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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, 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
-------
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 June 30, 2003. 52,413,101
----------
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, 2003 (unaudited)
and December 31, 2002....................................... 1
Consolidated Statements of Operations for the three and six
months ended June 30, 2003 and 2002 (unaudited)............. 2
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 (unaudited)............. 3
Consolidated Statements of Comprehensive Income for the three
and six months ended June 30, 2003 and 2002 (unaudited)..... 4
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. 5
Cautionary Statement Regarding Forward-Looking Information............... 11
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..... 19
ITEM 4. Controls and Procedures........................................ 20
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders............ 21
ITEM 6. Exhibits and Reports on Form 8-K............................... 22
Signatures............................................................... 22
Exhibit Index............................................................ 23
Part I - Item 1
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 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-$475,829) $ 465,491 $ --
Available for sale, at market value (amortized cost: 2003-$4,263,911;
2002-$4,181,354) (pledged, at market value: 2003-$337,884;
2002-$327,305) 4,510,795 4,361,489
Equities:
Common stocks available for sale, at market value (cost:
2003-$482,521; 2002-$477,738) (pledged, at market
value: 2003-$23,424; 2002-$13,421) 490,592 433,670
Nonredeemable preferred stocks available for sale, at market value
(cost: 2003-$28,542; 2002-$26,205) 28,530 26,199
Other invested assets 244,034 278,311
Short-term investment of funds received under securities loan agreements 369,566 347,647
Short-term investments, at cost which approximates market value 26,988 12,812
Cash and cash equivalents 185,810 127,402
----------- -----------
Total investments and cash 6,321,806 5,587,530
Accrued investment income 89,808 80,658
Premium balances receivable, net 400,674 350,214
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses:
Affiliates 199,477 191,704
Other 679,428 625,884
Deferred acquisition costs 160,740 132,967
Prepaid reinsurance premiums 99,095 65,809
Federal income tax recoverable 16,119 51,199
Deferred income taxes 145,827 170,822
Other assets 23,765 29,738
----------- -----------
Total assets $ 8,136,739 $ 7,286,525
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 4,386,109 $ 4,032,584
Unearned premiums 878,703 707,916
Reinsurance balances payable 152,992 109,082
Payable under securities loan agreements 369,566 347,647
Payable for securities in course of settlement 73,013 25,352
Other liabilities 63,401 33,177
----------- -----------
Total liabilities 5,923,784 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: 2003-53,277,301; 2002-53,225,149 53,277 53,225
Additional paid-in capital 194,770 192,141
Accumulated other comprehensive income 113,147 60,644
Retained earnings 1,866,204 1,739,200
Treasury Stock, at cost; 864,200 shares of common stock (14,443) (14,443)
----------- -----------
Total stockholders' equity 2,212,955 2,030,767
----------- -----------
Total liabilities and stockholders' equity $ 8,136,739 $ 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 Six Months Ended
June 30, June 30,
------------------- -----------------------
2003 2002 2003 2002
-------- -------- ---------- ----------
(in thousands, except per share data)
Revenues:
Net premiums written $802,850 $592,026 $1,570,931 $1,155,581
Increase in net unearned premiums (40,087) (40,198) (116,001) (47,750)
-------- -------- ---------- ----------
Net premiums earned 762,763 551,828 1,454,930 1,107,831
Net investment income 68,481 64,354 133,095 126,386
Realized net capital gains (losses) 731 3,369 1,269 (1,546)
-------- -------- ---------- ----------
831,975 619,551 1,589,294 1,232,671
-------- -------- ---------- ----------
Expenses:
Net losses and loss adjustment expenses 545,201 400,944 1,022,190 798,817
Net commissions 183,385 137,670 386,945 274,480
Other operating expenses 15,852 13,636 31,236 26,902
Increase in deferred acquisition costs (9,621) (9,651) (27,773) (11,614)
-------- -------- ---------- ----------
734,817 542,599 1,412,598 1,088,585
-------- -------- ---------- ----------
Operating income 97,158 76,952 176,696 144,086
Other (deductions) income (764) 517 (1,094) 37
-------- -------- ---------- ----------
Income before income taxes 96,394 77,469 175,602 144,123
Income taxes 21,216 15,960 37,596 29,691
-------- -------- ---------- ----------
Net income $ 75,178 $ 61,509 $ 138,006 $ 114,432
======== ======== ========== ==========
Net income per common share:
Basic $ 1.43 $ 1.18 $ 2.63 $ 2.19
Diluted 1.43 1.16 2.62 2.17
Dividends per common share 0.110 0.100 0.210 0.196
Weighted average common shares outstanding:
Basic 52,402 52,291 52,388 52,282
Diluted 52,739 52,801 52,715 52,808
