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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
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Commission File Number 1-10545
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TRANSATLANTIC HOLDINGS, INC.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3355897
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
80 Pine Street, New York, New York 10005
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 770-2000
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NONE
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 2004. 52,541,342
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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2004 (unaudited)
and December 31, 2003.................................................. 1
Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003 (unaudited).................................... 2
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003 (unaudited).............................. 3
Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2004 and 2003 (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................ 24
ITEM 4. Controls and Procedures................................................... 25
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities...................................................... 26
ITEM 6. Exhibits and Reports on Form 8-K.......................................... 26
Signatures.......................................................................... 26
Exhibit Index....................................................................... 27
Part I - Item 1
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2004 and December 31, 2003
(Unaudited)
2004 2003
----------- ----------
(in thousands, except
share data)
ASSETS
Investments and cash:
Fixed maturities:
Held to maturity, at amortized cost (market value: 2004-$737,216;
2003-$634,768) $ 718,600 $ 622,620
Available for sale, at market value (amortized cost: 2004-$4,765,559;
2003-$4,591,165) (pledged, at market value: 2004-$625,038;
2003-$426,536) 4,979,997 4,780,919
Equities:
Common stocks available for sale, at market value (cost: 2004-$513,444;
2003-$495,378) (pledged, at market value: 2004-$25,490; 2003-$47,999) 558,727 555,255
Nonredeemable preferred stocks available for sale, at market value
(cost: 2004-$20,911; 2003-$29,310) 20,887 29,131
Other invested assets 212,088 183,773
Short-term investment of funds received under securities loan agreements 666,927 485,869
Short-term investments, at cost which approximates market value 19,216 26,711
Cash and cash equivalents 154,484 182,887
---------- ----------
Total investments and cash 7,330,926 6,867,165
Accrued investment income 111,646 103,646
Premium balances receivable, net 485,914 408,029
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses:
Affiliates 214,216 221,686
Other 641,211 648,227
Deferred acquisition costs 177,478 173,612
Prepaid reinsurance premiums 113,669 75,515
Deferred income taxes 195,226 165,670
Other assets 28,181 44,208
---------- ----------
Total assets $9,298,467 $8,707,758
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $5,065,505 $4,805,498
Unearned premiums 981,820 917,355
Payable under securities loan agreements 666,927 485,869
Other liabilities 148,368 122,449
---------- ----------
Total liabilities 6,862,620 6,331,171
---------- ----------
Preferred Stock, $1.00 par value; shares authorized: 5,000,000 -- --
Common Stock, $1.00 par value; shares authorized: 100,000,000;
shares issued: 2004-53,405,542; 2003-53,332,678 53,406 53,333
Additional paid-in capital 200,739 196,645
Accumulated other comprehensive income 91,987 120,770
Retained earnings 2,104,158 2,020,282
Treasury Stock, at cost; 864,200 shares of common stock (14,443) (14,443)
---------- ----------
Total stockholders' equity 2,435,847 2,376,587
---------- ----------
Total liabilities and stockholders' equity $9,298,467 $8,707,758
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-1-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
---------------------
2004 2003
--------- --------
(in thousands, except
per share data)
Revenues:
Net premiums written $907,470 $768,081
Increase in net unearned premiums (14,323) (75,914)
-------- --------
Net premiums earned 893,147 692,167
Net investment income 72,048 64,614
Realized net capital gains 7,249 538
-------- --------
972,444 757,319
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Expenses:
Net losses and loss adjustment expenses 622,211 476,989
Net commissions 219,109 203,560
Other underwriting expenses 18,188 15,384
Increase in deferred acquisition costs (3,867) (18,152)
Other deductions, net 1,317 330
-------- --------
856,958 678,111
-------- --------
Income before income taxes 115,486 79,208
Income taxes 25,833 16,380
-------- --------
Net income $ 89,653 $ 62,828
======== ========
Net income per common share:
Basic $ 1.71 $ 1.20
Diluted 1.69 1.19
Dividends per common share 0.110 0.100
Weighted average common shares outstanding:
Basic 52,506 52,372
Diluted 52,973 52,689
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)
Three Months Ended
March 31,
---------------------
2004 2003
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(in thousands)
Net cash provided by operating activities $ 234,581 $ 287,933
--------- ---------
Cash flows from investing activities:
Proceeds of fixed maturities available for sale sold 102,269 321,065
Proceeds of fixed maturities available for sale redeemed or matured 85,543 163,343
Proceeds of equities sold 195,804 127,011
Purchase of fixed maturities held to maturity (96,631) (217,868)
Purchase of fixed maturities available for sale (361,942) (403,193)
Purchase of equities (193,053) (117,684)
Net purchase of other invested assets (27,447) (276,894)
Net purchase of short-term investment of funds received under
securities loan agreements (181,058) (47,274)
Net sale (purchase) of short-term investments 7,423 (23,307)
Change in other liabilities for securities in course of settlement 26,828 151,907
Other, net (2,411) (102)
--------- ---------
Net cash used in investing activities (444,675) (322,996)
--------- ---------
Cash flows from financing activities:
Net funds received under securities loan agreements 181,058 47,274
Dividends to stockholders (5,777) (5,210)
Proceeds from common stock issued 3,485 1,000
Other (7) 91
--------- ---------
Net cash provided by financing activities 178,759 43,155
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 2,932 3,535
--------- ---------
Change in cash and cash equivalents (28,403) 11,627
Cash and cash equivalents, beginning of period 182,887 127,402
--------- ---------
Cash and cash equivalents, end of period $ 154,484 $ 139,029
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------
2004 2003
-------- --------
(in thousands)
Net income $ 89,653 $ 62,828
-------- --------
Other comprehensive loss:
Net unrealized appreciation of investments:
Net unrealized holding gains 18,365 6,921
Related income tax effect (6,428) (2,422)
Reclassification adjustment for gains included in
net income (7,249) (538)
Related income tax effect 2,537 188
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7,225 4,149
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Net unrealized currency translation loss (55,397) (20,598)
Related income tax effect 19,389 7,209
-------- --------
(36,008) (13,389)
-------- --------
Other comprehensive loss (28,783) (9,240)
-------- --------
Comprehensive income $ 60,870 $ 53,588
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
1. General
The condensed consolidated financial statements are unaudited, but have
been prepared on the basis of accounting principles generally accepted in the
United States of America and, in the opinion of management, reflect all
adjustments (consisting of normal accruals) necessary for a fair presentation of
results for such periods. The results of operations and cash flows for any
interim period are not necessarily indicative of results for the full year.
