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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 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 September 30, 2004. 65,781,173
----------
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2004 (unaudited)
and December 31, 2003................................................. 1
Consolidated Statements of Operations for the three and nine months ended
September 30, 2004 and 2003 (unaudited)............................... 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003 (unaudited)......................... 3
Consolidated Statements of Comprehensive Income for the three and nine
months ended September 30, 2004 and 2003 (unaudited).................. 4
Notes to Condensed Consolidated Financial Statements (unaudited)......... 5
Cautionary Statement Regarding Forward-Looking Information......................... 10
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk............... 24
ITEM 4. Controls and Procedures.................................................. 25
PART II - OTHER INFORMATION
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.............. 26
ITEM 6. Exhibits................................................................. 26
Signatures......................................................................... 26
Exhibit Index...................................................................... 27
Part I - Item 1
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 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-$960,174;
2003-$634,768) $ 939,097 $ 622,620
Available for sale, at market value (amortized cost: 2004-$4,977,384;
2003-$4,591,165) (pledged, at market value: 2004-$790,912;
2003-$426,536) 5,156,604 4,780,919
Equities:
Common stocks available for sale, at market value (cost: 2004-$525,828;
2003-$495,378) (pledged, at market value: 2004-$32,766; 2003-$47,999) 545,906 555,255
Nonredeemable preferred stocks available for sale, at market value
(cost: 2004-$20,248; 2003-$29,310) 20,205 29,131
Other invested assets 298,912 183,773
Short-term investment of funds received under securities loan agreements 840,638 485,869
Short-term investments, at cost which approximates market value 30,317 26,711
Cash and cash equivalents 151,820 182,887
----------- ----------
Total investments and cash 7,983,499 6,867,165
Accrued investment income 124,857 103,646
Premium balances receivable, net 537,432 408,029
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses:
Affiliates 230,371 221,686
Other 663,044 648,227
Deferred acquisition costs 198,208 173,612
Prepaid reinsurance premiums 114,192 75,515
Deferred income taxes 215,219 165,670
Other assets 85,901 44,208
----------- ----------
Total assets $10,152,723 $8,707,758
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 5,551,947 $4,805,498
Unearned premiums 1,054,484 917,355
Payable under securities loan agreements 840,638 485,869
Other liabilities 229,079 122,449
----------- ----------
Total liabilities 7,676,148 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: 2004-66,645,373; 2003-53,332,678 66,645 53,333
Additional paid-in capital 189,700 196,645
Accumulated other comprehensive income 77,641 120,770
Retained earnings 2,157,032 2,020,282
Treasury Stock, at cost; 864,200 shares of common stock (14,443) (14,443)
----------- ----------
Total stockholders' equity 2,476,575 2,376,587
----------- ----------
Total liabilities and stockholders' equity $10,152,723 $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 Nine Months Ended
September 30, September 30,
--------------------- -----------------------
2004 2003 2004 2003
---------- -------- ---------- ----------
(in thousands, except per share data)
Revenues:
Net premiums written $ 987,385 $901,255 $2,822,052 $2,472,186
Increase in net unearned premiums (46,779) (37,596) (92,795) (153,597)
---------- -------- ---------- ----------
Net premiums earned 940,606 863,659 2,729,257 2,318,589
Net investment income 75,664 68,489 220,563 201,584
Realized net capital gains 5,029 5,501 14,493 6,770
---------- -------- ---------- ----------
1,021,299 937,649 2,964,313 2,526,943
---------- -------- ---------- ----------
Expenses:
Net losses and loss adjustment expenses 810,075 602,523 2,049,445 1,624,713
Net commissions 248,164 221,362 697,422 608,307
Other underwriting expenses 17,264 16,566 53,446 47,802
Increase in deferred acquisition costs (12,161) (8,985) (24,597) (36,758)
Other deductions, net 1,140 752 3,819 1,846
---------- -------- ---------- ----------
1,064,482 832,218 2,779,535 2,245,910
---------- -------- ---------- ----------
(Loss) income before income taxes (43,183) 105,431 184,778 281,033
Income taxes (benefits) (21,345) 24,651 29,139 62,247
---------- -------- ---------- ----------
Net (loss) income ($21,838) $ 80,780 $ 155,639 $ 218,786
========== ======== ========== ==========
Net (loss) income per common share: (a)
Basic ($0.33) $ 1.23 $ 2.37 $ 3.34
Diluted (0.33) 1.22 2.35 3.32
Dividends per common share (a) 0.100 0.088 0.288 0.256
Weighted average common shares outstanding: (a)
Basic 65,770 65,517 65,705 65,495
Diluted 65,770 65,970 66,206 65,918
(a) Share and per share information reflect 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)
Nine Months Ended
September 30,
-------------------------
2004 2003
----------- -----------
(in thousands)
Net cash provided by operating activities $ 721,651 $ 681,680
