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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _________ to ________
Commission File Number 1-10545
-------
TRANSATLANTIC HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3355897
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
80 Pine Street, New York, New York 10005
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 770-2000
--------------
NONE
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 2004. 65,758,682 (Adjusted for the 5-for-4 split of
the common stock in the form of a 25% stock dividend, paid on July 16, 2004.)
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31,
2003.................................................................... 1
Consolidated Statements of Operations for the three and six months ended
June 30, 2004 and 2003 (unaudited)...................................... 2
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2004 and 2003 (unaudited)...................................... 3
Consolidated Statements of Comprehensive (Loss) Income for the three and
six months ended June 30, 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 4. Submission of Matters to a Vote of Security Holders........................ 26
ITEM 6. Exhibits and Reports on Form 8-K........................................... 27
Signatures........................................................................... 27
Exhibit Index........................................................................ 28
Part I - Item 1
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 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-$754,734;
2003-$634,768) $ 766,009 $ 622,620
Available for sale, at market value (amortized cost: 2004-$4,803,285;
2003-$4,591,165) (pledged, at market value: 2004-$681,470;
2003-$426,536) 4,877,728 4,780,919
Equities:
Common stocks available for sale, at market value (cost: 2004-$514,633;
2003-$495,378) (pledged, at market value: 2004-$34,358; 2003-$47,999) 549,478 555,255
Nonredeemable preferred stocks available for sale, at market value
(cost: 2004-$20,742; 2003-$29,310) 20,096 29,131
Other invested assets 283,539 183,773
Short-term investment of funds received under securities loan agreements 735,688 485,869
Short-term investments, at cost which approximates market value 17,436 26,711
Cash and cash equivalents 152,084 182,887
---------- ----------
Total investments and cash 7,402,058 6,867,165
Accrued investment income 112,692 103,646
Premium balances receivable, net 546,088 408,029
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses:
Affiliates 225,605 221,686
Other 674,994 648,227
Deferred acquisition costs 186,259 173,612
Prepaid reinsurance premiums 111,956 75,515
Deferred income taxes 252,193 165,670
Other assets 67,720 44,208
---------- ----------
Total assets $9,579,565 $8,707,758
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $5,249,372 $4,805,498
Unearned premiums 1,004,818 917,355
Payable under securities loan agreements 735,688 485,869
Other liabilities 161,175 122,449
---------- ----------
Total liabilities 7,151,053 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: 2004-66,622,882; 2003-53,332,678 66,623 53,333
Additional paid-in capital 189,690 196,645
Accumulated other comprehensive income 1,270 120,770
Retained earnings 2,185,372 2,020,282
Treasury Stock, at cost; 864,200 shares of common stock (14,443) (14,443)
---------- ----------
Total stockholders' equity 2,428,512 2,376,587
---------- ----------
Total liabilities and stockholders' equity $9,579,565 $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 Six Months Ended
June 30, June 30,
------------------- -----------------------
2004 2003 2004 2003
-------- -------- ---------- ----------
(in thousands, except per share data)
Revenues:
Net premiums written $927,197 $802,850 $1,834,667 $1,570,931
Increase in net unearned premiums (31,693) (40,087) (46,016) (116,001)
-------- -------- ---------- ----------
Net premiums earned 895,504 762,763 1,788,651 1,454,930
Net investment income 72,851 68,481 144,899 133,095
Realized net capital gains 2,215 731 9,464 1,269
-------- -------- ---------- ----------
970,570 831,975 1,943,014 1,589,294
-------- -------- ---------- ----------
Expenses:
Net losses and loss adjustment expenses 617,159 545,201 1,239,370 1,022,190
Net commissions 230,149 183,385 449,258 386,945
Other underwriting expenses 17,994 15,852 36,182 31,236
Increase in deferred acquisition costs (8,569) (9,621) (12,436) (27,773)
Other deductions, net 1,362 764 2,679 1,094
-------- -------- ---------- ----------
858,095 735,581 1,715,053 1,413,692
-------- -------- ---------- ----------
Income before income taxes 112,475 96,394 227,961 175,602
Income taxes 24,651 21,216 50,484 37,596
-------- -------- ---------- ----------
Net income $ 87,824 $ 75,178 $ 177,477 $ 138,006
======== ======== ========== ==========
Net income per common share: (a)
Basic $ 1.34 $ 1.15 $ 2.70 $ 2.11
Diluted 1.32 1.14 2.68 2.09
Dividends per common share (a) 0.100 0.088 0.188 0.168
Weighted average common shares outstanding: (a)
Basic 65,719 65,503 65,676 65,485
Diluted 66,287 65,924 66,252 65,894