These financial statements include the accounts of Transatlantic Holdings, Inc.
and its subsidiaries (collectively, TRH). All material intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made to
conform the prior year's presentation with 2004.
For further information, refer to the Transatlantic Holdings, Inc. Form
10-K filing for the year ended December 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
March 31,
----------------------
2004 2003
------- -------
(in thousands,
except per share data)
Net income (numerator) $89,653 $62,828
======= =======
Weighted average common shares outstanding
used in the computation of net income per share:
Average shares issued 53,370 53,236
Less: Average shares in treasury 864 864
------- -------
Average outstanding shares - basic (denominator) 52,506 52,372
Average potential shares, principally stock options 467 317
------- -------
Average outstanding shares - diluted (denominator) 52,973 52,689
======= =======
Net income per common share:
Basic $ 1.71 $ 1.20
Diluted 1.69 1.19
-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." In accordance with that standard, TRH
disclosed the pro forma impact on net income had all stock-based 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 first quarters of 2004 and 2003 reflect
stock-based compensation expenses, which are included in the Statements of
Operations as a component of other deductions, net, primarily related to stock
options granted after January 1, 2003. The impact of implementing the
recognition provisions of SFAS No. 123 was not material to net income, financial
condition or cash flows in the first quarter of 2004 or 2003. Had compensation
cost been charged to earnings in accordance with the fair value based method as
prescribed in SFAS No. 123 for all outstanding stock-based compensation awards
(occurring both before and after adoption of the recognition provisions of SFAS
No. 123), TRH's net income and net income per common share (on a pro forma
basis) would have been as follows:
Three Months Ended
March 31,
---------------------
2004 2003
------- -------
(in thousands, except
per share data)
Net income:
As reported $89,653 $62,828
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 535 88
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects (1,165) (861)
------- -------
Pro forma $89,023 $62,055
======= =======
Net income per common share:
As reported:
Basic $ 1.71 $ 1.20
Diluted 1.69 1.19
Pro forma:
Basic 1.70 1.18
Diluted 1.68 1.18
While the pro forma impact of applying the recognition provisions to all
award grants are disclosed, the charges to net income in the first quarters of
2004 and 2003 resulting from TRH adopting the recognition provisions of SFAS No.
123 may not be indicative of future amounts charged to net income, as those
charges under the prospective method of transition will not reflect costs
associated with stock-based 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
March 31,
----------------------
2004 2003
---------- ---------
(in thousands)
Gross premiums written $1,042,062 $ 900,416
Reinsurance premiums ceded (134,592) (132,335)
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Net premiums written $ 907,470 $ 768,081
========== =========
Gross premiums earned $ 989,585 $ 779,293
Reinsurance premiums ceded (96,438) (87,126)
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Net premiums earned $ 893,147 $ 692,167
========== =========
Gross incurred losses and
loss adjustment expenses $ 640,950 $ 510,449
Reinsured losses and loss
adjustment expenses ceded (18,739) (33,460)
---------- ---------
Net losses and loss
adjustment expenses $ 622,211 $ 476,989
========== =========
5. Cash Dividends
During the first quarter of 2004, 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 first quarter totaled $15,996,000
and ($32,224,000) in 2004 and 2003, 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
March 31,
-------------------
2004 2003
-------- --------
(in thousands)
Domestic:
Net premiums written $496,816 $418,135
Net premiums earned 495,412 401,336
Net investment income 47,827 45,985
Realized net capital gains (losses) 7,212 (487)
Revenues(1) 550,451 446,834
Net losses and loss adjustment expenses 348,645 272,411
Underwriting expenses(2) 136,512 122,783
Underwriting profit(3) 11,115 10,778
Income before income taxes 64,943 55,796
Three Months Ended
March 31,
-------------------
2004 2003
-------- --------
(in thousands)
International-Europe:
Net premiums written $328,254 $270,668
Net premiums earned 306,977 219,896
Net investment income 20,426 15,248
Realized net capital (losses) gains (813) 155
Revenues(1)(4) 326,590 235,299
Net losses and loss adjustment expenses 227,329 159,183
Underwriting expenses(2) 72,384 64,650
Underwriting profit(3) 12,527 7,660
Income before income taxes(4) 32,122 23,407
Three Months Ended
March 31,
-------------------
2004 2003
-------- --------
(in thousands)
International-Other:
Net premiums written $82,400 $79,278
Net premiums earned 90,758 70,935
Net investment income 3,795 3,381
Realized net capital gains 850 870
Revenues(1) 95,403 75,186
Net losses and loss adjustment expenses 46,237 45,395
Underwriting expenses(2) 28,401 31,511
Underwriting profit (loss)(3) 13,864 (4,052)
Income before income taxes 18,421 5
-8-
7. Segment Information (continued)
Three Months Ended
March 31,
-------------------
2004 2003
-------- --------
(in thousands)
Consolidated:
Net premiums written $907,470 $768,081
Net premiums earned 893,147 692,167
Net investment income 72,048 64,614
Realized net capital gains 7,249 538
Revenues(1)(4) 972,444 757,319
Net losses and loss adjustment expenses 622,211 476,989
Underwriting expenses(2) 237,297 218,944
Underwriting profit(3) 37,506 14,386
Income before income taxes(4) 115,486 79,208
- ----------
(1) Net revenues from affiliates approximate $142,000 and $163,000 for the
three months ended March 31, 2004 and 2003, respectively, and are included
primarily in Domestic and International-Europe revenues.
