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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 MARCH 31, 2003
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
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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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 2003. 52,382,173
----------
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002............................................... 1
Consolidated Statements of Operations for the three months ended
March 31, 2003 and 2002 (unaudited)................................. 2
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 (unaudited)........................... 3
Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2003 and 2002 (unaudited)........................... 4
Notes to Condensed Consolidated Financial Statements (unaudited)....... 5
Cautionary Statement Regarding Forward-Looking Information....................... 10
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk............. 16
ITEM 4. Controls and Procedures................................................ 17
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K....................................... 18
Signatures....................................................................... 18
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002......... 19
Part I - Item 1
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2003 and December 31, 2002
(Unaudited)
2003 2002
----------- ----------
(in thousands, except share data)
ASSETS
Investments and cash:
Fixed maturities:
Held to maturity, at amortized cost (market value: 2003-$219,232) $ 217,866 $ --
Available for sale, at market value (amortized cost: 2003-$4,128,356;
2002-$4,181,354) (pledged, at market value: 2003-$359,562;
2002-$327,305) 4,307,505 4,361,489
Equities:
Common stocks available for sale, at market value (cost:2003-$449,201;
2002-$477,738) (pledged, at market value: 2003-$25,762; 2002-$13,421) 412,259 433,670
Nonredeemable preferred stocks available for sale, at market value
(cost: 2003-$26,367; 2002-$26,205) 26,380 26,199
Other invested assets 555,429 278,311
Short-term investment of funds received under securities loan agreements 394,921 347,647
Short-term investments, at cost which approximates market value 36,158 12,812
Cash and cash equivalents 139,029 127,402
---------- ----------
Total investments and cash 6,089,547 5,587,530
Accrued investment income 84,890 80,658
Premium balances receivable, net 385,903 350,214
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses:
Affiliates 190,451 191,704
Other 621,801 625,884
Deferred acquisition costs 151,119 132,967
Prepaid reinsurance premiums 111,018 65,809
Federal income tax recoverable 9,472 51,199
Deferred income taxes 168,941 170,822
Other assets 26,620 29,738
---------- ----------
Total assets $7,839,762 $7,286,525
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $4,162,409 $4,032,584
Unearned premiums 836,346 707,916
Reinsurance balances payable 152,225 109,082
Payable under securities loan agreements 394,921 347,647
Payable for securities in course of settlement 177,259 25,352
Other liabilities 36,366 33,177
---------- ----------
Total liabilities 5,759,526 5,255,758
---------- ----------
Preferred Stock, $1.00 par value; shares authorized: 5,000,000 -- --
Common Stock, $1.00 par value; shares authorized: 100,000,000;
shares issued: 2003-53,246,373; 2002-53,225,149 53,246 53,225
Additional paid-in capital 193,211 192,141
Accumulated other comprehensive income 51,404 60,644
Retained earnings 1,796,818 1,739,200
Treasury Stock, at cost; 864,200 shares of common stock (14,443) (14,443)
---------- ----------
Total stockholders' equity 2,080,236 2,030,767
---------- ----------
Total liabilities and stockholders' equity $7,839,762 $7,286,525
========== ==========
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
March 31,
-------------------
2003 2002
-------- --------
(in thousands, except per share data)
Revenues:
Net premiums written $768,081 $563,555
Increase in net unearned premiums (75,914) (7,552)
-------- --------
Net premiums earned 692,167 556,003
Net investment income 64,614 62,032
Realized net capital gains (losses) 538 (4,915)
-------- --------
757,319 613,120
-------- --------
Expenses:
Net losses and loss adjustment expenses 476,989 397,873
Net commissions 203,560 136,810
Other operating expenses 15,384 13,266
Increase in deferred acquisition costs (18,152) (1,963)
-------- --------
677,781 545,986
-------- --------
Operating income 79,538 67,134
Other deductions (330) (480)
-------- --------
Income before income taxes 79,208 66,654