(a) Share and per share information have been adjusted for the 5-for-4 split of
the common stock in the form of a 25% common stock dividend, paid on July
16, 2004.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-2-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
---------------------
2004 2003
--------- ---------
(in thousands)
Net cash provided by operating activities $ 432,507 $ 503,523
--------- ---------
Cash flows from investing activities:
Proceeds of fixed maturities available for sale sold 289,447 533,508
Proceeds of fixed maturities available for sale redeemed or matured 173,803 227,195
Proceeds of equities sold 390,942 316,586
Purchase of fixed maturities held to maturity (144,728) (465,812)
Purchase of fixed maturities available for sale (695,516) (788,335)
Purchase of equities (385,170) (341,337)
Net (purchase) sale of other invested assets (94,830) 40,954
Net purchase of short-term investment of funds received under
securities loan agreements (249,819) (21,919)
Net sale (purchase) of short-term investments 8,488 (14,177)
Change in other liabilities for securities in course of settlement 487 47,661
Other, net (655) (261)
--------- ---------
Net cash used in investing activities (707,551) (465,937)
--------- ---------
Cash flows from financing activities:
Net funds received under securities loan agreements 249,819 21,919
Dividends to stockholders (11,561) (10,451)
Proceeds from common stock issued 5,000 2,327
Other, net (106) --
--------- ---------
Net cash provided by financing activities 243,152 13,795
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 1,089 7,027
--------- ---------
Change in cash and cash equivalents (30,803) 58,408
Cash and cash equivalents, beginning of period 182,887 127,402
--------- ---------
Cash and cash equivalents, end of period $ 152,084 $ 185,810
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
--------- -------- --------- --------
(in thousands)
Net income $ 87,824 $ 75,178 $ 177,477 $138,006
--------- -------- --------- --------
Other comprehensive (loss) income:
Net unrealized (depreciation) appreciation of investments:
Net unrealized holding (losses) gains (143,373) 113,337 (125,008) 120,258
Related income tax effect 50,181 (39,668) 43,753 (42,090)
Reclassification adjustment for gains included in
net income (2,215) (731) (9,464) (1,269)
Related income tax effect 775 256 3,312 444
--------- -------- --------- --------
(94,632) 73,194 (87,407) 77,343
--------- -------- --------- --------
Net unrealized currency translation gain (loss) 6,023 (17,618) (49,374) (38,216)
Related income tax effect (2,108) 6,167 17,281 13,376
--------- -------- --------- --------
3,915 (11,451) (32,093) (24,840)
--------- -------- --------- --------
Other comprehensive (loss) income (90,717) 61,743 (119,500) 52,503
--------- -------- --------- --------
Comprehensive (loss) income ($2,893) $136,921 $ 57,977 $190,509
========= ======== ========= ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and Form 10-Q filing for the
quarter ended March 31, 2004.
2. Common Stock Split
In May 2004, the Board of Directors of Transatlantic Holdings, Inc.
declared a 5-for-4 split of the common stock in the form of a 25% common stock
dividend that was paid on July 16, 2004, to stockholders of record on June 25,
2004.
The effect of the split has been recorded in the Consolidated Balance Sheet
at June 30, 2004, increasing common stock by $13.2 million and decreasing
additional paid-in capital by $13.2 million. The Consolidated Balance Sheet at
December 31, 2003 has not been restated.
With respect to the Consolidated Statements of Operations, the net income
per common share amounts for each of the periods presented are based on the
weighted average number of common shares outstanding, adjusted to reflect the
5-for-4 common stock split. Dividend per common share amounts for each of the
periods presented have also been adjusted to reflect the 5-for-4 common stock
split.
-5-
3. Net Income Per Common Share
Net income per common share for the periods presented has been computed
below based upon weighted average common shares outstanding.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2004 2003 2004 2003
------- ------- -------- --------
(in thousands, except per share data)
Net income (numerator) $87,824 $75,178 $177,477 $138,006
======= ======= ======== ========
Weighted average common shares outstanding
used in the computation of net income per share:(a)
Average shares issued 66,583 66,367 66,540 66,349
Less: Average shares in treasury 864 864 864 864
------- ------- -------- --------
Average outstanding shares - basic (denominator) 65,719 65,503 65,676 65,485
Average potential shares, principally stock options 568 421 576 409
------- ------- -------- --------
Average outstanding shares - diluted (denominator) 66,287 65,924 66,252 65,894
======= ======= ======== ========
Net income per common share:(a)
Basic $ 1.34 $ 1.15 $ 2.70 $ 2.11
Diluted 1.32 1.14 2.68 2.09
(a) Share and per share information have been adjusted for the 5-for-4 split of
the common stock in the form of a 25% common stock dividend, paid on
July 16, 2004.