----------- -----------
Cash flows from investing activities:
Proceeds of fixed maturities available for sale sold 438,957 611,218
Proceeds of fixed maturities available for sale redeemed or matured 291,568 291,871
Proceeds of equities sold 618,197 444,050
Purchase of fixed maturities held to maturity (317,690) (534,727)
Purchase of fixed maturities available for sale (1,121,734) (1,046,615)
Purchase of equities (622,938) (470,646)
Net (purchase) sale of other invested assets (108,918) 63,105
Net (purchase) sale of short-term investment of funds received under
securities loan agreements (354,769) 27,062
Net (purchase) sale of short-term investments (3,608) 1,982
Change in other liabilities for securities in course of settlement 86,933 25,918
Other, net (257) 1,156
----------- -----------
Net cash used in investing activities (1,094,259) (585,626)
----------- -----------
Cash flows from financing activities:
Net funds received (disbursed) under securities loan agreements 354,769 (27,062)
Dividends to stockholders (18,139) (16,244)
Proceeds from common stock issued 4,366 2,417
Other, net (150) --
----------- -----------
Net cash provided by (used in) financing activities 340,846 (40,889)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 695 3,507
----------- -----------
Change in cash and cash equivalents (31,067) 58,672
Cash and cash equivalents, beginning of period 182,887 127,402
----------- -----------
Cash and cash equivalents, end of period $ 151,820 $ 186,074
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
(in thousands)
Net (loss) income ($21,838) $ 80,780 $155,639 $218,786
-------- -------- -------- --------
Other comprehensive income (loss):
Net unrealized appreciation (depreciation) of investments:
Net unrealized holding gains (losses) 96,541 (43,648) (28,467) 76,610
Related income tax effect (33,790) 15,276 9,963 (26,814)
Reclassification adjustment for gains included in
net (loss) income (5,029) (5,501) (14,493) (6,770)
Related income tax effect 1,761 1,926 5,073 2,370
-------- -------- -------- --------
59,483 (31,947) (27,924) 45,396
-------- -------- -------- --------
Net unrealized currency translation gain (loss) 25,982 46,434 (23,392) 8,218
Related income tax effect (9,094) (16,253) 8,187 (2,877)
-------- -------- -------- --------
16,888 30,181 (15,205) 5,341
-------- -------- -------- --------
Other comprehensive income (loss) 76,371 (1,766) (43,129) 50,737
-------- -------- -------- --------
Comprehensive income $ 54,533 $ 79,014 $112,510 $269,523
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 filings for the
quarters ended March 31, 2004 and June 30, 2004.
2. Net (Loss) Income Per Common Share
Net (loss) income per common share for the periods presented has been
computed below based upon weighted average common shares outstanding.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2004 2003 2004 2003
-------- ------- -------- --------
(in thousands, except per share data)
Net (loss) income (numerator) ($21,838) $80,780 $155,639 $218,786
======== ======= ======== ========
Weighted average common shares outstanding used
in the computation of net (loss) income per share:(a)
Average shares issued 66,634 66,381 66,569 66,359
Less: Average shares in treasury 864 864 864 864
-------- ------- -------- --------
Average outstanding shares - basic (denominator) 65,770 65,517 65,705 65,495
Average potential shares, principally stock options(b) -- 453 501 423
-------- ------- -------- --------
Average outstanding shares - diluted (denominator) 65,770 65,970 66,206 65,918
======== ======= ======== ========
Net (loss) income per common share:(a)
Basic ($0.33) $ 1.23 $ 2.37 $ 3.34
Diluted(b) (0.33) 1.22 2.35 3.32
(a) Share and per share information reflect the 5-for-4 split of the common
stock in the form of a 25% common stock dividend, paid on July 16, 2004.
(b) As the impact of potential shares for the three months ended September 30,
2004 is antidilutive (i.e., reduces the net loss per common share),
potential shares are not included in the diluted net loss per common share
calculation for that period.
-5-
3. Impact of Third Quarter 2004 Catastrophe Losses
Net (loss) income for each of the three and nine month periods ended
September 30, 2004 include aggregate estimated pre-tax catastrophe losses of
$165.0 million, or $115.1 million after tax, arising principally from Hurricanes
Charley, Frances, Ivan and Jeanne, which struck the United States and the
Caribbean, and from typhoons that affected Japan. The losses recorded for these
events represent TRH's estimate of aggregate ultimate losses based upon
information presently available.
The tax benefit from catastrophe losses reflected above of approximately
$49.9 million, which was recognized in the 2004 third quarter and first nine
months periods, was calculated by determining the impact of such losses on tax
expense in those periods based on the effective tax rate method. For the full
year, TRH expects to be able to recognize a tax benefit from such losses at the
statutory rate of 35%. Therefore an additional tax benefit of approximately
$7.9 million related to third quarter 2004 catastrophe losses will be recognized
in the fourth quarter of 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 (loss) income in the third quarters and first
nine 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.