Income taxes 16,380 13,731
-------- --------
Net income $ 62,828 $ 52,923
======== ========
Net income per common share:
Basic $ 1.20 $ 1.01
Diluted 1.19 1.00
Dividends per common share 0.100 0.096
Weighted average common shares outstanding:
Basic 52,372 52,273
Diluted 52,689 52,818
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 Three Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
--------- ---------
(in thousands)
Net cash provided by operating activities $ 287,933 $ 208,112
--------- ---------
Cash flows from investing activities:
Proceeds of fixed maturities available for sale sold 321,065 183,823
Proceeds of fixed maturities available for sale redeemed or matured 163,343 75,501
Proceeds of equities sold 127,011 177,584
Purchase of fixed maturities held to maturity (217,868) --
Purchase of fixed maturities available for sale (403,193) (402,719)
Purchase of equities (117,684) (200,319)
Net purchase of other invested assets (276,894) (38,711)
Net purchase of short-term investment of funds
received under securities loan agreements (47,274) (16,046)
Net (purchase) sale of short-term investments (23,307) 2,530
Change in other liabilities for securities in course of settlement 151,907 10,272
Other, net (102) 3,896
--------- ---------
Net cash used in investing activities (322,996) (204,189)
--------- ---------
Cash flows from financing activities:
Net funds received under securities loan agreements 47,274 16,046
Dividends to stockholders (5,210) (5,019)
Proceeds from common stock issued 1,000 1,070
Other 91 (691)
--------- ---------
Net cash provided by financing activities 43,155 11,406
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 3,535 (1,792)
--------- ---------
Change in cash and cash equivalents 11,627 13,537
Cash and cash equivalents, beginning of period 127,402 124,214
--------- ---------
Cash and cash equivalents, end of period $ 139,029 $ 137,751
========= =========
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
March 31,
-------------------
2003 2002
-------- --------
(in thousands)
Net income $ 62,828 $ 52,923
-------- --------
Other comprehensive loss:
Net unrealized appreciation (depreciation) of investments:
Net unrealized holding gains (losses) arising during period 6,921 (42,505)
Related income tax effect (2,422) 14,876
Reclassification adjustment for (gains) losses included in
net income (538) 4,915
Related income tax effect 188 (1,720)
-------- --------
4,149 (24,434)
-------- --------
Net unrealized currency translation (loss) gain (20,598) 14,916
Related income tax effect 7,209 (5,038)
-------- --------
(13,389) 9,878
-------- --------
Other comprehensive loss (9,240) (14,556)
-------- --------
Comprehensive income $ 53,588 $ 38,367
======== ========
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
MARCH 31, 2003
(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.
For further information, refer to the Transatlantic Holdings, Inc. Form
10-K filing for the year ended December 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
March 31,
-------------------
2003 2002
-------- --------
(in thousands, except per share data)
Net income (numerator) $ 62,828 $ 52,923
======== ========
Weighted average common shares outstanding
used in the computation of net income per share:
Average shares issued 53,236 53,137
Less: Average shares in treasury 864 864
-------- --------
Average outstanding shares - basic (denominator) 52,372 52,273
Average potential shares, principally stock options 317 545
-------- --------
Average outstanding shares - diluted (denominator) 52,689 52,818
======== ========
Net income per common share:
Basic $ 1.20 $ 1.01
Diluted 1.19 1.00
-5-
3. Reinsurance
Premiums written and earned and losses and loss adjustment expenses
incurred were comprised of the following:
Three Months Ended
March 31,
--------------------
2003 2002
--------- --------
(in thousands)
Gross premiums written $ 900,416 $661,871
Reinsurance ceded (132,335) (98,316)
--------- --------
Net premiums written $ 768,081 $563,555
========= ========
Gross premiums earned $ 779,293 $636,014
Reinsurance ceded (87,126) (80,011)
--------- --------
Net premiums earned $ 692,167 $556,003
========= ========
Gross incurred losses and
loss adjustment expenses $ 510,449 $459,069
Reinsurance ceded (33,460) (61,196)
--------- --------
Net losses and loss
adjustment expenses $ 476,989 $397,873
========= ========
4. Cash Dividends
During the first quarter of 2003, 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
Recoveries of income taxes previously paid totaled $32,224,000 and
$22,199,000 in the first quarters of 2003 and 2002, respectively.
