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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark One)
<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from to
Commission file number 1-10545
</TABLE>
------------------------
TRANSATLANTIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3355897
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
80 PINE STREET, NEW YORK, NEW YORK 10005
(Address of principal executive offices) (Zip Code)
(212) 770-2000
(Registrant's telephone number, including area code)
</TABLE>
------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- --------------------------------------------------------- ---------------------------------------------------------
<S> <C>
Common Stock, Par Value $1.00 per Share New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
</TABLE>
------------------------
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 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ____X____
The aggregate market value of the shares of all classes of voting stock of
the registrant held by non-affiliates of the registrant on January 31, 1997 was
approximately $858,764,183 computed upon the basis of the closing sales price of
the Common Stock on that date. For purposes of this computation, shares held by
directors (and shares held by any entities in which they serve as officers) and
officers of the registrant have been excluded. Such exclusion is not intended,
nor shall it be deemed, to be an admission that such persons are affiliates of
the registrant.
As of January 31, 1997, there were outstanding 23,022,710 shares of Common
Stock, $1.00 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement filed or to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A involving
the election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 22, 1997 are incorporated by reference in
Part III of this Form 10-K.
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<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<C> <S> <C>
PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 19
Item 3. Legal Proceedings.............................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............................................ 19
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters....................... 21
Item 6. Selected Financial Data........................................................................ 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 23
Item 8. Financial Statements and Supplementary Data.................................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 51
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 51
Item 11. Executive Compensation......................................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 51
Item 13. Certain Relationships and Related Transactions................................................. 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 52
</TABLE>
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-K, the Company's Annual
Report to Stockholders, any proxy statement, any Form 10-Q or any Form 8-K of
the Company or any other written or oral statements made by or on behalf of the
Company may include forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors (which are described in more
detail elsewhere in this Form 10-K) include, but are not limited to,
uncertainties relating to general economic conditions and cyclical industry
conditions, uncertainties relating to government and regulatory policies,
volatile and unpredictable developments (including catastrophes), the legal
environment, the uncertainties of the reserving process, the competitive
environment in which the Company operates, the uncertainties inherent in
international operations, and interest rate fluctuations. The words "believe,"
"expect," "anticipate," "project" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
Transatlantic Holdings, Inc. (the "Company") is a holding company
incorporated in the state of Delaware. Originally formed in 1986 under the name
PREINCO Holdings, Inc. as a holding company for Putnam Reinsurance Company
(Putnam), the Company's name was changed to Transatlantic Holdings, Inc. on
April 18, 1990 following the acquisition on April 17, 1990 of all of the common
stock of Transatlantic Reinsurance Company (TRC) in exchange for shares of
common stock of the Company (the "Share Exchange"). Prior to the Share Exchange,
American International Group, Inc. (AIG) held a direct and indirect interest of
approximately 25% in the Company and an indirect interest of 49.99% in TRC. As a
result of the Share Exchange, AIG became the beneficial owner of approximately
41% of the Company's outstanding common stock and TRC became a wholly-owned
subsidiary of the Company. In June 1990, certain stockholders of the Company
(other than AIG) sold shares of the Company's common stock in a registered
public offering, with the result that approximately 35% of the Company's
outstanding common stock became publicly owned. From June 1990 through December
31, 1996, an additional 12.2% of the Company's outstanding common stock has
become publicly owned as a result of sales by certain of such stockholders. At
December 31, 1996, AIG beneficially owned approximately 49% of the Company's
outstanding common stock.
The Company, through its wholly-owned subsidiaries, TRC, Trans Re Zurich
(TRZ), acquired in 1996 (See Note 1 of Notes to Consolidated Financial
Statements), and Putnam (contributed to TRC in 1995), offers reinsurance
capacity for a full range of property and casualty products on a treaty and
facultative basis, directly and through brokers, to insurance and reinsurance
companies, in both the domestic and international markets. One or both of TRC
and Putnam is licensed, accredited, authorized or can serve as a reinsurer in 50
states, Puerto Rico and the District of Columbia in the United States. TRC is
licensed by the federal government of and seven provinces in Canada. TRC is also
licensed in Japan, the United Kingdom, Hong Kong and the Dominican Republic and
is registered or authorized as a foreign reinsurer in Peru, Colombia, Argentina
(where it also maintains a representative office in Buenos Aires, Transatlantic
Re (Argentina) S.A.), Chile, Mexico, Ecuador, Guatemala, Venezuela and France.
TRZ is licensed as a reinsurer in Switzerland. TRH's (Transatlantic Holdings,
Inc. and its subsidiaries) principal lines of reinsurance include general
liability (including professional liability), medical malpractice, automobile
liability (including nonstandard risks), ocean marine and aviation and surety
and credit in the casualty lines, and fire and allied lines in the property
lines. Reinsurance is provided for most major lines of insurance on both
excess-of-loss and pro rata bases.
Each of TRC and Putnam is currently rated "A+ (Superior)", the second
highest classification, by A.M. Best Company (Best's) and "AA", the second
highest major rating classification, by Standard and Poor's Corporation (S&P).
TRZ is rated "A-" by S&P. Best's and S&P are independent industry rating
organizations. A publication of Best's indicates that the "A+ (Superior)" rating
is assigned to those companies which in Best's opinion have achieved superior
overall performance when compared to standards of the property and casualty
insurance industry established by Best's and that have a very strong ability to
meet their respective policyholder obligations over a long period of time. A
publication of S&P advises that insurers who receive a claims-paying ability
rating of "AA" offer excellent financial security, and their capacity to meet
policyholder obligations is strong under a variety of economic and underwriting
conditions. Insurers who receive a claims-paying ability rating of "A-" offer
good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions. These
ratings are based upon factors that may be of concern to policy or contract
holders, but may not reflect the considerations applicable to an equity
investment in an insurance or reinsurance company.
1
<PAGE>
The statutory surplus of TRC of $953 million as of December 31, 1996, would
have ranked TRC as the 6th largest domestic reinsurer according to statistics
distributed by the Reinsurance Association of America. Although TRC and, its
wholly-owned subsidiary, Putnam are separate entities, together they would also
have ranked as the 4th largest domestic reinsurer based upon combined statutory
net premiums written of $1,065 million and 5th based upon combined statutory net
income of $132 million for the year ended December 31, 1996, according to such
statistics.
THE REINSURANCE BUSINESS
Reinsurance is an arrangement whereby one or more insurance companies, the
"reinsurer," agrees to indemnify another insurance company, the "ceding
company," for all or part of the insurance risks underwritten by the ceding
company. Reinsurance can provide four basic benefits to the ceding company. It
reduces net liability on individual risks, thereby enabling the ceding company
to underwrite more business than its own resources can support; it provides
catastrophe protection to lessen the impact of large or multiple losses; it
stabilizes results by leveling fluctuations in the ceding company's loss ratio;
and it helps the ceding company maintain acceptable surplus and reserve ratios.
There are two major classes of reinsurance: treaty reinsurance and
facultative reinsurance. Treaty reinsurance is a contractual arrangement that
provides for the automatic reinsuring of a type or category of risk underwritten
by the ceding company. Facultative reinsurance is the reinsurance of individual
risks. Rather than agreeing to reinsure all or a portion of a class of risk, the
reinsurer separately rates and underwrites each risk. Facultative reinsurance is
normally purchased to cover risks not covered by treaty reinsurance or for
individual risks covered by reinsurance treaties that are in need of capacity
beyond that provided by such treaties.
A ceding company's reinsurance program may involve pro rata and
excess-of-loss reinsurance on both a treaty and facultative basis. Under pro
rata reinsurance (also referred to as proportional), the ceding company and the
reinsurer share the premiums as well as the losses and expenses in an agreed
proportion. Under excess-of-loss reinsurance, the reinsurer agrees to reimburse
the ceding company for all losses in excess of a predetermined amount up to a
predetermined limit. Premiums paid by the ceding company to the reinsurer for
excess-of-loss coverage are generally not proportional to the premiums that the
ceding company receives because the reinsurer does not assume a proportionate
risk.
In pro rata reinsurance, the reinsurer generally pays the ceding company a
ceding commission. Generally, the ceding commission is based on the ceding
company's cost of obtaining the business being reinsured (i.e., brokers' and
agents' commissions, local taxes, settlement costs and administrative expenses).
There is usually no ceding commission on excess-of-loss reinsurance and
therefore the pricing mechanism used by reinsurers is a rate applicable to
premiums of the individual policy or policies subject to the reinsurance
agreement.
In general, casualty insurance protects the insured against financial loss
arising out of its obligation to others for loss or damage to their person or
property. Property insurance protects the insured against financial loss arising
out of the loss of property or its use caused by an insured peril. Property and
casualty reinsurance protects the ceding company against loss to the extent of
the reinsurance coverage provided. A greater degree of unpredictability is
generally associated with casualty risks and catastrophe-exposed property risks,
and there tends to be a greater lag in the reporting and settlement of casualty
reinsurance claims, due to the nature of casualty risks and their greater
potential for litigation.
GENERAL
TRH reinsures risks from a broad spectrum of industries throughout the
United States and foreign countries. A significant portion of the reinsurance
written by TRH is assumed from AIG and its subsidiaries (the "AIG Group") and
therefore reflects their underwriting philosophy and diversified insurance
products. Approximately $232 million (18%), $189 million (17%) and $198 million
(21%) of
2
<PAGE>
gross premiums written by TRH in the years 1996, 1995 and 1994, respectively,
were attributable to reinsurance purchased by the AIG Group. (For a discussion
of TRH's business with the AIG Group, see "Relationship with the AIG Group.")
In 1996, TRH's activities in the United States were conducted through its
worldwide headquarters in New York and its regional office in Chicago, which
underwrites facultative business only. All domestic treaty business is
underwritten by, or under the close supervision of, senior officers of TRH
located in New York. TRH's headquarters in New York, the Miami office
(underwriting business from Latin America and the Caribbean) and international
offices in Toronto, London, Paris, Zurich, Hong Kong and Tokyo can offer treaty
as well as facultative reinsurance. In addition, TRH operates a representative
office in Buenos Aires. Non-U.S. business (representing risks underwritten by
the Miami office and the other international offices) accounted for
approximately 40%, 31% and 28% of net premiums written in 1996, 1995 and 1994,
respectively. In 1996, the increase in foreign net premiums written emanated
from newly-acquired subsidiary, TRZ, the London branch, and the Paris branch,
which was opened in late 1995 and recorded no premium volume in that year.
London branch net premiums written totaled $249.8 million, or 22% of worldwide
net premiums written. The significant increase in foreign premiums in 1995
compared to 1994 was due, in large part, to the increase in premium volume in
TRH's London branch. These increases were primarily reported in treaty business.
(For a discussion of certain conditions associated with international business
see "Regulation" and Note 11 of Notes to Consolidated Financial Statements.)
Casualty reinsurance constitutes the larger portion of TRH's business,
accounting for 67%, 67% and 65% of net premiums written in 1996, 1995 and 1994,
respectively. As a general matter, due to the longer period of time necessary to
settle casualty claims, casualty reinsurance underwriting tends to involve
variables (such as those discussed in the paragraph immediately following) that
are not as predictable as those in property reinsurance underwriting. The
greater degree of uncertainty associated with casualty business as a result of
these variables tends to produce a more volatile result over a period of time,
although property reinsurance is also subject to significant year to year
volatility due to major natural disasters. TRH also seeks to focus on more
complex risks within the casualty and property lines, and to adjust its mix of
business to take advantage of market opportunities. For example, in 1994, in
response to such market opportunities, TRH significantly increased the amount of
property reinsurance in its portfolio mix. The higher proportion of property
business, including property catastrophe business, compared to prior years,
increases the potential for volatile underwriting results caused by major
natural disasters.
In general, the overall operating results (including investment performance)
and changes to certain components of stockholders' equity of the property and
casualty insurance and reinsurance industry, and TRH (both domestically and
internationally), in particular, are subject to significant fluctuations due to
competition, catastrophic events, economic and social conditions, foreign
currency rate fluctuations, interest rates and other factors, such as changes in
tax laws, tort laws and the regulatory environment.
3
<PAGE>
The following table presents certain underwriting information concerning
TRH's casualty and property business for the periods indicated:(5)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET
LOSSES AND LOSS
NET PREMIUMS WRITTEN NET PREMIUMS EARNED ADJUSTMENT EXPENSES
------------------------------- ------------------------------- -------------------------------
<CAPTION>
1996 1995 1994 1996 1995 1994 1996 1995 1994
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Casualty
General
Liability(1)(3)(4)....... $ 203.7 $ 241.0 $ 241.5 $ 213.8 $ 235.7 $ 244.7 $ 183.4 $ 214.7 $ 207.2
Medical Malpractice........ 131.9 115.7 96.4 135.6 111.2 91.8 121.1 89.1 74.7
Automobile Liability....... 168.7 138.3 108.5 161.9 128.3 111.0 156.9 95.9 80.6
Ocean Marine and
Aviation(3)(4)........... 142.0 113.9 67.8 143.3 112.4 65.0 100.2 119.1 71.6
Surety and Credit(2)....... 52.6 29.1 16.2 45.3 25.9 12.9 29.6 14.2 7.1
Other(2)(4)................ 61.3 38.4 34.4 61.8 39.1 38.7 47.0 18.1 14.1
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Casualty........... 760.2 676.4 564.8 761.7 652.6 564.1 638.2 551.1 455.3
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Property(3)(4)
Fire(3)(4)................. 190.3 129.1 139.9 174.1 146.3 135.8 107.0 76.2 115.4
Allied Lines(2)............ 68.7 75.9 44.8 70.1 63.3 44.1 29.7 40.8 28.9
Inland Marine(2)(4)........ 37.0 49.6 38.4 38.3 45.7 35.5 26.3 32.4 36.6
Homeowners Multiple
Peril.................... 34.8 49.3 56.1 41.1 48.2 49.7 19.0 31.8 30.6
Other(2)................... 51.5 28.9 22.7 45.3 25.1 22.0 21.3 14.6 15.1
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Property........... 382.3 332.8 301.9 368.9 328.6 287.1 203.3 195.8 226.6
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total.................. $ 1,142.5 $ 1,009.2 $ 866.7 $ 1,130.6 $ 981.2 $ 851.2 $ 841.5 $ 746.9 $ 681.9
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
<S> <C> <C> <C>
LOSS AND LOSS
ADJUSTMENT EXPENSE
RATIO
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Casualty
General
Liability(1)(3)(4)....... 85.8 91.1 84.7
Medical Malpractice........ 89.3 80.2 81.3
Automobile Liability....... 96.9 74.8 72.6
Ocean Marine and
Aviation(3)(4)........... 69.9 106.0 110.2
Surety and Credit(2)....... 65.4 54.7 55.0
Other(2)(4)................ 76.0 46.4 36.5
Total Casualty........... 83.8 84.5 80.7
Property(3)(4)
Fire(3)(4)................. 61.5 52.1 85.0
Allied Lines(2)............ 42.3 64.5 65.6
Inland Marine(2)(4)........ 68.8 70.9 103.0
Homeowners Multiple
Peril.................... 46.2 65.9 61.6
Other(2)................... 47.0 57.8 68.6
Total Property........... 55.1 59.6 78.9
Total.................. 74.4 76.1 80.1
</TABLE>
- ------------------------------
(1) A significant portion of this line includes more complex risks such as
professional liability (other than medical malpractice), directors' and
officers' liability, errors and omissions and environmental impairment
liability.
(2) In 1996, development on reserves held at December 31, 1995 significantly
decreased the loss ratios in other casualty, allied lines, inland marine and
other property lines and significantly increased the loss ratio in surety
and credit.
(3) In 1995, development on reserves held at December 31, 1994 significantly
increased the loss ratios in the general liability and ocean marine and
aviation lines and decreased the loss ratio in the property lines,
particularly fire. Also in 1995, included in net losses and loss adjustment
expenses are $4.5 million from the Kobe, Japan earthquake in the property
lines.
(4) In 1994, development on reserves held at December 31, 1993 significantly
increased the loss ratios in general liability, fire and inland marine lines
and decreased the loss ratio in the other casualty line. Also in 1994,
included in net losses and loss adjustment expenses are $10 million from
USAir's Pittsburgh accident in the ocean marine and aviation line and $20
million from the Northridge, California earthquake in property lines.
(5) See Management's Discussion and Analysis of Financial Condition and Results
of Operations for a discussion of TRH's underwriting components.
Treaty reinsurance constitutes the larger portion of TRH's business,
accounting for 90%, 87% and 84% of net premiums written in 1996, 1995 and 1994,
respectively.
4
<PAGE>
The following table presents certain information concerning TRH's treaty and
facultative business for the periods indicated:
<TABLE>
<CAPTION>
TREATY
-----------------------------------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31,
-----------------------------------
<CAPTION>
1996(1) 1995(2) 1994
--------- ----------- -----------
(in millions)
<S> <C> <C> <C>
Gross premiums written......................................... $ 1,145.0 $ 959.1 $ 783.9
Net premiums written........................................... 1,033.7 879.9 729.5
Net premiums earned............................................ 1,013.0 854.8 722.7
<CAPTION>
FACULTATIVE
-----------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- ----------- -----------
(in millions)
<S> <C> <C> <C>
Gross premiums written......................................... $ 170.9 $ 177.8 $ 173.2
Net premiums written........................................... 108.8 129.3 137.2
Net premiums earned............................................ 117.6 126.4 128.5
</TABLE>
- ------------------------------
(1) In 1996 compared to 1995, treaty premiums increased significantly in
automobile liability (including nonstandard risks), ocean marine, surety and
credit, other casualty, medical malpractice and other property lines. Treaty
premiums also increased significantly in the fire line, principally from
international business. Treaty premium decreases were recorded in the general
liability line, including certain specialty casualty classes. International
operations contributed significantly to treaty premium growth. (See
Management's Discussion and Analysis of Financial Condition and Results of
Operations for further discussion of premium fluctuations.)
(2) In 1995 compared to 1994, treaty premiums increased primarily in medical
malpractice, automobile liability (including nonstandard risks), ocean
marine and aviation and allied lines. International operations, particularly
London, contributed significantly to treaty premium growth.
TREATY REINSURANCE
Treaty reinsurance accounted for approximately $1,145.0 million of gross
premiums written and $1,033.7 million of net premiums written in 1996,
approximately 67% of which resulted from casualty lines treaties, with the
remainder from property lines treaties. Approximately 56% of treaty gross
premiums written in 1996 represented treaty reinsurance written on a pro rata
basis and the balance represented treaty reinsurance written on an
excess-of-loss basis. Approximately 12% of treaty gross premiums written in 1996
were attributable to the AIG Group. Such premiums were primarily written on a
pro rata basis. The majority of TRH's non-AIG Group treaty premiums were also
written on a pro rata basis. As pro rata business is a proportional sharing of
premiums and losses among ceding company and reinsurer, generally, the
underwriting results of such business more closely reflect the underwriting
results of the business ceded than do the results of excess-of-loss business.
