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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 SEPTEMBER 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 September 30, 2003. 52,414,844
----------
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2003 (unaudited)
and December 31, 2002........................................................ 1
Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 and 2002 (unaudited)................................ 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 (unaudited)................................ 3
Consolidated Statements of Comprehensive Income for the three and
nine months ended September 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...................... 20
ITEM 4. Controls and Procedures......................................................... 21
PART II - OTHER INFORMATION
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 September 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-$537,192) $ 533,922 $ --
Available for sale, at market value (amortized cost: 2003-$4,389,258;
2002-$4,181,354) (pledged, at market value: 2003-$277,696;
2002-$327,305) 4,581,246 4,361,489
Equities:
Common stocks available for sale, at market value (cost: 2003-$486,388;
2002-$477,738) (pledged, at market value: 2003-$36,294; 2002-$13,421) 500,368 433,670
Nonredeemable preferred stocks available for sale, at market value
(cost: 2003-$29,310; 2002-$26,205) 29,102 26,199
Other invested assets 223,978 278,311
Short-term investment of funds received under securities loan agreements 320,585 347,647
Short-term investments, at cost which approximates market value 15,839 12,812
Cash and cash equivalents 186,074 127,402
---------- ----------
Total investments and cash 6,391,114 5,587,530
Accrued investment income 105,485 80,658
Premium balances receivable, net 445,363 350,214
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses:
Affiliates 201,296 191,704
Other 666,789 625,884
Deferred acquisition costs 169,724 132,967
Prepaid reinsurance premiums 97,177 65,809
Federal income tax recoverable 9,818 51,199
Deferred income taxes 157,649 170,822
Other assets 23,465 29,738
---------- ----------
Total assets $8,267,880 $7,286,525
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $4,508,127 $4,032,584
Unearned premiums 905,669 707,916
Reinsurance balances payable 145,534 109,082
Payable under securities loan agreements 320,585 347,647
Payable for securities in course of settlement 51,270 25,352
Other liabilities 50,158 33,177
---------- ----------
Total liabilities 5,981,343 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: 2003-53,279,044; 2002-53,225,149 53,279 53,225
Additional paid-in capital 195,129 192,141
Accumulated other comprehensive income 111,381 60,644
Retained earnings 1,941,191 1,739,200
Treasury Stock, at cost; 864,200 shares of common stock (14,443) (14,443)
---------- ----------
Total stockholders' equity 2,286,537 2,030,767
---------- ----------
Total liabilities and stockholders' equity $8,267,880 $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 Nine Months Ended
September 30, September 30,
------------------- -----------------------
2003 2002 2003 2002
-------- -------- ---------- ----------
(in thousands, except per share data)
Revenues:
Net premiums written $901,255 $687,207 $2,472,186 $1,842,788
Increase in net unearned premiums (37,596) (49,861) (153,597) (97,611)
-------- -------- ---------- ----------
Net premiums earned 863,659 637,346 2,318,589 1,745,177
Net investment income 68,489 63,476 201,584 189,862
Realized net capital gains 5,501 1,915 6,770 369
-------- -------- ---------- ----------
937,649 702,737 2,526,943 1,935,408
-------- -------- ---------- ----------
Expenses:
Net losses and loss adjustment expenses 602,523 458,092 1,624,713 1,256,909
Net commissions 221,362 165,973 608,307 440,453
Other operating expenses 16,566 13,818 47,802 40,720
Increase in deferred acquisition costs (8,985) (11,938) (36,758) (23,552)
-------- -------- ---------- ----------
831,466 625,945 2,244,064 1,714,530
-------- -------- ---------- ----------
Operating income 106,183 76,792 282,879 220,878
Other deductions (752) (260) (1,846) (223)
-------- -------- ---------- ----------
Income before income taxes 105,431 76,532 281,033 220,655
Income taxes 24,651 15,261 62,247 44,952
-------- -------- ---------- ----------
Net income $ 80,780 $ 61,271 $ 218,786 $ 175,703