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
(Unaudited)
Six Months Ended
June 30,
---------------------
2003 2002
--------- ---------
(in thousands)
Net cash provided by operating activities $ 503,523 $ 304,756
--------- ---------
Cash flows from investing activities:
Proceeds of fixed maturities available for sale sold 533,508 343,600
Proceeds of fixed maturities available for sale redeemed or matured 227,195 169,365
Proceeds of equities sold 316,586 345,897
Purchase of fixed maturities held to maturity (465,812) --
Purchase of fixed maturities available for sale (788,335) (763,654)
Purchase of equities (341,337) (370,854)
Net sale (purchase) of other invested assets 40,954 (45,185)
Net (purchase) sale of short-term investment of funds
received under securities loan agreements (21,919) 58,477
Net (purchase) sale of short-term investments (14,177) 2,279
Change in other liabilities for securities in course of settlement 47,661 30,527
Other, net (261) 3,438
--------- ---------
Net cash used in investing activities (465,937) (226,110)
--------- ---------
Cash flows from financing activities:
Net funds received (disbursed) under securities loan agreements 21,919 (58,477)
Dividends to stockholders (10,451) (10,039)
Proceeds from common stock issued 2,327 1,666
Other -- (1,717)
--------- ---------
Net cash provided by (used in) financing activities 13,795 (68,567)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 7,027 2,556
--------- ---------
Change in cash and cash equivalents 58,408 12,635
Cash and cash equivalents, beginning of period 127,402 124,214
--------- ---------
Cash and cash equivalents, end of period $ 185,810 $ 136,849
========= =========
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,
------------------ -------------------
2003 2002 2003 2002
-------- ------- -------- --------
(in thousands)
Net income $ 75,178 $61,509 $138,006 $114,432
-------- ------- -------- --------
Other comprehensive income (loss):
Net unrealized appreciation (depreciation) of investments:
Net unrealized holding gains (losses) 113,337 5,327 120,258 (37,178)
Related income tax effect (39,668) (1,864) (42,090) 13,012
Reclassification adjustment for (gains) losses included in
net income (731) (3,369) (1,269) 1,546
Related income tax effect 256 1,179 444 (541)
-------- ------- -------- --------
73,194 1,273 77,343 (23,161)
-------- ------- -------- --------
Net unrealized currency translation (loss) gain (17,618) 19,696 (38,216) 34,612
Related income tax effect 6,167 (6,894) 13,376 (11,932)
-------- ------- -------- --------
(11,451) 12,802 (24,840) 22,680
-------- ------- -------- --------
Other comprehensive income (loss) 61,743 14,075 52,503 (481)
-------- ------- -------- --------
Comprehensive income $136,921 $75,584 $190,509 $113,951
======== ======= ======== ========
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, 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 and Form 10-Q filing for the
quarter ended March 31, 2003.
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,
------------------ -------------------
2003 2002 2003 2002
------- ------- -------- --------
(in thousands, except per share data)
Net income (numerator) $75,178 $61,509 $138,006 $114,432
======= ======= ======== ========
Weighted average common shares outstanding
used in the computation of net income per share:
Average shares issued 53,266 53,155 53,252 53,146
Less: Average shares in treasury 864 864 864 864
------- ------- -------- --------
Average outstanding shares - basic (denominator) 52,402 52,291 52,388 52,282
Average potential shares, principally stock options 337 510 327 526
------- ------- -------- --------
Average outstanding shares - diluted (denominator) 52,739 52,801 52,715 52,808
======= ======= ======== ========
Net income per common share:
Basic $ 1.43 $ 1.18 $ 2.63 $ 2.19
Diluted 1.43 1.16 2.62 2.17
-5-
3. 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 in the second quarter and first six months of
2003 reflects stock-based compensation expenses primarily related to stock
options granted in 2003. Such expenses are included in other income
(deductions). 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 second
quarter or first six months 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 Six Months Ended
June 30, June 30,
------------------ -------------------
2003 2002 2003 2002
------- ------- -------- --------
(in thousands, except per share data)
Net income:
As reported $75,178 $61,509 $138,006 $114,432
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 217 -- 305 --
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects (944) (761) (1,805) (1,469)
------- ------- -------- --------
Pro forma $74,451 $60,748 $136,506 $112,963
======= ======= ======== ========
Net income per common share:
As reported:
Basic $ 1.43 $ 1.18 $ 2.63 $ 2.19
Diluted 1.43 1.16 2.62 2.17
Pro forma:
Basic 1.42 1.16 2.61 2.16
Diluted 1.41 1.15 2.59 2.14
While the pro forma impact of applying the recognition provisions to all
award grants are disclosed, the charges to income in the second quarter and
first six months 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.