TRH's treaty business consists primarily of lines of business within general
liability (including professional liability), medical malpractice, automobile
liability, ocean marine and aviation, surety and credit, fire and allied lines.
A significant portion of TRH's business within these lines (primarily general
liability and medical malpractice) is derived from certain more complex risks.
TRH also underwrites non-traditional reinsurance, which blends funding
characteristics with more traditional risk transfer.
TRH's treaty underwriting process emphasizes a team approach between TRH's
underwriters, actuaries and claims staff, as appropriate. Treaties are reviewed
for compliance with TRH's underwriting guidelines and objectives and certain
larger treaties are evaluated in part based upon actuarial analyses conducted by
TRH. The generic actuarial models used in such analyses are tailored in each
case to the exposures and experience underlying the specific treaty and the loss
experience for the risks covered thereunder. TRH also at times conducts
underwriting audits at the offices of a prospective ceding company before
entering into major treaties, because reinsurers, including TRH, do not
separately evaluate each of the individual risks assumed under their treaties
and, consequently, are largely dependent on the original underwriting decisions
made by the ceding company. Such dependence subjects TRH and reinsurers in
5
<PAGE>
general to the possibility that the ceding companies have not adequately
evaluated the risks to be reinsured and, therefore, that the premiums ceded in
connection therewith may not adequately compensate the reinsurer for the risk
assumed.
TRH offers brokers full service with large capacity for both casualty and
property risks. For non-AIG business, TRH generally seeks to lead treaty
arrangements. The lead reinsurer on a treaty generally accepts one of the
largest percentage shares of the treaty and represents the other participating
reinsurers in negotiating price, terms and conditions. TRH believes that this
strategy has enabled it to influence more effectively the terms and conditions
of the treaties in which it has participated. TRH has generally not set terms
and conditions as lead underwriter with respect to AIG Group treaty reinsurance,
although it may do so in the future. (See "Relationship with the AIG Group.")
When TRH does not lead the treaty, it may still suggest changes to any aspect of
the treaty. In either case, TRH may reject any treaty business offered to it by
the AIG Group or others based upon its assessment of all relevant factors. Such
factors include type and level of risk assumed, actuarial and underwriting
judgment with respect to rate adequacy, various treaty terms, prior and
anticipated loss experience on the treaty, prior business experience with the
ceding company, overall financial position, operating results and Best's and
S&P's ratings of the ceding company and social, legal, regulatory, environmental
and general economic conditions affecting the risks assumed or the ceding
company.
TRH currently has approximately 4,100 treaties in effect for the current
underwriting year. In 1996, no single treaty exceeded 4% of gross premiums
written. 4 of TRH's 15 largest treaties in effect in 1996 were with the AIG
Group. No ceding company, other than AIG Group companies, accounted for more
than 7% of total treaty gross premiums written in 1996.
Non-U.S. treaty business accounted for approximately 38% of TRH's total net
premiums written for the year ended December 31, 1996.
FACULTATIVE REINSURANCE
During 1996, TRH wrote approximately $170.9 million of gross premiums
written and $108.8 million of net premiums written of facultative reinsurance,
approximately 63% of which represented casualty risks with the balance
comprising property risks. The majority of facultative gross premiums written in
1996 represented facultative reinsurance written on an excess-of-loss basis.
Facultative lines of business are generally similar to the lines of business
discussed under "Treaty Reinsurance" above, including the underwriting of
certain more complex risks. Underwriting expenses associated with facultative
business are generally higher in proportion to related premiums than those
associated with treaty business, reflecting, among other things, the more
labor-intensive nature of underwriting and servicing facultative business.
Approximately 56% of facultative gross premiums written in 1996 were
attributable to AIG Group companies. Except for AIG Group companies, no single
ceding company accounted for more than 5% of total facultative gross premiums
written in 1996. Non-U.S. facultative business accounted for approximately 3% of
TRH's total net premiums written for the year ended December 31, 1996.
RETENTION LEVELS AND RETROCESSION ARRANGEMENTS
TRC and Putnam enter into retrocession arrangements for many of the same
reasons primary insurers seek reinsurance, including reducing the effect of
individual or aggregate losses and increasing gross premium writings and risk
capacity without requiring additional capital.
Under TRH's underwriting guidelines and retrocession arrangements in effect
at the end of 1996 for worldwide property treaty risks, generally, the maximum
net retention for property catastrophe excess-of-loss contracts is $9.6 million,
with a quota share retrocession of up to $3.9 million, for a maximum gross
underwriting capacity of $13.5 million. For other property treaty risks, the
maximum net retention and gross capacity is generally $5.0 million.
6
<PAGE>
For property facultative risks, TRH's U.S. offices may retain a maximum of
$1.0 million, with retrocession of up to an additional $9.0 million, for a
maximum gross underwriting capacity of $10.0 million. For non-U.S. property
facultative risks, the maximum net retention is $3.0 million, the maximum
retrocession is $12.0 million and the maximum gross capacity is $15.0 million.
Certain facultative retrocessions are subject to a per event aggregate limit.
TRH's net property account is further protected by catastrophe reinsurance
as described immediately following the table below.
For both treaty and facultative casualty risks, the maximum net retention is
$5.0 million. For treaty casualty risks the maximum retrocession and maximum
gross capacity are $5.0 million and $10.0 million, respectively. For facultative
casualty risks, the maximum retrocession and gross capacity are $2.5 million and
$7.5 million, respectively.
The following table illustrates TRH's maximum net retention, maximum
retrocession and maximum gross capacity under its underwriting guidelines at the
end of 1996:
<TABLE>
<CAPTION>
MAXIMUM
MAXIMUM NET MAXIMUM GROSS
RETENTION RETROCESSION CAPACITY
----------------- ------------- -----------
<S> <C> <C> <C>
(in millions)
Property
Treaty (Worldwide)
Catastrophe excess-of-loss............................. $ 9.6 $ 3.9 $ 13.5
Other.................................................. 5.0 -- 5.0
Facultative
U.S. .................................................. 1.0 9.0 10.0
Non-U.S. .............................................. 3.0 12.0 15.0
Casualty (Worldwide)
Treaty..................................................... 5.0 5.0 10.0
Facultative................................................ 5.0 2.5 7.5
</TABLE>
The entire net property book worldwide was protected by reinsurance
providing up to $52 million of coverage for one event and $75 million in the
aggregate in 1996, in excess of a retention of $17.5 million for the first event
and $15.0 million for subsequent events. In 1996, with respect to workers'
compensation, TRH maintained a catastrophe program that provided $30 million of
coverage per occurrence for treaty and facultative business combined after a
deductible of $3 million is exhausted. For the 1994 accident year, TRH protected
its entire net book of business with $50 million of coverage in respect of
losses incurred in excess of a 74% loss ratio, subject to a per occurrence
property catastrophe deductible.
Average gross lines and net retentions on risks assumed historically have
been smaller than the maximums permissible under the underwriting guidelines.
Underwriting guidelines, including gross lines and net retention levels, may be
changed and limited exceptions are made by TRH from time to time. For example,
in casualty clash business, where ceding companies use reinsurance to control
losses from various insured parties involved in the same event, our maximum net
retention and gross capacity is $7.5 million.
Retrocession arrangements do not relieve TRH from its obligations to the
insurers and reinsurers from whom it assumes business. The failure of
retrocessionnaires to honor their obligations could result in losses to TRH. TRH
holds substantial amounts of funds and letters of credit to collateralize
reinsurance recoverables. Such funds and letters of credit can be drawn on for
amounts remaining unpaid beyond contract terms. In addition, an allowance has
been established for estimated unrecoverable amounts.
As of December 31, 1996, TRH had in place 66 active retrocessional
arrangements for current and prior underwriting years with 330
retrocessionnaires, and reinsurance recoverable on paid and unpaid losses
totaled $367.8 million. (See Note 10 of Notes to Consolidated Financial
Statements for amounts recoverable from AIG Group companies.)
7
<PAGE>
MARKETING
TRH provides property and casualty reinsurance capacity directly and through
brokers to insurance and reinsurance companies in both the domestic and
international markets. TRH believes its worldwide network of offices and its
relationship with the AIG Group help position TRH to take advantage of market
opportunities.
AIG Group business is obtained directly from the ceding company. No ceding
company, other than the AIG Group companies, has accounted for more than 10% of
TRH's revenues in any of the last five years.
Non-AIG Group treaty business is produced primarily through brokers, while
non-AIG Group facultative business is produced both directly and through
brokers. In 1996, approximately 86% of TRH's non-AIG Group business was written
through brokers and the balance was written directly. TRH's largest single
broker accounted for 11% of TRH's gross premiums written in 1996. TRH's largest
10 brokers accounted for an aggregate of approximately 39% of such gross
premiums written. TRH does not believe that the loss of any one broker's
business would have a material adverse effect on TRH. Brokerage fees generally
are paid by reinsurers. TRH believes that its emphasis on seeking the lead
position in non-AIG Group reinsurance treaties in which it participates is
beneficial in obtaining business.
Brokers do not have the authority to bind TRH with respect to reinsurance
agreements, nor does TRH commit in advance to accept any portion of the business
that brokers submit to it. Reinsurance business from any ceding company, whether
new or renewal, is subject to acceptance by TRH.
Effective January 1, 1995, TRC and Putnam entered into a quota share
reinsurance agreement whereby TRC assumed all of Putnam's reinsurance
liabilities and immediately thereafter, Putnam assumed 5% of TRC's total assumed
reinsurance liabilities, net of retrocessions. Thereafter, TRC cedes 5% of its
assumed reinsurance, net of other retrocessions, to Putnam pursuant to this
quota share reinsurance agreement. Presently all of Putnam's business is assumed
from TRC pursuant to this quota share reinsurance agreement. From January 1,
1991 through December 31, 1994, TRC ceded 33% of its assumed reinsurance, net of
other retrocessions, to Putnam, pursuant to an agreement with terms similar to
the current agreement discussed immediately above. These agreements were entered
into for operational reasons and are believed to have had no material impact on
TRH's financial position or results of operations.
CLAIMS
Claims are managed by TRH's professional claims staff whose responsibilities
include the review of initial loss reports, creation of claim files,
determination of whether further investigation is required, establishment and
adjustment of case reserves and payment of claims. In addition to claims
assessment, processing and payment, the claims staff conducts comprehensive
claims audits of both specific claims and overall claims procedures at the
offices of selected ceding companies, which TRH believes benefit all parties to
the reinsurance arrangement. Claims audits are conducted in the ordinary course
of business. In certain instances, a claims audit may be performed prior to
assuming reinsurance business.
RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Significant periods of time may elapse between the occurrence of an insured
loss, the reporting of the loss to the ceding company and the reinsurer, and the
ceding company's payment of that loss and subsequent payments to the ceding
company by the reinsurer. To recognize liabilities for unpaid losses and loss
adjustment expenses (LAE), insurers and reinsurers establish reserves, which are
balance sheet liabilities representing estimates of future amounts needed to pay
claims and related expenses with respect to insured events which have occurred
on or before the balance sheet date, including events which have not been
reported to the ceding company.
8
<PAGE>
Upon receipt of a notice of claim from the ceding company, TRH establishes
its own case reserve for the estimated amount of the ultimate settlement, if
any. Case reserves usually are based upon the amount of reserves recommended by
the ceding company and may be supplemented by additional amounts as deemed
necessary. In certain instances, TRH establishes case reserves even when the
ceding company does not report any liability to the reinsurer.
TRH also establishes reserves to provide for the estimated expenses of
settling claims, including legal and other fees, and the general expenses of
administering the claims adjustment process (i.e. LAE), and the losses and loss
adjustment expenses incurred but not reported (IBNR). TRH calculates LAE and
IBNR reserves by using generally accepted actuarial reserving techniques to
project the ultimate liability for losses and loss adjustment expenses. Such
reserves are periodically revised by TRH to adjust for changes in the expected
loss development pattern over time. TRH has an in-house actuarial staff which
periodically reviews its loss reserves, and therefore does not retain any
outside actuarial firm to review its loss reserves.
Losses and loss adjustment expenses, net of related reinsurance recoverable,
are charged to income as incurred. Unpaid losses and loss adjustment expenses
represent the accumulation of case reserves and IBNR. 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 the numerous
judgments which are made as to expected trends in average claim severity.
Legislative changes may also affect TRH's liabilities, and evaluation of the
impact of such changes is made in the reserve setting process.
The methods of determining estimates for reported and unreported losses and
establishing resulting reserves and related reinsurance recoverable are
continually reviewed and updated, and adjustments resulting therefrom are
reflected in income currently. The process relies upon the basic assumption that
past experience, adjusted for the effect of current developments and likely
trends, is an appropriate basis for predicting future events. However,
estimation of loss reserves is a difficult process, 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. In addition,
trends that have affected development of liabilities in the past may not
necessarily occur or affect liability development to the same degree in the
future.
While the reserving process is difficult and subjective for the ceding
companies, the inherent uncertainties of estimating such 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, the necessary reliance
on the ceding companies for information regarding reported claims and differing
reserving practices among ceding companies. Thus, actual losses and loss
adjustment expenses may deviate, perhaps substantially, from estimates of
reserves reflected in the Company's consolidated financial statements.
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 less
than or greater than the revised estimates. TRH does not otherwise adjust
downward those claims reported to it by ceding companies or discount any of its
reserves for reported or unreported claims in any line of its business for
anticipated investment income.
TRH's reserves include amounts related to environmental impairment and
asbestos-related illnesses. (See Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 2(e) of Notes to
Consolidated Financial Statements for further discussion.)
The "Analysis of Consolidated Net Loss and Loss Adjustment Expense Reserve
Development" which follows presents the development of balance sheet loss and
loss adjustment expense reserves for calendar
9
<PAGE>
years 1986 through 1996. The upper half of the table shows the cumulative
amounts paid during successive years related to the opening reserve. For
example, with respect to the net loss and loss adjustment expense reserve of
$573.0 million as of December 31, 1987, by the end of 1996 (nine years later)
$519.8 million had actually been paid in settlement of those reserves. In
addition, as reflected in the lower section of the table, the original reserve
of $573.0 million was reestimated to be $721.4 million at December 31, 1996.
This change from the original estimate would normally result from a combination
of a number of factors, including losses being settled for different amounts
than originally estimated. The original estimates will also be increased or
decreased as more information becomes known about the individual claims and
overall claim frequency and severity patterns. The net deficiency or redundancy
depicted in the table, for any particular calendar year, shows the aggregate
change in estimates over the period of years subsequent to the calendar year
reflected at the top of the respective columns. For example, the net redundancy
of $7.7 million at December 31, 1996 related to December 31, 1995 net loss and
loss adjustment expense reserves of $1,985.8 million, represents the cumulative
amount by which net reserves for 1995 have developed favorably during 1996.
Each amount other than the original reserves in the top half of the table
below includes the effects of all changes in amounts for prior periods. For
example, if a loss settled in 1989 for $150,000 was first reserved in 1986 at
$100,000 and remained unchanged until settlement, the $50,000 deficiency (actual
loss minus original estimate) would be included in the cumulative net deficiency
in each of the years in the period 1986 through 1988 shown in the following
table. Conditions and trends that have affected development of liability in the
past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future development based on this table.
10
<PAGE>
ANALYSIS OF CONSOLIDATED NET LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE
DEVELOPMENT(1)(2)(3)
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net unpaid losses and
loss adjustment
expenses, December
31:(4)............. $ 433,750 $ 572,960 $ 691,046 $ 889,742 $1,064,214 $1,241,160 $1,386,092 $1,503,389 $1,727,380 $1,985,786
Paid (cumulative) as
of:
One year later..... 132,880 194,121 149,228 170,680 190,484 198,463 281,641 312,923 338,947 396,647
Two years later.... 267,651 285,165 235,860 303,175 336,547 396,739 497,557 506,681 594,508
Three years
later............ 309,382 336,310 313,810 383,518 443,578 526,776 633,737 681,388
Four years later... 342,558 386,151 355,899 460,239 534,824 614,555 760,091
Five years later... 379,734 409,918 406,292 519,814 586,303 699,667
Six years later.... 396,375 443,588 446,659 550,019 645,657
Seven years
later............ 423,294 472,656 463,757 599,451
Eight years
later............ 442,721 482,986 505,859
Nine years later... 451,032 519,816
Ten years later.... 485,762
Net liability
reestimated as
of:(4)
End of year........ 433,750 572,960 691,046 889,742 1,064,214 1,241,160 1,386,092 1,503,389 1,727,380 1,985,786
One year later..... 433,827 568,273 682,449 887,830 1,062,280 1,238,929 1,409,008 1,518,361 1,723,926 1,978,062
Two years later.... 442,785 571,650 665,867 887,991 1,072,552 1,250,809 1,425,146 1,516,299 1,729,924
Three years
later............ 448,266 572,610 682,267 909,820 1,084,635 1,260,763 1,426,424 1,522,635
Four years later... 464,443 602,847 711,611 928,640 1,095,054 1,268,476 1,437,271
Five years later... 497,563 645,100 737,070 942,530 1,102,404 1,269,583
Six years later.... 548,658 674,925 754,906 947,862 1,110,499
Seven years
later............ 583,316 695,593 758,012 963,041
Eight years
later............ 606,936 700,721 778,386
Nine years later... 615,112 721,441
Ten years later.... 633,449
Net (deficiency)
redundancy....... $(199,699) $(148,481) $ (87,340) $ (73,299) $ (46,285) $ (28,423) $ (51,179) $ (19,246) $ (2,544) $ 7,724
<CAPTION>
1996
---------
<S> <C>
<S> <C>
Net unpaid losses and
loss adjustment
expenses, December
31:(4)............. $2,383,528
Paid (cumulative) as
of:
One year later.....
Two years later....
Three years
later............
Four years later...
Five years later...
Six years later....
Seven years
later............
Eight years
later............
Nine years later...
Ten years later....
Net liability
reestimated as
of:(4)
End of year........ 2,383,528
One year later.....
Two years later....
Three years
later............
Four years later...
Five years later...
Six years later....
Seven years
later............
Eight years
later............
Nine years later...
Ten years later....
Net (deficiency)
redundancy.......
</TABLE>
- ------------------------------
(1) This table excludes data related to TRZ, a non-U.S. subsidiary acquired in
the third quarter of 1996, for 1995 and prior years as such data is not
available.
(2) This table is on a calendar year basis and does not present accident or
underwriting year data.
(3) Data have been affected by transactions between TRH and the AIG Group. (See
"Relationship with the AIG Group" and Notes 8 and 10 of Notes to
Consolidated Financial Statements.)
(4) Represents gross liability for unpaid losses and loss adjustment expenses
net of related reinsurance recoverable.