(2) Underwriting expenses represent the sum of net commissions and other
underwriting 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 $199,261 and $132,828
for the three months ended March 31, 2004 and 2003, respectively.
8. Related Party Transactions
Approximately $199.4 million (19.1%) and $191.6 million (21.3%)
of gross premiums written by TRH in the first quarters of 2004 and
2003, respectively, 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 property, medical malpractice,
other liability and auto liability lines. In addition, a portion of such gross
premiums, namely, $133.5 million and $124.6 million in the first quarters of
2004 and 2003, respectively, resulted from certain insurance business written by
other AIG subsidiaries that, by prearrangement with TRH, was almost entirely
reinsured by TRH.
-9-
9. Accounting Standards
In December 2003, the FASB revised Interpretation No. 46 (FIN 46(R)),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
FIN 46(R) defined a variable interest entity (VIE) as an entity that 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. FIN 46(R) requires a VIE to be consolidated by its
primary beneficiary. All other entities are evaluated for consolidation under
existing guidance. FIN 46(R) also requires disclosure of significant VIEs for
which a company is not the primary beneficiary.
The provisions of FIN 46(R) were effective for VIEs commonly referred to as
special-purpose entities in the first interim or annual period ending after
December 15, 2003 and for all other types of VIEs in the first interim or annual
period ending after March 15, 2004. The application of FIN 46(R) did not have a
material effect on results of operations, financial condition or cash flows in
the first quarter of 2004.
-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 U.S. federal securities laws. These forward-looking statements are
identified, including without limitation, by their use of such terms and phrases
as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects,"
"expect," "expected," "project," "projects," "projected," "projections,"
"plans," "anticipates," "anticipated," "should," "think," "thinks," "designed
to," "foreseeable future," "believe," "believes" and "scheduled" and similar
expressions. 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, regulatory and accounting 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
MARCH 31, 2004
Throughout this Quarterly Report on Form 10-Q, Transatlantic Holdings, Inc.
and its subsidiaries (TRH) presents its operations in the way it believes will
be most meaningful. TRH's unpaid losses and loss adjustment expenses net of
related reinsurance recoverable (loss reserves) and TRH's combined ratio and its
components are included herein and presented in accordance with principles
prescribed or permitted by insurance regulatory authorities as these are
standard measures in the insurance and reinsurance industries.
FINANCIAL STATEMENTS
The following discussion refers to the consolidated financial statements of
TRH as of March 31, 2004 and December 31, 2003 and for the three month periods
ended March 31, 2004 and 2003, which are presented elsewhere herein. Financial
data discussed below have been affected by certain transactions between TRH and
American International Group, Inc. (AIG) and its subsidiaries. (See Note 8 of
Notes to Condensed Consolidated Financial Statements.)
EXECUTIVE OVERVIEW
The operations of Transatlantic Holdings, Inc. (the Company) are conducted
principally by its three major operating subsidiaries - Transatlantic
Reinsurance Company (TRC), Trans Re Zurich (TRZ) and Putnam Reinsurance Company
(Putnam) - and managed based on its geographic segments which are presented in
this Form 10-Q as Domestic, International-Europe and International-Other.
Through its operations on six continents, TRH offers reinsurance capacity on
both a treaty and facultative basis - structuring programs for a full range of
property and casualty products, with an emphasis on specialty lines, which may
exhibit greater volatility of results over time than most other lines. Such
capacity is offered through reinsurance brokers and, to a lesser extent,
directly to domestic and foreign insurance and reinsurance entities.
TRH's operating strategy emphasizes product and geographic diversification
as key elements in controlling its level of risk concentration. TRH also adjusts
its mix of business to take advantage of market opportunities. Over time, TRH
has also capitalized on market opportunities when they arise by strategically
expanding operations in an existing location or opening a branch or
representative office (except for the acquisition of TRZ in 1996) in new
locations. TRH's operations that serve international markets grow by leveraging
TRH's product knowledge, worldwide resources and financial strength, typically
utilizing indigenous management and staff with a thorough knowledge of local
markets and product characteristics.
In recent years, casualty lines have comprised approximately three-quarters
of TRH's net premiums written, while property lines comprise the balance. In
addition, treaty reinsurance has totaled approximately 95% of net premiums
written in such years, with the balance representing facultative accounts.
Moreover, reinsurance assumed by international offices has represented almost
half of net premiums written in such years. (See OPERATIONAL REVIEW for detailed
period to period comparisons of such measures.)
AIG, which through its subsidiaries is one of the largest providers of
insurance and investment products and services to businesses and individuals
around the world, beneficially owned approximately 60% of the common stock of
the Company as of March 26, 2004.
TRH's major sources of revenues are net premiums earned for reinsurance
risks undertaken and net investment income earned on investments made. The great
majority of TRH's investments are in fixed maturity securities with an average
duration of 5.4 years as of March 31, 2004. In general, premiums are received
significantly in advance of related claims payments. The following table
summarizes TRH's revenues, income before income taxes and net income for the
periods indicated:
- 12 -
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2004
Three Months Ended
March 31,
------------------------
2004 2003 Change
------------------------
(dollars in millions)
Revenues $972.4 $757.3 28.4%
Income before income taxes 115.5 79.2 45.8
Net income 89.7 62.8 42.7
CONSOLIDATED RESULTS AND MARKET CONDITIONS
Revenues for the first quarter of 2004 grew significantly compared to the
same prior year period, principally due to an increase in net premiums earned.
TRH continued to benefit from rate increases in casualty lines (albeit at a
slower pace than in 2003), offset, in part, by decreases in rates in many
property classes, as well as from the greater number of favorable underwriting
opportunities offered to global reinsurers with superior financial strength
ratings and a full range of products, such as TRH. Though the pace of market
improvement overall has slowed compared to a year ago, TRH believes market
conditions continue to be strong in most classes and may remain so for the
foreseeable future. While the markets in which TRH operates are highly
competitive and have historically been cyclical, TRH cannot predict, with any
reasonable certainty, future market conditions.