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 (loss) income and net (loss) income per
common share (on a pro forma basis) would have been as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2004 2003 2004 2003
-------- ------- -------- --------
(in thousands, except per share data)
Net (loss) income:
As reported ($21,838) $80,780 $155,639 $218,786
Add: Stock-based employee compensation
expense included in reported net (loss) income,
net of related tax effects 522 224 1,572 529
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects (1,141) (968) (3,404) (2,773)
-------- ------- -------- --------
Pro forma ($22,457) $80,036 $153,807 $216,542
======== ======= ======== ========
Net (loss) income per common share:(a)
As reported:
Basic ($0.33) $ 1.23 $ 2.37 $ 3.34
Diluted (0.33) 1.22 2.35 3.32
Pro forma:
Basic (0.34) 1.22 2.34 3.31
Diluted (0.34) 1.21 2.32 3.29
(a) Per share information reflects the 5-for-4 split of the common stock in the
form of a 25% common stock dividend, paid on July 16, 2004.
-6-
4. Stock-Based Compensation (continued)
While the pro forma impact of applying the recognition provisions to all
award grants are disclosed, the charges to income in the third quarters and
first nine 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.
5. Reinsurance
Premiums written, premiums earned and losses and loss adjustment expenses
incurred were comprised of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
2004 2003 2004 2003
---------- -------- ---------- ----------
(in thousands)
Gross premiums written $1,086,832 $995,811 $3,166,946 $2,761,658
Reinsurance premiums ceded (99,447) (94,556) (344,894) (289,472)
---------- -------- ---------- ----------
Net premiums written $ 987,385 $901,255 $2,822,052 $2,472,186
========== ======== ========== ==========
Gross premiums earned $1,037,817 $960,133 $3,035,474 $2,576,693
Reinsurance premiums ceded (97,211) (96,474) (306,217) (258,104)
---------- -------- ---------- ----------
Net premiums earned $ 940,606 $863,659 $2,729,257 $2,318,589
========== ======== ========== ==========
Gross incurred losses and
loss adjustment expenses $ 848,689 $642,980 $2,161,933 $1,804,097
Reinsured losses and loss
adjustment expenses ceded (38,614) (40,457) (112,488) (179,384)
---------- -------- ---------- ----------
Net losses and loss
adjustment expenses $ 810,075 $602,523 $2,049,445 $1,624,713
========== ======== ========== ==========
6. Cash Dividends
During the third quarter of 2004, the Board of Directors of Transatlantic
Holdings, Inc. declared a dividend of $0.10 per common share, or approximately
$6.5 million in the aggregate, payable on December 10, 2004.
7. Income Taxes (Benefits)
Income taxes (benefits) recorded in each of the three and nine month
periods ended September 30, 2004 includes a tax benefit of $49.9 million from
the pre-tax impact of $165.0 million of third quarter 2004 catastrophe losses.
(See Note 3 for a further discussion of the impact of catastrophe losses on tax
expenses (benefits).)
Income taxes paid, net, in the third quarter totaled $5.0 million and $28.9
million in 2004 and 2003, respectively. For the 2004 and 2003 nine month
periods, income taxes paid, net, totaled $101.9 million and $34.6 million,
respectively. Amounts referred to in this footnote are net of recoveries of
income taxes previously paid, as applicable.
-7-
8. Segment Information
The following tables present a summary of comparative financial data by
segment:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -----------------------
2004 2003 2004 2003
--------- -------- ---------- ----------
(in thousands)
Domestic:
Net premiums written $ 494,927 $515,986 $1,465,313 $1,375,625
Net premiums earned(a) 467,238 487,343 1,403,046 1,280,551
Net investment income 47,667 47,257 143,297 141,650
Realized net capital gains 4,537 3,922 12,843 2,959
Revenues(a) 519,442 538,522 1,559,186 1,425,160
Net losses and loss adjustment expenses(b) 452,910 341,555 1,123,662 895,724
Underwriting expenses(c) 131,905 136,699 387,909 368,145
Underwriting (loss) profit(b)(d) (109,558) 16,465 (90,905) 39,658
(Loss) income before income taxes(b) (58,339) 67,028 62,057 182,597
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
2004 2003 2004 2003
-------- -------- ---------- --------
(in thousands)
International-Europe:
Net premiums written $388,166 $303,821 $1,065,662 $849,559
Net premiums earned(a) 373,145 283,581 1,051,324 796,821
Net investment income 23,970 17,836 65,747 49,639
Realized net capital gains (losses) 204 945 (667) 1,024
Revenues(a)(e) 397,319 302,362 1,116,404 847,484
Net losses and loss adjustment expenses(b) 253,633 210,279 735,198 589,505
Underwriting expenses(c) 98,514 75,929 270,119 206,966
Underwriting profit(b)(d) 23,345 1,680 47,916 12,750
Income before income taxes(b) 47,747 20,327 112,722 63,541
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2004 2003 2004 2003
-------- ------- -------- --------
(in thousands)
International-Other:
Net premiums written $104,292 $81,448 $291,077 $247,002
Net premiums earned(a) 100,223 92,735 274,887 241,217
Net investment income 4,027 3,396 11,519 10,295
Realized net capital gains 288 634 2,317 2,787
Revenues(a) 104,538 96,765 288,723 254,299
Net losses and loss adjustment expenses(b) 103,532 50,689 190,585 139,484
Underwriting expenses(c) 35,009 25,300 92,840 80,998
Underwriting (loss) profit(b)(d) (36,523) 14,048 (3,470) 22,117
(Loss) income before income taxes(b) (32,591) 18,076 9,999 34,895
-8-
8. Segment Information (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
2004 2003 2004 2003
---------- -------- ---------- ----------
(in thousands)
Consolidated:
Net premiums written $ 987,385 $901,255 $2,822,052 $2,472,186
Net premiums earned(a) 940,606 863,659 2,729,257 2,318,589
Net investment income 75,664 68,489 220,563 201,584
Realized net capital gains 5,029 5,501 14,493 6,770
Revenues(a)(e) 1,021,299 937,649 2,964,313 2,526,943
Net losses and loss adjustment expenses(b) 810,075 602,523 2,049,445 1,624,713
Underwriting expenses(c) 265,428 237,928 750,868 656,109
Underwriting (loss) profit(b)(d) (122,736) 32,193 (46,459) 74,525
(Loss) income before income taxes(b) (43,183) 105,431 184,778 281,033
- ----------
(a) Net premiums earned related to affiliates approximate $124,000 and $129,000
for the three months ended September 30, 2004 and 2003, respectively, and
$380,000 and $382,000 for the nine months ended September 30, 2004 and
2003, respectively, and are included primarily in Domestic and
International-Europe.