11
<PAGE>
<TABLE>
<CAPTION>
ANALYSIS OF NET UNPAID LOSSES AND
LOSS ADJUSTMENT EXPENSES AND
NET REESTIMATED LIABILITY(1) 1992 1993 1994 1995 1996
- ------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(in thousands)
End of year:
Gross liability.................................. $ 1,769,486 $ 1,890,178 $ 2,167,316 $ 2,388,155 $ 2,733,055
Related reinsurance recoverable.................. 383,394 386,789 439,936 402,369 349,527
----------- ----------- ----------- ----------- -----------
Net liability.................................... $ 1,386,092 $ 1,503,389 $ 1,727,380 $ 1,985,786 $ 2,383,528
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
One year later:
Gross reestimated liability...................... $ 1,807,550 $ 1,930,343 $ 2,138,947 $ 2,326,770
Reestimated related reinsurance recoverable...... 398,542 411,982 415,021 348,708
----------- ----------- ----------- -----------
Net reestimated liability........................ $ 1,409,008 $ 1,518,361 $ 1,723,926 $ 1,978,062
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Two years later:
Gross reestimated liability...................... $ 1,857,100 $ 1,945,407 $ 2,091,724
Reestimated related reinsurance recoverable...... 431,954 429,108 361,800
----------- ----------- -----------
Net reestimated liability........................ $ 1,425,146 $ 1,516,299 $ 1,729,924
----------- ----------- -----------
----------- ----------- -----------
Three years later:
Gross reestimated liability...................... $ 1,875,877 $ 1,894,754
Reestimated related reinsurance recoverable...... 449,453 372,119
----------- -----------
Net reestimated liability........................ $ 1,426,424 $ 1,522,635
----------- -----------
----------- -----------
Four years later:
Gross reestimated liability...................... $ 1,818,521
Reestimated related reinsurance recoverable...... 381,250
-----------
Net reestimated liability........................ $ 1,437,271
-----------
-----------
Gross (deficiency) redundancy as of December 31,
1996........................................... $ (49,035) $ (4,576) $ 75,592 $ 61,385
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- --------------------------
(1) This table excludes data related to TRZ for 1995 and prior years.
The trend depicted in the latest development year in the reestimated net
liability portion of the "Analysis of Consolidated Net Loss and Loss Adjustment
Expense Reserve Development" table and in the "Analysis of Net Unpaid Losses and
Loss Adjustment Expenses and Net Reestimated Liability" table reflects net
favorable development. In the other liability line, favorable development on
losses occurring in more recent years was offset by adverse development in 1984
and prior years. In addition, in more recent years, favorable development,
particularly in the fire, allied line and aircraft lines was partially offset by
adverse development in the automobile liability line. Included in the table
immediately above, significant favorable development in the gross reestimated
liability in the latest development year resulted in significant reductions in
the reestimated related reinsurance recoverable, with no effect on the net
reestimated liability. (See Management's Discussion and Analysis of Financial
Condition and Results of Operations.)
The deficiencies shown in the table for the reserves carried for all years
prior to 1995 generally reflect the adverse development for losses occurring
from 1981 to 1985 which is common throughout the industry. A number of industry
and external factors combined during this period to drive loss frequency and
severity to unexpectedly high levels.
From 1985 to 1991, casualty business generally had increased as a percentage
of net premiums written. As a result of this change in the underlying book of
business, TRH believes that the length of time needed for TRH's unpaid loss and
loss adjustment expense reserves to be ultimately paid for those years will
generally continue to increase. For 1992 through 1996, the length of time needed
for reserves to be ultimately paid may decrease compared to 1991 due, in large
part, to a shift in the business mix towards lines with shorter loss payment
patterns and the return of loss and loss adjustment expense reserves
12
<PAGE>
associated with the reduced participation in one of TRH's then largest assumed
treaties from 1992 through 1995.
The increase in the level of net losses and loss adjustment expenses paid in
respect of reserves carried at December 31, 1986 and 1987 was due to certain
treaties with the AIG Group. Because of the nature of such treaties, the payment
of losses occurred earlier than would be expected given the payment pattern for
overall TRH losses excluding these treaties. Cumulative losses paid Two Years
Later, of $285.2 million and $267.7 million, relating to reserves held at
December 31, 1987 and 1986, respectively, include amounts paid under such
treaties of $86 million and $115 million, respectively. TRH has no remaining
liability with respect to these treaties.
With respect to non-U.S. subsidiary TRZ, acquired in mid-1996, gross and net
loss and loss adjustment expense reserves totaled $176.3 million at the date of
acquisition. There was no reserve development between the acquisition date and
December 31, 1996. In addition, gross and net losses and loss adjustment
expenses paid in 1996 related to the opening reserve totaled $50.5 million. At
December 31, 1996, TRZ's gross and net reserves totaled $184.0 million. Accident
year information for prior years was not available. Amounts for TRZ are included
in the table below in 1996.
The following table presents a reconciliation of beginning and ending net
reserve balances for the years indicated. For TRH, there is no difference in
reserves for losses and loss adjustment expenses net of reinsurance recoverable
on unpaid losses and loss adjustment expenses whether determined in accordance
with generally accepted accounting principles or statutory accounting
principles.
RECONCILIATION OF RESERVE
FOR NET LOSSES AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(in thousands)
Reserve for net unpaid losses and loss adjustment expenses at
beginning of year(1).......................................... $1,985,786 $1,727,380 $1,503,389
---------- ---------- ----------
Trans Re Zurich reserves acquired, as of acquisition date....... 176,260 -- --
---------- ---------- ----------
Net losses and loss adjustment expenses incurred in respect of
losses occurring in:
Current year................................................ 849,235 750,326 666,932
Prior years................................................. (7,724) (3,454) 14,972
---------- ---------- ----------
Total..................................................... 841,511 746,872 681,904
---------- ---------- ----------
Net losses and loss adjustment expenses paid in respect of
losses occurring in:
Current year................................................ 172,875 149,519 144,990
Prior years................................................. 447,154 338,947 312,923
---------- ---------- ----------
Total..................................................... 620,029 488,466 457,913
---------- ---------- ----------
Reserve for net unpaid losses and loss adjustment expenses at
end of year(1)................................................ $2,383,528 $1,985,786 $1,727,380
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- --------------------------
(1) In TRH's balance sheet and in accordance with Statement of Financial
Accounting Standards (SFAS) No. 113, unpaid losses and loss adjustment
expenses are presented before deduction of related reinsurance recoverable.
(See Notes 2 and 5 of Notes to Consolidated Financial Statements.)
In each of 1996 and 1995, the increase in current year paid losses compared
to the prior year is attributable, in large part, to increases in premium volume
and a shift in the business mix to lines with shorter payment patterns in recent
years. (See Management's Discussion and Analysis of Financial Condition and
Results of Operations for further analysis of incurred and paid loss activity.)
13
<PAGE>
INVESTMENT OPERATIONS
TRH's investments must largely comply with the insurance laws of the state
of New York, their domiciliary state, and of the other states and jurisdictions
in which the Company and its subsidiaries are regulated. These laws prescribe
the kind, quality and concentration of investments which may be made by
insurance companies. In general, these laws permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate mortgages
and real estate. The Finance Committee of the Company's Board of Directors and
senior management oversee investments, establish TRH's investment strategy and
implement investment decisions with the assistance of certain AIG Group
companies, which act as financial advisors and managers of TRH's investment
portfolio and, in connection therewith, make the selection of particular
investments. Other than as set forth above, there are no guidelines or policies
with respect to the specific composition of TRH's overall investment portfolio
or the composition of its bond portfolio by rating or maturity.
TRH's current investment strategy seeks to maximize after-tax income through
a high quality diversified taxable bond and tax-exempt municipal bond portfolio,
while maintaining an adequate level of liquidity. TRH adjusts its mix of taxable
and tax-exempt investments, as appropriate, generally as a result of strategic
investment and tax planning considerations. (See Management's Discussion and
Analysis of Financial Condition and Results of Operations.) The equity portfolio
is structured to achieve capital appreciation primarily through investment in
quality growth companies.
The following table reflects investment results for TRH for each of the five
years in the period ended December 31, 1996.
INVESTMENT RESULTS
<TABLE>
<CAPTION>
PRE-TAX NET PRE-TAX
YEARS ENDED AVERAGE INVESTMENT EFFECTIVE PRE-TAX REALIZED
DECEMBER 31, INVESTMENTS(1) INCOME(2) YIELD(3) NET CAPITAL GAINS
--------------- -------------- ------------ ------------- -----------------
<S> <C> <C> <C> <C>
(dollars in thousands)
1996............................................... $ 3,286,514 $ 192,636 5.9% $ 18,668
1995............................................... 2,742,704 172,876 6.3 11,119
1994............................................... 2,427,894 153,594 6.3 14,911
1993............................................... 2,190,336 138,902 6.3 5,697
1992............................................... 1,906,266 129,971 6.8 11,103
</TABLE>
- ------------------------------
(1) Average of the beginning and ending carrying values of investments and cash
for the year, excluding non-interest bearing cash. Bonds available for sale,
revalued from amortized cost upon adoption of SFAS No. 115 as of December
31, 1993, bonds included in a trading portfolio as of December 31, 1992,
common stocks and nonredeemable preferred stocks are carried at fair market
value. Other bonds and redeemable preferred stocks are carried at amortized
cost.
(2) After investment expenses, excluding realized net capital gains.
(3) Pre-tax net investment income for the year divided by average investments
for the same year.
14
<PAGE>
The following table summarizes the investments of TRH (on the basis of
carrying value) as of December 31, 1996:
<TABLE>
<CAPTION>
BREAKDOWN OF INVESTMENTS
-------------------------
<S> <C> <C>
DECEMBER 31, 1996
-------------------------
<CAPTION>
AMOUNT PERCENT
------------ -----------
(dollars in thousands)
<S> <C> <C>
Bonds held to maturity (at amortized cost):
U.S. Government and government agency bonds........................................ $ 4,365 0.1%
Domestic and foreign municipal bonds............................................... 1,120,768 31.9
------------ -----
1,125,133 32.0
------------ -----
Bonds available for sale (at market value):
Corporate bonds.................................................................... 417,352 11.9
U.S. Government and government agency bonds........................................ 527,175 15.0
Foreign government bonds........................................................... 386,842 11.0
Domestic and foreign municipal bonds............................................... 604,308 17.2
------------ -----
1,935,677 55.1
------------ -----
Preferred stocks..................................................................... 5,642 0.2
------------ -----
Common stocks........................................................................ 386,723 11.0
------------ -----
Short-term investments............................................................... 59,191 1.7
------------ -----
Total investments................................................................ $ 3,512,366 100.0%
------------ -----
------------ -----
</TABLE>
The carrying value of bonds and equities available for sale are subject to
significant volatility from changes in their market values. (See Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
As of December 31, 1996, the market value of the total investment portfolio
was $3,569.9 million.
The following table indicates the composition of the bond portfolio of TRH
by rating as of December 31, 1996:
<TABLE>
<CAPTION>
BREAKDOWN OF BOND HELD TO AVAILABLE
PORTFOLIO BY RATING(1) MATURITY FOR SALE TOTAL
----------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
U.S. Government and government agency bonds................... 0.1% 17.2% 17.3%
Foreign government bonds...................................... -- 12.6 12.6
Aaa........................................................... 17.7 13.6 31.3
Aa............................................................ 13.5 12.6 26.1
A............................................................. 4.1 4.9 9.0
Baa........................................................... 0.3 0.2 0.5
Not rated (2)................................................. 1.1 2.1 3.2
--- --- ---------
Total................................................... 36.8% 63.2% 100.0%
--- --- ---------
--- --- ---------
</TABLE>
- ------------------------------
(1) Ratings are as assigned by Moody's Investors Service, Inc. (Moody's).
(2) Of the bonds not rated by Moody's as of December 31, 1996, 2.5% of the bond
portfolio was rated investment grade by either Standard & Poor's
Corporation, Dominion Bond Rating Service Limited (Canada) or Japanese Bond
Rating Institute (Japan) and 0.7% of bonds available for sale represented
non-government securities not rated by such services.
At December 31, 1996, TRH had no real estate or derivative financial
instruments. (See Note 3 of Notes to Consolidated Financial Statements.)
15
<PAGE>
In December 1992, TRH made a $5 million minority investment in nonredeemable
preferred stock of the Galtney Group, Inc., a privately held holding company
whose subsidiaries are involved in brokering, underwriting and managing
insurance risks for the healthcare industry. Business assumed by TRH, which is
assumed from or placed by Galtney Group, Inc. companies, represented
approximately 4% of gross premiums written by TRH in 1996.
COMPETITION
The reinsurance business is highly competitive in virtually all lines. With
certain limited exceptions, conditions (including pricing and contract terms) in
these lines have continued to weaken in recent years. With the property and
casualty insurance and reinsurance industry just having completed its ninth
consecutive year of generally soft market conditions, the Company cannot predict
with any reasonable certainty, if, when or to what extent market conditions as a
whole will improve.
TRH faces competition from new market entrants and from market participants
that devote greater amounts of capital to the types of business written by TRH.
In recent years, increased market capacity, significant domestic and
international merger and acquisition activity, and in 1996, the reemergence of
Lloyd's of London, have added to competitive pressures. The ultimate impact on
the market of these events is uncertain.
Competition in the types of reinsurance in which TRH is engaged is based on
many factors, including the perceived overall financial strength of the
reinsurer, Best's and S&P's ratings, the states or other jurisdictions where the
reinsurer is licensed, accredited, authorized or can serve as a reinsurer,
premiums charged, other terms and conditions of the reinsurance offered,
services offered, speed of claims payment and reputation and experience in the
lines of business underwritten.
TRH competes in the United States and international reinsurance markets with
numerous major international reinsurance companies and numerous domestic
reinsurance companies, some of which have greater financial and other resources
than TRH. While TRC and Putnam, on a combined basis, would rank in the top 10%
of domestic reinsurers, on the basis of net premiums written, they are a less
significant reinsurer in international reinsurance markets. TRH's competitors
include independent reinsurance companies, subsidiaries or affiliates of
established worldwide insurance companies, reinsurance departments of certain
primary insurance companies and domestic and European underwriting syndicates.
Many of these competitors have been operating for substantially longer than TRH
and have established long-term and continuing business relationships throughout
the industry, which can be a significant competitive advantage. Although most
reinsurance companies operate in the broker market, most of TRH's largest
competitors work directly with ceding companies, competing with brokers.
According to the Reinsurance Association of America, there were 49 domestic
reinsurers for which results were reported in their quarterly survey as of
December 31, 1996.
TRH believes that the reinsurance industry, including the brokerage
industry, will continue to undergo further consolidation (i.e. the largest
reinsurers will write a larger portion of total industry premiums) and, to
compete effectively, significant size and financial strength will attain greater
importance.
EMPLOYEES
At December 31, 1996, TRH had approximately 335 employees. Approximately 190
employees were located in the New York headquarters; 35 employees were located
in Chicago and Miami (serving Latin America) and 110 employees were located in
other international offices. None of TRH's employees in the United States are
represented by labor unions.
16
<PAGE>
REGULATION
The rates and contract terms of reinsurance agreements are generally not
subject to regulation by any governmental authority. This contrasts with primary
insurance agreements, the rates and policy terms of which are generally closely
regulated by state insurance departments. As a practical matter, however, the
rates charged by primary insurers and the policy terms of primary insurance
agreements may affect the rates charged and the policy terms associated with
reinsurance agreements.
The Company, TRC, TRZ and Putnam are subject to the insurance statutes,
including insurance
holding company statutes, of various states and jurisdictions. The insurance
holding company laws and regulations vary from jurisdiction to jurisdiction, but
generally require domestic insurance holding companies and insurers and
reinsurers that are subsidiaries of insurance holding companies to register with
the applicable state regulatory authority and to file with that authority
certain reports which provide information concerning their capital structure,
ownership, financial condition and general business operations.
Such holding company laws generally also require prior regulatory agency
approval of changes in direct or indirect control of an insurer or reinsurer and
of certain material intercorporate transfers of assets within the holding
company structure. The New York Insurance Law provides that no corporation or
other person, except an authorized insurer, may acquire direct control of TRC or
Putnam, or acquire control of the Company and thus indirect control of TRC and
Putnam, unless such corporation or person has obtained the prior approval of the
New York Insurance Department for such acquisition. For the purposes of the New
York Insurance Law, any investor acquiring ten percent or more of the Common
Stock of the Company would be presumed to be acquiring "control" of the Company
and its subsidiaries, unless the New York Insurance Department determines upon
application that such investor would not control the Company. An investor who
would be deemed to be acquiring control of the Company would be required to
obtain the approval of the New York Insurance Department prior to such
acquisition. In addition, such investor would become subject to various ongoing
reporting requirements in New York and in certain other states.
TRC, TRZ and Putnam, in common with other reinsurers, are subject to
regulation and supervision by the states and by other jurisdictions in which
they do business. Within the United States, the method of such regulation varies
but generally has its source in statutes that delegate regulatory and
supervisory powers to an insurance official. The regulation and supervision
relate primarily to the standards of solvency that must be met and maintained,
including risk-based capital measurements, the licensing of reinsurance, the
nature of and limitations on investments, restrictions on the size of risks
which may be insured under a single contract, deposits of securities for the
benefit of ceding companies, methods of accounting, periodic examinations of the
affairs of insurance companies, the form and content of reports of financial
condition required to be filed, and reserves for unearned premiums, losses and
other purposes. In general, such regulation is for the protection of the ceding
companies and, ultimately, their policyholders rather than securityholders.
Risk Based Capital (RBC) is designed to measure the adequacy of an insurer's
statutory surplus in relation to the risks inherent in its business. Thus,
inadequately capitalized insurance companies may be identified. The RBC formula
develops a risk adjusted target level of statutory surplus by applying certain
factors to various asset, premium and reserve items. Higher factors are applied
to items deemed to have more risk by the National Association of Insurance
Commissioners and lower factors are applied to items that are deemed to have
less risk. Thus, the target level of statutory surplus varies not only as a
result of the insurer's size, but also on the risk profile of the insurer's
operations. The RBC Model Law provides for four incremental levels of regulatory
attention for insurers whose surplus is below the calculated RBC target. These
levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to placing the insurer under regulatory control. The
statutory surplus of each of the Company's subsidiaries significantly exceeded
the risk-based capital requirements as of December 31, 1996.
17
<PAGE>
TRC and Putnam are subject to examination of their affairs by the insurance
departments of the states in which they are licensed, authorized or accredited.
The insurance department of New York, TRC's and Putnam's domiciliary state,
generally conducts a triennial examination of insurance companies domiciled in
New York. The most recent examinations of TRC and Putnam covered the years from
1989 for TRC and 1990 for Putnam through December 31, 1993. The report on
examination for TRC has not been filed. The Putnam report was filed as of
November 22, 1995. The Putnam report and reports filed related to the
immediately prior triennial examinations of both companies disclosed no material
deficiencies.
Through the "credit for reinsurance" mechanism, TRC and Putnam are
indirectly subject to the effects of regulatory requirements imposed by
jurisdictions in which TRC's and Putnam's ceding companies are licensed. In
general, an insurer which obtains reinsurance from a reinsurer that is licensed,
accredited or authorized by the state in which the insurer files statutory
financial statements is permitted to take a credit on its statutory financial
statements in an aggregate amount equal to the reinsurance recoverable on paid
losses and the liabilities for unearned premiums and loss and loss adjustment
expense reserves ceded to the reinsurer, subject to certain limitations where
amounts of reinsurance recoverable on paid losses are more than 90 days overdue.