Income before income taxes and net income improved in the first quarter of
2004 compared to the year ago quarter due primarily to improvements in
underwriting profit from international operations, and, to a lesser extent,
increases in net investment income and realized net capital gains. Underwriting
profit (loss) represents net premiums earned less net losses and loss adjustment
expenses, net commissions and other underwriting expenses, plus (minus) the
increase (decrease) in deferred acquisition costs. (See OPERATIONAL REVIEW for
further discussion.)
For the full year of 2004, TRH expects premiums to continue to grow and
result in positive operating cash flow and increased net investment income as
compared to 2003, absent any unusual loss events or other unforeseen
developments. However, TRH believes that the percentage increase in net premiums
written in the year 2004 over 2003 may be less than the 33.6% increase in the
year 2003 compared to 2002, due largely to the overall tempering of premium rate
increases in 2004 as compared to 2003.
Further information related to items discussed in this EXECUTIVE OVERVIEW
may be found throughout this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of the financial condition and results of
operations are based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these 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 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 consolidated financial statements and
footnotes. The accounting estimates that result require the use of assumptions
about certain matters that are highly uncertain at the time of estimation.
The major categories for which assumptions are developed and used to
establish each critical accounting estimate are highlighted below:
- 13 -
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2004
LOSS RESERVES
Loss cost trend factors by class of business - These factors are used to
establish expected loss and loss adjustment expense ratios for more recent years
based on the projected loss and loss adjustment expense ratios with respect to
prior accident years. These factors take into account, among other things, loss
cost inflation, changes in amounts of jury awards, social inflation (e.g.,
awards by judges and juries which progressively increase in size at a rate
exceeding that of general inflation) and trends in court interpretations of
coverages.
Expected loss and loss adjustment expense ratio for the latest accident
year by class of business - These ratios are determined based on the significant
body of knowledge that TRH has gathered with respect to current and historical
loss trends by class of business. Because certain longer-tail casualty lines
such as excess-of-loss medical malpractice and directors' and officers'
liability tend to settle claims over an extended number of years, loss
experience for recent accident years may not constitute statistically reliable
data to use to project ultimate losses for current year business. Therefore, the
results of more fully developed accident years modified for current trends need
to be considered in the determination of these ratios.
Loss development factors - These factors are used to project reported
losses to an ultimate amount by class of business using historical data and need
to be modified to allow for current trends in a variety of factors such as those
discussed in the paragraph above under loss cost trend factors by class of
business.
Variability of reserving practices and reporting patterns affecting
premiums and losses - These practices govern the information reported to us,
which is the single most important factor used in estimating reserves, and may
vary by country, class of business and ceding company and are subject to
significant variability over time and change without notice.
Premium trends and rate sufficiency considerations - As the various factors
discussed above are used to generate a loss and loss adjustment expense ratio or
factor that is often based upon premiums earned, the changing relationships of
premium rates to related exposures must be factored into the analyses used to
arrive at appropriate reserve estimates.
DEFERRED ACQUISITION COSTS
Acquisition costs, consisting primarily of net commissions incurred on
business conducted through reinsurance contracts or certificates, are deferred,
and then amortized over the period in which the related premiums are earned,
generally one year. The evaluation of recoverability of acquisition costs to be
deferred considers the expected profitability of the underlying treaties and
facultative certificates which may vary materially from actual results.
OPERATIONAL REVIEW
RESULTS OF OPERATIONS
TRH derives its revenue from two principal sources: premiums from
reinsurance assumed net of reinsurance ceded (i.e., net premiums earned) and
income from investments. Premiums are earned primarily on a pro rata basis over
the term of the related coverages. Unearned premiums and prepaid reinsurance
premiums represent the portion of gross premiums assumed and reinsurance ceded,
respectively, relating to the unexpired terms of such coverages. The
relationship between net premiums written and net premiums earned will,
therefore, vary depending generally on the volume and inception dates of the
business assumed and ceded and the mix of such business between pro rata and
excess-of-loss reinsurance.
- 14 -
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2004
The following table shows net premiums written, net premiums earned and net
investment income of TRH for the periods indicated:
Three Months Ended
March 31,
------------------------
2004 2003 Change
------------------------
(dollars in millions)
Net premiums written $907.5 $768.1 18.1%
Net premiums earned 893.1 692.2 29.0
Net investment income 72.0 64.6 11.5
Net premiums written for the first quarter of 2004 exceeded the comparable
2003 period principally as a result of pricing increases and, to a lesser
extent, increased coverage provided, coupled with the impact of foreign exchange
rate movements. In the 2004 first quarter compared to the same prior year
period, the value of the U.S. dollar declined compared to certain significant
currencies in which TRH does business, particularly in TRH's European locations,
serving to increase the amount of net premiums written in U.S. dollars (the
reporting currency) from these locations related solely to this exchange rate
movement. Net premiums written in the first quarter of 2004 increased in both
domestic and international operations as compared to the same 2003 quarter. On a
worldwide basis, casualty lines business represented 75.7% of net premiums
written in the first quarter of 2004 versus 81.4% in the comparable 2003 period.
The balance represented property lines. Treaty business represented 96.5% of net
premiums written in the first quarter of 2004 versus 95.9% in the year ago
quarter. The balance represented facultative accounts.
Of the total increase in net premiums written in the first quarter of 2004
compared to the first quarter of 2003, domestic net premiums written increased
by $78.7 million, or 18.8%, to $496.8 million with significant increases in net
premiums written recorded in property as well as other liability lines
(principally the specialty casualty classes of directors' and officers'
liability and other professional liability as well as general casualty classes).
The increase in net premiums written in property lines is due, in part, to a
reduction in ceded property premiums written.
Net premiums written by international offices increased in the first
quarter of 2004 by $60.7 million, or 17.3%, over the prior year, to $410.7
million. Most international offices recorded increases in net premiums written,
led by London and Paris. International net premiums written increased
significantly in property and credit lines. The increases in international net
premiums written resulted, in part, from the impact of foreign exchange as
discussed above. International business represented 45.3% of worldwide net
premiums written for the first quarter of 2004 compared to 45.6% for the
respective 2003 quarter.