(b) Results for the three and nine months ended September 30, 2004 include
pre-tax losses and loss adjustment expenses of $165,000 (representing
approximately $95,950 from Domestic operations, $16,550 from International
- Europe and $52,500 from International-Other operations (approximately
$27,660 from Miami, serving Latin American and the Caribbean, and
approximately $24,840 from Japan)) related to third quarter 2004
catastrophe losses.
(c) Underwriting expenses represent the sum of net commissions and other
underwriting expenses.
(d) 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.
(e) Revenues from the London, England office totaled $211,067 and $172,244 for
the three months ended September 30, 2004 and 2003, respectively, and
$633,952 and $498,579 for the nine months ended September 30, 2004 and
2003, respectively.
9. Related Party Transactions
Approximately $147.3 million (13.6%) and $139.9 million (14.0%) in the
third quarters of 2004 and 2003, respectively, and approximately $529.5 million
(16.7%) and $498.7 million (18.1%) for the nine months ended September 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, in 2004
only, medical malpractice lines. Of the amounts above, $53.7 million and $51.4
million in the third quarters of 2004 and 2003, respectively, and $264.0 million
and $245.6 million in the nine months ended September 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. Accounting Standard
At the March 2004 meeting, the Emerging Issues Task Force (EITF) reached a
consensus with respect to Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." On September 30, 2004,
the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)
No. 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, 'The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments' " delaying the effective date of this guidance until the FASB has
resolved certain implementation issues with respect to this guidance. This delay
does not suspend the requirement to recognize other than temporary impairments
as required by existing authoritative literature. The disclosures as required by
EITF No. 03-1 continue to be effective for annual financial statements for
fiscal years ending after December 15, 2003, for investments accounted for under
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities."
For all other investments within the scope of EITF No. 03-1, the disclosures are
effective in annual financial statements for fiscal years ending after June 15,
2004.
-9-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q and other publicly available
documents may include, and Transatlantic Holdings, Inc. and its subsidiaries
(collectively, TRH) officers and representatives may from time to time make,
statements which may constitute "forward-looking statements" within the meaning
of the 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, legal matters, 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, legal and regulatory proceedings, the reserving process, the
competitive environment in which TRH operates, interest rate and foreign
currency exchange rate fluctuations, and the uncertainties inherent in
international operations, and are further discussed throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations. TRH is
not under any obligation to (and expressly disclaims any such obligations to)
update or alter any forward-looking statement, whether written or oral, that may
be made from time to time, whether as a result of new information, future events
or otherwise.
-10-
Part I - Item 2
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SEPTEMBER 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 September 30, 2004 and December 31, 2003 and for the
three and nine month periods ended September 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. 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 September 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 5.0 years as of September 30, 2004. In general,
premiums are received significantly in advance of related claims payments. The
following table summarizes TRH's revenues, (loss) income before income taxes and
net (loss) income for the periods indicated:
-11-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2004
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2004 2003 Change 2004 2003 Change
-------------------------- ----------------------------
(dollars in millions)
Revenues $1,021.3 $937.6 8.9% $2,964.3 $2,526.9 17.3%
(Loss) income before income taxes (43.2) 105.4 -- 184.8 281.0 (34.3)
Net (loss) income (21.8) 80.8 -- 155.6 218.8 (28.9)
CONSOLIDATED RESULTS AND MARKET CONDITIONS
Revenues for the third quarter and first nine months of 2004 grew
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. In Europe in
recent periods, TRH has benefited from the fact that the financial difficulties
of certain large European reinsurers and certain withdrawals from the market
have caused ceding companies to place greater value on the financial security of
their reinsurance partners. Generally, market conditions in Europe remain strong
with property and marine line rates holding firm. Rates for motor classes have
weakened a bit and certain casualty class rates have slipped as the market
recedes a bit from the record high rate levels of recent years.