-6-
4. 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,
--------------------- -----------------------
2003 2002 2003 2002
--------- --------- ---------- ----------
(in thousands)
Gross premiums written $ 865,431 $ 691,883 $1,765,847 $1,353,754
Reinsurance ceded (62,581) (99,857) (194,916) (198,173)
--------- --------- ---------- ----------
Net premiums written $ 802,850 $ 592,026 $1,570,931 $1,155,581
========= ========= ========== ==========
Gross premiums earned $ 837,267 $ 660,055 $1,616,560 $1,296,069
Reinsurance ceded (74,504) (108,227) (161,630) (188,238)
--------- --------- ---------- ----------
Net premiums earned $ 762,763 $ 551,828 $1,454,930 $1,107,831
========= ========= ========== ==========
Gross incurred losses and
loss adjustment expenses $ 650,668 $ 449,686 $1,161,117 $ 908,755
Reinsurance ceded (105,467) (48,742) (138,927) (109,938)
--------- --------- ---------- ----------
Net losses and loss
adjustment expenses $ 545,201 $ 400,944 $1,022,190 $ 798,817
========= ========= ========== ==========
5. Cash Dividends
During the second quarter of 2003, the Board of Directors of Transatlantic
Holdings, Inc. declared a dividend of $0.11 per common share, or approximately
$5,750,000 in the aggregate.
6. Income Taxes
Income taxes paid, net, in the second quarter totaled $37,860,000 and
$31,967,000 in 2003 and 2002, respectively. For the 2003 and 2002 six month
periods, income taxes paid, net, totaled $5,636,000 and $9,767,000,
respectively. Amounts above are net of recoveries of income taxes previously
paid, which were significant in each of the first quarters of 2003 and 2002.
-7-
7. Segment Information
The following tables present a summary of comparative financial data by
segment:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands)
Domestic:
Net premiums written $441,504 $315,202 $859,639 $622,181
Net premiums earned 391,872 293,024 793,208 597,739
Net investment income 48,408 45,526 94,393 93,056
Revenues(1) 439,804 342,787 886,638 689,610
Net losses and loss adjustment expenses 281,758 192,368 554,169 398,751
Underwriting expenses(2) 108,663 84,822 231,446 174,064
Underwriting profit(3) 12,415 21,107 23,193 31,270
Income before income taxes 59,773 70,403 115,569 122,246
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands)
International-Europe:
Net premiums written $275,070 $206,075 $545,738 $403,978
Net premiums earned 293,344 201,863 513,240 393,730
Net investment income 16,555 15,813 31,803 27,572
Revenues(1)(4) 309,823 217,693 545,122 421,319
Net losses and loss adjustment expenses 220,043 159,681 379,226 307,206
Underwriting expenses(2) 66,387 44,894 131,037 87,130
Underwriting profit (loss)(3) 3,410 (1,016) 11,070 2,115
Income before income taxes(4) 19,807 15,213 43,214 30,038
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2003 2002 2003 2002
------- -------- -------- --------
(in thousands)
International-Other:
Net premiums written $86,276 $ 70,749 $165,554 $129,422
Net premiums earned 77,547 56,941 148,482 116,362
Net investment income 3,518 3,015 6,899 5,758
Revenues(1) 82,348 59,071 157,534 121,742
Net losses and loss adjustment expenses 43,400 48,895 88,795 92,860
Underwriting expenses(2) 24,187 21,590 55,698 40,188
Underwriting profit (loss)(3) 12,121 (10,862) 8,069 (14,139)
Income (loss) before income taxes 16,814 (8,147) 16,819 (8,161)
-8-
7. Segment Information (continued)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------------
2003 2002 2003 2002
-------- -------- ---------- ----------
(in thousands)
Consolidated:
Net premiums written $802,850 $592,026 $1,570,931 $1,155,581
Net premiums earned 762,763 551,828 1,454,930 1,107,831
Net investment income 68,481 64,354 133,095 126,386
Revenues(1)(4) 831,975 619,551 1,589,294 1,232,671
Net losses and loss adjustment expenses 545,201 400,944 1,022,190 798,817
Underwriting expenses(2) 199,237 151,306 418,181 301,382
Underwriting profit(3) 27,946 9,229 42,332 19,246
Income before income taxes(4) 96,394 77,469 175,602 144,123
- ----------
(1) Net revenues from affiliates approximate $133,000 and $69,000 for the three
months ended June 30, 2003 and 2002, respectively, and $296,000 and
$112,000 for the six months ended June 30, 2003 and 2002, respectively, and
are included primarily in Domestic and International-Europe revenues.