-6-
6. Segment Information
The following tables present a summary of comparative financial data by
segment:
International
-------------------
Domestic Europe(2) Other Consolidated
-------- --------- ------- ------------
(in thousands)
Three Months Ended March 31, 2003:
Net premiums written $418,135 $270,668 $79,278 $768,081
Net premiums earned 401,336 219,896 70,935 692,167
Net investment income 45,985 15,248 3,381 64,614
Revenues(1) 446,834 235,299 75,186 757,319
Net losses and loss adjustment expenses 272,411 159,183 45,395 476,989
Underwriting expenses(3) 122,783 64,650 31,511 218,944
Adjusted underwriting profit (loss)(4) 10,778 7,660 (4,052) 14,386
Income before income taxes 55,796 23,407 5 79,208
Three Months Ended March 31, 2002:
Net premiums written $306,979 $197,903 $58,673 $563,555
Net premiums earned 304,715 191,867 59,421 556,003
Net investment income 47,530 11,759 2,743 62,032
Revenues(1) 346,823 203,626 62,671 613,120
Net losses and loss adjustment expenses 206,383 147,525 43,965 397,873
Underwriting expenses(3) 89,242 42,236 18,598 150,076
Adjusted underwriting profit (loss)(4) 10,163 3,131 (3,277) 10,017
Income (loss) before income taxes 51,843 14,825 (14) 66,654
- ----------
(1) Net revenues from affiliates approximate $163,000 and $44,000 for the three
months ended March 31, 2003 and 2002, respectively, and are included
primarily in Domestic and, in 2003 only, International-Europe revenues.
(2) Includes revenues from the London, England office of $132,828 and $128,338
for the three months ended March 31, 2003 and 2002, respectively.
(3) Underwriting expenses represent the sum of net commissions and other
operating expenses.
(4) Adjusted underwriting profit (loss) represents net premiums earned less net
losses and loss adjustment expenses and underwriting expenses, plus (minus)
the increase (decrease) in deferred acquisition costs.
7. Other Invested Assets
Other invested assets includes $395.3 million and $90.3 million as of March
31, 2003 and December 31, 2002, respectively, representing the market value of
an investment in a limited duration bond fund managed by a subsidiary of
American International Group, Inc. (AIG).
8. Related Party Transactions
Approximately $191.6 million (21.3 percent) and $65.6 million (9.9 percent)
of gross premiums written by TRH in the first quarters of 2003 and 2002,
respectively, were attributable to reinsurance purchased by subsidiaries of AIG.
The great majority of the increase in such premiums resulted from an increase in
certain business written by AIG subsidiaries with the understanding by both the
respective AIG subsidiary and TRH that virtually all of such business will be
reinsured by TRH.
-7-
9. Change in Accounting Principle and Disclosure of Stock-Based Compensation
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 Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." TRH was also required to disclose the
pro forma impact on net income had all stock compensation cost been charged to
earnings in accordance with the fair value based method prescribed in SFAS No.
123.
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. Accordingly, net income for the first quarter of 2003 reflects
stock-based compensation expenses primarily related to stock options granted in
2003. The impact of adopting the recognition provisions of SFAS No. 123 was not
material to net income, financial condition or cash flows. Pursuant to APB No.
25, no stock-based compensation expenses were recognized in the first quarter of
2002. Had compensation cost been charged to earnings in accordance with the fair
value based method as prescribed in SFAS No. 123 for all outstanding stock-based
compensation awards (occurring both before and after adoption of the recognition
provisions of SFAS No. 123), TRH's net income and net income per common share
(on a pro forma basis) would have been as follows:
Three Months Ended
March 31,
-----------------
2003 2002
------- -------
(in thousands, except per share data)
Net income:
As reported $62,828 $52,923
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 88 --
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects (861) (708)
------- -------
Pro forma $62,055 $52,215
======= =======
Net income per common share:
As reported:
Basic $ 1.20 $ 1.01
Diluted 1.19 1.00
Pro forma:
Basic 1.18 1.00
Diluted 1.18 0.99
While the pro forma impact of applying the recognition provisions to all
award grants are disclosed, the charges to income in the first quarter of 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 compensation issued or granted prior to January 1, 2003.