Generally, reasons for increases in gross premiums written between periods
are similar to those for net premiums written.
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 over
time. The difference in the percentage increase in net premiums written compared
to the percentage increase in net premiums earned in the first quarter of 2004
compared to the same 2003 quarter was principally caused by differences in
earnings patterns related to variances in the inception dates of business
assumed and ceded and the mix of business between pro rata and excess-of-loss
for the respective periods.
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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2004
Net investment income increased in the first quarter of 2004, as compared
to the prior year quarter, due principally to the investment (primarily 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, particularly from European
countries, in which TRH's net investment income is earned. For the first
quarters of 2004 and 2003, the pre-tax yields on fixed maturities were 4.5% and
4.7%, respectively. The pre-tax yield on fixed maturities represents annualized
pre-tax net investment income from fixed maturities for the periods indicated
divided by the average balance sheet carrying value of the fixed maturity
portfolio for such periods. (See operating cash flow discussion under FINANCIAL
CONDITION AND LIQUIDITY.)
The property and casualty insurance and reinsurance industries use the
combined ratio as a measure of underwriting profitability. The combined ratio
reflects only underwriting results, and does not include income from
investments. Generally, a combined ratio under 100 indicates an underwriting
profit and a combined ratio exceeding 100 indicates an underwriting loss.
Underwriting profitability is subject to significant fluctuations due to
competition, natural and man-made catastrophic events, economic and social
conditions, changes in foreign currency exchange rates, interest rates and other
factors. The combined ratio represents the sum of the loss and loss adjustment
expense ratio and the underwriting expense ratio. The loss and loss adjustment
expense ratio represents net losses and loss adjustment expenses divided by net
premiums earned, while the underwriting expense ratio represents the sum of net
commissions and other underwriting expenses expressed as a percentage of net
premiums written.
The following table presents loss and loss adjustment expense ratios,
underwriting expense ratios and combined ratios for consolidated TRH, and
separately for its domestic and international components, for the periods
indicated:
Three Months Ended
March 31,
------------------
2004 2003
------------------
Consolidated:
Loss and loss adjustment
expense ratio 69.7 68.9
Underwriting expense ratio 26.1 28.5
Combined ratio 95.8 97.4
- ------------------------------------------------------------------------------
Domestic:
Loss and loss adjustment
expense ratio 70.4 67.9
Underwriting expense ratio 27.5 29.3
Combined ratio 97.9 97.2
International:
Loss and loss adjustment
expense ratio 68.8 70.3
Underwriting expense ratio 24.5 27.5
Combined ratio 93.3 97.8
The loss and loss adjustment expense ratios for consolidated TRH
deteriorated slightly in the first quarter of 2004 compared to the same 2003
quarter principally as a result of increased loss activity from domestic
operations offset, in part, by improved loss experience in international
operations. Results for the first quarters of 2004 and 2003 contained no
significant losses related to catastrophes occurring in those periods.
- 16 -
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2004
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, financial condition or
liquidity. 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 first
quarter of 2004 compared to the same year ago quarter due to a decrease of 2.4
in the net commission component of the ratio. With respect to the net commission
component, the decrease between periods results from a decrease in such
components related to both domestic and international operations, due, in part,
to changes in the mix of business between periods.
The increase in deferred acquisition costs for the first quarter of 2004
was less than the comparable prior year amount. As the increase in unearned
premiums in the first quarter of 2004 was less than such increase in the same
prior year quarter, a related, and smaller, portion of acquisition costs was
deferred in the first quarter of 2004 compared to the year ago quarter.
Acquisition costs (consisting primarily of net commissions incurred) are charged
to earnings over the period in which the related premiums are earned.
Other deductions, net, generally includes pre-tax expense charges of $0.7
million and $0.1 million for the first quarters of 2004 and 2003, respectively,
for stock-based compensation (see OTHER MATTERS herein and Note 3 of Notes to
Condensed Consolidated Financial Statements for a discussion of the Change in
Accounting Principle and Disclosure of Stock-Based Compensation) related to
TRH's voluntary adoption of the recognition provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, as well as currency transaction gains and
losses and other miscellaneous income and expense items.
Pre-tax realized net capital gains totaled $7.2 million and $0.5 million
for the first quarters of 2004 and 2003, respectively. Realized capital gains
and losses are generally the result of investment dispositions, which reflect
TRH's investment and tax planning strategies to maximize after-tax income. In
addition, pre-tax realized net capital gains include charges for write-downs
related to certain securities that, in the opinion of management, had
experienced a decline in market value that was other than temporary. In the
first quarter of 2004, pre-tax realized net capital gains included charges for
write-downs for other than temporary declines in market value totaling $6.2
million related to other invested assets and the first quarter of 2003 included
write-downs totaling $3.1 million and $3.8 million of equities available for
sale and fixed maturities available for sale, respectively. Upon the ultimate
disposition of securities which have recorded write-downs, a portion of the
write-downs may be recoverable depending on market conditions. (See discussion
under FINANCIAL CONDITION AND LIQUIDITY for criteria used in determination of
such write-downs.)
Income before income taxes increased 45.8% to $115.5 million in the first
quarter of 2004 versus $79.2 million in the first quarter of 2003. The increase
in income before income taxes in the 2004 period compared to the prior year
period resulted primarily from improved underwriting profit from international
operations and, to a lesser extent, increased net investment income and realized
net capital gains in the 2004 first quarter.
Federal and foreign income tax expense of $25.8 million and $16.4 million
were recorded in the first quarters of 2004 and 2003, respectively. The Company
and its domestic subsidiaries, TRC (which includes foreign operations) and
Putnam, file consolidated federal income tax returns. The tax burden among the
companies is allocated in accordance with a tax sharing agreement. TRC will also
include as part of its taxable income or loss those items of income of the
non-U.S. subsidiary, TRZ, which are subject to U.S. income tax currently,
pursuant to Subpart F income rules of the Internal Revenue Code, and included,
as appropriate, in the consolidated federal income tax return.