(2) Underwriting expenses represent the sum of net commissions and other
operating expenses.
(3) 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.
(4) Includes revenues from the London, England office of $193,507 and $120,688
for the three months ended June 30, 2003 and 2002, respectively, and
$326,335 and $249,026 for the six months ended June 30, 2003 and 2002,
respectively.
8. Related Party Transactions
Approximately $167.2 million (19.3 percent) and $88.8 million (12.8
percent) in the second quarters of 2003 and 2002, respectively, and
approximately $358.8 million (20.3 percent) and $154.4 million (11.4 percent)
for the six months ended June 30, 2003 and 2002, respectively, of gross premiums
written by TRH were attributable to reinsurance purchased by other subsidiaries
of American International Group, Inc. (AIG). The great majority of such gross
premiums written were recorded in auto liability, other liability, property
and aircraft lines. Of the amounts above, $69.9 million and $34.9 million in the
second quarters of 2003 and 2002, respectively, and $194.5 million and $47.6
million in the six months ended June 30, 2003 and 2002, respectively, represent
premiums resulting from certain insurance business written by AIG subsidiaries
that, by prearrangement with TRH, is almost entirely reinsured by TRH.
-9-
9. 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 was required to apply FIN 46 to VIEs created after January 31, 2003,
and to VIEs in which TRH obtained an interest after that date, beginning 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 second
quarter or first six months of 2003.
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.
Management believes that the application of FIN 46 will not have a material
effect on its results of operations, financial condition or cash flows.
-10-
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.
-11-
Part I - Item 2
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2003
CRITICAL ACCOUNTING ESTIMATES
The preparation of Transatlantic Holdings, Inc. and its subsidiaries
(collectively, TRH) financial statements requires the use of estimates and
judgments that affect the reported amounts and related disclosures. We rely on
historical experience and on various other assumptions, that we believe to be
reasonable under the circumstances, to make judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ materially from these estimates.
TRH believes its most critical accounting estimates are those with respect
to unpaid losses and loss adjustment expenses net of reinsurance recoverable
thereon ("loss reserves") and deferred acquisition costs as they require
management's most significant exercise of judgment on both a quantitative and
qualitative basis used in the preparation of TRH's financial statements and
footnotes. These accounting estimates require the use of assumptions about
certain matters that are highly uncertain at the time of estimation.
Loss Reserves - The reserving process is inherently difficult and
subjective, especially in view of changes in the legal and tort environment
which impact the development of loss reserves, and therefore quantitative
techniques frequently have to be supplemented by subjective considerations and
managerial judgment. Trends that have affected development of liabilities in the
past may not necessarily occur or affect development to the same degree in the
future. While this process is difficult for ceding companies, the inherent
uncertainties of estimating reserves are even greater for the reinsurer, due
primarily to the longer term nature of most reinsurance business, the diversity
of development patterns among different types of reinsurance treaties or
facultative contracts and the necessary reliance on the ceding companies for
information regarding reported claims and differing reserving practices among
ceding companies. In addition, loss reserves are estimated using data that
include reported losses of more recent accident years of long tail casualty
lines that have limited statistical credibility. During the loss settlement
period, which can be many years in duration, additional facts regarding
individual claims and trends usually become known. As these become apparent, it
usually becomes necessary to refine and adjust the reserves upward or downward
and even then the ultimate net liability may be materially different from the
revised estimates.