-8-
10. Accounting Standard
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51." FIN 46 requires a variable interest entity
(VIE) to be consolidated by its primary beneficiary if such VIE has (i) equity
that is insufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, or (ii) equity
investors that cannot make significant decisions about the entity's operations,
or that do not absorb the expected losses or receive the expected returns of
the entity. The primary beneficiary of a VIE is the party that has a majority
of the expected losses or a majority of the expected residual returns of the
VIE, or both. All other entities are evaluated for consolidation under existing
guidance. FIN 46 also requires disclosure of significant VIEs for which a
company is not the primary beneficiary.
TRH is required to apply FIN 46 to VIEs created after January 31, 2003, and
to VIEs in which TRH obtained an interest after that date in the first quarter
of 2003. The application of FIN 46 did not have a material effect on results of
operations, financial condition or cash flows in the current quarter.
For VIEs in which TRH holds a variable interest that it acquired before
February 1, 2003 and for which it is the primary beneficiary, the consolidation
requirements of FIN 46 first apply to the fiscal quarter ended September 30,
2003. For any VIE that must be consolidated under FIN 46 that was created before
February 1, 2003, the assets, liabilities and noncontrolling interest of the VIE
would be initially measured at their "carrying" amounts with any difference
between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change.
While TRH continues to analyze the effects of FIN 46, management presently
believes that the application of FIN 46 will not have a material effect on its
results of operations, financial condition or cash flows.
-9-
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.
-10-
Part I - Item 2
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARCH 31, 2003
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
March 31,
------------------------
2003 2002 Change
------ ------ ------
(dollars in millions)
Net premiums written $768.1 $563.6 36.3%
Net premiums earned 692.2 556.0 24.5
Net investment income 64.6 62.0 4.2
Net premiums written for the first quarter of 2003 significantly exceeded
the comparable 2002 amount principally as a result of increases in both domestic
and international treaty business. Significant domestic treaty net premiums
written growth in the first quarter of 2003 compared to the first quarter of
2002 occurred in specialty casualty (principally medical malpractice, directors'
and officers' liability and professional liability) lines. The increase in first
quarter 2003 versus first quarter 2002 international treaty net premiums written
(the majority of which emanated from the London office and, to a lesser extent,
Trans Re Zurich) was primarily caused by significant increases in property and
automobile liability lines. Increases in net premiums written in the 2003 period
as compared to the same prior year period resulted from rate increases and, to a
lesser extent, increased capacity provided. Generally, reasons for increases in
gross premiums written between years are similar to those for net premiums
written as discussed above.
International business represented 45.6 percent of worldwide net premiums
written for the first quarter of 2003 compared to 45.5 percent for the
respective 2002 quarter. On a worldwide basis, casualty lines business
represented 81.4 percent of net premiums written for the first three months of
2003 versus 81.6 percent in the comparable 2002 period. The balance represented
property lines.
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. 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.
With respect to the market environment, rates, terms and conditions
continue to be favorable with improvements still being achieved in many lines,
most significantly in certain specialty casualty classes. Nevertheless, the
reinsurance marketplace worldwide remains competitive, with significant
additional capital having entered the market, and Transatlantic Holdings, Inc.
and its subsidiaries (collectively, TRH) cannot predict, with any reasonable
certainty, future market conditions.
The increase in net investment income for the first quarter of 2003 versus
the comparable 2002 period was generally due to the impact of the weakening U.S.
dollar compared to certain currencies in which TRH's net investment income is
earned and to the investment of significant positive operating cash flow
generated in recent periods, offset, in part, by declining investment yields,
particularly from the fixed maturity portfolio, and by increased investment
balances towards the end of the first quarter of 2003 in a limited duration
liquid investment (i.e., the limited duration bond fund included in other
invested assets) that generates a lower yield than longer-term fixed maturities.