Certain states impose additional requirements that make it difficult to become
so authorized, and certain states do not allow credit for reinsurance ceded to
reinsurers that are not licensed or accredited in that state without additional
provision for security.
In addition to licensing requirements, TRH's international operations are
also regulated in various jurisdictions with respect to currency, amount and
type of security deposits, amount and type of reserves and amount and type of
local investment, and are subject to local economic, political and social
conditions. In addition, TRH's results of operations and net unrealized currency
translation gain or loss (a separate component of stockholders' equity) are
subject to volatility as the value of the foreign currencies fluctuate relative
to the U.S. dollar. Regulations governing constitution of technical reserves and
remittance balances in some countries may hinder remittance of profits and
repatriation of assets.
RELATIONSHIP WITH THE AIG GROUP
AIG
AIG is a holding company which, through its subsidiaries, is primarily
engaged in a broad range of insurance and insurance-related activities and
financial services in the United States and abroad. U.S.-based property and
casualty insurance subsidiaries of AIG currently attain the highest rating
classification assigned by both Best's and S&P. The AIG Group is one of the
largest purchasers of reinsurance in the insurance industry based on premiums
ceded.
CONTROL OF THE COMPANY
As of December 31, 1996, AIG owned approximately 49% of the Company's
outstanding Common Stock. Four of the Company's 9 current directors, including
the Chairman, are officers of AIG and hold the following positions with AIG: Mr.
Greenberg is a Director and the Chairman and Chief Executive Officer; Mr.
Matthews is a Director and Vice Chairman; Mr. Howard I. Smith is the Executive
Vice President, Chief Financial Officer and Comptroller and Mr. Tizzio is a
Director and President.
AIG GROUP REINSURANCE
From 1977 through June 1990, TRH and AIG had an agreement granting TRH a
right of first acceptance to participate in substantially all property and
casualty reinsurance purchased by the AIG Group. AIG continues to grant TRH a
right of first acceptance under terms similar to those in effect under the above
mentioned agreement. TRH either accepts or rejects the AIG Group reinsurance
offered based upon TRH's assessment of risk selection, pricing, terms and
conditions. Historically, and with few exceptions, TRH has generally not set
terms and conditions as lead underwriter with respect to the AIG
18
<PAGE>
Group treaty reinsurance; however, TRH may in the future set terms and
conditions with respect to such business as lead underwriter and intends that
the terms and conditions of any such reinsurance will be negotiated on an arms'
length basis. The operating management of TRH is not employed by the AIG Group,
and the Underwriting Committee of the Board of Directors of the Company, which
includes directors of the Company who are not employees of the AIG Group,
monitor TRH's underwriting policies.
Approximately $232 million (18%), $189 million (17%) and $198 million (21%)
of gross premiums written by TRH in the years 1996, 1995 and 1994, respectively,
were attributable to reinsurance purchased by the AIG Group, for the production
of which TRH paid ceding commissions to the AIG Group of approximately $33
million, $40 million and $52 million, respectively, in such years. TRH has no
goal with respect to the proportion of AIG Group versus non-AIG Group business
it accepts. TRH's objective in determining its business mix is to evaluate each
underwriting opportunity individually with a view to maximizing overall
underwriting results.
TRH retroceded gross premiums written to the AIG Group in the years 1996,
1995 and 1994 of approximately $80.8 million, $71.8 million and $58.9 million,
respectively, and received ceding commissions of approximately $8.0 million,
$6.7 million and $6.0 million, respectively, for the production of such business
in such years.
ITEM 2. PROPERTIES
One-half of the office space of TRH's New York headquarters, and its Hong
Kong and Toronto offices are rented from AIG, which either owns the property or
leases it from others. The remaining office space of TRH's headquarters and the
Chicago, Miami, Buenos Aires, Tokyo, London, Paris and Zurich offices, are
rented from third parties. The leases for the office space occupied by TRH's New
York headquarters expire in 2005.
ITEM 3. LEGAL PROCEEDINGS
TRH, in common with the reinsurance industry in general, is subject to
litigation in the normal course of its business. TRH does not believe that any
pending litigation will have a material adverse effect on its consolidated
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
19
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names, positions and ages of the persons who
are the directors and executive officers of the Company as of December 31,
1996.(1)
<TABLE>
<CAPTION>
SERVED AS
DIRECTOR OR
NAME POSITION AGE OFFICER SINCE
- ------------------------------------------------------------ ------------------------------ --- ---------------
<S> <C> <C> <C>
Robert F. Orlich............................................ President, Chief Executive
Officer and Director 49 1990(2)
Paul A. Bonny............................................... Senior Vice President 40 1994(3)
Robert V. Mucci............................................. Senior Vice President and
Actuary 39 1990(2)
Steven S. Skalicky.......................................... Senior Vice President and
Controller 48 1995
David W. Smith.............................................. Senior Vice President and
General Counsel 48 1990(2)
Javier E. Vijil............................................. Senior Vice President 44 1996(4)
Louis Curreri............................................... Vice President 45 1990(2)
Elizabeth M. Tuck........................................... Secretary 40 1991
M.R. Greenberg.............................................. Chairman of the Board 71 1986
James Balog................................................. Director 68 1988
Ikuo Egashira............................................... Director 66 1995
John M. Fowler.............................................. Director 48 1989
John J. Mackowski........................................... Director 70 1990
Edward E. Matthews.......................................... Director 65 1986
Howard I. Smith............................................. Director 52 1994
Thomas R. Tizzio............................................ Director 58 1990(2)
</TABLE>
- ------------------------
(1) Joseph F. Murphy, a director as of December 31, 1996, died in January 1997.
Mr. Murphy served as a director of the Company since April 1990, and prior
thereto, was a director of TRC, but not of the Company.
(2) Prior to April 1990, such person was a director or an officer of TRC and
Putnam, but not of the Company.
(3) Prior to May 1994, Mr. Bonny was an officer of TRC and Putnam, but not of
the Company.
(4) Mr. Vijil was elected as a Senior Vice President of the Company on May 22,
1996. From November 1994 to May 1996, Mr. Vijil was a Senior Vice President
of TRC and Putnam, but not of the Company. From August 1993 to November
1994, Mr. Vijil was an officer of TRC and Putnam, but not of the Company.
Prior to August 1993, Mr. Vijil was an officer of Cigna Reinsurance Company.
Except as noted, each of the executive officers has, for more than five
years, occupied an executive position with the Company or companies that are now
its subsidiaries. For more than five years prior to joining the Company in
February 1995, Mr. Skalicky served as an officer of certain AIG Group companies,
with his most recent position as Assistant Vice President and Deputy
Comptroller, AIG. Since January 1991, Ms. Tuck has also served as the Secretary
of a number of AIG Group companies and, prior to that time, she served in
various capacities in the AIG Corporate Secretary's office since July 1986. Mr.
David Smith and Mr. Howard Smith are not related.
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) The following table sets forth the high and low closing sales prices per
share of the Company's Common Stock, as reported on the New York Stock Exchange
Composite Tape for each of the four quarters of 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
HIGH LOW High Low
------- ------- -------- ---------
First Quarter.................................................... 75 67 5/8 61 3/8 52 1/4
Second Quarter................................................... 70 62 1/2 65 1/2 61 3/8
Third Quarter.................................................... 72 3/8 65 3/4 70 1/8 62 5/8
Fourth Quarter................................................... 80 1/2 68 5/8 73 5/8 64 5/8
</TABLE>
(b) The approximate number of holders of Common Stock, as of January 31,
1997, was 3,043.
(c) In 1996, the Company declared a quarterly dividend of $0.12 per common
share in March, May and September and $0.135 in December. In 1995, the Company
declared a quarterly dividend of $0.10 per common share in March, May and
September and $0.12 in December. The Company paid each dividend in the quarter
following the date of declaration.
The declaration and payment of future dividends, if any, by the Company will
be at the discretion of the Board of Directors and will depend upon many
factors, including the Company's consolidated earnings, financial condition and
business needs, capital and surplus requirements of the Company's operating
subsidiaries, regulatory considerations and other factors.
The Company is a holding company whose principal source of income is
dividends from TRC. The payment of dividends by TRC and its wholly-owned
subsidiaries, Trans Re Zurich and Putnam, is restricted by insurance
regulations. (See Note 9 of Notes to Consolidated Financial Statements.)
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
The following Selected Consolidated Financial Data is prepared in accordance
with generally accepted accounting principles. This data should be read in
conjunction with the Consolidated Financial Statements and accompanying notes
included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996(1) 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<CAPTION>
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net premiums written..................... $ 1,142,515 $ 1,009,227 $ 866,665 $ 631,023 $ 482,435
Net premiums earned...................... 1,130,633 981,177 851,183 581,056 477,841
Net investment income.................... 192,636 172,876 153,594 138,902 129,971
Realized net capital gains............... 18,668 11,119 14,911 5,697 11,103
Total revenues........................... 1,341,937 1,165,172 1,019,688 725,655 618,915
Operating income......................... 197,518 165,320 122,545 96,573 84,603
Income before income taxes and cumulative
effect of accounting changes........... 196,320 163,799 119,262 93,618 83,806
Income before cumulative effect of
accounting changes..................... 154,860 131,858 101,627 86,743 71,655
Cumulative effect of accounting
changes(2)............................. -- -- -- 46,340 --
Net income............................... 154,860 131,858 101,627 133,083 71,655
PER COMMON SHARE:(3)
Income before cumulative effect of
accounting changes..................... 6.74 5.75 4.44 3.79 3.13
Cumulative effect of accounting
changes(2)............................. -- -- -- 2.02 --
Net income............................... 6.74 5.75 4.44 5.81 3.13
Cash dividends declared.................. 0.50 0.42 0.37 0.30 0.25
BALANCE SHEET DATA
(AT YEAR END):
Investments and cash..................... 3,589,889 2,987,915 2,497,062 2,361,067 2,022,605
Total assets............................. 4,379,141 3,898,967 3,457,779 3,169,581 2,826,172
Unpaid losses and loss adjustment
expenses............................... 2,733,055 2,388,155 2,167,316 1,890,178 1,769,486
Unearned premiums........................ 343,936 291,568 249,098 222,625 167,557
Stockholders' equity..................... 1,137,306 988,502 763,368 771,854 562,276
</TABLE>
- ------------------------
(1) TRH, through its wholly-owned subsidiary TRC, acquired Trans Re Zurich (TRZ)
in the third quarter of 1996. TRZ's results for the second half of 1996 are
included in the Consolidated Financial Statements and accompanying notes
included elsewhere herein.
(2) Represents a benefit of $47,000 and a charge of $660 for the cumulative
effect of adoption of accounting standards related to income taxes (SFAS No.
109) and postretirement benefits (SFAS No. 106), respectively.
(3) Weighted average common shares outstanding was 22,983 for 1996, 22,939 for
1995, 22,902 for 1994, 22,886 for 1993 and 22,867 for 1992.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL STATEMENTS
The following discussion refers to the consolidated financial statements of
Transatlantic Holdings, Inc. and its subsidiaries (TRH) as of December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996,
which are presented elsewhere herein.
American International Group, Inc. and subsidiaries (the AIG Group) own
approximately 49% of the Company's outstanding Common Stock. Financial data
discussed below have been affected by certain transactions between TRH and the
AIG Group. (See Notes 8 and 10 of Notes to Consolidated Financial Statements.)
ACQUISITION OF TRANS RE ZURICH
In the third quarter of 1996, Transatlantic Holdings, Inc. (the Company),
through its wholly-owned subsidiary, Transatlantic Reinsurance Company (TRC),
acquired all of the outstanding shares of Trans Re Zurich (TRZ), formerly known
as Guardian Ruckversicherungs-Gesellschaft ("Guardian Re"), an international
reinsurance company based in Zurich, Switzerland, for approximately $105 million
in cash. Assets of TRZ totaled $366.8 million at the date of acquisition.
This acquisition was accounted for as a purchase. Accordingly, TRZ's results
for the second half of 1996 are included in the consolidated results of the
Company for 1996. This acquisition has not had a material effect on financial
position or net income.
OPERATIONAL REVIEW
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. Gross premiums assumed and reinsurance ceded are
initially deferred and then are credited or charged to income, respectively,
over the terms of the underlying contracts or certificates in force. The
deferred amounts constitute the unearned premium reserve or prepaid reinsurance
premium and are generally ratably credited or charged, respectively, to income
over the contract periods. 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994
------------------------ -------------------------- ------------------------
<CAPTION>
% CHANGE % Change % Change
FROM From From
AMOUNT PRIOR YEAR Amount Prior Year Amount Prior Year
--------- ------------- --------- --------------- --------- -------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Net premiums written....................... $ 1,142.5 13.2% $ 1,009.2 16.4% $ 866.7 37.3%
Net premiums earned........................ 1,130.6 15.2 981.2 15.3 851.2 46.5
Net investment income...................... 192.6 11.4 172.9 12.6 153.6 10.6
</TABLE>
Generally as a result of more favorable conditions in certain sectors of the
market in 1996 as compared to other sectors, net premiums written increased in
1996. Net premiums written by our international locations increased by 48.2%
compared to 1995, to $462.7 million, while domestic premiums decreased by 2.5%
to $679.8 million. International business represented 40.5% of total net
premiums written. International net premiums written increased significantly in
treaty property, motor, ocean marine
23
<PAGE>
and other liability lines, aided by $78.2 million of net premiums written by
newly-acquired TRZ. The decrease in domestic net premiums written was due to
significant market competition. Decreases in domestic property lines and certain
specialty and general casualty classes other than medical malpractice were
partially offset by increases in treaty workers' compensation, motor (including
nonstandard risks), medical malpractice, surety and marine lines. On a worldwide
basis, property lines business represented 33.5% of net premiums written in 1996
compared to 33.0% in 1995. The balance represented casualty lines. The increased
amount of property business increases the potential for volatile underwriting
results caused by major natural disasters. Treaty volume represented 90.5% of
net premiums written in 1996 compared to 87.2% in 1995. The balance represented
facultative accounts. The net increases noted above were primarily from treaty
business and generally resulted from increased coverage provided.
Generally as a result of more favorable conditions in certain sectors of the
market in 1995 as compared to other sectors, premiums increased as compared to
1994 in specialty casualty lines, particularly medical malpractice, and in auto
liability (including nonstandard risks), ocean marine, surety and credit lines
and decreased in certain general casualty classes. Property lines premiums also
increased in 1995 versus 1994 due primarily to an increase in allied lines and,
as a group, represented 33.0% of net premiums written in 1995 compared to 34.8%
in 1994. In addition, approximately one-half of the increase in 1995 premium
volume emanated from the international locations, particularly TRH's London
office, which recorded significant premium increases in the ocean marine and
auto liability lines. International business increased to 30.9% of net premiums
written in 1995 compared to 28.0% in 1994. The increases noted above were
primarily from treaty business and generally resulted from increased coverage
provided. (See Note 11 of Notes to Consolidated Financial Statements.)
The increase in net premiums earned in each of 1996 and 1995 compared to the
respective prior year amounts resulted primarily from the significant growth in
net premiums written in both years. Net investment income grew each year due to
significant cash flow available for investment which was generated by operating
activities. In 1996, the growth was offset, in part, by generally lower
available yields on bonds purchased as compared to yields on bonds disposed of
in the past year. In 1996, TRZ contributed $8.4 million to net investment
income. (See Note 3 of Notes to Consolidated Financial Statements.)
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.
The following table sets forth TRH's combined ratios and the components
thereof for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Loss and loss adjustment expense ratio................................................. 74.4 76.1 80.1
Underwriting expense ratio............................................................. 26.9 26.1 25.6
Combined ratio......................................................................... 101.3 102.2 105.7
</TABLE>
TRH's 1996 results did not include any significant catastrophe loss
activity. In addition, as a result of net decreases in estimates of losses
occurring in prior years, net losses and loss adjustment expenses incurred were
reduced by $7.7 million in 1996. In the other liability line, favorable
development on losses occurring in more recent years was offset by adverse
development in 1984 and prior years. In addition, in more recent years,
favorable development, particularly in the fire, allied line and aircraft lines
was partially offset by adverse development in the auto liability line.
1995 results included $4.5 million of losses from the Kobe, Japan
earthquake. In addition, these results benefited from net favorable development
on losses occurring in prior years of $3.5 million. Favorable development in
1995 from losses occurring in 1992 through 1994, particularly in the fire lines
in 1994, was partially offset by adverse development from casualty treaty losses
occurring in 1982 and prior
24
<PAGE>
years. In 1994, TRH's results included $20 million of losses from the
Northridge, California earthquake and $10 million from USAir's Pittsburgh
accident. 1994 results also included $15.0 million of losses resulting from net
adverse development of losses occurring in prior years. Adverse development from
casualty treaties prior to 1984 and property treaties in 1992 was partially
offset by favorable development on 1992 and prior fidelity treaty losses.
At December 31, 1996, reserves for unpaid losses and loss adjustment
expenses totaled $2.73 billion, an increase of $344.9 million over the prior
year. This increase included reserves acquired of $176.3 million upon the
purchase of TRZ in the third quarter of 1996. Also at December 31, 1996,
reinsurance recoverable on unpaid losses and loss adjustment expenses totaled
$336.2 million, a decrease of $53.8 million, or 13.8%, from the prior year. (See
Note 10 of Notes to Consolidated Financial Statements.) TRH's reserves and
related recoverables represent estimates of all future liability and reinsurance
recoverable thereon 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 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. Because the reserving
process is inherently difficult and subjective, actual net losses and loss
adjustment expenses may deviate, perhaps substantially, from estimates of
reserves and reinsurance recoverable on such amounts reflected in TRH's
consolidated financial statements.
Reserves for the reinsurance of risks related to environmental impairment
and asbestos-related illnesses amounted to $78 million and $75 million at
December 31, 1996 and 1995, respectively. 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 incurred but not reported claims (IBNR), are based upon known
facts and current law. However, significant uncertainty exists as, among other
things, there are inconsistent court resolutions with respect to underlying
policy intent and coverage, an increasing number of new claims and uncertainties
as to the allocation of responsibility for clean up costs of hazardous waste
dump sites. The government's refusal to release parties from liability and the
possibility of dramatic changes from the Congressional re-evaluation of
Superfund add to this uncertainty. Additional liabilities which cannot be
currently measured may emerge in the future and this emergence may have a
material adverse effect on future earnings. TRH believes that these claims
reserves, as well as all other claims reserves carried at December 31, 1996, are
adequate.
The increase of the underwriting expense ratio in 1996 compared to 1995
consisted of an increase in the ratio of net commissions to net premiums written
of 0.5 and an increase in the other operating expense ratio of 0.3. The increase
of the underwriting expense ratio in 1995 compared to 1994 consisted of an
increase in the net commission ratio of 0.8 and a decrease in the other
operating expense ratio of 0.3.
Other deductions generally include currency translation gains and losses and
other miscellaneous income and expenses. 1994 includes a provision for
unrecoverable reinsurance receivables of $2.8 million.