- 17 -
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2004
The effective tax rates, which represent income taxes divided by income
before income taxes, were 22.4% and 20.7% in the first quarters of 2004 and
2003, respectively. The increased effective tax rate in the first quarter of
2004 compared to the prior year quarter resulted primarily from the fact that in
the 2004 first quarter a smaller percentage of income before income taxes
resulted from tax-exempt investment income.
Net income for the first quarter of 2004 increased 42.7% to $89.7 million,
or $1.69 per common share (diluted), compared to net income of $62.8 million, or
$1.19 per common share (diluted), in the 2003 first quarter. Reasons for the
changes between periods are as discussed earlier.
SEGMENT RESULTS
(a) Domestic:
Comparing the results of the first quarter of 2004 with the same prior year
period, revenues increased over the prior year due primarily to increases in net
premiums written, as discussed earlier in RESULTS OF OPERATIONS. Income before
income taxes in the first quarter of 2004 increased compared to the same 2003
period due primarily to increased realized net capital gains in the 2004 first
quarter.
(b) International - Europe (London and Paris branches and TRZ):
Comparing the results of the first quarter of 2004 with the same prior year
period, revenues increased over the prior year due mostly to increases in net
premiums written in each location, with the largest increase occurring in
London. The increases occurred largely in property and credit lines. Such
increases were a result, in part, of the weakening U.S. dollar compared to the
currencies in which premiums were written in the first quarter of 2004 as
compared to the prior year quarter. Income before income taxes in the first
quarter of 2004 increased compared to the same 2003 period due primarily to
increased net investment income and improved underwriting profit, which was
primarily the result of an improved combined ratio in London, partially offset
by a deterioration of loss experience in Paris and TRZ.
(c) International - Other (Miami (serving Latin America and the Caribbean),
Toronto, Hong Kong and Tokyo branches):
Comparing the results of the first quarter of 2004 with the same prior year
period, revenues increased over the prior year due primarily to an increase in
net premiums earned in the 2004 period. The increase in net premiums earned in
the 2004 period was caused principally by the fact that net unearned premiums
decreased in the 2004 first quarter, while net unearned premiums increased in
the same 2003 quarter. Each of the offices in this grouping contributed to the
rise in revenues, with Miami providing the largest contribution. Income before
income taxes in the first quarter of 2004 increased compared to the same 2003
period due primarily to improved underwriting profit that was primarily the
result of better overall loss experience in 2004 than in 2003. Year over year
results also benefited, to a lesser extent, from a lower overall commission
ratio in the 2004 quarter caused, in part, by a change in the mix of business.
The commission ratio, a component of the underwriting expense ratio, is defined
as net commissions divided by net premiums written.
FINANCIAL CONDITION AND LIQUIDITY
As a holding company, the Company's assets consist primarily of the stock
of TRC and the Company's future cash flows depend on the availability of
dividends or other statutorily permissible payments from TRC and its
wholly-owned operating subsidiaries, TRZ and Putnam. In the first quarters of
2004 and 2003, the Company received cash dividends from TRC of $5.8 million and
$5.2 million, respectively. Sources of funds for the operating subsidiaries
consist primarily of premiums, reinsurance recoverables, investment income,
proceeds from sales, redemptions and the maturing of investments and funds
received under securities loan agreements. Funds are applied primarily to
payments of claims, ceded reinsurance premiums, insurance operating expenses,
income taxes and investments in fixed income and equity securities. Premiums are
generally received substantially in advance of related claims payments. Cash and
cash equivalents are maintained for the payment of claims and expenses as they
become due. TRH does not anticipate any material capital expenditures in the
foreseeable future.
- 18 -
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2004
At March 31, 2004, total investments and cash were $7,330.9 million
compared to $6,867.2 million at December 31, 2003. The increase was caused, in
large part, by $234.6 million of cash provided by operating activities and the
investment of $181.1 million of net funds received under securities loan
agreements.
TRH's fixed maturity investments, approximately 79.4% of total investments
as of March 31, 2004, are predominantly investment grade, liquid securities,
approximately 62% of which will mature in less than 10 years. The duration of
the fixed maturity portfolio was 5.4 years as of March 31, 2004. Also as of that
date, approximately 8.1% of total investments were in common and nonredeemable
preferred stocks, approximately 2.9% of total investments were in other invested
assets, including investments in partnerships, approximately 9.3% of total
investments were in the short-term investment of funds received under securities
loan agreements, and the remaining 0.3% consisted of short-term investments.
Based on the foregoing, TRH considers its liquidity to be adequate through the
end of 2004 and thereafter for a period the length of which is difficult to
predict, but which TRH believes will be at least one year.
Activity within the fixed maturities available for sale portfolio for the
periods under discussion generally represented strategic portfolio realignments
to maximize after-tax income. TRH adjusts its mix of taxable and tax-exempt
investments, as appropriate, generally as a result of strategic investment and
tax planning considerations. In addition, TRH engaged in securities lending
transactions whereby certain securities (i.e., fixed maturities and common
stocks available for sale) from its portfolio were loaned to third parties. In
these transactions, initial collateral, principally cash, is received by TRH in
an amount exceeding the market value of the loaned security and is invested in a
pooled account (shown on the balance sheet at cost, which approximates market
value) of the lending agent in these transactions (an AIG subsidiary). A
liability is recorded in an amount equal to the collateral received to recognize
TRH's obligation to return such funds when the related loaned securities are
returned. The market values of fixed maturities and common stocks available for
sale that are on loan are reflected parenthetically as pledged on the balance
sheet and totaled $625.0 million and $25.5 million, respectively, as of March
31, 2004.
At March 31, 2004, gross unrealized gains and losses on fixed maturities
amounted to $240.0 million and $6.9 million, respectively, and gross unrealized
gains and losses on equities amounted to $49.2 million and $3.9 million,
respectively.