======== ======== ========== ==========
Net income per common share:
Basic $ 1.54 $ 1.17 $ 4.18 $ 3.36
Diluted 1.53 1.16 4.15 3.33
Dividends per common share 0.110 0.100 0.320 0.296
Weighted average common shares outstanding:
Basic 52,414 52,305 52,396 52,289
Diluted 52,776 52,725 52,734 52,781
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)
Nine Months Ended
September 30,
-------------------------
2003 2002
----------- -----------
(in thousands)
Net cash provided by operating activities $ 681,680 $ 435,745
----------- -----------
Cash flows from investing activities:
Proceeds of fixed maturities available for sale sold 611,218 822,772
Proceeds of fixed maturities available for sale redeemed or matured 291,871 282,602
Proceeds of equities sold 444,050 476,862
Purchase of fixed maturities held to maturity (534,727) --
Purchase of fixed maturities available for sale (1,046,615) (1,404,736)
Purchase of equities (470,646) (522,785)
Net sale (purchase) of other invested assets 63,105 (344,281)
Net sale of short-term investment of funds received under
securities loan agreements 27,062 65,101
Net sale (purchase) of short-term investments 1,982 (8,339)
Change in other liabilities for securities in course of settlement 25,918 267,385
Other, net 1,156 14,875
----------- -----------
Net cash used in investing activities (585,626) (350,544)
----------- -----------
Cash flows from financing activities:
Net funds disbursed under securities loan agreements (27,062) (65,101)
Dividends to stockholders (16,244) (15,270)
Proceeds from common stock issued 2,417 1,795
Other -- (1,739)
----------- -----------
Net cash used in financing activities (40,889) (80,315)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 3,507 4,962
----------- -----------
Change in cash and cash equivalents 58,672 9,848
Cash and cash equivalents, beginning of period 127,402 124,214
----------- -----------
Cash and cash equivalents, end of period $ 186,074 $ 134,062
=========== ===========
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 Nine Months Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands)
Net income $ 80,780 $ 61,271 $218,786 $175,703
-------- -------- -------- --------
Other comprehensive (loss) income:
Net unrealized (depreciation) appreciation of investments:
Net unrealized holding (losses) gains (43,648) 70,183 76,610 33,005
Related income tax effect 15,276 (24,564) (26,814) (11,552)
Reclassification adjustment for gains included in
net income (5,501) (1,915) (6,770) (369)
Related income tax effect 1,926 670 2,370 129
-------- -------- -------- --------
(31,947) 44,374 45,396 21,213
-------- -------- -------- --------
Net unrealized currency translation gain (loss) 46,434 (17,710) 8,218 16,902
Related income tax effect (16,253) 6,199 (2,877) (5,733)
-------- -------- -------- --------
30,181 (11,511) 5,341 11,169
-------- -------- -------- --------
Other comprehensive (loss) income (1,766) 32,863 50,737 32,382
-------- -------- -------- --------
Comprehensive income $ 79,014 $ 94,134 $269,523 $208,085
======== ======== ======== ========
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
SEPTEMBER 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 filings for the
quarters ended March 31, 2003 and June 30, 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 Nine Months Ended
September 30, September 30,
------------------ -------------------
2003 2002 2003 2002
------- ------- -------- --------
(in thousands, except per share data)
Net income (numerator) $80,780 $61,271 $218,786 $175,703
======= ======= ======== ========
Weighted average common shares outstanding
used in the computation of net income per share:
Average shares issued 53,278 53,169 53,260 53,153
Less: Average shares in treasury 864 864 864 864
------- ------- -------- --------
Average outstanding shares - basic (denominator) 52,414 52,305 52,396 52,289
Average potential shares, principally stock options 362 420 338 492
------- ------- -------- --------
Average outstanding shares - diluted (denominator) 52,776 52,725 52,734 52,781
======= ======= ======== ========
Net income per common share:
Basic $ 1.54 $ 1.17 $ 4.18 $ 3.36
Diluted 1.53 1.16 4.15 3.33
-5-
3. Change in Accounting Principles 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." In accordance with that standard, TRH
disclosed 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.