Realized net capital gains on the disposition of investments totaled $18.7
million in 1996, $11.1 million in 1995 and $14.9 million in 1994. Income before
income taxes was $196.3 million in 1996, $163.8 million in 1995 and $119.3
million in 1994. The increase in income before income taxes in 1996 over 1995
resulted
25
<PAGE>
from increased net investment income and realized net capital gains, and
improved underwriting results. The increase in income before income taxes in
1995 compared to 1994 was due to an improvement in underwriting results, caused,
in large part, by reduced catastrophe loss activity, and increased net
investment income, partially offset by a reduction in realized net capital
gains.
The provisions for federal and foreign income taxes were $41.5 million in
1996, $31.9 million in 1995 and $17.6 million in 1994. The Company and its
domestic subsidiaries, TRC and Putnam Reinsurance Company (Putnam), filed
consolidated federal income tax returns for the years under discussion, except
those for 1996 which are not yet due. The tax burden among the companies is
allocated in accordance with a tax sharing agreement. TRC will include as part
of its taxable income 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.
On a consolidated basis, the effective tax rates were 21.1% in 1996, 19.5%
in 1995 and 14.8% in 1994. The increase in the effective tax rate in each of
1996 and 1995 as compared to the respective prior year rates is due, in large
part, to higher earnings and a lower proportion of tax-exempt investment income
to income before income taxes in each of 1996 and 1995 as compared to the
respective prior year.
Net income for 1996 was $154.9 million, or $6.74 per common share, versus
$131.9 million, or $5.75 per common share in 1995 and $101.6 million, or $4.44
per common share in 1994. Reasons for these changes are as discussed above.
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. (See Note 9 of Notes to Consolidated
Financial Statements for a discussion of restrictions on dividend payment.)
Sources of funds for the operating subsidiaries consist primarily of premiums,
reinsurance recoverables, investment income and proceeds from sales, redemptions
and the maturing of investments. Funds are applied primarily to payments of
claims, ceded reinsurance premiums, insurance operating expenses, income taxes
and investments in fixed income and equity securities. Premiums are generally
received substantially in advance of related claims payments. Cash and
short-term investments 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 December 31, 1996, total investments and cash were $3,589.9 million
compared to $2,987.9 million at December 31, 1995. This increase is principally
due to net cash provided by operating activities which totaled $373.4 million in
1996, investments and cash acquired upon the purchase of TRZ, net of purchase
price, of $246.4 million and net unrealized appreciation of investments
available for sale during the year of $3.7 million. (See Note 3 of Notes to
Consolidated Financial Statements.)
TRH's operating cash flow in 1996 and 1995 surpassed the respective prior
year amounts due, in part, to a significant increase in net premium volume and
increased net investment income received, partially offset by increased
commissions and paid losses. International operations, most significantly
London, accounted for 67.1%, 62.0% and 85.6% of net positive operating cash
flow, other than cash flow from net investment income, (i.e. primarily, assumed
premiums received less ceded premiums paid, net commissions paid, net losses
paid and other operating expenses) in 1996, 1995 and 1994, respectively. In each
of 1996 and 1995 as compared to the respective prior year, the increase in paid
losses is principally due to increases in premium volume and a shift in the
business mix towards lines with shorter loss payment patterns in recent years.
TRH believes that its balance of cash and short-term investments of $136.7
million as of December 31, 1996 and its future cash flows will be sufficient to
meet TRH's cash requirements through the end of 1997
26
<PAGE>
and thereafter for a period the length of which is difficult to predict, but
which TRH believes will be at least one year.
TRH's fixed maturity investments, approximately 87.1% of total investments
as of December 31, 1996, are predominantly investment grade, liquid securities
concentrated in maturities of less than 10 years. Also as of that date,
approximately 11.2% of total investments were in common and nonredeemable
preferred stocks and the remaining 1.7% consisted of short-term investments. In
considering the impact of inflation in conducting its operations, TRH structures
investment maturities to minimize the effects of interest rate fluctuations on
operating results. Based on the foregoing, TRH considers its liquidity to be
adequate through the end of 1997 and thereafter for a period the length of which
is difficult to predict, but which TRH believes will be at least one year.
As of December 31, 1996, a significant portion of the bond portfolio was
classified as available-for-sale and carried at market value. Fixed maturity
investments are carried at amortized cost when it is TRH's positive intent to
hold these securities to maturity and TRH has the ability to do so. Most
activity within the bonds available for sale portfolio for the years under
discussion represented strategic portfolio realignments, partially for tax
purposes. TRH adjusts its mix of taxable and tax-exempt investments, as
appropriate, generally as a result of strategic investment and tax planning
considerations. As of December 31, 1996, bonds held to maturity had gross
unrealized gains of $58.9 million and gross unrealized losses of $1.3 million.
Gross unrealized gains and losses on bonds available for sale as of December 31,
1996 amounted to $56.3 million and $4.9 million, respectively.
As of December 31, 1996, 17.3% of the bond portfolio represented U.S.
Government and government agency bonds and 12.6% represented foreign government
bonds. Of the remainder, 57.4% were rated Aaa or Aa by Moody's, an additional
12.0% were also rated investment grade or better by Moody's or similar foreign
or domestic services and 0.7% were not rated. Also, as of December 31, 1996, TRH
had no real estate or derivative financial instruments. (See Note 3 of Notes to
Consolidated Financial Statements.)
TRH's stockholders' equity increased to $1,137.3 million at December 31,
1996, an increase of $148.8 million over year-end 1995. The net increase was
comprised principally of net income of $154.9 million and a $2.4 million net
increase in unrealized appreciation of investments, net of deferred income
taxes, which consists of an increase of $25.8 million from equities and a
decrease of $23.4 million from bonds available for sale. Unrealized appreciation
(depreciation) of investments, net of deferred income taxes, is subject to
significant volatility resulting from changes in the market value of bonds and
equities available for sale. Market values may fluctuate due to changes in
general economic conditions, market interest rates and other factors.
Stockholders' equity was reduced during the year by dividends declared of $11.4
million.
Insurance practices and regulatory guidelines suggest that property and
casualty insurance companies maintain a statutory ratio of net premiums written
to policyholders' surplus of not more than approximately 3 to 1. For the
reinsurance industry, a ratio of 2 to 1 is generally considered more prudent.
For the year ended December 31, 1996, based on statistics distributed by the
Reinsurance Association of America, the reinsurance industry's average ratio of
statutory net premiums written to policyholders' surplus was approximately 0.7
to 1. For the year ended December 31, 1996, TRH's ratio was 1.1 to 1, which
includes the statutory net premiums written of TRC and Putnam on a combined
basis and the policyholders' surplus of TRC. (See Note 9 of Notes to
Consolidated Financial Statements.) TRH believes that this ratio falls within an
acceptable range and, as such, reflects an appropriate leveraging of its
surplus. Note that for U.S. statutory purposes, TRZ is carried as an equity
investment and, therefore, its net premiums written are not consolidated into
the Company's statutory total.
In addition, risk-based capital (RBC) standards, promulgated by the National
Association of Insurance Commissioners (NAIC), relate an individual company's
statutory surplus to the risk inherent in its overall operations and sets
thresholds at which certain company and regulatory corrective actions are
mandated. At December 31, 1996, the statutory surpluses of TRC and Putnam each
significantly exceeded RBC requirements.
27
<PAGE>
ACCOUNTING STANDARDS
1996 ACCOUNTING STANDARD: In June 1996, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
In addition, it provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
SFAS No. 125 is effective as of January 1, 1997 and is to be applied
prospectively. However, SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS No. 125," defers, for one year, the effective date of certain
provisions of SFAS No. 125 which affect repurchase agreements, dollar-rolls,
securities lending and similar transactions. While the Company is currently
assessing the impact of the new standard, management believes that the
implementation of SFAS No. 125 will not have a material impact on results of
operations, financial position or liquidity.
1995 ACCOUNTING STANDARD: In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement establishes new
financial accounting and reporting standards for stock-based employee
compensation plans, including stock option and stock purchase plans.
Compensation resulting from the award of stock-based compensation must be
determined based on the fair value of consideration received or fair value of
the equity instrument issued, whichever is more reliably measurable. Such
compensation expense, net of income taxes, may be recognized in the Statement of
Operations over the service period of the employee (generally the vesting
period). In lieu of recording such compensation expense, entities are permitted
to disclose its pro forma impact, net of income taxes, on reported net income
and earnings per share. Entities choosing such disclosure will continue to
measure compensation expense from stock-based compensation in the Statement of
Operations based on the intrinsic value method prescribed in Statement of the
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees."
In accordance with the standard, TRH adopted SFAS No. 123 for the 1996
annual financial statements and chose the pro forma disclosure option of
implementation. (See Note 7 of Notes to Consolidated Financial Statements.)
1994 ACCOUNTING STANDARD: In October 1994, the FASB issued SFAS No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments." Among other things, this standard requires disclosure about the
amounts, nature and terms of derivative financial instruments and is effective
for fiscal years ending after December 15, 1994. In 1996, 1995 and 1994, TRH had
no derivative financial instruments as defined in SFAS No. 119.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... 30
Consolidated Balance Sheets as of December 31, 1996 and 1995............................................... 31
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994............................................................................................ 32
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994....... 33
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994............................................................................................ 34
Notes to Consolidated Financial Statements................................................................. 35
</TABLE>
<TABLE>
<C> <S> <C>
Schedules:
I --Summary of Investments--Other than Investments in Related Parties as of December 31, 1996................ S-1
II --Condensed Financial Information of Registrant as of December 31, 1996 and 1995 and for the years ended
December 31, 1996, 1995 and 1994.......................................................................... S-2
III --Supplementary Insurance Information as of December 31, 1996, 1995 and 1994 and for the years then ended.. S-5
IV --Reinsurance for the years ended December 31, 1996, 1995 and 1994......................................... S-6
VI --Supplementary Information Concerning Property/Casualty Insurance Operations as of December 31, 1996,
1995 and 1994 and for the years then ended................................................................ S-7
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Transatlantic Holdings, Inc.:
We have audited the consolidated financial statements and the financial
statement schedules of Transatlantic Holdings, Inc. and Subsidiaries listed in
the index on page 29 of this Form 10-K. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Transatlantic
Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 18, 1997
30
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
(in thousands, except
share data)
A S S E T S
Investments and cash:
Fixed maturities:
Bonds held to maturity, at amortized cost (market value: 1996--$1,182,713;
1995--$951,497)........................................................................ $ 1,125,133 $ 878,068
Bonds available for sale, at market value (amortized cost: 1996--$1,884,274;
1995--$1,700,599)...................................................................... 1,935,677 1,788,000
Equities:
Common stocks available for sale, at market value (cost: 1996--$289,938;
1995--$197,704)........................................................................ 386,723 255,116
Nonredeemable preferred stocks available for sale, at market value
(cost: 1996--$6,276; 1995--$6,953)..................................................... 5,642 6,025
Short-term investments, at cost which approximates market value............................ 59,191 12,874
Cash and cash equivalents.................................................................. 77,523 47,832
------------ ------------
Total investments and cash........................................................... 3,589,889 2,987,915
Accrued investment income.................................................................... 63,213 56,806
Premium balances receivable, net of losses payable:
Affiliates................................................................................. 15,060 27,104
Other...................................................................................... 24,035 34,740
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses:
Affiliates................................................................................. 162,739 134,326
Other...................................................................................... 205,105 277,352
Funds held under reinsurance treaties:
Affiliates................................................................................. 2,701 1,058
Other...................................................................................... 118,463 193,550
Deferred acquisition costs................................................................... 58,700 47,200
Prepaid reinsurance premiums................................................................. 26,617 39,716
Deferred income taxes........................................................................ 93,782 87,914
Other assets................................................................................. 18,837 11,286
------------ ------------
Total assets......................................................................... $ 4,379,141 $ 3,898,967
------------ ------------
------------ ------------
L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y
Unpaid losses and loss adjustment expenses................................................... $ 2,733,055 $ 2,388,155
Unearned premiums............................................................................ 343,936 291,568
Contingent commissions, expenses and taxes................................................... 18,552 6,764
Reinsurance balances payable:
Affiliates................................................................................. 3,386 14,791
Other...................................................................................... 11,549 9,004
Funds held under reinsurance treaties:
Affiliates................................................................................. 164 312
Other...................................................................................... 47,435 165,831
Current income taxes payable................................................................. 20,356 12,256
Payable for securities in course of settlement............................................... 32,224 3,996
Other liabilities............................................................................ 31,178 17,788
------------ ------------
Total liabilities.................................................................... 3,241,835 2,910,465
------------ ------------
Commitments and contingent liabilities
Preferred Stock, $1.00 par value; shares authorized: 5,000,000............................... -- --
Common Stock, $1.00 par value; shares authorized: 50,000,000;
shares issued: 1996--23,812,796; 1995--23,749,582.......................................... 23,813 23,750
Additional paid-in capital................................................................... 201,930 199,243
Net unrealized appreciation of investments, net of
deferred income taxes (1996--$51,644; 1995--$50,359)....................................... 95,910 93,525
Net unrealized currency translation gain..................................................... 2,596 2,392
Retained earnings............................................................................ 823,057 679,592
Treasury Stock, at cost; 800,000 shares...................................................... (10,000) (10,000)
------------ ------------
Total stockholders' equity........................................................... 1,137,306 988,502
------------ ------------
Total liabilities and stockholders' equity........................................... $ 4,379,141 $ 3,898,967
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(in thousands, except per share data)
Income:
Net premiums written.................................................. $ 1,142,515 $ 1,009,227 $ 866,665
Increase in net unearned premiums..................................... (11,882) (28,050) (15,482)
------------ ------------ ------------
Net premiums earned................................................... 1,130,633 981,177 851,183
Net investment income................................................. 192,636 172,876 153,594
------------ ------------ ------------
1,323,269 1,154,053 1,004,777
------------ ------------ ------------
Expenses:
Net losses and loss adjustment expenses............................... 841,511 746,872 681,904
Net commissions....................................................... 270,873 234,551 194,407
Other operating expenses.............................................. 35,722 28,329 27,732
Increase in deferred acquisition costs................................ (3,687) (9,900) (6,900)
------------ ------------ ------------
1,144,419 999,852 897,143
------------ ------------ ------------
178,850 154,201 107,634
Realized net capital gains.............................................. 18,668 11,119 14,911
------------ ------------ ------------
Operating income........................................................ 197,518 165,320 122,545
Other deductions........................................................ (1,198) (1,521) (3,283)
------------ ------------ ------------
Income before income taxes.............................................. 196,320 163,799 119,262
------------ ------------ ------------
Income taxes (benefits):
Current............................................................... 48,000 38,886 26,318
Deferred.............................................................. (6,540) (6,945) (8,683)
------------ ------------ ------------
41,460 31,941 17,635
------------ ------------ ------------
Net income.............................................................. $ 154,860 $ 131,858 $ 101,627
------------ ------------ ------------
------------ ------------ ------------
Net income per common share............................................. $ 6.74 $ 5.75 $ 4.44
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding.............................. 22,983 22,939 22,902
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
(in thousands, except per share
data)
Common Stock:
Balance, beginning of year............................................... $ 23,750 $ 23,726 $ 23,691
Issued under stock option and purchase plans............................. 63 24 35
------------ ---------- ----------
Balance, end of year................................................. 23,813 23,750 23,726
------------ ---------- ----------
Additional paid-in capital:
Balance, beginning of year............................................... 199,243 198,564 197,622
Excess of proceeds over par value of common stock issued under stock
option and purchase plans.............................................. 2,687 679 942
------------ ---------- ----------
Balance, end of year................................................. 201,930 199,243 198,564
------------ ---------- ----------
Net unrealized appreciation (depreciation) of investments, net of deferred
income taxes:
Balance, beginning of year............................................... 93,525 (10,590) 93,564
Net change for year...................................................... 3,670 160,176 (160,237)
Deferred income tax on change............................................ (1,285) (56,061) 56,083
------------ ---------- ----------
Balance, end of year................................................. 95,910 93,525 (10,590)
------------ ---------- ----------
Net unrealized currency translation gain:
Balance, beginning of year............................................... 2,392 4,298 2,758
Net change for year...................................................... 204 (1,906) 1,540
------------ ---------- ----------
Balance, end of year................................................. 2,596 2,392 4,298
------------ ---------- ----------
Retained earnings:
Balance, beginning of year............................................... 679,592 557,370 464,219
Net income............................................................... 154,860 131,858 101,627
Cash dividends declared (per common share: 1996--$0.50; 1995-- $0.42;
1994--$0.37)........................................................... (11,395) (9,636) (8,476)
------------ ---------- ----------
Balance, end of year................................................. 823,057 679,592 557,370
------------ ---------- ----------
Treasury Stock:
Balance, beginning and end of year....................................... (10,000) (10,000) (10,000)
------------ ---------- ----------
Total stockholders' equity........................................... $ 1,137,306 $ 988,502 $ 763,368
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
(in thousands)
Cash flows from operating activities:
Net income............................................................... $ 154,860 $ 131,858 $ 101,627
---------- ----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Changes in unpaid losses and loss adjustment expenses, unearned
premiums and prepaid reinsurance premiums.......................... 179,651 248,443 294,325
Changes in premium and reinsurance balances receivable and payable,
net................................................................ 92,921 (18,042) (51,691)
Change in deferred acquisition costs................................. (3,687) (9,900) (6,900)
Change in accrued investment income.................................. (6,407) (5,546) (3,221)
Realized net capital gains........................................... (18,668) (11,119) (14,911)
Changes in funds held under reinsurance contracts, net............... (45,100) (11,879) (14,613)
Changes in current and deferred income taxes......................... 836 1,587 (7,860)
Change in reserve for contingent commissions, expenses and taxes..... 11,788 1,164 (10,785)
Changes in other assets and liabilities, net......................... 8,390 5,187 (2,211)
Other, net........................................................... (1,216) 1,077 342
---------- ----------- -----------
Total adjustments................................................ 218,508 200,972 182,475
---------- ----------- -----------
Net cash provided by operating activities........................ 373,368 332,830 284,102
---------- ----------- -----------
Cash flows from investing activities:
Proceeds of bonds available for sale sold................................ 472,008 77,110 106,668
Proceeds of bonds held to maturity redeemed.............................. 19,253 3,583 13,788
Proceeds of bonds available for sale redeemed or matured................. 169,581 78,281 61,293
Proceeds of equities sold................................................ 156,895 118,605 103,342
Purchase of bonds held to maturity....................................... (265,741) (201,805) (58,975)
Purchase of bonds available for sale..................................... (587,663) (248,786) (415,489)
Purchase of equities..................................................... (212,030) (163,389) (97,259)
Net (purchase) proceeds of short-term investments........................ (46,317) 703 (1,585)
Change in payable for securities in course of settlement................. 28,228 (1,356) 3,520
Investment in Trans Re Zurich, net of cash acquired...................... (66,479) -- --
Other, net............................................................... (2,971) (354) (2,728)
---------- ----------- -----------
Net cash used in investing activities............................ (335,236) (337,408) (287,425)
---------- ----------- -----------
Cash flows from financing activities:
Dividends to stockholders................................................ (11,395) (9,176) (8,245)
Proceeds from common stock issued........................................ 2,750 703 977
---------- ----------- -----------
Net cash from financing activities............................... (8,645) (8,473) (7,268)
---------- ----------- -----------
Change in net unrealized currency translation gain......................... 204 (1,906) 1,540
---------- ----------- -----------
Change in cash and cash equivalents.............................. 29,691 (14,957) (9,051)
Cash and cash equivalents, beginning of year............................... 47,832 62,789 71,840
---------- ----------- -----------
Cash and cash equivalents, end of year........................... $ 77,523 $ 47,832 $ 62,789
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Transatlantic Holdings, Inc. (the Company) is a holding company,
incorporated in the state of Delaware, which owns all of the common stock of
Transatlantic Reinsurance Company (TRC). In addition to TRC, the Company owned
100% of Putnam Reinsurance Company (Putnam) until December 29, 1995, when the
Company contributed all the stock of Putnam to TRC.