As of March 31, 2004, 93.0% of the fixed maturity portfolio was rated Aaa
or Aa, an additional 6.8% was also rated investment grade or better, 0.1% was
rated below investment grade and 0.1% was not rated. Also, as of March 31, 2004,
TRH had no derivative instruments.
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) resulting from investment write-downs.
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 possible that TRH may not realize a
full recovery on its investment, irrespective of the occurrence of one of
the foregoing events.
- 19 -
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2004
Once a security has been identified as impaired, the amount of such
impairment is determined by reference to that security's contemporaneous market
price.
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.)
At March 31, 2004, reserves for unpaid losses and loss adjustment expenses
totaled $5.07 billion, an increase of $260.0 million, or 5.4%, as compared to
December 31, 2003. Also at March 31, 2004, reinsurance recoverable on unpaid
losses and loss adjustment expenses totaled $830.5 million, a decrease of $5.5
million, or 0.7%, from the 2003 year-end. The increase in loss reserves in the
2004 first quarter includes provision for losses occurring in the 2004 first
quarter, and, to a lesser extent, additional reserves for losses occurring prior
to 2004 as well as the impact of the weakening U.S. dollar in the 2004 first
quarter against most foreign currencies, particularly from Europe.
TRH's loss reserves represent estimates of future liability and related
reinsurance recoverable for losses occurring on or prior to the balance sheet
date. Net losses and loss adjustment expenses are charged to income as incurred.
Unpaid losses and loss adjustment expenses are principally based on reports and
individual case estimates received from ceding companies. A provision is
included for losses and loss adjustment expenses incurred but not reported
(IBNR) on the basis of past experience and other factors. The methods of making
such estimates and for establishing the resulting reserves and related
recoverables are continually reviewed and updated, and any adjustments resulting
therefrom are reflected in income currently. Provisions for inflation and social
inflation (e.g., awards by judges and juries which progressively increase in
size at a rate exceeding that of general inflation) are implicitly considered in
the overall reserve setting process as an element of numerous judgments which
are made as to expected trends in average claim severity.
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 high
level of dependence TRH places on the claims reserving and reporting practices
of ceding companies, which vary greatly by size, specialization and country of
origin, and whose practices are subject to change without notice. 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.
In particular, TRH writes a significant amount of non proportional assumed
casualty reinsurance as well as proportional assumed reinsurance of excess
casualty business for such volatile classes as medical malpractice and
directors' and officers' liability. Significant adverse development was recorded
in 2002 and 2003 for losses occurring in 1998 through 2000 in these lines,
reflecting industry wide trends. At the primary level, there are significant
risk factors which contribute to the variability and unpredictability of the
loss cost trends for this business such as jury awards, social inflation,
medical inflation, tort reforms, and court interpretations of coverage. These
uncertainties are even greater for a reinsurer for the reasons discussed in the
immediately preceding paragraph.
- 20 -
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2004
Additionally, loss reserves include amounts resulting from the September
11, 2001 terrorist attack which are principally related to property (including
business interruption), other liability, workers' compensation and aviation
coverages. These amounts are subject to significant uncertainty due to a variety
of issues such as coverage disputes, the assignment of liability and a
potentially long latency period for claims due to respiratory disorders and
stress.
Loss reserves also include amounts for risks related to environmental
impairment and asbestos-related illnesses. The majority of TRH's environmental
and asbestos-related liabilities arise from contracts entered into after 1984.
These obligations generally arose from contracts underwritten specifically as
environmental or asbestos-related coverages rather than from standard general
liability coverages where the environmental or asbestos-related liabilities were
neither clearly defined nor specifically excluded. The reserves carried for such
claims, including IBNR, are based upon known facts and current law. However,
significant uncertainty exists as, among other things, there are inconsistent
court resolutions and judicial interpretations with respect to underlying policy
intent and coverage and uncertainties as to the allocation of responsibility for
resultant damages.
Because the reserving process is inherently difficult and subjective,
actual net losses and loss adjustment expenses may materially differ from
reserves and related reinsurance recoverables reflected in TRH's consolidated
financial statements, and accordingly, may have a material effect on future
results of operations. And while there is also the possibility of changes in
statutes, laws, regulations and other factors that could have a material effect
on these liabilities and, accordingly, future earnings, TRH believes that its
loss and loss adjustment expense reserves carried at March 31, 2004 are
adequate.
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 other underwriting expenses) and investment
activities (principally interest and dividends received, net of investment
expenses paid). For the first quarter of 2004, TRH's operating cash flow of
$234.6 million was less than the comparable 2003 quarter amount of $287.9
million. The decrease was due, in large part, to the difference between income
taxes paid in the first quarter of 2004 compared to recoveries of income taxes
previously paid in the same prior year quarter.
As losses from the September 11, 2001 terrorist attack and Enron
reinsurance exposure remain unpaid, TRH expects that payments related to these
events may negatively impact operating cash flows in future 2004 quarters and in
2005.
Of total consolidated operating cash flows, $135.7 million and $89.7
million were derived from international operations in the first quarters of 2004
and 2003, respectively. More than half of such cash flows were derived from
London in each of those periods.
TRH believes that its balance of cash and cash equivalents of $154.5
million as of March 31, 2004 and its future cash flows will be sufficient to
meet TRH's cash requirements through the end of 2004 and thereafter for a period
the length of which is difficult to predict, but which TRH believes will be at
least one year.
Generally, paid losses have been increasing in more recent years largely as
a result of a shift in the mix of business 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.
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.
- 21 -
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2004
TRH's stockholders' equity totaled $2.44 billion at March 31, 2004, an
increase of $59.3 million from year-end 2003. The net increase consisted
principally of net income of $89.7 million, offset, in part, by a decrease in
accumulated other comprehensive income of $28.8 million and cash dividends
declared of $5.8 million.