4. Stock-Based Compensation
On January 1, 2003, TRH adopted the recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," using the prospective method of transition. That method requires
application of such recognition provisions under the fair value method to all
stock-based compensation awards granted, modified, or settled on or after the
date of adoption. Accordingly, net income in the second quarters and first six
months of 2004 and 2003 reflect stock-based compensation expenses, which are
included in the Consolidated Statements of Operations as a component of other
deductions, net, primarily related to stock options granted after January 1,
2003. 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.
-6-
4. Stock-Based Compensation (continued)
Had compensation cost been charged to earnings in accordance with the fair
value based method as prescribed in SFAS No. 123 for all outstanding stock-based
compensation awards (occurring both before and after adoption of the recognition
provisions of SFAS No. 123), TRH's net income and net income per common share
(on a pro forma basis) would have been as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2004 2003 2004 2003
------- ------- -------- --------
(in thousands, except per share data)
Net income:
As reported $87,824 $75,178 $177,477 $138,006
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 515 217 1,050 305
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects (1,098) (944) (2,263) (1,805)
------- ------- -------- --------
Pro forma $87,241 $74,451 $176,264 $136,506
======= ======= ======== ========
Net income per common share:(a)
As reported:
Basic $ 1.34 $ 1.15 $ 2.70 $ 2.11
Diluted 1.32 1.14 2.68 2.09
Pro forma:
Basic 1.33 1.14 2.68 2.08
Diluted 1.32 1.13 2.66 2.07
(a) Per share information has been adjusted for the 5-for-4 split of the
common stock in the form of a 25% common stock dividend, paid on
July 16, 2004.
While the pro forma impact of applying the recognition provisions to all
award grants are disclosed, the charges to income in the second quarters and
first six months 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 compensation issued or granted prior to
January 1, 2003.
-7-
5. Reinsurance
Premiums written and earned and losses and loss adjustment expenses
incurred were comprised of the following:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
2004 2003 2004 2003
---------- -------- ---------- ----------
(in thousands)
Gross premiums written $1,038,052 $865,431 $2,080,114 $1,765,847
Reinsurance premiums ceded (110,855) (62,581) (245,447) (194,916)
---------- -------- ---------- ----------
Net premiums written $ 927,197 $802,850 $1,834,667 $1,570,931
========== ======== ========== ==========
Gross premiums earned $1,008,072 $837,267 $1,997,657 $1,616,560
Reinsurance premiums ceded (112,568) (74,504) (209,006) (161,630)
---------- -------- ---------- ----------
Net premiums earned $ 895,504 $762,763 $1,788,651 $1,454,930
========== ======== ========== ==========
Gross incurred losses and
loss adjustment expenses $ 672,294 $650,668 $1,313,244 $1,161,117
Reinsured losses and loss
adjustment expenses ceded (55,135) (105,467) (73,874) (138,927)
---------- -------- ---------- ----------
Net losses and loss
adjustment expenses $ 617,159 $545,201 $1,239,370 $1,022,190
========== ======== ========== ==========
6. Cash Dividends
During the second quarter of 2004, the Board of Directors of Transatlantic
Holdings, Inc. declared a dividend of $0.10 per common share (post-split), or
approximately $6,576,000 in the aggregate, payable on September 17, 2004.
7. Income Taxes
Income taxes paid, net, in the second quarter totaled $80,919,000 and
$37,860,000 in 2004 and 2003, respectively. For the 2004 and 2003 six month
periods, income taxes paid, net, totaled $96,915,000 and $5,636,000,
respectively. Amounts above are net of recoveries of income taxes previously
paid, which were significant in the first quarter of 2003.