In the third quarter of 1996, TRC acquired all of the outstanding shares of
Trans Re Zurich (TRZ), formerly known as Guardian Ruckversicherungs-Gesellschaft
(Guardian Re), an international reinsurance company based in Zurich,
Switzerland, for approximately $105 million in cash. The acquisition was
accounted for as a purchase. Accordingly, TRZ's results for the second half of
1996 are included in the consolidated results of the Company in 1996. This
acquisition has not had a material effect on financial position or net income.
Transatlantic Holdings, Inc. and subsidiaries (TRH), through its operating
subsidiaries TRC, TRZ and Putnam, offers reinsurance capacity for a full range
of property and casualty products to insurers and reinsurers on a treaty and
facultative basis, with an emphasis on specialty classes. Including domestic as
well as international risks, TRH's principal lines of business are general
liability (including directors' and officers' liability and other professional
liability), automobile liability (including nonstandard risks), medical
malpractice and marine and aviation in the casualty lines, and fire and allied
lines in the property lines (which include property catastrophe risks). Casualty
lines represent 66.5%, 67.0% and 65.2% of net premiums written in 1996, 1995 and
1994, respectively. The balance represents property lines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION: The
accompanying consolidated financial statements have been prepared on the basis
of generally accepted accounting principles (GAAP). Certain reclassifications
have been made to conform prior years' presentations with 1996.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
These consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions have
been eliminated.
(b) INVESTMENTS: Bonds are classified as held-to-maturity and carried at
amortized cost if TRH has the positive intent and ability to hold each of these
securities to maturity. The balance of TRH's bonds are classified as
available-for-sale and carried at market value. Common and nonredeemable
preferred stocks are carried principally at market value. Market values for
fixed maturity securities and equities are generally based upon quoted market
prices. For certain fixed maturity securities for which market prices were not
readily available, market values were estimated using values obtained from
independent pricing services. Short-term investments are carried at cost, which
approximates market value.
Realized gains or losses on the sale of investments are determined on the
basis of specific identification. Changes in unrealized appreciation
(depreciation) of bonds available for sale and in unrealized appreciation
(depreciation) of equity investments are charged or credited, net of deferred
income taxes,
35
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
directly to stockholders' equity. Investment income is recorded as earned.
Amortization of bond premium and the accrual of bond discount are charged or
credited to net investment income.
(c) CASH EQUIVALENTS: A significant portion of cash equivalents is
invested in a money market fund managed by an American International Group, Inc.
(AIG, and collectively, with its subsidiaries, the AIG Group) subsidiary. (See
Note 8.)
(d) 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. Anticipated losses and loss
adjustment expenses and estimated remaining costs of servicing the contracts are
considered in determining acquisition costs to be deferred. Anticipated
investment income is not considered in the deferral of acquisition costs.
(e) LOSSES AND LOSS ADJUSTMENT EXPENSES: Losses and loss adjustment
expenses, net of related reinsurance recoverable, 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. An amount
is included for losses and loss adjustment expenses incurred but not reported
(IBNR) on the basis of past experience. The methods of making such estimates and
for establishing the resulting reserves are continually reviewed and updated,
and any adjustments resulting therefrom are reflected in income currently. TRH
does not discount its unpaid losses and loss adjustment expenses.
Unpaid losses and loss adjustment expenses include certain amounts for the
reinsurance of 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 at December 31, 1996 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 with respect to underlying policy intent and coverage, an
increasing number of new claims and uncertainties as to the allocation of
responsibility for clean up costs of hazardous waste dump sites. The
government's refusal to release parties from liability and the possibility of
dramatic changes from the Congressional re-evaluation of Superfund add to this
uncertainty. Additional liabilities which cannot be currently measured may
emerge in the future and this emergence may have a material adverse effect on
future earnings.
(f) UNEARNED PREMIUMS: Unearned premiums represent the portion of gross
premiums written which is applicable to the unexpired terms of reinsurance
contracts or certificates in force. Accordingly, premiums written are taken into
income as earned. Unearned premiums are calculated principally by the monthly
pro rata method or are based on reports received from ceding companies. In the
Consolidated Statements of Operations, the change in unearned premiums is
presented net of the change in prepaid reinsurance premiums.
(g) DEFERRED INCOME TAXES: Deferred income taxes are provided for the
expected tax effect of temporary differences between the amounts of assets and
liabilities used for financial reporting purposes and the amounts used in tax
returns.
36
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h) CURRENCY TRANSLATION: Assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at year-end exchange rates. Income
and expense accounts are translated at average exchange rates for the year. The
resulting net translation adjustment for functional currencies is reflected as a
separate component of stockholders' equity.
Transaction gains and losses on assets and liabilities denominated in
foreign currencies which are not designated as functional currencies are
reflected in results of operations during the period in which they occur.
(i) NET INCOME PER COMMON SHARE: Net income per common share has been
computed based on the weighted average number of common shares outstanding.
(j) ACCOUNTING STANDARDS:
i. 1996 ACCOUNTING STANDARD: In June 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. In addition, it provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings.
SFAS No. 125 is effective as of January 1, 1997 and is to be applied
prospectively. However, SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS No. 125," defers, for one year, the effective date of certain
provisions of SFAS No. 125 which affect repurchase agreements, dollar-rolls,
securities lending and similar transactions. While the Company is currently
assessing the impact of the new standard, management believes that the
implementation of SFAS No. 125 will not have a material impact on results of
operations, financial position or liquidity.
ii. 1995 ACCOUNTING STANDARD: In October 1995, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation." This statement establishes new
financial accounting and reporting standards for stock-based employee
compensation plans, including stock option and stock purchase plans.
Compensation resulting from the award of stock-based compensation must be
determined based on the fair value of consideration received or fair value of
the equity instrument issued, whichever is more reliably measurable. Such
compensation expense, net of income taxes, may be recognized in the Statement of
Operations over the service period of the employee (generally the vesting
period). In lieu of recording such compensation expense, entities are permitted
to disclose its pro forma impact, net of income taxes, on reported net income
and earnings per share. Entities choosing such disclosure will continue to
measure compensation expense from stock-based compensation in the Statement of
Operations based on the intrinsic value method prescribed in Statement of the
Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to
Employees."
In accordance with the standard, TRH adopted SFAS No. 123 for the 1996
annual financial statements and chose the pro forma disclosure option of
implementation. (See Note 7.)
iii. 1994 ACCOUNTING STANDARD: In October 1994, the FASB issued SFAS No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments." Among other things, this standard requires disclosure
about the amounts, nature and terms of derivative financial instruments and is
effective for fiscal years ending after December 15, 1994. In 1996, 1995 and
1994, TRH had no derivative financial instruments as defined in SFAS No. 119.
37
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENTS
(a) STATUTORY DEPOSITS: Investments, the substantial majority of which are
bonds and common stocks available for sale, were deposited with governmental
authorities as required by law and amounted to approximately $119,000,000 and
$97,000,000 at December 31, 1996 and 1995, respectively.
(b) NET INVESTMENT INCOME: An analysis of net investment income of TRH
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
<CAPTION>
(in thousands)
<S> <C> <C> <C>
Fixed maturities............................................................. $ 191,348 $ 171,065 $ 152,812
Equities..................................................................... 5,695 4,207 3,450
Short-term investments....................................................... 362 229 393
Cash equivalents............................................................. 1,361 2,255 1,268
---------- ---------- ----------
Total investment income.................................................... 198,766 177,756 157,923
Investment expenses.......................................................... (6,130) (4,880) (4,329)
---------- ---------- ----------
Net investment income...................................................... $ 192,636 $ 172,876 $ 153,594
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(c) INVESTMENT GAINS AND LOSSES: The realized net capital gains (losses)
and change in net unrealized (depreciation) appreciation of investments are
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- -----------
<CAPTION>
(in thousands)
<S> <C> <C> <C>
Realized net capital gains (losses) on sale of investments:
Fixed maturities........................................................... $ 415 $ 628 $ (170)
Equities................................................................... 18,223 10,460 15,119
Other...................................................................... 30 31 (38)
---------- ---------- -----------
Realized net capital gains............................................... $ 18,668 $ 11,119 $ 14,911
---------- ---------- -----------
---------- ---------- -----------
Change in net unrealized (depreciation) appreciation of investments:*
Fixed maturities carried at amortized cost................................. $ (15,849) $ 44,405 $ (52,397)
Fixed maturities carried at market......................................... (35,998) 115,323 (141,807)
Equities................................................................... 39,667 44,855 (18,431)
---------- ---------- -----------
Change in net unrealized (depreciation) appreciation of investments.......... $ (12,180) $ 204,583 $ (212,635)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
- ------------------------------
* Before deferred income tax effect.
38
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENTS (Continued)
(d) FIXED MATURITIES: The amortized cost and market value of bonds at
December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED --------------------
COST GAINS LOSSES MARKET VALUE
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
(in thousands)
<CAPTION>
1996
<S> <C> <C> <C> <C>
BONDS HELD TO MATURITY AND CARRIED AT AMORTIZED COST:
U.S. Government and government agency bonds:
Mortgage-backed securities........................................ $ 4,365 $ 278 $ -- $ 4,643
States, foreign and domestic municipalities and political
subdivisions...................................................... 1,120,768 58,596 1,294 1,178,070
------------ --------- --------- ------------
Totals.......................................................... $ 1,125,133 $ 58,874 $ 1,294 $1,182,713
------------ --------- --------- ------------
------------ --------- --------- ------------
BONDS AVAILABLE FOR SALE AND CARRIED AT MARKET VALUE:
U.S. Government and government agency bonds......................... $ 520,256 $ 8,572 $ 1,653 $ 527,175
States, foreign and domestic municipalities and political
subdivisions...................................................... 582,386 22,631 709 604,308
Foreign governments................................................. 377,821 9,519 498 386,842
Corporate........................................................... 403,811 15,618 2,077 417,352
------------ --------- --------- ------------
Totals.......................................................... $ 1,884,274 $ 56,340 $ 4,937 $1,935,677
------------ --------- --------- ------------
------------ --------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
Gross Unrealized
Amortized --------------------
Cost Gains Losses Market Value
------------ --------- --------- -------------
<S> <C> <C> <C> <C>
(in thousands)
1995
Bonds held to maturity and carried at amortized cost:
U.S. Government and government agency bonds:
Mortgage-backed securities........................................ $ 5,938 $ 345 $ -- $ 6,283
States, foreign and domestic municipalities and political
subdivisions...................................................... 872,130 73,084 -- 945,214
------------ --------- --------- -------------
Totals.......................................................... $ 878,068 $ 73,429 $ -- $ 951,497
------------ --------- --------- -------------
------------ --------- --------- -------------
Bonds available for sale and carried at market value:
U.S. Government and government agency bonds......................... $ 566,053 $ 26,664 $ 547 $ 592,170
States, foreign and domestic municipalities and political
subdivisions...................................................... 609,370 39,162 299 648,233
Foreign governments................................................. 287,972 12,075 198 299,849
Corporate........................................................... 237,204 10,694 150 247,748
------------ --------- --------- -------------
Totals.......................................................... $ 1,700,599 $ 88,595 $ 1,194 $ 1,788,000
------------ --------- --------- -------------
------------ --------- --------- -------------
</TABLE>
39
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENTS (Continued)
The amortized cost and market value of bonds at December 31, 1996 by
contractual maturity, are summarized as follows. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. Investments in
fixed maturities exclude short-term investments.
<TABLE>
<CAPTION>
AMORTIZED
COST MARKET VALUE
------------ ------------
<S> <C> <C>
(in thousands)
BONDS HELD TO MATURITY:
Due in one year or less........................................................... $ 14,523 $ 14,913
Due after one year through five years............................................. 221,465 239,999
Due after five years through ten years............................................ 237,521 255,104
Due after ten years............................................................... 647,259 668,054
------------ ------------
1,120,768 1,178,070
Mortgage-backed securities........................................................ 4,365 4,643
------------ ------------
Totals........................................................................ $ 1,125,133 $1,182,713
------------ ------------
------------ ------------
BONDS AVAILABLE FOR SALE:
Due in one year or less........................................................... $ 270,773 $ 274,200
Due after one year through five years............................................. 1,019,900 1,048,152
Due after five years through ten years............................................ 554,074 572,429
Due after ten years............................................................... 39,527 40,896
------------ ------------
Totals........................................................................ $ 1,884,274 $1,935,677
------------ ------------
------------ ------------
</TABLE>
Gross gains of $6,771,000, $2,094,000 and $3,240,000 and gross losses of
$6,903,000, $2,305,000 and $3,474,000 were realized on sales of investments in
fixed maturities available for sale in 1996, 1995 and 1994, respectively.
(e) EQUITIES: Gross gains of $23,621,000, $15,830,000 and $20,187,000 and
gross losses of $5,398,000, $5,370,000 and $5,068,000 were realized on sales of
equities in 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995,
net unrealized appreciation of equities (before applicable income taxes)
included gross gains of $98,316,000 and $57,795,000 and gross losses of
$2,165,000 and $1,311,000, respectively.
4. FEDERAL AND FOREIGN INCOME TAXES
(a) The Company files a U.S. consolidated federal income tax return with its
domestic subsidiaries, TRC and Putnam. TRC will include as part of its taxable
income 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.
40
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. FEDERAL AND FOREIGN INCOME TAXES (Continued)
The U.S. Federal Income tax rate is 35% for 1996, 1995 and 1994. Actual tax
expense on income before income taxes differs from the "expected" amount
computed by applying the U.S. Federal income tax rate because of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994
--------------------------- --------------------------- ---------------------------
<CAPTION>
PERCENT OF Percent of Percent of
INCOME BEFORE Income Before Income Before
AMOUNT INCOME TAXES Amount Income Taxes Amount Income Taxes
---------- --------------- ---------- --------------- ---------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
"Expected" tax expense.................. $ 68,712 35.0 % $ 57,330 35.0 % $ 41,742 35.0 %
Adjustments:
Tax-exempt interest................... (27,554) (14.0) (25,609) (15.6) (24,120) (20.2)
Dividends received deduction.......... (1,064) (0.6) (774) (0.5) (624) (0.5)
Other................................. 1,366 0.7 994 0.6 637 0.5
---------- ----- ---------- ----- ---------- -----
Actual tax expense.................. $ 41,460 21.1 % $ 31,941 19.5 % $ 17,635 14.8 %
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
Foreign and domestic components of
actual tax expense (benefit):
Foreign............................... $ 19,770 $ 15,237 $ 7,125
Domestic:
Current............................. 28,230 23,649 19,193
Deferred............................ (6,540) (6,945) (8,683)
---------- ---------- ----------
$ 41,460 $ 31,941 $ 17,635
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
41
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. FEDERAL AND FOREIGN INCOME TAXES (Continued)
(b) The components of the net deferred income tax asset at December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
(in thousands)
Deferred income tax assets:
Unpaid losses and loss adjustment expenses, net of related
reinsurance recoverable............................................................... $ 149,021 $ 135,755
Unearned premiums, net of prepaid reinsurance premiums.................................. 22,274 17,630
Alternative minimum tax credit carryforward............................................. -- 3,369
Allowance for unrecoverable reinsurance................................................. 4,655 4,655
Other................................................................................... 1,897 1,206
---------- ----------
Total deferred income tax assets...................................................... 177,847 162,615
---------- ----------
Deferred income tax liabilities:
Deferred acquisition costs.............................................................. 20,545 16,520
Net unrealized appreciation of investments.............................................. 51,644 50,359
Other................................................................................... 11,876 7,822
---------- ----------
Total deferred income tax liabilities................................................. 84,065 74,701
---------- ----------
Net deferred income tax asset......................................................... $ 93,782 $ 87,914
---------- ----------
---------- ----------
</TABLE>
No valuation allowance has been recorded.
(c) Income tax payments by TRH totaled $39,939,000, $31,588,000 and
$25,036,000 in 1996, 1995 and 1994, respectively.
42
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1996 1995 1994
------------ ------------ ------------
<CAPTION>
(in thousands)
<S> <C> <C> <C>
At beginning of year:
Unpaid losses and loss adjustment expenses............................ $ 2,388,155 $ 2,167,316 $ 1,890,178
Less reinsurance recoverable.......................................... 402,369 439,936 386,789
------------ ------------ ------------
Net unpaid losses and loss adjustment expenses.................... 1,985,786 1,727,380 1,503,389
------------ ------------ ------------
Trans Re Zurich reserves acquired, as of acquisition date............... 176,260 -- --
------------ ------------ ------------
Net losses and loss adjustment expenses incurred in respect of losses
occurring in:
Current year........................................................ 849,235 750,326 666,932
Prior years......................................................... (7,724) (3,454) 14,972
------------ ------------ ------------
Total............................................................. 841,511 746,872 681,904
------------ ------------ ------------
Net losses and loss adjustment expenses paid in respect of losses
occurring in:
Current year........................................................ 172,875 149,519 144,990
Prior years......................................................... 447,154 338,947 312,923
------------ ------------ ------------
Total............................................................. 620,029 488,466 457,913
------------ ------------ ------------
At end of year:
Net unpaid losses and loss adjustment expenses........................ 2,383,528 1,985,786 1,727,380
Plus reinsurance recoverable.......................................... 349,527 402,369 439,936
------------ ------------ ------------
Unpaid losses and loss adjustment expenses........................ $ 2,733,055 $ 2,388,155 $ 2,167,316
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
As a result of net decreases in estimates of losses occurring in prior
years, net losses and loss adjustment expenses incurred were reduced by $7.7
million in 1996. In the other liability line, favorable development on losses
occurring in more recent years was offset by adverse development in 1984 and
prior years. In addition, in more recent years, favorable development,
particularly in the fire, allied line and aircraft lines was partially offset by
adverse development in the auto liability line.
As a result of net decreases in estimates of losses occurring in prior
years, net losses and loss adjustment expenses incurred were reduced by $3.5
million in 1995. Favorable development in 1995 from losses occurring in 1992
through 1994, particularly in the fire line in 1994, was partially offset by
adverse development from casualty treaty losses occurring in 1982 and prior
years. As a result of increases in estimates of losses occurring in prior years,
losses incurred increased by $15.0 million in 1994. Adverse development in 1994
from casualty treaty losses occurring prior to 1984 and property treaty losses
occurring in 1992 was partially offset by favorable development on 1992 and
prior fidelity treaty losses.