In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of SFAS No. 123," to provide alternative methods (in
addition to the prospective method already provided in SFAS No. 123) of
transition for a voluntary change to the recognition provisions of SFAS No. 123,
as well as to amend certain of its disclosure requirements as reflected in the
table below.
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 third quarter and first nine 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 third
quarter or first nine 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 Nine Months Ended
September 30, September 30,
------------------ -------------------
2003 2002 2003 2002
------- ------- -------- --------
(in thousands, except per share data)
Net income:
As reported $80,780 $61,271 $218,786 $175,703
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 224 -- 529 --
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects (968) (750) (2,773) (2,219)
------- ------- -------- --------
Pro forma $80,036 $60,521 $216,542 $173,484
======= ======= ======== ========
Net income per common share:
As reported:
Basic $ 1.54 $ 1.17 $ 4.18 $ 3.36
Diluted 1.53 1.16 4.15 3.33
Pro forma:
Basic 1.53 1.16 4.13 3.32
Diluted 1.52 1.15 4.11 3.29
While the pro forma impact of applying the recognition provisions to all
award grants are disclosed, the charges to income in the third quarter and first
nine 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 Nine Months Ended
September 30, September 30,
-------------------- -----------------------
2003 2002 2003 2002
-------- --------- ---------- ----------
(in thousands)
Gross premiums written $995,811 $ 830,929 $2,761,658 $2,184,683
Reinsurance ceded (94,556) (143,722) (289,472) (341,895)
-------- --------- ---------- ----------
Net premiums written $901,255 $ 687,207 $2,472,186 $1,842,788
======== ========= ========== ==========
Gross premiums earned $960,133 $ 767,649 $2,576,693 $2,063,718
Reinsurance ceded (96,474) (130,303) (258,104) (318,541)
-------- --------- ---------- ----------
Net premiums earned $863,659 $ 637,346 $2,318,589 $1,745,177
======== ========= ========== ==========
Gross incurred losses and
loss adjustment expenses $642,980 $ 457,499 $1,804,097 $1,366,254
Reinsurance ceded (40,457) 593 (179,384) (109,345)
-------- --------- ---------- ----------
Net losses and loss
adjustment expenses $602,523 $ 458,092 $1,624,713 $1,256,909
======== ========= ========== ==========
5. Cash Dividends
During the third 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 (refunded), net, in the third quarter totaled $28,948,000
and ($887,000) in 2003 and 2002, respectively. For the 2003 and 2002 nine month
periods, income taxes paid, net, totaled $34,584,000 and $8,880,000,
respectively. Amounts referred to in this footnote are net of recoveries of
income taxes previously paid, as applicable.