-8-
8. Segment Information
The following tables present a summary of comparative financial data by
segment:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
2004 2003 2004 2003
-------- -------- ---------- --------
(in thousands)
Domestic:
Net premiums written $473,570 $441,504 $ 970,386 $859,639
Net premiums earned 440,396 391,872 935,808 793,208
Net investment income 47,803 48,408 95,630 94,393
Realized net capital gains (losses) 1,094 (476) 8,306 (963)
Revenues(1) 489,293 439,804 1,039,744 886,638
Net losses and loss adjustment expenses 322,107 281,758 670,752 554,169
Underwriting expenses(2) 119,492 108,663 256,004 231,446
Underwriting profit(3) 7,538 12,415 18,653 23,193
Income before income taxes 55,453 59,773 120,396 115,569
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
(in thousands)
International-Europe:
Net premiums written $349,242 $275,070 $677,496 $545,738
Net premiums earned 371,202 293,344 678,179 513,240
Net investment income 21,351 16,555 41,777 31,803
Realized net capital (losses) gains (58) (76) (871) 79
Revenues(1)(4) 392,495 309,823 719,085 545,122
Net losses and loss adjustment expenses 254,236 220,043 481,565 379,226
Underwriting expenses(2) 99,221 66,387 171,605 131,037
Underwriting profit(3) 12,044 3,410 24,571 11,070
Income before income taxes 32,853 19,807 64,975 43,214
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2004 2003 2004 2003
-------- ------- -------- --------
(in thousands)
International-Other:
Net premiums written $104,385 $86,276 $186,785 $165,554
Net premiums earned 83,906 77,547 174,664 148,482
Net investment income 3,697 3,518 7,492 6,899
Realized net capital gains 1,179 1,283 2,029 2,153
Revenues(1) 88,782 82,348 184,185 157,534
Net losses and loss adjustment expenses 40,816 43,400 87,053 88,795
Underwriting expenses(2) 29,430 24,187 57,831 55,698
Underwriting profit(3) 19,189 12,121 33,053 8,069
Income before income taxes 24,169 16,814 42,590 16,819
-9-
8. Segment Information (continued)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------------
2004 2003 2004 2003
-------- -------- ---------- ----------
(in thousands)
Consolidated:
Net premiums written $927,197 $802,850 $1,834,667 $1,570,931
Net premiums earned 895,504 762,763 1,788,651 1,454,930
Net investment income 72,851 68,481 144,899 133,095
Realized net capital gains 2,215 731 9,464 1,269
Revenues(1)(4) 970,570 831,975 1,943,014 1,589,294
Net losses and loss adjustment expenses 617,159 545,201 1,239,370 1,022,190
Underwriting expenses(2) 248,143 199,237 485,440 418,181
Underwriting profit(3) 38,771 27,946 76,277 42,332
Income before income taxes 112,475 96,394 227,961 175,602
- ----------
(1) Net revenues from affiliates approximate $129,000 and $133,000 for the
three months ended June 30, 2004 and 2003, respectively, and $271,000 and
$296,000 for the six months ended June 30, 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 $223,624 and $193,507
for the three months ended June 30, 2004 and 2003, respectively, and
$422,885 and $326,335 for the six months ended June 30, 2004 and 2003,
respectively.
9. Related Party Transactions
Approximately $182.7 million (17.6%) and $167.2 million (19.3%) in the
second quarters of 2004 and 2003, respectively, and approximately $382.2 million
(18.4%) and $358.8 million (20.3%) for the six months ended June 30, 2004 and
2003, 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
property, other liability, auto liability, marine and aviation and, for the
first quarters of 2004 and 2003 only, medical malpractice lines. Of the amounts
above, $109.4 million and $69.9 million in the second quarters of 2004 and 2003,
respectively, and $242.9 million and $194.5 million in the six months ended June
30, 2004 and 2003, respectively, represent premiums resulting from certain
insurance business written by AIG subsidiaries that, by prearrangement with TRH,
is almost entirely reinsured by TRH.
-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
JUNE 30, 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 June 30, 2004 and December 31, 2003 and for the three
and six month periods ended June 30, 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 9 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, 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 in new locations, except for the acquisition of TRZ in
1996. 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, business written 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 June 30, 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 June 30, 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
JUNE 30, 2004
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------------
2004 2003 Change 2004 2003 Change
------------------------ ----------------------------
(dollars in millions)
Revenues $970.6 $832.0 16.7% $1,943.0 $1,589.3 22.3%
Income before income taxes 112.5 96.4 16.7 228.0 175.6 29.8
Net income 87.8 75.2 16.8 177.5 138.0 28.6
CONSOLIDATED RESULTS AND MARKET CONDITIONS
Revenues for the second quarter and first six months of 2004 grew
significantly compared to the same prior year periods, principally due to an
increase in net premiums earned, with the largest contribution from European
operations -- where more favorable underwriting opportunities continue to be
available. Domestically, the pace of improvement in casualty line rates has
slowed and pricing for many property classes has declined from recent peaks,
while longer-tail casualty lines, such as directors' and officers' liability,
other professional liability, medical malpractice and general casualty umbrella,
continue to exhibit greater strength.
While TRH believes market conditions continue to be strong in most
classes, the markets in which TRH operates are highly competitive and have
historically been cyclical. Accordingly, TRH cannot predict, with any reasonable
certainty, future market conditions.
Income before income taxes increased in the second quarter of 2004
compared to the year ago quarter due primarily to improvements in underwriting
profit from international operations (both Europe and Other) and, to a lesser
extent, increased net investment income from European operations. Income before
income taxes increased in the first six months of 2004 compared to the prior
year period due primarily to improvements in underwriting profit from
international operations (both Europe and Other) and, to a lesser extent,
increased net investment income from European operations and a shift from
realized net capital losses to realized net capital gains in domestic
operations. With respect to the year over year increases in net income for the
three and six month periods, the above increases in income before income taxes
in the 2004 periods are partially offset by related increases in tax expense.