The abovementioned decrease in accumulated other comprehensive income
consisted of net unrealized currency translation loss, net of income taxes, of
$36.0 million, caused, in part, by a weakening of the U.S. dollar particularly
against certain European currencies, partially offset by net unrealized
appreciation of investments, net of income taxes, of $7.2 million. The net
unrealized appreciation of investments, net of income taxes, is composed
principally of an increase of $16.0 million from unrealized appreciation of
fixed maturities available for sale, offset, in part, by a decrease of $9.4
million from unrealized depreciation of equities available for sale.
Net unrealized appreciation (depreciation) of investments, net of income
taxes, is subject to significant volatility resulting from changes in the market
value of fixed maturities and equities available for sale. Market values may
fluctuate due to changes in general economic and political conditions, market
interest rates, prospects of investee companies and other factors.
OTHER MATTERS
(a) 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." In accordance with that standard, TRH
disclosed the pro forma impact on net income had all stock-based 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 first quarters of 2004 and 2003 reflect
stock-based compensation expenses, which are included in the Statements of
Operations as a component of other deductions, net, primarily related to stock
options granted after January 1, 2003. The impact of adopting the recognition
provisions of SFAS No. 123 was not material to net income, financial condition
or cash flows in the first quarter of 2004 or 2003. (See Note 3 of Notes to
Condensed Consolidated Financial Statements.)
While the pro forma impact of applying the recognition provisions to all
award grants are disclosed, the charges to net income in the first quarters of
2004 and 2003 resulting from TRH adopting the recognition provisions of SFAS No.
123 may not be indicative of future amounts charged to net income, as those
charges under the prospective method of transition will not reflect costs
associated with stock-based compensation issued or granted prior to
January 1, 2003.
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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
MARCH 31, 2004
(b) OTHER ACCOUNTING STANDARDS:
In December 2003, the FASB revised Interpretation No. 46 (FIN 46(R)),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51."
FIN 46(R) defined a variable interest entity (VIE) as an entity that 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. FIN 46(R) requires a VIE to be consolidated by its
primary beneficiary. All other entities are evaluated for consolidation under
existing guidance. FIN 46(R) also requires disclosure of significant VIEs for
which a company is not the primary beneficiary.
The provisions of FIN 46(R) were effective for VIEs commonly referred to as
special-purpose entities in the first interim or annual period ending after
December 15, 2003 and for all other types of VIEs in the first interim or annual
period ending after March 15, 2004. The application of FIN 46(R) did not have a
material effect on results of operations, financial condition or cash flows in
the first quarter of 2004.
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Part I - Item 3
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Transatlantic Holdings, Inc. and its subsidiaries (collectively, TRH)
operations are exposed to market risk. Market risk is the risk of loss of fair
market value resulting from adverse fluctuations in interest rates, equity
prices and foreign currency exchange rates.
Measuring potential losses in fair values is a major focus of risk
management efforts by many companies. Such measurements are performed through
the application of various statistical techniques. One such technique is Value
at Risk (VaR). VaR is a summary statistical measure that uses changes in
historical interest rates, equity prices and foreign currency exchange rates to
calculate the maximum loss that could occur over a defined period of time given
a certain probability.
TRH believes that statistical models alone do not provide a reliable method
of monitoring and controlling market risk. While VaR models are relatively
sophisticated, the quantitative market risk information generated is limited by
the assumptions and parameters established in creating the related models.
Therefore, such models are tools and do not substitute for the experience or
judgment of senior management.
TRH has performed VaR analyses to estimate the maximum potential loss of
fair value for financial instruments for each type of market risk. In this
analysis, financial instrument assets include all investments and cash and
accrued investment income. Financial instrument liabilities include unpaid
losses and loss adjustment expenses and unearned premiums, each net of
reinsurance. TRH has calculated the VaR for the first three months of 2004 and
for the year ending December 31, 2003 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% confidence (i.e., only 5% of historical
scenarios show losses greater than the VaR figure). A one-month holding period
is assumed in computing the VaR figure.
The following table presents the VaR on a combined basis and of each
component of market risk for the three months ended March 31, 2004 and for the
year ended December 31, 2003. VaR with respect to combined operations cannot be
derived by aggregating the individual risk amounts presented herein.
Market Risk
- -----------
(in millions)
2004 2003
--------------------------------- ------------------------------------
As of As of
March 31, Average High Low December 31, Average High Low
--------------------------------- ------------------------------------
Combined $166 $169 $171 $166 $171 $135 $171 $105
Interest rate 193 196 198 193 198 148 198 104
Equity 70 72 73 70 73 61 73 48
Currency 5 5 5 4 4 4 4 3
- 24 -
Part I - Item 4
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONTROLS AND PROCEDURES
TRH's disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports that TRH files or submits
under the Securities Exchange Act of 1934, as amended (Exchange Act), is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission. Disclosure
controls and procedures include controls and procedures designed to ensure that
information required to be disclosed by TRH in the reports that it files or
submits under the Exchange Act is accumulated and communicated to TRH's
management, including TRH's Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. TRH's
management, with the participation of TRH's Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of TRH's disclosure controls
and procedures as of the end of the period covered by this report. Based on that
evaluation, TRH's Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures provided reasonable assurance of
effectiveness as of the end of the period covered by this report. In addition,
there has been no change in TRH's internal control over financial reporting that
occurred during the first quarter of 2004 that has materially affected, or is
reasonably likely to materially affect, TRH's internal control over financial
reporting.
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Part II - Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
In November 2000, the Board of Directors authorized the purchase of up
to 200,000 shares of the Company's common stock in the open market or
through negotiated transactions. There were no shares purchased under
this authorization during the three months ended March 31, 2004 and,
at that date, 135,800 shares remained available for purchase under the
foregoing authorization. The purchase program has no set expiration or
termination date.
The information included in this section does not include 1,853 shares
attested to in satisfaction of the exercise price by a holder of the
Company's employee stock options (granted under employee stock option
plans) who exercised options during the three months ended
March 31, 2004.
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 March 31, 2004, 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 May 7, 2004
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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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