-7-
7. Segment Information
The following tables present a summary of comparative financial data by
segment:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
2003 2002 2003 2002
-------- -------- ---------- ----------
(in thousands)
Domestic:
Net premiums written $515,986 $382,845 $1,375,625 $1,005,026
Net premiums earned 487,343 357,247 1,280,551 954,986
Net investment income 47,257 45,553 141,650 138,609
Revenues(1) 538,522 404,689 1,425,160 1,094,299
Net losses and loss adjustment expenses 341,555 247,794 895,724 646,545
Underwriting expenses(2) 136,699 107,826 368,145 281,890
Underwriting profit(3) 16,465 7,223 39,658 38,493
Income before income taxes 67,028 54,543 182,597 176,789
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands)
International-Europe:
Net premiums written $303,821 $225,808 $849,559 $629,786
Net premiums earned 283,581 216,935 796,821 610,665
Net investment income 17,836 14,961 49,639 42,533
Revenues(1)(4) 302,362 231,988 847,484 653,307
Net losses and loss adjustment expenses 210,279 171,642 589,505 478,848
Underwriting expenses(2) 75,929 48,331 206,966 135,461
Underwriting profit(3) 1,680 161 12,750 2,276
Income before income taxes(4) 20,327 15,326 63,541 45,364
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2003 2002 2003 2002
------- ------- -------- --------
(in thousands)
International-Other:
Net premiums written $81,448 $78,554 $247,002 $207,976
Net premiums earned 92,735 63,164 241,217 179,526
Net investment income 3,396 2,962 10,295 8,720
Revenues(1) 96,765 66,060 254,299 187,802
Net losses and loss adjustment expenses 50,689 38,656 139,484 131,516
Underwriting expenses(2) 25,300 23,634 80,998 63,822
Underwriting profit (loss)(3) 14,048 4,017 22,117 (10,122)
Income (loss) before income taxes 18,076 6,663 34,895 (1,498)
-8-
7. Segment Information (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
2003 2002 2003 2002
-------- -------- ---------- ----------
(in thousands)
Consolidated:
Net premiums written $901,255 $687,207 $2,472,186 $1,842,788
Net premiums earned 863,659 637,346 2,318,589 1,745,177
Net investment income 68,489 63,476 201,584 189,862
Revenues(1)(4) 937,649 702,737 2,526,943 1,935,408
Net losses and loss adjustment expenses 602,523 458,092 1,624,713 1,256,909
Underwriting expenses(2) 237,928 179,791 656,109 481,173
Underwriting profit(3) 32,193 11,401 74,525 30,647
Income before income taxes(4) 105,431 76,532 281,033 220,655
- ----------
(1) Net revenues from affiliates approximate $122,000 and $87,000 for the three
months ended September 30, 2003 and 2002, respectively, and $418,000 and
$199,000 for the nine months ended September 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 $172,244 and $141,494
for the three months ended September 30, 2003 and 2002, respectively, and
$498,579 and $390,520 for the nine months ended September 30, 2003 and
2002, respectively.
8. Related Party Transactions
Approximately $139.9 million (14.0 percent) and $116.1 million (14.0
percent) in the third quarters of 2003 and 2002, respectively, and approximately
$498.7 million (18.1 percent) and $270.5 million (12.4 percent) for the nine
months ended September 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, $43.5 million and $34.5 million in the
third quarters of 2003 and 2002, respectively, and $238.0 million and $82.1
million in the nine months ended September 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 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.
The provisions of FIN 46 are to be applied immediately to VIEs created
after January 31, 2003, and to VIEs in which an interest was obtained after that
date. The application of FIN 46 did not have a material effect on results of
operations, financial condition or cash flows in the third quarter or first nine
months of 2003.
For VIEs in which a variable interest was acquired before February 1, 2003,
the consolidation requirements of FIN 46 were to be applied by the primary
beneficiary in the first interim or annual period beginning after June 15, 2003.
However, FASB Staff Position No. FIN 46-6, "Effective Date of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities," issued in
October 2003, deferred application of FIN 46 for VIEs acquired before
February 1, 2003 to the end of the first interim or annual period ending after
December 15, 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.