(See discussion of cash flow and investment activity under FINANCIAL CONDITION
AND LIQUIDITY.)
-11-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2003
Pre-tax realized net capital gains (losses) totaled $0.5 million and ($4.9)
million for the first quarters of 2003 and 2002, respectively. Such gains and
losses are generally the result of investment dispositions which reflect TRH's
investment and tax planning strategies to maximize after-tax income. In the
first quarter of 2003 only, realized net capital gains include write-downs
totaling $3.1 million and $3.8 million of equities available for sale and fixed
maturities available for sale, respectively, related to certain of such
securities that, in the opinion of management, had experienced a decline in
market value that was other than temporary.
The following table presents loss and loss adjustment expense ratios,
underwriting expense ratios and combined ratios for consolidated TRH, and
separately for its domestic and international components, for the periods
indicated:
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Consolidated:
Loss and loss adjustment
expense ratio 68.9 71.6
Underwriting expense ratio 28.5 26.6
Combined ratio 97.4 98.2
- --------------------------------------------------
Domestic:
Loss and loss adjustment
expense ratio 67.9 67.7
Underwriting expense ratio 29.3 29.1
Combined ratio 97.2 96.8
International:
Loss and loss adjustment
expense ratio 70.3 76.2
Underwriting expense ratio 27.5 23.7
Combined ratio 97.8 99.9
The combined ratio represents the sum of the ratio of net losses and loss
adjustment expenses divided by net premiums earned (loss and loss adjustment
expense ratio) and the ratio of the sum of net commissions and other operating
expenses divided by net premiums written (underwriting expense ratio). The
combined ratio and its components are presented in accordance with principles
prescribed by insurance regulatory authorities as these are standard measures in
the insurance and reinsurance industries.
No significant catastrophe losses occurred in the first quarter of either
2003 or 2002. The loss and loss adjustment expense ratio for consolidated TRH
improved in the first quarter of 2003 compared to the first quarter of 2002
principally as a result of improved loss experience, year over year,
particularly in international operations, as well as general improvements in
rates, terms and conditions.
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.
-12-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2003
The underwriting expense ratio for consolidated TRH increased in the 2003
first quarter compared to the year ago quarter as the net commissions component
increased by 2.2, offset, in part, by a 0.3 decrease in the other operating
expense component. With respect to the net commissions component, the increase
in the first quarter of 2003 is generally due to a slight change in the mix of
business, particularly in international operations, between periods. With
respect to the other operating expense component, the decrease in the first
quarter of 2003 compared to the same 2002 quarter is due to the fact that
other operating expenses are increasing at a slower rate than net premiums
written.
The increase in deferred acquisition costs in the first quarter of 2003
considerably exceeded the comparable prior year amount. As a larger portion of
premiums written in the first quarter of 2003 were unearned as compared to the
same 2002 quarter, a related, and larger portion of acquisition costs were
deferred in the 2003 first quarter compared to the year ago quarter. Note that
acquisition costs (consisting primarily of net commissions incurred) are charged
to earnings over the period in which the related premiums are earned.
Income before income taxes increased to $79.2 million in the first quarter
of 2003 versus $66.7 million in the first quarter of 2002. The increase in
income before income taxes in the 2003 first quarter versus the comparable 2002
quarter resulted primarily from the movement to realized net capital gains in
2003 from realized net capital losses in 2002 and improved underwriting results
in the first quarter of 2003 compared to the year ago quarter.
For a discussion of fluctuations in results by segment see SEGMENT RESULTS
below.
Income tax expenses totaled $16.4 million and $13.7 million for the first
quarters of 2003 and 2002, respectively. The effective tax rate, which
represents income taxes divided by income before income taxes, was 20.7 percent
for the first quarter of 2003 compared to 20.6 percent for the comparable year
ago period.
Net income for the first quarter of 2003 increased to $62.8 million, or
$1.19 per common share (diluted), compared to net income of $52.9 million, or
$1.00 per common share (diluted), in the 2002 first quarter. Net income includes
after-tax net realized capital gains (losses) of $0.3 million and ($3.2) million
in the first quarters of 2003 and 2002, respectively. Reasons for the increases
in net income between periods are as discussed above.