Domestically, modest rate improvements continue in certain specialty
and general casualty classes. In certain cases, however, rate decreases in such
classes have been observed. For most property classes, rates have generally
declined from recent peaks, though the high level of third quarter 2004
catastrophe losses are expected to exert upward pressure on these rates,
particularly in those areas struck by the hurricanes. The changing pricing
environment and generally greater level of competition in recent quarters has
had a moderating effect on premium increases as the year has progressed and that
effect is expected to continue for at least the immediate future.
Catastrophe losses of $165.0 million, or $115.1 million after tax,
dramatically affected 2004 third quarter and year to date results. These losses
resulted from Hurricanes Charley, Frances, Ivan and Jeanne, that affected the
Southeastern United States and the Caribbean, and from typhoons that affected
Japan. These losses also affected many other companies as well, as industry
sources have estimated that third quarter 2004 catastrophe losses may ultimately
cost the global insurance and reinsurance industries an estimated $30.0 billion.
While TRH believes that the high level of third quarter catastrophe
losses encountered in the United States, the Caribbean and Japan will exert
upward pressure on rates, particularly in those areas experiencing the
catastrophe losses, the ultimate impact of those losses has yet to be
determined, as the industry continues to measure the enormous costs of these
events.
The loss before income taxes in the third quarter of 2004, as compared
to the same 2003 quarter, and the lower income before income taxes for the first
nine months of 2004 as compared to the same prior year period, resulted
primarily from the abovementioned catastrophe losses occurring in the third
quarter of 2004. The impact of these losses was partially offset by improvements
in underwriting profit and increased net investment income, both from
International - Europe, in each of the 2004 periods as compared to the
comparable prior year periods. Tax benefits associated with the losses described
above somewhat tempered the impact of these items on net (loss) income in the
2004 third quarter and first nine month periods, respectively. Underwriting
profit (loss) is defined as 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.)
While TRH believes market conditions, while moderating somewhat,
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.
-12-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2004
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).
RECENT DEVELOPMENTS
Various regulators including the New York State Attorney General
have commenced investigations into certain insurance business practices.
In connection with these investigations, AIG has asked TRH to review its
documents and TRH has been cooperating fully with AIG in such request. To
date, nothing has come to the attention of TRH's management that would indicate
that TRH has been involved in any improper conduct.
CRITICAL ACCOUNTING ESTIMATES
This discussion and analysis of financial condition and results of
operations is 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.
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
coverage.
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.
-13-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2004
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.
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 Nine Months Ended
September 30, September 30,
------------------------ ----------------------------
2004 2003 Change 2004 2003 Change
------------------------ ----------------------------
(dollars in millions)
Net premiums written $987.4 $901.3 9.6% $2,822.1 $2,472.2 14.2%
Net premiums earned 940.6 863.7 8.9 2,729.3 2,318.6 17.7
Net investment income 75.7 68.5 10.5 220.6 201.6 9.4
Net premiums written for the third quarter and first nine months of
2004 exceeded the comparable 2003 periods principally as a result of pricing
increases and increased coverage provided, coupled with 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. The increase in net premiums written in the third quarter of 2004
compared to the third quarter of 2003 resulted from international operations,
particularly Europe. The increase in net premiums written in the first nine
months of 2004 compared to the same 2003 period resulted from increases in
international operations, particularly Europe, and to a lesser extent, domestic
operations. On a worldwide basis, casualty lines business represented 73.1% of
net premiums written in the first nine months of 2004 versus 75.3% in the
comparable 2003 period. The balance represented property lines. Treaty business
represented 96.4% of net premiums written in the first nine months of 2004
versus 95.7% in the year ago period. The balance represented facultative
accounts.
-14-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2004
Domestic net premiums written decreased for the third quarter of 2004
by $21.1 million, or 4.1%, to $494.9 million, with the most significant
decreases occurring in auto liability and other liability (principally in the
specialty casualty class of directors' and officers' liability) lines, partially
offset by increases in the medical malpractice line. Domestic net premiums
written increased in the first nine months of 2004 by $89.7 million, or 6.5%,
over the same prior year period to $1,465.3 million with significant increases
in other liability (principally in general casualty classes) and property lines,
partially offset by decreases in the auto liability line. The increase in net
premiums written in the property line is due, in part, to a reduction in ceded
property premiums written for the first nine months of 2004.
Net premiums written by international offices increased in the third
quarter of 2004 by $107.2 million, or 27.8%, over the prior year, to $492.5
million, led by European operations. International net premiums written
increased significantly in property, auto liability and other liability
(primarily in general casualty classes) lines in the third quarter of 2004
compared to the third quarter of 2003. For the first nine months of 2004,
international net premiums written increased by $260.2 million, or 23.7%, over
the same year ago period to $1,356.7 million, again led by European operations,
particularly London. Significant increases in international net premiums written
were recorded in property, credit and ocean marine lines in the first nine
months of 2004 compared to the same prior year period. The increases in
international net premiums written in both the third quarter and first nine
months of 2004 periods as compared to the same 2003 periods resulted, in part,
from the impact of foreign exchange rate movements as discussed above.