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.)
Based on results for the first six months of 2004 and current market
conditions, TRH expects that for the second half of 2004, net premiums written
and net investment income will each increase versus comparable amounts in the
same period of 2003 and operating cash flow will remain positive, 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 will
be significantly less than the 33.6% increase in the year 2003 compared to 2002,
due largely to the changing pricing environment discussed above.
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 (Management's Discussion).
CRITICAL ACCOUNTING ESTIMATES
This discussion and analysis of the financial condition and results of
operations are based upon TRH's 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. TRH relies on historical experience, and on various other
assumptions that it believes 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.
-13-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2004
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:
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 TRH,
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 adequacy 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.
-14-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2004
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.
The following table shows net premiums written, net premiums earned
and net investment income of TRH for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------------
2004 2003 Change 2004 2003 Change
------------------------ ----------------------------
(dollars in millions)
Net premiums written $927.2 $802.9 15.5% $1,834.7 $1,570.9 16.8%
Net premiums earned 895.5 762.8 17.4 1,788.7 1,454.9 22.9
Net investment income 72.9 68.5 6.4 144.9 133.1 8.9
Net premiums written for the second quarter and first six months of
2004 exceeded the comparable 2003 periods principally as a result of increased
coverage provided and pricing increases and, to a lesser extent, the impact of
foreign exchange rate movements. In the 2004 periods compared to the same prior
year periods, 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 second quarter of 2004
increased in international and, to a lesser extent, domestic operations as
compared to the second quarter of 2003. Net premiums written in the first six
months of 2004 increased in both domestic and international operations as
compared to the same 2003 period. On a worldwide basis, casualty lines business
represented 73.2% of net premiums written in the first six months of 2004 versus
76.2% in the comparable 2003 period. The balance represented property lines.
Treaty business represented 96.6% of net premiums written in the first six
months of 2004 versus 95.8% in the year ago period. The balance represented
facultative accounts.
Of the total increase in net premiums written in the second quarter of
2004 compared to the second quarter of 2003, domestic net premiums written
increased by $32.1 million, or 7.3%, to $473.6 million with significant
increases in net premiums written recorded in other liability lines (principally
in general casualty classes). Domestic net premiums written increased in the
first six months of 2004 by $110.7 million, or 12.9%, over the same prior year
period to $970.4 million with significant increases in other liability
(principally in general casualty classes and, to a lesser extent, the specialty
casualty classes of directors' and officers' liability and other professional
liability) and property lines. The increase in net premiums written in property
lines is due, in part, to a reduction in ceded property premiums written for the
first six months in 2004.
-15-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2004
Net premiums written by international offices increased in the second
quarter of 2004 by $92.3 million, or 25.5%, over the prior year, to $453.6
million, led by European operations, particularly London. International net
premiums written increased significantly in property and credit lines in the
second quarter of 2004 compared to the second quarter of 2003. For the first six
months of 2004 international net premiums written increased by $153.0 million,
or 21.5%, over the same year ago period to $864.3 million, again led by European
operations, particularly London. Significant increases in international net
premiums written were recorded in property and credit lines in the first six
months of 2004 compared to the same prior year period. The increases in
international net premiums written resulted, in part, from the impact of foreign
exchange as discussed above. International business represented 47.1% of
worldwide net premiums written for the first six months of 2004 compared to
45.3% for the respective 2003 period.
Generally, reasons for increases in gross premiums written between
periods are similar to those for net premiums written.
A significant portion of the increase in ceded premiums written for
the three and six month periods ended June 30, 2004 compared to the same prior
year periods represents amounts which, by prearrangement, were assumed from an
affiliate and then ceded in an equal amount to other affiliates.
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 is 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.
Net investment income increased in the second quarter and first six
months of 2004, as compared to the prior year periods, 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 three and six month periods ending June 30, 2004, the pre-tax
yields on fixed maturities were 4.5% and 4.6%, respectively, compared to 4.7%
and 4.6% for the prior year three and six month periods, respectively. The
pre-tax yield on fixed maturities represents annualized pre-tax net investment
income from fixed maturities for the periods indicated divided by the average
balance sheet carrying value of the fixed maturity portfolio for such periods.
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.