6. PENSION, SAVINGS AND STOCK PURCHASE PLANS
TRH's employees participate in benefit plans sponsored by AIG including a
noncontributory defined benefit pension plan and a voluntary savings plan (a
401(k) plan) which provides for certain matching
43
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. PENSION, SAVINGS AND STOCK PURCHASE PLANS (Continued)
contributions. These plans cover a substantial majority of TRH's employees. The
AIG plans do not separately identify plan benefits and plan assets attributable
to employees of participating companies. In the opinion of TRH, no material
additional liability would accrue to TRH were such plan benefits and plan assets
identifiable.
Under TRH's 1990 Employee Stock Purchase Plan, as amended, all full time
employees with at least two years of employment with the Company or any of its
subsidiaries are eligible to receive privileges to purchase shares of the
Company's Common Stock at a price which is 85% of the fair market value of such
stock on the date of subscription or the date of grant of the purchase
privilege, whichever is greater. An aggregate of 500,000 shares of Common Stock
has been authorized for subscription and 2,893 shares were purchased under the
plan in 1996.
The charges made to operations for these plans for 1996, 1995 and 1994 were
$678,000, $555,000 and $336,000, respectively.
7. STOCK OPTION PLANS
In each of 1994 and 1992, the Stock Option and Purchase Plan Committee
granted 20,000 options to certain non-employee directors of the Company who are
also directors, officers and employees of AIG. These options may be used to
purchase shares of the Company's common stock at $51.00 per share and $52.50 per
share for the 1994 and 1992 options, respectively, representing the fair market
value of a share of the Company's common stock at the date of grant. Such
options were granted outside of, but on substantially the same terms and
conditions as, the "Transatlantic Holdings, Inc. 1990 Stock Option Plan" (the
1990 Plan). All of the 1992 options and 10,000 of the 1994 options were
exercisable at December 31, 1996 and as of year-end, none were exercised or
forfeited. The impact of the above options on the financial statements is not
material.
In 1995, the Company's Board of Directors adopted, and the stockholders
approved, the "1995 Stock Option Plan" (the 1995 Plan) which provides that
options may be granted to certain key employees and non-employee directors to
purchase a maximum of 1,000,000 shares of the Company's common stock at prices
not less than their fair market value at the date of grant. At December 31,
1996, 750,750 shares were reserved for future grants under the 1995 Plan.
Options granted under the plan may be used to purchase the Company's common
stock at the fair market value of each share at the date of grant. The Company
also maintains the 1990 Plan which operates under substantially the same terms
as the 1995 Plan. The 1995 Plan and the 1990 Plan are together hereinafter
referred to as the Company Plans.
Each of the above plans provide that 25% of the options granted become
exercisable on the anniversary date of the grant in each of the four years
following the grant and expire 10 years from the date of grant. No further
options can be granted under the 1990 Plan although options outstanding continue
in force until exercise, expiration or forfeiture.
44
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. STOCK OPTION PLANS (Continued)
A summary of the status of the Company Plans as of December 31, 1996, 1995
and 1994 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED Weighted Weighted
NUMBER AVERAGE Number Average Number Average
OF SHARES EXERCISE PRICE of Shares Exercise Price of Shares Exercise Price
--------- --------------- --------- --------------- --------- ---------------
Outstanding, beginning of
year.......................... 437,079 $ 52.47 337,844 $ 44.85 322,043 $ 41.75
Granted......................... 144,350 77.00 126,125 69.00 96,500 51.00
Exercised....................... (60,231) 43.34 (20,826) 29.16 (32,324) 26.53
Forfeited....................... (46,940) 59.78 (6,064) 52.11 (48,375) 48.69
--------- --------- ---------
Outstanding, end of year........ 474,258 60.37 437,079 52.47 337,844 44.85
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
Exercisable, end of year........ 193,615 $ 47.00 184,917 $ 41.47 130,425 $ 36.41
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
Weighted average fair value of
options granted during the
year.......................... $25.42 $21.65
</TABLE>
The weighted average fair value of each option grant is estimated on the
date of grant using the "Binomial Option Price Model" with the following
weighted average assumptions used for grants in 1996 and 1995, respectively:
expected volatility of 22.5% in both years; risk-free interest rates of 6.2% and
5.6%; and expected lives of six years for each grant. An increasing dividend
schedule is used in the binomial model based on historical experience.
The following table summarizes information about the Company Plans'
outstanding and exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE EXERCISE PRICE OF SHARES EXERCISE PRICE
---------------- ----------- ----------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$21.63 TO $29.63.................. 56,980 4.38 YEARS $ 26.18 56,980 $ 26.18
$51.00 TO $54.38.................. 168,028 7.10 52.29 110,410 52.52
$69.00 TO $77.00.................. 249,250 9.52 73.63 26,225 69.00
----------- -----------
$21.63 TO $77.00.................. 474,258 8.04 60.37 193,615 47.00
----------- -----------
----------- -----------
</TABLE>
The Company accounts for its stock options based on the intrinsic value
method prescribed in APB No. 25 and related interpretations, as permitted under
SFAS No. 123. Had compensation cost been charged to earnings in accordance with
the fair value method discussed in SFAS No. 123, the reduction of the Company's
net income and net income per share (on a pro forma basis) would not have been
material.
The effects of applying SFAS No. 123 in the pro forma calculations
previously mentioned may not be indicative of future amounts as this standard
does not apply to options granted prior to 1995. Additional grants in future
years are anticipated.
45
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. RELATED PARTY TRANSACTIONS
As of December 31, 1996, the AIG Group beneficially owned approximately 49%
of the Company's outstanding common stock.
TRH has service and expense agreements and certain other agreements with the
AIG Group which provide for the reimbursement to the AIG Group of certain
administrative and operating expenses which include, but are not limited to,
investment advisory services, office space, data processing and payroll
processing services. In 1996, 1995 and 1994, $8,500,000, $7,700,000 and
$7,600,000, respectively, of operating and investment expenses relate to
services and expenses provided by the AIG Group under these agreements.
Approximately $232 million (18%), $189 million (17%) and $198 million (21%)
of gross premiums written by TRH in 1996, 1995 and 1994, respectively, were
attributable to reinsurance purchased by the AIG Group, for the production of
which TRH paid ceding commissions to the AIG Group of $33 million, $40 million
and $52 million, respectively, in such years. (See Note 10 for information
relating to reinsurance ceded to related parties.)
9. DIVIDEND RESTRICTION AND STATUTORY FINANCIAL DATA
The payment of dividends by the Company is dependent on the ability of its
subsidiaries to pay dividends. The payment of dividends by TRC and its
wholly-owned subsidiaries, TRZ and Putnam, is restricted by insurance
regulations. Under New York insurance law, TRC and Putnam may pay dividends only
out of their statutory earned surplus. Generally, the maximum amount of
dividends that a company may pay without regulatory approval in any twelve-month
period is the lesser of adjusted net investment income or 10% of statutory
policyholders' surplus as of the end of the most recently reported quarter
unless the New York Insurance Department, upon prior application, approves a
greater dividend distribution. Adjusted net investment income is defined for
this purpose to include net investment income for the twelve months immediately
preceding the declaration or distribution of the current dividend increased by
the excess, if any, of net investment income over dividends declared or
distributed during the period commencing thirty-six months prior to the
declaration or distribution of the current dividend and ending twelve months
prior thereto. At December 31, 1996 and 1995, the statutory surplus of TRC
includes the statutory surplus of Putnam since, during 1995, all the capital
stock of Putnam was contributed by the Company to TRC. Also, at December 31,
1996, TRC had statutory earned surplus of $475,872,000 and, in 1997, could pay
dividends of approximately $95,271,000 without such regulatory approval.
Statutory surplus and net income as reported to the New York Insurance
Department were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
<CAPTION>
(in thousands)
<S> <C> <C> <C>
TRC
Statutory surplus.......................................................... $ 952,707 $ 787,403 $ 378,425
Statutory net income....................................................... 185,887 63,800 55,655
Putnam
Statutory surplus.......................................................... 108,327 164,113 212,505
Statutory net income....................................................... 12,221 98,497 30,681
</TABLE>
46
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. DIVIDEND RESTRICTION AND STATUTORY FINANCIAL DATA (Continued)
TRC and Putnam each prepare statutory financial statements in accordance
with accounting practices prescribed or permitted by New York--their state of
domicile. Prescribed statutory accounting practices are discussed in a variety
of publications of the National Association of Insurance Commissioners (NAIC),
as well as in state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. All material statutory accounting practices of TRC and Putnam are
prescribed in the authoritative literature described above.
10. REINSURANCE CEDED
In the normal course of business, TRH purchases reinsurance from its
retrocessionnaires to reduce the effect of individual or aggregate losses and to
allow increased gross premium writings and afford greater risk capacity without
necessarily requiring additional capital.
TRH's ceded reinsurance agreements consist of pro rata and excess-of-loss
contracts. Under pro rata reinsurance, TRH and its retrocessionnaires share
premiums, losses and expenses in an agreed upon proportion. For consideration,
generally based on a percentage of premiums of the individual policy or policies
subject to the reinsurance agreement, excess-of-loss contracts provide
reimbursement to TRH for losses in excess of a predetermined amount up to a
predetermined limit.
Premiums written and earned and losses and loss adjustment expenses incurred
are comprised as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
<S> <C> <C> <C>
1996 1995 1994
------------ ------------ ----------
<CAPTION>
(in thousands)
<S> <C> <C> <C>
Gross premiums assumed.................................................... $ 1,315,937 $ 1,136,946 $ 957,084
------------ ------------ ----------
Reinsurance ceded:
AIG Affiliates.......................................................... 80,755 71,847 58,879
Other................................................................... 92,667 55,872 31,540
------------ ------------ ----------
173,422 127,719 90,419
------------ ------------ ----------
Net premiums written...................................................... $ 1,142,515 $ 1,009,227 $ 866,665
------------ ------------ ----------
------------ ------------ ----------
Gross premiums earned..................................................... $ 1,317,155 $ 1,094,029 $ 932,316
------------ ------------ ----------
Reinsurance ceded:
AIG Affiliates.......................................................... 78,698 66,768 58,716
Other................................................................... 107,824 46,084 22,417
------------ ------------ ----------
186,522 112,852 81,133
------------ ------------ ----------
Net premiums earned....................................................... $ 1,130,633 $ 981,177 $ 851,183
------------ ------------ ----------
------------ ------------ ----------
Gross incurred losses and loss adjustment expenses........................ $ 842,409 $ 763,046 $ 799,147
Reinsurance ceded......................................................... 898 16,174 117,243
------------ ------------ ----------
Net losses and loss adjustment expenses................................... $ 841,511 $ 746,872 $ 681,904
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
47
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. REINSURANCE CEDED (Continued)
Amounts recoverable from retrocessionnaires are recognized in a manner
consistent with the claims liabilities associated with the retrocession and are
presented on the balance sheet as reinsurance recoverable on paid and unpaid
losses and loss adjustment expenses. Such balances at December 31, 1996 and 1995
are comprised as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
AIG AIG
AFFILIATES OTHER Affiliates Other
---------- ---------- ---------- ----------
<CAPTION>
(in thousands)
<S> <C> <C> <C> <C>
Paid............................................................. $ 9,545 $ 22,072 $ 2,556 $ 19,122
Unpaid........................................................... 153,194 183,033 131,770 258,230
---------- ---------- ---------- ----------
Total.......................................................... $ 162,739 $ 205,105 $ 134,326 $ 277,352
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Ceded reinsurance arrangements do not relieve TRH from its obligations to
the insurers and reinsurers from whom it assumes business. The failure of
retrocessionnaires to honor their obligation could result in losses to TRH;
consequently, an allowance has been established for estimated unrecoverable
reinsurance on paid and unpaid losses totaling $13.3 million in each of 1996 and
1995. TRH evaluates the financial condition of its retrocessionnaires through a
security committee. With respect to reinsurance recoverable on paid and unpaid
losses and prepaid reinsurance premiums, TRH holds substantial amounts of funds
and letters of credit to collateralize these amounts. Such funds and letters of
credit can be drawn on for amounts remaining unpaid beyond contract terms. No
uncollateralized amounts recoverable from a single retrocessionnaire, other than
amounts due from AIG affiliates, are considered material to the financial
position of TRH.
11. SEGMENT INFORMATION
A significant portion of TRH's business was conducted in countries other
than the United States. A significant portion of assets and liabilities of TRH's
international operations, other than investments, relate to the countries where
ceding companies and reinsurers of the offices are located. Most investments are
located in the country of domicile of these operations. In addition to licensing
requirements, TRH's international operations are regulated in various
jurisdictions with respect to currency, amount and type of security deposits,
amount and type of reserves and amount and type of local investment. Regulations
governing constitution of technical reserves and remittance balances in some
countries may hinder remittance of profits and repatriation of assets.
The following table is a summary of business by geographic segment. Premium
revenues from certain international operations are derived from many countries,
generally within their respective regions. With respect to London, while a
majority of premium revenues are derived from ceding companies in the United
Kingdom and continental Europe, a significant portion of premium revenues are
also derived from
48
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. SEGMENT INFORMATION (Continued)
other regions of the world. Allocations among the segments have been made on the
basis of location of operations and assets.
<TABLE>
<CAPTION>
INTERNATIONAL
----------------------
DOMESTIC EUROPE OTHER CONSOLIDATED
------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C>
(in thousands)
1996
REVENUES(1)............................................... $ 840,868 $ 386,126 $ 114,943 $ 1,341,937
INCOME BEFORE INCOME TAXES................................ 140,750 44,515 11,055 196,320
IDENTIFIABLE ASSETS(2).................................... 3,259,818 788,600 330,723 4,379,141
</TABLE>
<TABLE>
<CAPTION>
International
----------------------
Domestic Europe Other Consolidated
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
(in thousands)
1995
Revenues(1)................................................. $ 841,992 $ 224,511 $ 98,669 $ 1,165,172
Income before income taxes.................................. 121,543 39,107 3,149 163,799
Identifiable assets(2)...................................... 3,341,492 287,410 270,065 3,898,967
</TABLE>
<TABLE>
<CAPTION>
International
----------------------
Domestic Europe(3) Other Consolidated
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
(in thousands)
1994
Revenues(1)................................................. $ 807,917 $ 139,866 $ 71,905 $ 1,019,688
Income before income taxes.................................. 99,252 10,901 9,109 119,262
Identifiable assets(2)...................................... 3,049,913 187,991 219,875 3,457,779
</TABLE>
- ------------------------
(1) Revenues represent the sum of net premiums earned, net investment income and
realized net capital gains.
(2) As of December 31.
(3) In 1994, the Company's only European operations were based in London.
49
<PAGE>
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for each of
the years ended December 31, 1996 and 1995. However, in the opinion of
management, all adjustments, consisting of normal recurring accruals, necessary
to present fairly the results of operations for such periods have been made.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
----------- --------- ------------- -------------
<CAPTION>
(in thousands, except per share data)
<S> <C> <C> <C> <C>
NET PREMIUMS WRITTEN..................... $ 251,932 $ 256,996 $ 321,708 $ 311,879
NET PREMIUMS EARNED...................... 222,261 257,128 314,356 336,888
NET INVESTMENT INCOME.................... 44,859 45,986 51,291 50,500
REALIZED NET CAPITAL GAINS............... 5,274 3,820 4,311 5,263
OPERATING INCOME......................... 45,739 47,352 50,454 53,973
NET INCOME............................... 36,230 37,759 39,561 41,310
NET INCOME PER COMMON SHARE.............. 1.58 1.64 1.72 1.80
<CAPTION>
Three Months Ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
----------- --------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net premiums written..................... $ 225,890 $ 232,513 $ 278,815 $ 272,009
Net premiums earned...................... 225,300 232,663 252,445 270,769
Net investment income.................... 41,521 42,864 43,652 44,839
Realized net capital gains............... 2,643 2,678 2,708 3,090
Operating income......................... 37,829 39,827 43,440 44,224
Net income............................... 30,512 32,591 34,484 34,271
Net income per common share.............. 1.33 1.42 1.50 1.50
</TABLE>
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in nor any disagreements with accountants on
accounting and financial disclosure within the twenty-four months ended December
31, 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item concerning directors of the Company is
included in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders, filed with the Securities and Exchange Commission within 120 days
after the end of the Company's fiscal year (the "1997 Proxy Statement"), in the
section captioned "Election of Directors," and such information is incorporated
herein by reference. Information required by this Item concerning the executive
officers of the Company is included in Part I of this Annual Report on Form 10-K
under the section captioned "Directors and Executive Officers of the
Registrant". Information required by this Item concerning compliance with
Section 16(a) of the Securities Exchange Act of 1934, as amended, is included in
the 1997 Proxy Statement under the caption "Election of Directors: 'Ownership of
Certain Securities' ", and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is included in the 1997 Proxy Statement in
the sections captioned "Election of Directors: 'Compensation of Directors and
Executive Officers', 'Compensation Committee Interlocks and Insider
Participation' and 'Pension Benefits' ", and such information is incorporated
herein by reference. The sections of the 1997 Proxy Statement captioned
"Election of Directors: 'Committee Reports on Executive Compensation' and
'Performance Graph' " are not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is included in the 1997 Proxy Statement in
the sections captioned "Beneficial Ownership" and "Election of Directors:
'Ownership of Certain Securities' ", and such information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is included in the 1997 Proxy Statement in
the section captioned "Election of Directors: 'Compensation Committee Interlocks
and Insider Participation', 'Relationship with AIG', 'AIG Group Reinsurance',
'Certain Transactions with the AIG Group' and 'Relationship with SICO and
Starr' ", and such information is incorporated herein by reference.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements and Schedules
See accompanying Index to Consolidated Financial Statements in Item 8.
Schedules not included in the accompanying index have been omitted because
they are not applicable.
2. Exhibits
<TABLE>
<S> <C> <C>
11.1 --Computation of Earnings Per Share for the Years Ended December 31, 1996,
1995 and 1994.
21.1 --Subsidiaries of Registrant.
23.1 --Consent of Coopers & Lybrand L.L.P.
27.0 --Financial Data Schedule.
See accompanying Exhibit Index for additional Exhibits incorporated by reference.
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1996.
52
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) 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.
By: /s/ ROBERT F. ORLICH
..........................................
Robert F. Orlich
Title: President and Chief Executive
Officer
March 20, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------- ----------------------------------------- -----------------
<C> <S> <C>
/s/ ROBERT F. ORLICH President and Chief Executive Officer March 20, 1997
................................................... (principal executive officer); Director
Robert F. Orlich
/s/ STEVEN S. SKALICKY Senior Vice President and Controller March 20, 1997
................................................... (principal financial and accounting
Steven S. Skalicky officer)
/s/ JAMES BALOG Director March 20, 1997
...................................................