Deferred Acquisition Costs - Anticipated losses and loss adjustment
expenses and estimated remaining costs of servicing the contracts are considered
in determining acquisition costs to be deferred. Anticipated investment income
is not considered in the deferral of acquisition costs. Recoverability of
deferred acquisition costs is contingent upon the underlying insurance
operations being profitable going forward.
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.
-12-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 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 Six Months Ended
June 30, June 30,
------------------------ ----------------------------
2003 2002 Change 2003 2002 Change
------ ------ ------ -------- -------- ------
(dollars in millions)
Net premiums written $802.9 $592.0 35.6% $1,570.9 $1,155.6 35.9%
Net premiums earned 762.8 551.8 38.2 1,454.9 1,107.8 31.3
Net investment income 68.5 64.4 6.4 133.1 126.4 5.3
Net premiums written for the second quarter and first six months of 2003
significantly exceeded the comparable 2002 periods principally as a result of
increases in both domestic and international treaty business. Significant growth
in domestic treaty net premiums written in the second quarter of 2003 compared
to the second quarter of 2002 occurred in specialty casualty (principally
directors' and officers' liability, professional liability and medical
malpractice) and property lines. The increase in second quarter 2003 versus
second quarter 2002 international treaty net premiums written (the majority of
which emanated from European operations) was primarily caused by significant
increases in property and, to a lesser extent, specialty casualty lines
(principally directors' and officers' liability, professional liability and
medical malpractice). With respect to the comparative six month net premiums
written, significant domestic treaty net premiums written increases in the 2003
period compared to the same prior year period occurred in specialty casualty
(principally directors' and officers' liability, professional liability and
medical malpractice) and, to a lesser extent, property and ocean marine and
aviation lines. Significant increases in international treaty net premiums
written occurred in property and, to a lesser extent, specialty casualty
(principally directors' and officers' liability, professional liability and
medical malpractice) lines principally from European operations. Increases in
net premiums written in the 2003 periods as compared to the same prior year
periods 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 45.3 percent of worldwide net premiums
written for the first six months of 2003 compared to 46.2 percent for the
respective 2002 period. On a worldwide basis, casualty lines business
represented 76.2 percent of net premiums written for the first six months of
2003 versus 79.2 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 principally 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 greater rate increases being achieved in certain
specialty casualty classes. Nevertheless, the reinsurance marketplace worldwide
remains competitive, with significant additional capital having entered the
market since 2001, and TRH cannot predict, with any reasonable certainty, future
market conditions.
-13-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2003
The increase in net investment income for the second quarter and first six
months of 2003 versus the comparable 2002 periods was generally due to the
investment (principally in fixed maturities) of significant positive operating
cash flow generated in recent periods and, to a lesser extent, the impact of the
weakening U.S. dollar compared to certain currencies in which TRH's net
investment income is earned, offset, in part, by declining investment yields,
particularly from the fixed maturity portfolio. For the three and six month
periods ending June 30, 2003, the pre-tax yields on fixed maturities were 4.7
percent and 4.6 percent, respectively, compared to 5.3 percent and 5.4 percent
for the prior year three and six month periods, respectively. The pre-tax yield
on fixed maturities represents annualized pre-tax net investment income from
fixed maturities for the period indicated divided by the average balance sheet
carrying value of the fixed maturity portfolio for such periods. (See discussion
of cash flow and investment activity under FINANCIAL CONDITION AND LIQUIDITY.)
Pre-tax realized net capital gains totaled $0.7 million and $3.4 million
for the second quarters of 2003 and 2002, respectively. For the first six months
of 2003 and 2002, pre-tax realized net capital gains (losses) totaled $1.3
million and ($1.5) million, 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.