-16-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2004
The following table presents loss and loss adjustment expense ratios,
underwriting expense ratios and combined ratios for consolidated TRH, and
separately for its domestic and international components, for the periods
indicated:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
----------- -----------
Consolidated:
Loss and loss adjustment
expense ratio 68.9 71.5 69.3 70.3
Underwriting expense ratio 26.8 24.8 26.5 26.6
Combined ratio 95.7 96.3 95.8 96.9
- ---------------------------------------------------------------------
Domestic:
Loss and loss adjustment
expense ratio 73.2 71.9 71.7 69.9
Underwriting expense ratio 25.2 24.6 26.4 26.9
Combined ratio 98.4 96.5 98.1 96.8
International:
Loss and loss adjustment
expense ratio 64.8 71.0 66.7 70.7
Underwriting expense ratio 28.4 25.1 26.5 26.3
Combined ratio 93.2 96.1 93.2 97.0
The loss and loss adjustment expense ratios for consolidated TRH
improved in the second quarter and first six months of 2004 compared to the same
2003 periods as a result of improved loss experience in international
operations. Results for the second quarters and first six month periods of 2004
and 2003 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, 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 increased in the
second quarter of 2004 compared to the same year ago quarter due to an increase
in the net commission component of the ratio caused largely by an increase in
profit commissions related to international business and, to a lesser extent, a
change in the mix of business. The change in the underwriting expense ratio
between the comparable six month periods was not significant.
The increase in deferred acquisition costs for the first six months of
2004 was less than the comparable prior year amount. The difference arose
principally in the first quarter on 2004 compared to the first quarter of 2003.
As the increase in unearned premiums in the first six months of 2004 was less
than such increase in the same prior year period, a related, and smaller, amount
of acquisition costs was deferred in the first six months of 2004 compared to
the same 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.
-17-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2004
Other deductions, net, includes pre-tax expense charges of $0.7
million and $0.3 million for the second quarters of 2004 and 2003, respectively,
and $1.4 million and $0.4 million for the six month periods of 2004 and 2003,
respectively, for stock-based compensation (see Note 4 of Notes to Condensed
Consolidated Financial Statements) related to TRH's voluntary adoption of the
recognition provisions of Statement of Financial Accounting Standards (SFAS) No.
123. In addition, other deductions, net, also includes currency transaction
gains and losses and other miscellaneous income and expense items.
Pre-tax realized net capital gains totaled $2.2 million and $0.7
million for the second quarters of 2004 and 2003, respectively. Pre-tax realized
net capital gains totaled $9.5 million and $1.3 million for the first six months
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. There were no write-downs for other than
temporary declines in market value in the second quarter of 2004 while the
second quarter of 2003 included write-downs totaling $1.3 million and $0.7
million of equities available for sale and fixed maturities available for sale,
respectively. In the first six months 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 six months of 2003 included write-downs totaling $4.4 million and $4.5
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 16.7% to $112.5 million in the
second quarter of 2004 versus $96.4 million in the second quarter of 2003. For
the six month periods, income before income taxes increased 29.8% to $228.0
million in 2004 versus $175.6 million in 2003. The increase in income before
income taxes in the 2004 periods compared to the prior year periods resulted
primarily from increased underwriting profit from international operations (both
Europe and Other) and, to a lesser extent, increased net investment income from
European operations and, for the six month period only, a shift from realized
net capital losses to realized net capital gains in domestic operations.
Federal and foreign income tax expenses of $24.7 million and $21.2
million were recorded in the second quarters of 2004 and 2003, respectively.
Federal and foreign income tax expenses of $50.5 million and $37.6 million were
recorded in the first half 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.
The effective tax rates, which represent income taxes divided by
income before income taxes, were 21.9% and 22.0% in the second quarters of 2004
and 2003, respectively. The effective tax rates were 22.1% and 21.4% in the
first six months of 2004 and 2003, respectively. The increased effective tax
rate in the first six months of 2004 compared to the prior year period resulted
primarily from the fact that in the 2004 first six months, a smaller percentage
of income before income taxes resulted from tax-exempt investment income than in
the comparable 2003 period.
All of the share and per-share amounts included in this Management's
Discussion have been adjusted to reflect the 5-for-4 split of the Company's
common stock in the form of a 25% common stock dividend that was paid on July
16, 2004, to stockholders of record on June 25, 2004. (See Note 2 of Notes to
Condensed Consolidated Financial Statements.)
-18-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2004
Net income for the second quarter of 2004 increased 16.8% to $87.8
million, or $1.32 per common share (diluted), compared to net income of $75.2
million, or $1.14 per common share (diluted), in the 2003 second quarter. Net
income for the first six months of 2004 increased 28.6% to $177.5 million, or
$2.68 per common share (diluted), compared to net income of $138.0 million, or
$2.09 per common share (diluted), in the same prior year period. Reasons for the
changes between periods are as discussed earlier.