The FASB continues to re-evaluate and potentially modify many of the
provisions of FIN 46. Management believes that the application of FIN 46, in its
present form, will not have a material effect on TRH's 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
SEPTEMBER 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
SEPTEMBER 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 Nine Months Ended
September 30, September 30,
------------------------ ----------------------------
2003 2002 Change 2003 2002 Change
------ ------ ------ -------- -------- ------
(dollars in millions)
Net premiums written $901.3 $687.2 31.1% $2,472.2 $1,842.8 34.2%
Net premiums earned 863.7 637.3 35.5 2,318.6 1,745.2 32.9
Net investment income 68.5 63.5 7.9 201.6 189.9 6.2
Net premiums written for the third quarter and first nine 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 third quarter of 2003 compared to
the third quarter of 2002 occurred in specialty casualty (principally directors'
and officers' liability, professional liability and medical malpractice) and, to
a lesser extent, property lines. The increase in third quarter 2003 versus third
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, the auto liability line. With respect to
the comparative nine 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 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. Note that
the increases in international net premiums written in 2003 compared to 2002
resulted, in part, from the impact of the weakened U.S. dollar in 2003 compared
to the currencies in which TRH does business. In addition, increases in net
premiums written in the 2003 periods, both domestically and internationally, 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. However, ceded premiums written and earned were
lower in the three and nine month periods ended September 30, 2003 compared to
the comparable prior year periods. Such decreases were due, in part, to a
reduction in ceded premiums resulting from certain domestic contracts in the
specialty casualty area wherein a portion of premiums assumed under those
agreements was retroceded to non-affiliates.
International business represented 44.4 percent of worldwide net premiums
written for the first nine months of 2003 compared to 45.5 percent for the
respective 2002 period. On a worldwide basis, casualty lines business
represented 75.3 percent of net premiums written for the first nine months of
2003 versus 78.1 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 current market environment, rates, terms and conditions
continue to be favorable with rate increases more frequently being achieved in
casualty classes, particularly specialty casualty. 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
SEPTEMBER 30, 2003
The increase in net investment income for the third quarter and first nine
months of 2003 versus the comparable 2002 periods was generally due to the
investment (principally in fixed maturities) of significant positive cash flow
from operating activities generated in recent periods and, to a lesser extent,
the impact of the weakening U.S. 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 nine
month periods ending September 30, 2003, the pre-tax yields on fixed maturities
were 4.5 percent and 4.6 percent, respectively, compared to 5.0 percent and 5.3
percent for the prior year three and nine 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 $5.5 million and $1.9 million
for the third quarters of 2003 and 2002, respectively. For the first nine months
of 2003 and 2002, pre-tax realized net capital gains totaled $6.8 million and
$0.4 million, respectively. Such gains 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. Such
write-downs were insignificant in each of the third quarters of 2003 and 2002.
However, for the first nine months of 2003, pre-tax realized net capital gains
include charges for write-downs for other than temporary declines in market
value totaling $4.5 million and $4.6 million of equities available for sale and
fixed maturities available for sale, respectively, and for the first nine months
of 2002 write-downs totaling $7.6 million and $1.8 million of equities available
for sale and fixed maturities available for sale, respectively. (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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- -----
Consolidated:
Loss and loss adjustment
expense ratio 69.8 71.9 70.1 72.0
Underwriting expense ratio 26.4 26.1 26.5 26.1
Combined ratio 96.2 98.0 96.6 98.1
- ---------------------------------------------------------------------
Domestic:
Loss and loss adjustment
expense ratio 70.1 69.3 69.9 67.7
Underwriting expense ratio 26.5 28.2 26.8 28.1
Combined ratio 96.6 97.5 96.7 95.8
International:
Loss and loss adjustment
expense ratio 69.3 75.1 70.2 77.2
Underwriting expense ratio 26.3 23.6 26.3 23.8
Combined ratio 95.6 98.7 96.5 101.0
-14-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 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 or permitted 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 third quarter and first nine months of 2003 compared to the same 2002
periods principally as a result of improved loss experience in international
operations in 2003. 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
third quarters and first nine 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 increased in the 2003
third quarter compared to the same year ago quarter as the net commissions
component increased by 0.5, offset, in part, by a decrease of 0.2 in the other
operating expense component. For the comparable nine month periods, the
underwriting expense ratio for 2003 increased compared to 2002 as the net
commissions component increased by 0.7, offset, in part, by a decrease of 0.3 in
the other operating expense component.