International business represented 48.1% of worldwide net premiums written for
the first nine months of 2004 compared to 44.4% for the respective 2003 period.
(See discussion of market conditions under CONSOLIDATED RESULTS AND MARKET
CONDITIONS.)
Generally, reasons for increases in gross premiums written between
periods are similar to those for net premiums written.
While ceded premiums written in the 2004 and 2003 third quarters did
not materially differ, ceded premiums for the first nine months of 2004 exceeded
the comparable 2003 amount due, in large part, to increases in amounts which, by
prearrangement, were assumed by TRH 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 coverage, 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 third quarter and first nine
months of 2004, as compared to the same 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 both the three and nine month periods ending September 30, 2004, the
pre-tax yield on fixed maturities was 4.5% compared to 4.5% and 4.6% for the
prior year three and nine month periods, respectively. The pre-tax yield on
fixed maturities represents annualized pre-tax net investment income from fixed
maturities for the periods indicated divided by the average balance sheet
carrying value of the fixed maturity portfolio for such periods.
-15-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2004
Pre-tax realized net capital gains totaled $5.0 million and $5.5
million for the third quarters of 2004 and 2003, respectively. Pre-tax realized
net capital gains totaled $14.5 million and $6.8 million for the first nine
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 third quarter of 2004 and in the
third quarter of 2003 write-downs were insignificant. In the first nine 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 nine months of 2003 included write-downs
totaling approximately $9.1 million, representing $4.5 million and $4.6 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.)
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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
----- ---- ----- ----
Consolidated:
Loss and loss adjustment
expense ratio 86.1 69.8 75.1 70.1
Underwriting expense ratio 26.9 26.4 26.6 26.5
Combined ratio 113.0 96.2 101.7 96.6
- ----------------------------------------------------------------------
Domestic:
Loss and loss adjustment
expense ratio 96.9 70.1 80.1 69.9
Underwriting expense ratio 26.7 26.5 26.5 26.8
Combined ratio 123.6 96.6 106.6 96.7
International:
Loss and loss adjustment
expense ratio 75.5 69.3 69.8 70.2
Underwriting expense ratio 27.1 26.3 26.8 26.3
Combined ratio 102.6 95.6 96.6 96.5
-16-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2004
The loss and loss adjustment expense ratios for consolidated TRH
increased in the third quarter and first nine months of 2004 due to the negative
impact of catastrophe losses arising from third quarter 2004 major storm
activity in the United States, the Caribbean and Japan. The impact of such
catastrophe losses added 17.5 and 6.0, respectively, to the 2004 third quarter
and first nine months period loss and loss adjustment expense and combined
ratios. The 2003 periods contained no significant losses related to catastrophes
occurring in those periods. (See Note 8 of Notes to Condensed Consolidated
Financial Statements and the discussion under SEGMENT RESULTS for the amount of
catastrophe losses by segment.)
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
third quarter of 2004 compared to the same year ago quarter primarily due to an
increase in the international net commission component of the ratio. The change
in the underwriting expense ratio between the comparable nine month periods was
not significant.
The increase in deferred acquisition costs for the first nine months
of 2004 was significantly 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 nine months
of 2004 was significantly less than such increase in the same prior year period,
a related, and smaller, amount of acquisition costs was deferred in the first
nine 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.
Other deductions, net, includes pre-tax expense charges of $0.7
million and $0.3 million for the third quarters of 2004 and 2003, respectively,
and $2.1 million and $0.7 million for the nine 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.
The loss before income taxes amounted to ($43.2) million in the third
quarter of 2004 versus income before income taxes of $105.4 million in the third
quarter of 2003. For the first nine months of 2004, income before income taxes
amounted to $184.8 million versus $281.0 million in the first nine months of
2003. The third quarter and first nine months of 2004 (loss) income before
income taxes includes pre-tax catastrophe losses of $165.0 million occurring in
the third quarter of 2004. The loss before income taxes in the third quarter of
2004 as compared to income before income taxes in the third quarter of 2003 was
due primarily to the abovementioned catastrophe losses which affected all
segments, partially offset by improvements in underwriting profit and increased
net investment income, both from International - Europe. Those same factors also
caused income before income taxes in the first nine months of 2004 to decline
when compared to the same prior year period result.
