain on liquidity could occur if the investments sold to fund such
paid losses were sold in a depressed marketplace and/or reinsurance recoverable
on such paid losses became uncollectible.
TRH's operations are exposed to market risk. Market risk is the risk of
loss of fair market value resulting from adverse fluctuations in interest rates,
equity prices and foreign currency exchange rates. See Part I Item 3 of this
Form 10-Q for a discussion of market risk.
CRITICAL ACCOUNTING POLICIES
TRH considers among its most important accounting policies those policies
with respect to reserves for losses and loss adjustment expenses and deferred
acquisition costs. These are the policies that require management's most
significant exercise of judgment on both a quantitative and qualitative basis.
See further discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in the Notes to Consolidated Financial
Statements in the Transatlantic Holdings, Inc. Form 10-K for the year ended
December 31, 2001.
ACCOUNTING STANDARD. Adoption of Statement of Financial Accounting Standards
(SFAS) No. 133 and Change in Classification of Certain Fixed Maturities: SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," issued
by the Financial Accounting Standards Board (FASB) in June 1998, as amended,
established accounting and 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 (with an amortized cost of
$932.3 million and market value of $982.1 million at the date of transfer) to
the fixed maturities available-for-sale classification (on the balance sheet) to
enhance TRH's flexibility with respect to future portfolio management. The
resulting increase in unrealized appreciation of investments, net of income
taxes (a component of accumulated other comprehensive income), of $32.4 million
(net of a tax effect of $17.4 million) has been recorded as the cumulative
effect of an accounting change in the Consolidated Statement of Comprehensive
Income for the six months ended June 30, 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.
-14-
Part I - Item 3
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Transatlantic Holdings, Inc. and its subsidiaries (collectively, TRH)
operations are exposed to market risk. Market risk is the risk of loss of fair
market value resulting from adverse fluctuations in interest rates, equity
prices and foreign currency exchange rates.
Measuring potential losses in fair values is a major focus of risk
management efforts by many companies. Such measurements are performed through
the application of various statistical techniques. One such technique is Value
at Risk (VaR). VaR is a summary statistical measure that uses changes in
historical interest rates, equity prices and foreign currency exchange rates to
calculate the maximum loss that could occur over a defined period of time given
a certain probability.
TRH believes that statistical models alone do not provide a reliable
method of monitoring and controlling market risk. While VaR models are
relatively sophisticated, the quantitative market risk information generated is
limited by the assumptions and parameters established in creating the related
models. Therefore, such models are tools and do not substitute for the
experience or judgment of senior management.
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 the first six months of 2002 and for
the year ended December 31, 2001 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 percent confidence (i.e., only 5 percent 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 the six months ended June 30, 2002 and for the year
ended December 31, 2001. VaR with respect to combined operations cannot be
derived by aggregating the individual risk amounts presented herein:
Market Risk
(in millions)
2002 2001
----------------------------------------- --------------------------------------------
As of As of
June 30, Average High Low December 31, Average High Low
----------------------------------------- --------------------------------------------
Combined $104 $111 $118 $104 $111 $96 $111 $80
Interest rate 107 106 113 99 99 82 99 66
Equity 48 53 55 48 55 53 55 51
Currency 2 2 3 2 3 3 4 3
-15-
Part II - Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 16, 2002,
the stockholders:
(a) elected nine directors as follows:
SHARES SHARES NOT
NOMINEE SHARES FOR WITHHELD VOTING
------- ---------- -------- ----------
Takashi Aihara 50,709,401 681,687 892,556
James Balog 51,262,932 128,156 892,556
C. Fred Bergsten 50,709,401 681,687 892,556
Maurice R. Greenberg 50,709,229 681,859 892,556
John J. Mackowski 51,262,932 128,156 892,556
Edward E. Matthews 51,262,954 128,134 892,556
Robert F. Orlich 51,263,104 127,984 892,556
Howard I. Smith 50,709,401 681,687 892,556
Thomas R. Tizzio 51,262,954 128,134 892,556
(b) approved, by a vote of 51,093,263 shares to 296,581 shares, with
1,244 abstentions and 892,556 shares not voting, a proposal to ratify
PricewaterhouseCoopers LLP as independent accountants of Transatlantic
Holdings, Inc. for 2002.
-16-
Part II - Item 6. Exhibits and Reports on Form 8-K
There are no exhibits included with this filing nor were any reports on
Form 8-K filed for the three months ended June 30, 2002.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSATLANTIC HOLDINGS, INC.
-----------------------------------------
(Registrant)
/s/ STEVEN S. SKALICKY
-----------------------------------------
Steven S. Skalicky
On behalf of the registrant and in his capacity as
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated August 9, 2002
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