The increase in deferred acquisition costs for the first nine months of
2003 exceeded the comparable prior year amount. This difference arose in the
first quarter of 2003 compared to the prior year first quarter. As the increase
in unearned premiums in the first nine months of 2003 was greater than such
increase in the same 2002 period, a related, and larger, portion of acquisition
costs was deferred in the first nine 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 $105.4 million in the third quarter
of 2003 versus $76.5 million in the third quarter of 2002. For the nine month
periods, income before income taxes increased to $281.0 million in 2003 versus
$220.7 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 (which represents net premiums earned less net losses and
loss adjustment expenses and underwriting expenses, plus (minus) the increase
(decrease) in deferred acquisition costs) 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. (See discussion of sources of operating cash flow under FINANCIAL
CONDITION AND LIQUIDITY.)
For a discussion of fluctuations in results by segment see SEGMENT RESULTS
below.
-15-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2003
Income tax expenses totaled $24.7 million and $62.2 million for the three
and nine month periods ending September 30, 2003, respectively, compared to
income tax expenses of $15.3 million and $45.0 million, respectively, for the
comparable year ago periods. The effective tax rates, which represent income
taxes divided by income before income taxes, were 23.4 percent and 22.1 percent
for the three and nine month periods ending September 30, 2003, respectively,
and 19.9 percent and 20.4 percent for the three and nine month periods ending
September 30, 2002, respectively. 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.
Net income for the third quarter of 2003 increased to $80.8 million, or
$1.53 per common share (diluted), compared to net income of $61.3 million, or
$1.16 per common share (diluted), in the 2002 third quarter. Net income for the
first nine months of 2003 increased to $218.8 million, or $4.15 per common share
(diluted), compared to net income of $175.7 million, or $3.33 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 third 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 November 28, 2003, payable on December 12, 2003.
SEGMENT RESULTS
Domestic - Comparing the results of each of the three and nine months ended
September 30, 2003 with the same prior year periods, 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
nine month periods ended September 30, 2003 increased compared to the same 2002
periods due primarily to improved underwriting results (caused principally by a
lower commission ratio) for the 2003 three month period and increased net
investment income and realized net capital gains for the 2003 nine month period,
each as compared to the same prior year period.
International - Europe (London and Paris branches and Trans Re Zurich) -
Comparing the results of each of the three and nine months ended September 30,
2003 with the same prior year periods, revenues increased compared to the prior
year primarily due to significant 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, auto liability lines.
Such increases were a result, in part, of the weakening U.S. dollar compared to
the currencies in which premiums were written in 2003 as compared to 2002.
Income before income taxes for the three and nine months ended September 30,
2003 increased compared to the same prior year periods due primarily to improved
underwriting results, that were a result of better loss experience in Paris and
Trans Re Zurich, partially offset by a decline in underwriting results in
London, principally due to a higher commission rate caused by a slight change in
the business mix. In addition, such increases in income before income taxes for
the 2003 three and nine month periods as compared to the same prior year periods
were also due, in part, to an increase in net investment income in London.
International - Other (Miami (serving Latin America and the Caribbean),
Toronto, Hong Kong and Tokyo branches) - Comparing the results of each of the
three and nine months ended September 30, 2003 with the same prior year periods,
revenues increased in the 2003 periods versus the comparable 2002 periods due to
increases in net premiums written, net of the change in unearned premiums, in
each location, with the largest increase occurring in Miami. These increases
generally occurred in property lines. Income before income taxes for the three
and nine months ended September 30, 2003 increased compared to the same prior
year periods due primarily to improved underwriting results in each location.
-16-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2003
FINANCIAL CONDITION AND LIQUIDITY. The increase in cash and invested assets at
September 30, 2003 compared to December 31, 2002 was due, in large part, to
positive cash flow from operations, the impact of the weakening U.S. dollar
compared to certain currencies in which TRH's investments are denominated and
net unrealized appreciation of fixed maturities and equities available for sale,
each occurring in the first nine 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 September 30, 2003.