Federal and foreign income tax (benefits) expenses of ($21.3) million
and $24.7 million were recorded in the third quarters of 2004 and 2003,
respectively. Federal and foreign income tax expenses of $29.1 million and $62.2
million were recorded in the first nine months 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
SEPTEMBER 30, 2004
The effective tax rates, which represent income taxes (benefits)
divided by income (loss) before income taxes, were 49.4% and 23.4% in the third
quarters of 2004 and 2003, respectively, and were 15.8% and 22.1% in the first
nine months of 2004 and 2003, respectively. The higher effective tax rate in the
third quarter of 2004 compared to the same year ago quarter resulted from the
tax benefit derived from the third quarter pre-tax catastrophe losses. The lower
effective tax rate in the first nine months of 2004 compared to the same prior
year period also resulted primarily from the impact of the catastrophe losses
occurring in the third quarter of 2004. As a result, tax-exempt income was a
larger percentage of income before income taxes in the first nine months of 2004
than in the comparable 2003 period. (See Note 3 of Notes to Condensed
Consolidated Financial Statements for a discussion of the tax impact of the
third quarter 2004 catastrophe losses.)
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.
Net loss for the third quarter of 2004 was ($21.8) million, or ($0.33)
per common share (diluted), compared to net income of $80.8 million, or $1.22
per common share (diluted), in the 2003 third quarter. Net income for the first
nine months of 2004 was $155.6 million, or $2.35 per common share (diluted),
compared to net income of $218.8 million, or $3.32 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 the three month period ended September 30,
2004 with the same prior year period, revenues decreased compared to the prior
year period due primarily to decreases in net premiums written, as discussed
earlier in RESULTS OF OPERATIONS. Revenues for the nine month period ended
September 30, 2004 increased over the same prior year period, due primarily to
increases in net premiums written, as discussed earlier in RESULTS OF
OPERATIONS, and to a lesser extent, a smaller increase in net unearned premiums
in the 2004 period as compared to the 2003 period. The loss before income taxes
in the three month period and the decreased income before income taxes in the
nine month period ended September 30, 2004 as compared to the income before
income taxes for the same 2003 periods was due to underwriting losses in the
2004 periods, a result primarily of approximately $96.0 million of catastrophe
losses that occurred in the third quarter of 2004, compared to underwriting
profit in the 2003 periods.
(b) International - Europe (London and Paris branches and TRZ):
Comparing the results for the three month period ended September 30,
2004 with the same prior year period, revenues increased over the prior year
period due mostly to increases in net premiums written in each location. The
increases occurred largely in the property and other liability lines and, to a
lesser extent, credit and auto liability lines. For the nine month period ended
September 30, 2004, revenues increased over the same prior year period due
mostly to increases in net premiums written in each location, particularly
London. The increases occurred largely in the property, credit and ocean
marine 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 third quarter and first nine months of 2004 as compared to the
same prior year periods.
Income before income taxes in the third quarter and first nine months
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 Paris. To a lesser extent, increased net
investment income also contributed to the increase in income before income taxes
in both the third quarter and first nine months of 2004, benefiting, in part,
from strong operating cash flows in recent periods in this region (particularly
London) and the impact of foreign exchange as discussed above. Income before
income taxes in the third quarter and the first nine months of 2004 each
included approximately $16.6 million of catastrophe losses that occurred in the
third quarter of 2004.
-18-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2004
(c) International - Other (Miami (serving Latin America and the
Caribbean), Toronto, Hong Kong and Tokyo branches):
Comparing the results for the three month period ended September 30,
2004 with the same prior year period, revenues increased over the prior year due
primarily to an increase in net premiums written in the 2004 period, partially
offset by an increase in net unearned premiums in the 2004 third quarter
compared to a decrease in the same prior year quarter. For the nine month period
ended September 30, 2004, revenues increased over the same prior year period due
primarily to an increase in net premiums written in the 2004 period, partially
offset by a greater increase in net unearned premiums in the 2004 period as
compared to the same prior year period. The Miami office provided the largest
contribution to the rise in revenues, with significant increases in net premiums
written in property and auto liability lines, for both the three and nine month
periods ended September 30, 2004.
The loss before income taxes in the three and nine month periods ended
September 30, 2004 as compared to income before income taxes for the same 2003
periods was due to underwriting losses in the 2004 periods, a result of
approximately $52.5 million of catastrophe losses that occurred in the third
quarter of 2004, compared to underwriting profits in the 2003 periods.
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 third quarters of
2004 and 2003, the Company received cash dividends from TRC of $6.0 million and
$5.8 million, respectively. For the first nine months of 2004 and 2003, the
Company received cash dividends from TRC of $17.3 million and $16.2 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, 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 September 30, 2004, total investments and cash were $7,983.5
million compared to $6,867.2 million at December 31, 2003. The increase was
caused, in large part, by $721.7 million of cash provided by operating
activities and the investment of $354.8 million of net funds received under
securities loan agreements.
TRH's fixed maturity investments, approximately 77.8% of total
investments as of September 30, 2004, are predominantly investment grade, liquid
securities, approximately 65.9% of which will mature in less than 10 years. The
duration of the fixed maturity portfolio was 5.0 years as of September 30, 2004.
Also as of that date, approximately 7.2% of total investments were in common and
nonredeemable preferred stocks, approximately 3.8% of total investments were in
other invested assets, including investments in partnerships, approximately
10.8% of total investments were in the short-term investment of funds received
under securities loan agreements, and the remaining 0.4% 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.
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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2004
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 $790.9 million and
$32.8 million, respectively, as of September 30, 2004.