In the first quarter of 2003, the Board of Directors of Transatlantic
Holdings, Inc. declared a dividend of $0.10 per common share to stockholders of
record as of June 6, 2003, payable on June 13, 2003.
SEGMENT RESULTS
Domestic - Comparing the results of the first quarter of 2003 with the same
prior year period, Domestic revenues increased over the prior year due primarily
to increases in net premiums earned, as discussed earlier in the OPERATIONAL
REVIEW. Income before income taxes in the 2003 first quarter increased compared
to the same 2002 period due to a reduction of realized net capital losses,
partially offset by a decrease in net investment income principally related to
fixed maturities.
International - Europe (London and Paris branches and Trans Re Zurich) -
Comparing the results of the first quarter of 2003 with the same prior year
period, European revenues increased compared to the prior year primarily due to
increases in net premiums earned in Trans Re Zurich and Paris. These increases
generally occurred in property lines. Income before income taxes for the first
quarter of 2003 increased compared to the same prior year period due primarily
to improved underwriting results and increased net investment income.
International - Other (Miami (serving Latin America and the Caribbean),
Toronto, Hong Kong and Tokyo branches) - Comparing the results of the first
quarter of 2003 with the same prior year period, International-Other revenues
increased due, in large part, to increases in net premiums earned in Toronto and
Tokyo in the 2003 first quarter versus the comparable 2002 period. These
increases generally occurred in property lines.
-13-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2003
FINANCIAL CONDITION AND LIQUIDITY. The increase in cash and invested assets at
March 31, 2003 compared to December 31, 2002 was due, in large part, to positive
cash flow from operations during the first quarter of 2003 and an increase in
securities acquired in the first quarter of 2003 for which payments occurred
after quarter-end (see corresponding increase in payable for securities in
course of settlement at March 31, 2003 as compared to December 31, 2002.) With
respect to the components of cash and invested assets, other invested assets
grew significantly, principally as a result of an increase in the balance of the
limited duration bond fund of $305.0 million. (See Note 7 of Notes to Condensed
Consolidated Financial Statements.) Also during the first quarter of 2003, TRH
purchased certain fixed maturities which are classified as held-to-maturity and
carried at amortized cost as TRH has the positive intent and ability to hold
each of these securities to maturity. The duration of the fixed maturity
portfolio was 4.7 years as of March 31, 2003.
Stockholders' equity totaled $2,080.2 million at March 31, 2003, a net
increase of $49.5 million from year-end 2002. The increase in stockholders'
equity during 2003 is primarily composed of net income of $62.8 million, offset,
in part, by a decrease in accumulated other comprehensive income of $9.2 million
(see Consolidated Statements of Comprehensive Income) and dividends declared of
$5.2 million.
The abovementioned decrease in accumulated other comprehensive income
consisted of a net unrealized currency translation loss, net of income taxes, of
$13.4 million, partially offset by net unrealized appreciation of investments,
net of income taxes, of $4.1 million. The net unrealized appreciation of
investments is composed principally of an increase of $4.6 million from
unrealized appreciation of equities, partially offset by a decrease of $0.6
million from unrealized depreciation 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 related investments and other factors.
Operating cash flow for the first quarter of 2003 was $287.9 million, an
increase of $79.8 million over the same 2002 period. This increase was caused
largely by increased net premiums written, net of commissions. Management
believes that the liquidity of TRH has not materially changed since the end of
2002. A portion of operating cash flow, namely, $89.7 million and $86.2 million
was derived from international operations in the first quarters of 2003 and
2002, respectively.
Generally, paid losses have been increasing in more recent years as a
result of an increase in premium volume and a shift towards lines with shorter
payment patterns. 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 ESTIMATES
TRH considers among its most important accounting policies those policies
with respect to loss reserves, net of reinsurance recoverable thereon, 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 the Transatlantic Holdings, Inc. Form 10-K for
the year ended December 31, 2002 in Management's Discussion and Analysis of
Financial Condition and Results of Operations and in the Notes to Consolidated
Financial Statements.