Stockholders' equity totaled $2,286.5 million at September 30, 2003, a net
increase of $255.8 million from year-end 2002. The increase in stockholders'
equity during 2003 is primarily composed of net income of $218.8 million and an
increase in accumulated other comprehensive income of $50.7 million (see
Consolidated Statements of Comprehensive Income), offset, in part, by dividends
declared of $16.8 million.
The abovementioned increase in accumulated other comprehensive income
consisted of net unrealized appreciation of investments, net of income taxes, of
$45.4 million and a net unrealized currency translation gain, net of income
taxes, of $5.3 million. The net unrealized appreciation of investments is
composed principally of increases of $7.7 million from unrealized appreciation
of fixed maturities available for sale and $37.6 million from unrealized
appreciation of equities available for sale.
The amounts discussed in the immediately preceding paragraph reflect
changes in accumulated other comprehensive income during the first nine months
of 2003. However, in the third quarter of 2003, accumulated other comprehensive
income decreased by $1.8 million. Such decrease consists of a decline in net
unrealized appreciation of investments, net of income taxes, of $31.9 million
offset by net unrealized currency translation gains, net of income taxes, of
$30.2 million. The decline in net unrealized appreciation of investments, net of
income taxes, results largely from the impact of a slight increase in interest
rates on the market value of fixed maturities available for sale in the 2003
third quarter.
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.
-17-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2003
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.)
Cash provided by operating activities is 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 investment expenses paid).
Operating cash flow for the first nine months of 2003 was $681.7 million, an
increase of $245.9 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 and loss adjustment expenses and taxes paid. Management
believes that the liquidity of TRH has not materially changed since the end of
2002. A significant portion of operating cash flow, namely, $298.1 million and
$178.9 million was derived from international operations (the majority of such
amounts emanating from London) in the first nine months of 2003 and 2002,
respectively.
Generally, paid losses have been increasing in more recent years as a
result of a shift towards lines with shorter payment patterns and an increase in
the amount of business TRH has written over the past several years. 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.
ACCOUNTING STANDARDS
CHANGE IN ACCOUNTING PRINCIPLES - 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." In accordance with that
standard, TRH disclosed 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.
-18-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2003
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 third quarter and first nine 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 December 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of SFAS No. 123," to provide alternative methods (in
addition to the prospective method already provided in SFAS No. 123) of
transition for a voluntary change to the recognition provisions of SFAS No. 123,
as well as to amend certain of its disclosure requirements as reflected in Note
3 of Notes to the Condensed Consolidated Financial Statements.
In January 2003, the 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.
The provisions of FIN 46 are to be applied immediately to VIEs created
after January 31, 2003, and to VIEs in which an interest was obtained after that
date. The application of FIN 46 did not have a material effect on results of
operations, financial condition or cash flows in the third quarter or first nine
months of 2003.
For VIEs in which a variable interest was acquired before February 1, 2003,
the consolidation requirements of FIN 46 were to be applied by the primary
beneficiary in the first interim or annual period beginning after June 15, 2003.
However, FASB Staff Position No. FIN 46-6, "Effective Date of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities," issued in
October 2003, deferred application of FIN 46 for VIEs acquired before
February 1, 2003 to the end of the first interim or annual period ending after
December 15, 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.
The FASB continues to re-evaluate and potentially modify many of the
provisions of FIN 46. Management believes that the application of FIN 46, in its
present form, will not have a material effect on TRH's results of operations,
financial condition or cash flows.
-19-
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 nine 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 nine months ended September 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
September 30, Average High Low December 31, Average High Low
------------------------------------- -----------------------------------
Combined $152 $125 $152 $105 $105 $107 $118 $96
Interest rate 176 135 176 104 104 104 113 98
Equity 71 58 71 48 48 50 55 45
Currency 4 4 4 3 3 2 3 2
-20-
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.
-21-
Part II - Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See accompanying Exhibit Index.
(b) Reports on Form 8-K
During the three months ended September 30, 2003, there were no
Current Reports filed on Form 8-K.
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 November 13, 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.
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