At September 30, 2004, gross unrealized gains and losses on fixed
maturities available for sale amounted to $188.7 million and $9.5 million,
respectively, amounts not significantly different than the comparable amounts at
December 31, 2003. At September 30, 2004, gross unrealized gains and losses on
equities amounted to $29.9 million and $9.9 million, respectively. The reduction
in gross unrealized gains and increase in gross unrealized losses on such
equities in the first nine months of 2004 is due primarily to weakness in the
United States equity markets reflecting a still uncertain economy.
As of September 30, 2004, 92.9% of the fixed maturity portfolio was
rated Aaa or Aa, an additional 6.9% was also rated investment grade or better
and 0.2% was not rated. Also, as of September 30, 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, 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.)
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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2004
At September 30, 2004, the net deferred income tax asset totaled
$215.2 million compared to $165.7 million at December 31, 2003. The great
majority of the increase in this net asset is due to increases in the deferred
tax asset related to unpaid losses and loss adjustment expenses and net unearned
premiums and, to a lesser extent, a decrease in the deferred tax liability
related to unrealized appreciation of investments.
At September 30, 2004, reserves for unpaid losses and loss adjustment
expenses totaled $5.55 billion, an increase of $746.4 million, or 15.5%, as
compared to December 31, 2003. Also at September 30, 2004, reinsurance
recoverable on unpaid losses and loss adjustment expenses totaled $869.8
million, an increase of $33.8 million, or 4.0%, from the 2003 year-end. In the
first nine months of 2004, net adverse loss reserve development for prior
accident years was estimated to be approximately $165.0 million.
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
there from 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. In addition, a significant portion of the
adverse reserve development estimated for the first nine months of 2004, as
discussed earlier, emanates from these classes as well. 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.
-21-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2004
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 September 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 nine months of 2004, TRH's operating
cash flow was $721.7 million, an increase of $40.0 million over the comparable
2003 period. The increase was due, in large part, to increased premiums
received, net of commissions, and increased investment income collected,
partially offset by increased losses and loss adjustment expenses paid and
income taxes paid in the first nine months of 2004 compared to the same period
in 2003. Management expects that the great majority of the loss and loss
adjustment expense payments related to the third quarter 2004 catastrophe losses
will be paid over the next twelve to eighteen months.
Of total consolidated operating cash flows, $441.4 million and $298.1
million were derived from international operations in the first nine months 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 $151.8
million as of September 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 $2.48 billion at September 30,
2004, an increase of $100.0 million from year-end 2003. The net increase
consisted principally of net income of $155.6 million, offset, in part, by a
decrease in accumulated other comprehensive income of $43.1 million and cash
dividends declared of $18.9 million.
-22-
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION - CONTINUED
SEPTEMBER 30, 2004
The abovementioned decrease in accumulated other comprehensive income
consisted of net unrealized currency translation loss, net of income taxes, of
$15.2 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 $27.9 million. The net unrealized
depreciation of investments, net of income taxes, is composed principally of a
decrease of $6.8 million in unrealized appreciation of fixed maturities
available for sale and a decrease of $25.8 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.
ACCOUNTING STANDARD
At the March 2004 meeting, the Emerging Issues Task Force (EITF)
reached a consensus with respect to Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." On
September 30, 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) No. 03-1-1, "Effective Date of Paragraphs 10-20 of EITF
Issue No. 03-1, 'The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments' " delaying the effective date of this
guidance until the FASB has resolved certain implementation issues with respect
to this guidance. This delay does not suspend the requirement to recognize other
than temporary impairments as required by existing authoritative literature. The
disclosures as required by EITF No. 03-1 continue to be effective for annual
financial statements for fiscal years ending after December 15, 2003, for
investments accounted for under SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities." For all other investments within the scope of EITF
No. 03-1, the disclosures are effective in annual financial statements for
fiscal years ending after June 15, 2004.
-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 nine 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 nine months ended September 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
September 30, Average High Low December 31, Average High Low
------------------------------------- ------------------------------------
Combined $183 $180 $198 $166 $171 $135 $171 $105
Interest rate 214 204 214 193 198 148 198 104
Equity 63 69 73 63 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 third 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. Unregistered Sales of Equity Securities and Use of Proceeds
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 nine months ended September 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 38,556
shares and 51,538 shares related to options exercised in the three
and nine month periods ended September 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 6. Exhibits
See accompanying Exhibit Index.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSATLANTIC HOLDINGS, INC.
--------------------------------------------
(Registrant)
/s/ STEVEN S. SKALICKY
--------------------------------------------
Steven S. Skalicky
On behalf of the registrant and in his
capacity as Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: November 8, 2004
-26-
EXHIBIT INDEX
Exhibit
Number Description Location
- ------- ----------------------------------------------------- ------------------
10.1 Form of Transatlantic Holdings, Inc. 2000 Stock Filed herewith.
Option Plan stock option agreement.
10.2 Form of Transatlantic Holdings, Inc. 2003 Stock
Incentive Plan RSU award agreement. Filed herewith.
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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