-14-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2003
ACCOUNTING STANDARDS
CHANGE IN ACCOUNTING PRINCIPLE - ADOPTION OF RECOGNITION PROVISIONS OF
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 123. 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." TRH was also required to
disclose the pro forma impact on net income had all stock compensation cost been
charged to earnings in accordance with the fair value based method prescribed in
SFAS No. 123.
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. Accordingly, net income for the first quarter of 2003 reflects
stock-based compensation expenses primarily related to stock options granted in
2003. The impact of adopting the recognition provisions of SFAS No. 123 was not
material to net income, financial condition or cash flows. (See Note 9 of Notes
to Condensed Consolidated Financial Statements.)
OTHER. In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51." FIN 46 requires a variable
interest entity (VIE) to be consolidated by its primary beneficiary if such
VIE has (i) equity that is insufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties, or (ii) equity investors that cannot make significant decisions about
the entity's operations, or that do not absorb the expected losses or receive
the expected returns of the entity. The primary beneficiary of a VIE is the
party that has a majority of the expected losses or a majority of the expected
residual returns of the VIE, or both. All other entities are evaluated for
consolidation under existing guidance. FIN 46 also requires disclosure of
significant VIEs for which a company is not the primary beneficiary.
TRH is required to apply FIN 46 to VIEs created after January 31, 2003, and
to VIEs in which TRH obtained an interest after that date in the first quarter
of 2003. The application of FIN 46 did not have a material effect on results of
operations, financial condition or cash flows in the current quarter.
For VIEs in which TRH holds a variable interest that it acquired before
February 1, 2003 and for which it is the primary beneficiary, the consolidation
requirements of FIN 46 first apply to the fiscal quarter ended September 30,
2003. For any VIE that must be consolidated under FIN 46 that was created before
February 1, 2003, the assets, liabilities and noncontrolling interest of the VIE
would be initially measured at their "carrying" amounts with any difference
between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change.
While TRH continues to analyze the effects of FIN 46, management presently
believes that the application of FIN 46 will not have a material effect on its
results of operations, financial condition or cash flows.
-15-
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 three months of 2003 and
for the year ended December 31, 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 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 three months ended March 31, 2003 and for the
year ended December 31, 2002. VaR with respect to combined operations cannot be
derived by aggregating the individual risk amounts presented herein.
Market Risk
(in millions)
2003 2002
--------------------------------- -----------------------------------
As of As of
March 31, Average High Low December 31, Average High Low
--------------------------------- -----------------------------------
Combined $110 $108 $110 $105 $105 $107 $118 $96
Interest rate 109 107 109 104 104 104 113 98
Equity 50 49 50 48 48 50 55 45
Currency 4 4 4 3 3 2 3 2
-16-
Part I - Item 4
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission. The Chief Executive Officer and the Chief Financial Officer
have reviewed the effectiveness of our disclosure controls and procedures within
the last ninety days and have concluded that the disclosure controls and
procedures are effective. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the last day they were evaluated by our Chief Executive Officer
and Chief Financial Officer.
-17-
Part II - Item 6. Exhibits and Reports on Form 8-K
(a) There are no exhibits included with this filing.
(b) In a Current Report on Form 8-K filed on February 4, 2003,
Transatlantic Holdings, Inc. reported the issuance of a press
release (attached as an exhibit to that Form 8-K) on February 3,
2003 announcing an increase in loss reserves resulting in a $65
million after-tax charge to fourth quarter 2002 earnings.
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 May 14, 2003
-18-
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Robert F. Orlich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Transatlantic
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ ROBERT F. ORLICH
-------------------------------------
Robert F. Orlich
President and Chief Executive Officer
-19-
CERTIFICATION
I, Steven S. Skalicky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Transatlantic
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ STEVEN S. SKALICKY
----------------------------------------------------
Steven S. Skalicky
Executive Vice President and Chief Financial Officer
-20-