Pre-tax realized net capital gains include charges for write-downs, related
to certain of such securities that, in the opinion of management, had
experienced a decline in market value that was other than temporary, totaling
$1.3 million and $0.7 million of equities available for sale and fixed
maturities available for sale, respectively, for the second quarter of 2003 and
write-downs totaling $7.5 million and $1.8 million of equities available for
sale and fixed maturities available for sale, respectively, for the second
quarter of 2002. Pre-tax realized net capital gains (losses) include charges for
write-downs for other than temporary declines in market value totaling $4.4
million and $4.5 million of equities available for sale and fixed maturities
available for sale, respectively, for the first six months of 2003 and
write-downs totaling $7.5 million and $1.8 million of equities available for
sale and fixed maturities available for sale, respectively, for the first six
months of 2002. (See discussion under FINANCIAL CONDITION AND LIQUIDITY for
criteria used in determination of such write-downs.)
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 Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ----- ---- -----
Consolidated:
Loss and loss adjustment
expense ratio 71.5 72.7 70.3 72.1
Underwriting expense ratio 24.8 25.5 26.6 26.1
Combined ratio 96.3 98.2 96.9 98.2
- -------------------------------------------------------------------
Domestic:
Loss and loss adjustment
expense ratio 71.9 65.7 69.9 66.7
Underwriting expense ratio 24.6 26.9 26.9 28.0
Combined ratio 96.5 92.6 96.8 94.7
International:
Loss and loss adjustment
expense ratio 71.0 80.6 70.7 78.4
Underwriting expense ratio 25.1 24.0 26.3 23.9
Combined ratio 96.1 104.6 97.0 102.3
-14-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2003
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.
The loss and loss adjustment expense ratios for consolidated TRH improved
in the second quarter and first six months of 2003 compared to the same 2002
periods principally as a result of improved loss experience in international
operations, year over year, offset, in part, by a deterioration of loss
experience from domestic operations. Overall, the improvements in rates, terms
and conditions in recent periods have, and may continue to, benefit results for
the near term, absent the impact of any unusual or unanticipated loss events.
Results for the second quarters and first six month periods of 2003 and 2002
contained no significant losses related to catastrophes occurring in those
periods.
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 for consolidated TRH decreased in the 2003
second quarter compared to the same year ago quarter as the net commissions
component decreased by 0.4 and the other operating expense component declined by
0.3. For the comparable six month periods, the underwriting expense ratio for
2003 increased compared to 2002 as the net commissions component increased by
0.8, offset, in part, by a decrease of 0.3 in the other operating expense
component.
The increase in deferred acquisition costs for the first six months of 2003
considerably exceeded the comparable prior year amount. This significant
difference arose in the first quarter of 2003 compared to the prior year first
quarter. As a larger portion of premiums written in the first six months of 2003
were unearned as compared to the same 2002 period, a related, and larger portion
of acquisition costs were deferred in the first six months of 2003 compared to
the year ago period. 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 $96.4 million in the second quarter
of 2003 versus $77.5 million in the second quarter of 2002. For the six month
periods, income before income taxes increased to $175.6 million in 2003 versus
$144.1 million in 2002. The increase in income before income taxes in the 2003
periods versus the comparable 2002 periods resulted primarily from improved
underwriting results in the 2003 periods compared to the same year ago periods
and, to a much lesser extent, increased investment income generated principally
from the investment of new cash flow from operating activities. Such cash is
principally generated from underwriting (i.e., premiums assumed less premiums
ceded, net of related commissions, net losses and loss adjustment expenses paid
and operating expenses) and investment activities (principally interest and
dividends received, net of related expenses).
For a discussion of fluctuations in results by segment see SEGMENT RESULTS
below.
Income tax expenses totaled $21.2 million and $37.6 million for the three
and six month periods ending June 30, 2003, respectively, compared to income tax
expenses of $16.0 million and $29.7 million, respectively, for the comparable
year ago periods. The effective tax rates, which represent income taxes divided
by income before income taxes, were 22.0 percent and 21.4 percent for the three
and six month periods ending June 30, 2003, respectively, and 20.6 percent in
each of the three and six month periods ending June 30, 2002. The increased
effective tax rates in the 2003 periods versus the comparable 2002 periods
resulted primarily from the fact that income before income taxes is increasing
at a greater rate than tax-exempt investment income year over year.