SEGMENT RESULTS
(a) Domestic:
Comparing the results for each of the three and six month periods
ended June 30, 2004 with the same prior year periods, revenues increased over
the prior year periods due primarily to increases in net premiums written, as
discussed earlier in RESULTS OF OPERATIONS. Income before income taxes in the
second quarter of 2004 decreased compared to the same 2003 period due to a
decrease in underwriting profit, caused by a slight deterioration in the loss
and loss adjustment expense ratio. Income before income taxes in the first half
of 2004 increased compared to the same 2003 period due to a shift from realized
net capital losses to realized net capital gains, partially offset by a decrease
in underwriting profit, caused principally by a slight deterioration in the loss
and loss adjustment expense ratio.
(b) International - Europe (London and Paris branches and TRZ):
Comparing the results for each of the three and six month periods
ended June 30, 2004 with the same prior year periods, 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
the property and credit lines. The increases in net premiums written were a
result, in part, of the weakening U.S. dollar compared to the currencies in
which premiums were written in the second quarter and first half of 2004 as
compared to the same prior year periods. Income before income taxes in the
second quarter and first half of 2004 increased compared to the same 2003
periods due primarily to increased underwriting profit, which was primarily the
result of an improved loss and loss adjustment expense ratio in London and TRZ,
partially offset by a higher commission ratio caused in large part by increased
profit commissions and, to a lesser extent, 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. To a lesser extent, increased
net investment income also contributed to the increase in income before income
taxes in both the second quarter and first half of 2004, benefiting, in part,
from strong cash flows in recent periods in this region (particularly London)
and the impact of foreign exchange as discussed above.
(c) International - Other (Miami (serving Latin America and the
Caribbean), Toronto, Hong Kong and Tokyo branches):
Comparing the results for the each of the three and six month periods
ended June 30, 2004 with the same prior year periods, revenues increased over
the prior year due primarily to an increase in net premiums written in the 2004
periods. For the three month periods only, the increase in net premiums written
in 2004 was partially offset by the impact of a greater increase in net unearned
premiums in the 2004 second quarter compared to the same prior year quarter. The
Miami office provided the largest contribution to the rise in revenues,
partially offset by a decrease in revenues from Hong Kong. Income before income
taxes in the second quarter and first half of 2004 increased compared to the
same 2003 periods due primarily to increased underwriting profit that was
primarily the result of better overall loss experience in 2004 than in 2003.
Underwriting profit for the first half of 2004 as compared with the same period
of 2003 also benefited, to a lesser extent, from a lower commission ratio in
Miami, caused in part, by a change in the mix of business.
-19-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2004
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 second quarters of
2004 and 2003, the Company received cash dividends from TRC of $5.5 million and
$5.2 million, respectively. For the first six months of 2004 and 2003, the
Company received cash dividends from TRC of $11.3 million and $10.4 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, as well as the short-term investment of
funds received under securities loan agreements. 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.
At June 30, 2004, total investments and cash were $7,402.1 million
compared to $6,867.2 million at December 31, 2003. The increase was caused, in
large part, by $432.5 million of cash provided by operating activities and the
investment of $249.8 million of net funds received under securities loan
agreements, partially offset by a decrease of $134.5 million in net unrealized
appreciation of investments.
TRH's fixed maturity investments, approximately 77.9% of total
investments as of June 30, 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 June 30, 2004. Also
as of that date, approximately 7.9% of total investments were in common and
nonredeemable preferred stocks, approximately 3.9% of total investments were in
other invested assets, including investments in partnerships, approximately
10.1% of total investments were in the short-term investment of funds received
under securities loan agreements, and the remaining 0.2% 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 $681.5 million and
$34.4 million, respectively, as of June 30, 2004.
At June 30, 2004, gross unrealized gains and losses on fixed
maturities available for sale amounted to $112.8 million and $38.4 million,
respectively. The reduction in gross unrealized gains and increase in gross
unrealized losses on such fixed maturities in the first six months of 2004 is
due primarily to the increase in market interest rates during that period. At
June 30, 2004, gross unrealized gains and losses on equities amounted to $40.3
million and $6.1 million, respectively.
As of June 30, 2004, 93.3% of the fixed maturity portfolio was rated
Aaa or Aa, an additional 6.6% was also rated investment grade or better and 0.1%
was not rated. Also, as of June 30, 2004, TRH had no derivative instruments.
-20-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2004
Management reviews TRH's investments on a continual basis for evidence
of other than temporary declines in market value, exercising its judgment in
making such a determination, and calculates the amount of loss recognition (as a
realized 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.
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
capital losses resulting from write-downs of securities for other than temporary
declines in market value.)
At June 30, 2004, the net deferred income tax asset totaled $252.2
million compared to $165.7 million at December 31, 2003. The majority of the
increase in this net asset caption relates to the significant reduction in
deferred tax liability (which is netted against the deferred income tax asset
balance) representing the tax impact of the reduction in unrealized appreciation
of investments as discussed earlier in this section.