-15-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2003
Net income for the second quarter of 2003 increased to $75.2 million, or
$1.43 per common share (diluted), compared to net income of $61.5 million, or
$1.16 per common share (diluted), in the 2002 second quarter. Net income for the
first six months of 2003 increased to $138.0 million, or $2.62 per common share
(diluted), compared to net income of $114.4 million, or $2.17 per common share
(diluted), in the same prior year period. Reasons for the increases in net
income between periods are as discussed above.
In the second quarter of 2003, the Board of Directors of Transatlantic
Holdings, Inc. declared a dividend of $0.11 per common share to stockholders of
record as of September 5, 2003, payable on September 12, 2003. This represents a
10 percent increase over the prior quarterly dividend.
SEGMENT RESULTS
Domestic - Comparing the results of each of the three and six months ended
June 30, 2003 with the same prior year periods, Domestic revenues increased over
the prior year due primarily to increases in net premiums written, as discussed
earlier in the OPERATIONAL REVIEW. Income before income taxes in the three and
six month periods ended June 30, 2003 decreased compared to the same 2002
periods due to a slight increase in loss activity (as expressed by the loss and
loss adjustment expense ratio), and for the three month period only, the shift
to realized net capital losses from realized net capital gains, partially offset
by the benefit of a reduced underwriting expense ratio.
International - Europe (London and Paris branches and Trans Re Zurich) -
Comparing the results of each of the three and six months ended June 30, 2003
with the same prior year periods, European revenues increased compared to the
prior year primarily due to increases in net premiums written in each location,
with the largest increase occurring in London. These increases generally
occurred in property and, to a lesser extent, specialty casualty lines. Income
before income taxes for the three and six months ended June 30, 2003 increased
compared to the same prior year periods due primarily to improved underwriting
results and, for the six month period only, an increase in net investment
income.
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 months ended June 30, 2003 with the same prior year periods,
International-Other revenues increased due, in large part, to increases in net
premiums written, net of the change in unearned premiums, in Hong Kong and
Toronto in the 2003 periods versus the comparable 2002 periods. These increases
generally occurred in property lines. Income before income taxes for the three
and six months ended June 30, 2003 increased compared to the same prior year
periods due primarily to improved underwriting results in each location.
FINANCIAL CONDITION AND LIQUIDITY. The increase in cash and invested assets
at June 30, 2003 compared to December 31, 2002 was due, in large part, to
positive cash flow from operations, net unrealized appreciation of fixed
maturities and equities available for sale and the impact of the weakening U.S.
dollar compared to certain currencies in which TRH's investments are denominated
each occurring in the first six months of 2003. Also during that period, 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 5.3 years as of June 30, 2003.
Stockholders' equity totaled $2,213.0 million at June 30, 2003, a net
increase of $182.2 million from year-end 2002. The increase in stockholders'
equity during 2003 is primarily composed of net income of $138.0 million and an
increase in accumulated other comprehensive income of $52.5 million (see
Consolidated Statements of Comprehensive Income), offset, in part, by dividends
declared of $11.0 million.
The abovementioned increase in accumulated other comprehensive income
consisted of net unrealized appreciation of investments, net of income taxes, of
$77.3 million, partially offset by a net unrealized currency translation loss,
net of income taxes, of $24.8 million. The net unrealized appreciation of
investments is composed principally of increases of $43.4 million from
unrealized appreciation of fixed maturities available for sale and $33.9 million
from unrealized appreciation of equities available for sale.
-16-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2003
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.
Management reviews TRH's investments on a continual basis for evidence of
other than temporary declines in market value and exercises its judgment in
making such a determination and calculating the amount of loss recognition (as a
realized net capital loss).
In general, a security is considered a candidate for such a write-down if
it meets any of the following criteria:
o Trading at a significant discount to par, amortized cost (if lower) or
cost for an extended period of time;
o The occurrence of a discrete credit event resulting in (i) the issuer
defaulting on a material outstanding obligation; or (ii) the issuer seeking
protection from creditors under the bankruptcy laws or any similar laws intended
for the court supervised reorganization of insolvent enterprises; or (iii) the
issuer proposing a voluntary reorganization pursuant to which creditors are
asked to exchange their claims for cash or securities having a fair value
substantially lower than par value of their claims; or,
o In the opinion of management, it is unlikely that TRH will realize a full
recovery on its investment, irrespective of the occurrence of one of the
foregoing events.
Once a security has been identified as potentially impaired, the amount of
such impairment is determined by reference to that security's contemporaneous
market price. However, the market price following a significant credit event of
any issuer may be volatile after such an event. Factors such as market
liquidity, hedge fund activity, sensitivity to "headline" risk, and the widening
of bid/ask spreads contribute to price volatility. Because of such volatility,
the market price may not be indicative of the fair value of such an investment;
and consequently, not indicative of a reasonable estimate of realizable value.
TRH has the ability to hold any security to its stated maturity. Therefore,
the decision to sell reflects the judgment of management that the security sold
is unlikely to provide, on a relative value basis, as attractive a return in the
future as alternative securities entailing comparable risks. With respect to
distressed securities, the sale decision reflects management's judgment that the
risk-discounted anticipated ultimate recovery is less than the value achievable
on sale. (see Operational Review for a discussion of realized net capital losses
resulting from write-downs of securities for other than temporary declines in
market value.)
Operating cash flow for the first six months of 2003 was $503.5 million, an
increase of $198.8 million over the same 2002 period. This increase was caused
largely by increased net premiums written, net of commissions, partially offset
by increased paid losses. Management believes that the liquidity of TRH has not
materially changed since the end of 2002. A significant portion of operating
cash flow, namely, $205.2 million and $118.1 million was derived from
international operations in the first six months 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.
-17-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 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 in the second quarter and first six months of
2003 reflects stock-based compensation expenses primarily related to stock
options granted in 2003. Such expenses are included in other income
(deductions). The impact of adopting the recognition provisions of SFAS No. 123
was not material to net income, financial condition or cash flows. (See Note 3
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 was required to apply FIN 46 to VIEs created after January 31, 2003,
and to VIEs in which TRH obtained an interest after that date, beginning 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 second
quarter or first six months of 2003.
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.
Management believes that the application of FIN 46 will not have a material
effect on its results of operations, financial condition or cash flows.
-18-
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 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 six months ended June 30, 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
June 30, Average High Low December 31, Average High Low
-------- ------- ---- ---- ------------ ------- ---- ---
Combined $134 $117 $134 $105 $105 $107 $118 $96
Interest rate 151 121 151 104 104 104 113 98
Equity 64 54 64 48 48 50 55 45
Currency 3 4 4 3 3 2 3 2
-19-
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 as of
the end of the period covered by this report and have concluded that the
disclosure controls and procedures are effective.
-20-
Part II - Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 15, 2003, the
stockholders:
(a) elected nine directors as follows:
SHARES
NOMINEE SHARES FOR WITHHELD
-------------------- ---------- --------
Takashi Aihara 51,536,063 156,358
James Balog 51,536,963 155,458
C. Fred Bergsten 50,905,209 787,212
Maurice R. Greenberg 51,148,665 543,756
John J. Mackowski 51,586,963 105,458
Edward E. Matthews 51,347,843 344,578
Robert F. Orlich 51,347,843 344,578
Howard I. Smith 50,904,909 787,512
Thomas R. Tizzio 51,148,665 543,756
(b) approved, by a vote of 51,272,657 shares to 293,430 shares, with
126,334 abstentions and 689,612 shares not voting, a proposal to adopt the
2003 Stock Incentive Plan.
(c) approved, by a vote of 51,242,676 shares to 441,026 shares, with 8,719
abstentions and 689,612 shares not voting, a proposal to ratify the
selection of PricewaterhouseCoopers LLP as independent accountants of
Transatlantic Holdings, Inc. for 2003.
-21-
Part II - Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See accompanying Exhibit Index.
(b) In a Current Report on Form 8-K dated April 24, 2003, Transatlantic
Holdings, Inc. reported the issuance of a press release (attached as
an exhibit to that Form 8-K) on April 24, 2003 announcing its
financial results for the first quarter of 2003.
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 12, 2003
-22-
EXHIBIT INDEX
Exhibit
Number Description Location
- ------- ----------- --------
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, by Robert F. Orlich,
President and Chief Executive Officer. Filed herewith.
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, by Steven S. Skalicky,
Executive Vice President and Chief Financial Officer. Filed herewith.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, by Robert F. Orlich, President and Chief
Executive Officer. Provided herewith.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, by Steven S. Skalicky, Executive Vice
President and Chief Financial Officer. Provided herewith.
-23-