At June 30, 2004, reserves for unpaid losses and loss adjustment
expenses totaled $5.25 billion, an increase of $443.9 million, or 9.2%, as
compared to December 31, 2003. Also at June 30, 2004, reinsurance recoverable on
unpaid losses and loss adjustment expenses totaled $867.0 million, an increase
of $30.9 million, or 3.7%, from the 2003 year-end. The increase in loss reserves
in 2004 includes provisions for losses occurring in the first six months of
2004, and, to a much lesser extent, additional reserves for losses occurring
prior to 2004.
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.
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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2004
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.
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 June 30, 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 six months of 2004, TRH's operating
cash flow of $432.5 million was less than the comparable six months of 2003
amount of $503.5 million. The decrease was due, in large part, to increases in
income taxes paid and paid losses and loss adjustment expenses, net of
reinsurance recovered, partially offset by increased premiums received, net of
commissions, in the first half of 2004 compared to the same period in 2003.
Of total consolidated operating cash flows, $277.3 million and $205.2
million were derived from international operations in the first six months of
2004 and 2003, respectively. More than half of such cash flows were derived from
London in each of those periods.
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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
JUNE 30, 2004
TRH believes that its balance of cash and cash equivalents of $152.1
million as of June 30, 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.
TRH's stockholders' equity totaled $2.43 billion at June 30, 2004, an
increase of $51.9 million from year-end 2003. The net increase consisted
principally of net income of $177.5 million, offset, in part, by a decrease in
accumulated other comprehensive income of $119.5 million and cash dividends
declared of $12.4 million.
The abovementioned decrease in accumulated other comprehensive income
consisted of net unrealized currency translation loss, net of income taxes, of
$32.1 million, caused, primarily, by a weakening of the U.S. dollar particularly
against certain European currencies, and net unrealized depreciation of
investments, net of income taxes, of $87.4 million, primarily occurring in the
second quarter of 2004. The net unrealized depreciation of investments, net of
income taxes, is composed principally of a decrease of $75.0 million in
unrealized appreciation of fixed maturities available for sale, caused primarily
by an increase in market interest rates in the first six months of 2004, and a
decrease of $16.6 million in unrealized appreciation 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.
In May 2004, the Board of Directors of Transatlantic Holdings, Inc.
declared a 5-for-4 split of the common stock in the form of a 25% common stock
dividend that was paid on July 16, 2004, to stockholders of record on June 25,
2004. (See Note 2 of Notes to Condensed Consolidated Financial Statements.)
-23-
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 half 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 six months ended June 30, 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
June 30, Average High Low December 31, Average High Low
-------------------------------- ------------------------------------
Combined $198 $178 $198 $166 $171 $135 $171 $105
Interest rate 212 201 212 193 198 148 198 104
Equity 69 71 73 69 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 provide
reasonable assurance 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 (SEC). Disclosure controls and procedures include controls and
procedures reasonably 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 were effective as of the end of the period
covered by this report to provide reasonable assurance that the information
required to be disclosed in the reports TRH files or submits under the Exchange
Act are recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC. In addition, there has been no
change in TRH's internal control over financial reporting that occurred during
the second fiscal quarter of 2004 that has materially affected, or is reasonably
likely to materially affect, TRH's internal control over financial reporting.
-25-
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 (375,000 shares after adjustment for subsequent
stock splits) of the Company's common stock in the open market or
through negotiated transactions. There were no shares purchased under
this authorization during the six months ended June 30, 2004 and, at
that date, 294,750 shares (as adjusted for stock splits) 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 10,666
shares and 12,982 shares related to options exercised in the three and
six month periods ended June 30, 2004, respectively, that were
attested to in satisfaction of the exercise price by holders of the
Company's employee stock options (granted under employee stock option
plans).
Part II - Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 20, 2004,
the stockholders:
(a) elected nine directors (which constitute the Company's entire
Board of Directors) for a one year term, as follows:
SHARES
NOMINEE SHARES FOR WITHHELD
------- ---------- --------
James Balog 51,059,409 231,641
C. Fred Bergsten 51,059,709 231,341
Maurice R. Greenberg 50,296,947 994,103
Tomio Higuchi 51,058,809 232,241
John J. Mackowski 51,059,709 231,341
Edward E. Matthews 50,296,967 994,083
Robert F. Orlich 50,718,221 572,829
Howard I. Smith 50,717,446 573,604
Thomas R. Tizzio 50,296,963 994,087
(b) approved, by a vote of 51,268,209 shares in favor to 15,785 shares
opposed, with 7,056 abstentions and 1,246,442 shares not voting, a
proposal to ratify the selection of PricewaterhouseCoopers LLP as
independent accountants of Transatlantic Holdings, Inc. for 2004.
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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 June 30, 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: August 6, 2004
-27-
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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