James Balog
/s/ IKUO EGASHIRA Director March 20, 1997
...................................................
Ikuo Egashira
................................................... Director
John M. Fowler
/s/ M. R. GREENBERG Director March 20, 1997
...................................................
M. R. Greenberg
/s/ JOHN J. MACKOWSKI Director March 20, 1997
...................................................
John J. Mackowski
/s/ EDWARD E. MATTHEWS Director March 20, 1997
...................................................
Edward E. Matthews
/s/ HOWARD I. SMITH Director March 20, 1997
...................................................
Howard I. Smith
/s/ THOMAS R. TIZZIO Director March 20, 1997
...................................................
Thomas R. Tizzio
</TABLE>
53
<PAGE>
SCHEDULE I
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
AMOUNT AT
WHICH SHOWN
COST OR IN THE
AMORTIZED MARKET BALANCE
TYPE OF INVESTMENT COST* VALUE SHEET
- ------------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
(in thousands)
Fixed maturities:
Bonds:
United States government and government agencies and authorities.... $ 524,621 $ 531,818 $ 531,540
States, foreign and domestic municipalities and political
subdivisions...................................................... 1,703,154 1,782,378 1,725,076
Foreign governments................................................. 377,821 386,842 386,842
Public utilities.................................................... 85,158 84,425 84,425
All other corporate................................................. 318,653 332,927 332,927
------------ ------------ ------------
Total fixed maturities.......................................... 3,009,407 3,118,390 3,060,810
------------ ------------ ------------
Equities:
Common stocks:
Public utilities.................................................... 9,173 10,781 10,781
Banks, trust and insurance companies................................ 36,912 52,877 52,877
Industrial, miscellaneous and all other............................. 243,853 323,065 323,065
------------ ------------ ------------
Total common stocks............................................. 289,938 386,723 386,723
Nonredeemable preferred stocks........................................ 6,276 5,642 5,642
------------ ------------ ------------
Total equities.................................................. 296,214 392,365 392,365
------------ ------------ ------------
Short-term investments.................................................. 59,191 59,191 59,191
------------ ------------ ------------
Total investments............................................... $ 3,364,812 $ 3,569,946 $3,512,366
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- ------------------------
* Investments in fixed maturities are shown at amortized cost.
S-1
<PAGE>
SCHEDULE II
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(PARENT COMPANY ONLY)
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
(in thousands)
Assets:
Bonds available for sale, at market value (amortized cost: 1996--$7,548;
1995--$4,638)....................................................................... $ 7,581 $ 4,782
Cash and cash equivalents............................................................. 276 286
Investment in subsidiaries............................................................ 1,129,658 983,464
Other assets.......................................................................... 748 469
Dividends due from subsidiaries....................................................... 3,111 2,756
------------ ----------
Total assets...................................................................... $ 1,141,374 $ 991,757
------------ ----------
------------ ----------
Liabilities:
Dividends payable..................................................................... $ 3,113 $ 2,751
Accrued liabilities................................................................... 955 504
------------ ----------
Total liabilities................................................................. 4,068 3,255
------------ ----------
Stockholders' equity:
Preferred Stock....................................................................... -- --
Common Stock.......................................................................... 23,813 23,750
Additional paid-in capital............................................................ 201,930 199,243
Net unrealized appreciation of investments, net of deferred income taxes
(1996--$51,644; 1995--$50,359)...................................................... 95,910 93,525
Net unrealized currency translation gain.............................................. 2,596 2,392
Retained earnings..................................................................... 823,057 679,592
Treasury Stock, at cost; 800,000 shares............................................... (10,000) (10,000)
------------ ----------
Total stockholders' equity........................................................ 1,137,306 988,502
------------ ----------
Total liabilities and stockholders' equity........................................ $ 1,141,374 $ 991,757
------------ ----------
------------ ----------
</TABLE>
See Notes to Condensed Financial Information of Registrant--(Parent Company
Only)
S-2
<PAGE>
SCHEDULE II
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF OPERATIONS
(PARENT COMPANY ONLY)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(in thousands)
Revenues:
Net investment income (principally dividends from subsidiaries)............ $ 12,426 $ 10,909 $ 9,825
Equity in undistributed income of subsidiaries............................. 143,536 122,014 92,543
---------- ---------- ----------
Total revenues......................................................... 155,962 132,923 102,368
Operating expenses........................................................... 1,493 1,498 1,058
---------- ---------- ----------
Income before income taxes................................................... 154,469 131,425 101,310
Income tax benefits--current................................................. (391) (433) (317)
---------- ---------- ----------
Net income............................................................. $ 154,860 $ 131,858 $ 101,627
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Notes to Condensed Financial Information of Registrant--(Parent Company
Only)
S-3
<PAGE>
SCHEDULE II
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(in thousands)
Cash flows from operating activities:
Net income.................................................................. $ 154,860 $ 131,858 $ 101,627
---------- ---------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed income of subsidiaries............................ (143,536) (122,014) (92,543)
Changes in receivable and payable to subsidiary, net...................... 7 (464) (232)
Changes in other assets and accrued liabilities........................... 221 388 (247)
---------- ---------- ----------
Total adjustments..................................................... (143,308) (122,090) (93,022)
---------- ---------- ----------
Net cash provided by operating activities............................. 11,552 9,768 8,605
---------- ---------- ----------
Cash flows from investing activities:
Purchase of bonds........................................................... (2,917) (2,239) (564)
---------- ---------- ----------
Net cash used in investing activities................................. (2,917) (2,239) (564)
---------- ---------- ----------
Cash flows from financing activities:
Dividends to stockholders................................................... (11,395) (9,176) (8,245)
Proceeds from common stock issued........................................... 2,750 703 977
---------- ---------- ----------
Net cash from financing activities.................................... (8,645) (8,473) (7,268)
---------- ---------- ----------
Change in cash and cash equivalents................................... (10) (944) 773
Cash and cash equivalents, beginning of year.................................. 286 1,230 457
---------- ---------- ----------
Cash and cash equivalents, end of year........................................ $ 276 $ 286 $ 1,230
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
Notes to Condensed Financial Information of Registrant--(Parent Company Only)
(1) The condensed financial information of registrant should be read in
conjunction with the Consolidated Financial Statements and Notes to
Consolidated Financial Statements included elsewhere herein.
(2) Investment in subsidiaries is reflected on the equity method.
S-4
<PAGE>
SCHEDULE III
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
AS OF DECEMBER 31, 1996, 1995 AND 1994 AND FOR THE YEARS THEN ENDED
<TABLE>
<CAPTION>
UNPAID LOSSES NET LOSSES NET COMMISSIONS
DEFERRED AND LOSS NET AND LOSS AND CHANGE IN
ACQUISITION ADJUSTMENT UNEARNED NET PREMIUMS INVESTMENT ADJUSTMENT DEFERRED
COSTS EXPENSES PREMIUMS EARNED INCOME EXPENSES ACQUISITION COSTS
----------- -------------- ------------ -------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
1996
PROPERTY-CASUALTY.... $ 58,700 $ 2,733,055 $ 343,936 $ 1,130,633 $ 192,636 $ 841,511 $ 267,186
1995
Property-Casualty.... $ 47,200 $ 2,388,155 $ 291,568 $ 981,177 $ 172,876 $ 746,872 $ 224,651
1994
Property-Casualty.... $ 37,300 $ 2,167,316 $ 249,098 $ 851,183 $ 153,594 $ 681,904 $ 187,507
<CAPTION>
OTHER
OPERATING NET PREMIUMS
EXPENSES WRITTEN
---------- --------------
<S> <C> <C>
1996
PROPERTY-CASUALTY.... $ 35,722 $ 1,142,515
1995
Property-Casualty.... $ 28,329 $ 1,009,227
1994
Property-Casualty.... $ 27,732 $ 866,665
</TABLE>
S-5
<PAGE>
SCHEDULE IV
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PERCENTAGE
CEDED ASSUMED OF AMOUNT
TO OTHER FROM OTHER ASSUMED
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
------------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
(in thousands)
1996
PREMIUMS WRITTEN:
PROPERTY-CASUALTY.............................. -- $ 173,422 $ 1,315,937 $ 1,142,515 115%
1995
Premiums written:
Property-Casualty.............................. -- $ 127,719 $ 1,136,946 $ 1,009,227 113%
1994
Premiums written:
Property-Casualty.............................. -- $ 90,419 $ 957,084 $ 866,665 110%
</TABLE>
S-6
<PAGE>
SCHEDULE VI
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
AS OF DECEMBER 31, 1996, 1995 AND 1994 AND FOR THE YEARS THEN ENDED
<TABLE>
<CAPTION>
NET LOSSES AND LOSS
ADJUSTMENT EXPENSES
UNPAID NET PAID
LOSSES RELATED TO LOSSES AND
DEFERRED AND LOSS DISCOUNT NET NET -------------------- LOSS
ACQUISITION ADJUSTMENT IF ANY UNEARNED PREMIUMS INVESTMENT CURRENT PRIOR ADJUSTMENT
COSTS EXPENSES DEDUCTED PREMIUMS EARNED INCOME YEAR YEARS EXPENSES
----------- ----------- ----------- ----------- ----------- ------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
1996 $ 58,700 $ 2,733,055 -- $ 343,936 $ 1,130,633 $ 192,636 $ 849,235 $ (7,724) $ 620,029
1995 $ 47,200 $ 2,388,155 -- $ 291,568 $ 981,177 $ 172,876 $ 750,326 $ (3,454) $ 488,466
1994 $ 37,300 $ 2,167,316 -- $ 249,098 $ 851,183 $ 153,594 $ 666,932 $ 14,972 $ 457,913
<CAPTION>
NET COMMISSIONS
AND CHANGE IN
DEFERRED NET
ACQUISITION PREMIUMS
COSTS WRITTEN
---------------- -----------
<S> <C> <C>
1996 $ 267,186 $ 1,142,515
1995 $ 224,651 $ 1,009,227
1994 $ 187,507 $ 866,665
</TABLE>
S-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
- --------- -------------------------------------------------- --------------------------------------------------
<C> <S> <C>
3.1 --Certificate of Incorporation, as amended........ Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
3.2 --By-Laws......................................... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
4.1 --Form of Common Stock Certificate................ Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.1 --Amended and Restated Shareholders Agreement
among American Express Company, Gulf Insurance
Company, The Lambert Brussels Financial
Corporation, Stoneridge Limited, Mavron Ltd.,
American International Group, Inc., American
Home Assurance Company, Metropolitan Life
Insurance Company, certain trustees under an
Indenture of Trust made by SwissRe Holding
Limited, SwissRe Holding Limited, General Re
Corporation, Compagnie Financiere et de
Reassurance du Groupe AG, Daido Mutual Life
Insurance Company, The Nichido Fire and Marine
Insurance Company, Limited, Transatlantic Rein-
surance Company, and PREINCO Holdings, Inc.,
dated January 5, 1990........................... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.2 --Exclusive Agency Agreement between Transatlantic
Reinsurance Company and American Home Assurance
Company, dated February 27, 1980................ Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.3 --Service and Expense Agreement among PREINCO
Holdings, Inc., Putnam Reinsurance Company, and
American International Group, Inc. dated July 1,
1986............................................ Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.4 --Service and Expense Agreement between
Transatlantic Reinsurance Company and American
International Group, Inc., dated December 15,
1977............................................ Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
- --------- -------------------------------------------------- --------------------------------------------------
<C> <S> <C>
10.5 --Investment Management Contract between
Transatlantic Reinsurance Company and AIG Global
Investors, Inc. dated August 1, 1986............ Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.6 --Investment Management Contract between Putnam
Reinsurance Company and AIG Global Investors,
Inc. dated August 1, 1986....................... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.7 --Transatlantic Holdings, Inc. 1990 Stock Option
Plan*........................................... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.7(a) --Transatlantic Holdings, Inc. 1990 Employee Stock
Purchase Plan*.................................. Filed as exhibit to the Company's Registration
Statement (File No. 33-41474) and incorporated
herein by reference.
10.7(b) --Amended Transatlantic Holdings, Inc. 1990 Stock
Option Plan*.................................... Filed as exhibit to the Company's 1992 Quarterly
Report on Form 10-Q for the quarter ended June
30, 1992 (File No. 1-10545) and incorporated
herein by reference.
10.7(c) --Transatlantic Holdings, Inc. 1995 Stock Option
Plan and form of Director Option Agreement*..... Filed as exhibits to the Company's Registration
Statement on Form S-8 (File No. 33-99764) and
incorporated herein by reference.
10.7(d) --Amendment to Transatlantic Holdings, Inc. 1990
Employee Stock Purchase Plan, effective as of
December 7, 1995*............................... Filed as exhibit to the Company's Current Report
on Form 8-K (File No. 1-10545) dated January 31,
1996, and incorporated herein by reference.
10.8 --Transatlantic Reinsurance Company 1989 Stock
Option Plan*.................................... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference
10.9 --Transatlantic Reinsurance Company 1984 Stock
Option Plan*.................................... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.10 --Transatlantic Reinsurance Company 1979 Stock
Option Plan*.................................... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
</TABLE>
------------------------------
* Management compensation plan
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
EXHIBIT
NO. DESCRIPTION LOCATION
- --------- -------------------------------------------------- --------------------------------------------------
10.11 --Quota Share Reinsurance Treaty between National
Union Fire Insurance Company of Pittsburgh, Pa.
and Transatlantic Reinsurance Company, dated
June 5, 1978.................................... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.12 --Quota Share Reinsurance Treaty between New
Hampshire Insurance Company and Transatlantic
Reinsurance Company, dated February 9, 1978..... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.13 --Quota Share Reinsurance Treaty between American
International Underwriters Overseas Ltd. and
Transatlantic Reinsurance Company, dated
September 22, 1978.............................. Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.14 --Surplus Treaty between American International
Group Companies and Transatlantic Reinsurance
Company, dated September 29, 1989............... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.15 --Quota Share Reinsurance Treaty among Lexington
Insurance Company, Landmark Insurance Company,
New Hampshire Insurance Company and
Transatlantic Reinsurance Company, dated
February 28, 1990............................... Filed as exhibit to the Company's Registration
statement (File No. 33-34433) and incorporated
herein by reference.
10.16 --Representative Facultative Insurance Certif-
icate for Casualty Reinsurance Risk (Certif-
icate between National Union Fire Insurance
Company of Pittsburgh, Pa. and Transatlantic
Reinsurance Company, dated January 9, 1990)..... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.17 --Representative Facultative Insurance Certif-
icate for Property Reinsurance Risk (Certif-
icate between American Home Assurance Company
and Transatlantic Reinsurance Company, dated
March 7, 1990).................................. Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
- --------- -------------------------------------------------- --------------------------------------------------
<C> <S> <C>
10.18 --Agreement between American International Group,
Inc. and Transatlantic Reinsurance Company,
dated December 15, 1977, providing Transatlantic
Reinsurance Company with a right of first
acceptance of reinsurance of risks insured by
affiliates of American International Group,
Inc. ........................................... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.19 --Aggregate Excess Treaty between Transatlantic
Reinsurance Company and National Union Fire
Insurance Company of Pittsburgh, Pa., dated
November 15, 1989............................... Filed as exhibit to the Company's Registration
Statement (File No. 33-34433) and incorporated
herein by reference.
10.20 --Management Agreement between Transatlantic
Reinsurance Company and Putnam Reinsurance
Company, dated February 15, 1991................ Filed as exhibit to the Company's 1995 Annual
Report on Form 10-K (File No. 1-10545) and
incorporated herein by reference.
10.21 --Quota Share Reinsurance Agreement between
Transtlantic Reinsurance Company and Putnam
Reinsurance Company, dated December 6, 1995..... Filed as exhibit to the Company's 1995 Annual
Report on Form 10-K (File No. 1-10545) and
incorporated herein by reference.
11.1 --Statement re computation of per share
earnings........................................ Filed herewith.
21.1 --Subsidiaries of the registrant.................. Filed herewith.
23.1 --Consent of Coopers & Lybrand L.L.P. ............ Filed herewith.
27.0 --Financial Data Schedule......................... Provided herewith.
</TABLE>
<PAGE>
EXHIBIT 11.1
TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
<CAPTION>
(in thousands, except per
common share data)
<S> <C> <C> <C>
Weighted average common shares outstanding used in the computation of per
common share earnings:
Common shares issued....................................................... 23,783 23,739 23,702
Common shares in treasury.................................................. 800 800 800
---------- ---------- ----------
Weighted average common shares outstanding*.................................. 22,983 22,939 22,902
---------- ---------- ----------
---------- ---------- ----------
Net income (applicable to common stock)...................................... $ 154,860 $ 131,858 $ 101,627
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share:*
Net income................................................................. $ 6.74 $ 5.75 $ 4.44
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
* The effect of all other common stock equivalents is not significant;
therefore, this information is not presented.
<PAGE>
EXHIBIT 21.1
TRANSATLANTIC HOLDINGS, INC.
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
% OF VOTING
SECURITIES
JURISDICTION OWNED BY ITS
OF IMMEDIATE
NAME OF CORPORATION INCORPORATION PARENT
- ------------------------ ------------------ ---------------
<S> <C> <C>
Transatlantic Reinsurance Company........................................... New York, U.S.A. 100%
Putnam Reinsurance Company................................................ New York, U.S.A. 100%*
Trans Re Zurich........................................................... Zurich, Switzerland 100%*
</TABLE>
- ------------------------
* The common stock is owned 100 percent by Transatlantic Reinsurance Company.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
------------------------
We consent to the incorporation by reference in the registration statements
of Transatlantic Holdings, Inc. on Forms S-8 (File No. 33-99764 and File No.
33-41474) of our report dated February 18, 1997, on our audits of the
consolidated financial statements and financial statement schedules of
Transatlantic Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996, which
report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TRANSATLANTIC HOLDINGS, INC.'S FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 1,935,677
<DEBT-CARRYING-VALUE> 1,125,133
<DEBT-MARKET-VALUE> 1,182,713
<EQUITIES> 392,365
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,512,366
<CASH> 77,523
<RECOVER-REINSURE> 367,844
<DEFERRED-ACQUISITION> 58,700
<TOTAL-ASSETS> 4,379,141
<POLICY-LOSSES> 2,733,055
<UNEARNED-PREMIUMS> 343,936
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 23,813
<OTHER-SE> 1,113,493
<TOTAL-LIABILITY-AND-EQUITY> 4,379,141
1,130,633
<INVESTMENT-INCOME> 192,636
<INVESTMENT-GAINS> 18,668
<OTHER-INCOME> (1,198)
<BENEFITS> 841,511
<UNDERWRITING-AMORTIZATION> (3,687)
<UNDERWRITING-OTHER> 306,595
<INCOME-PRETAX> 196,320
<INCOME-TAX> 41,460
<INCOME-CONTINUING> 154,860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 154,860
<EPS-PRIMARY> 6.74
<EPS-DILUTED> 6.74
<RESERVE-OPEN> 1,985,786
<PROVISION-CURRENT> 849,235
<PROVISION-PRIOR> (7,724)
<PAYMENTS-CURRENT> 172,875
<PAYMENTS-PRIOR> 447,154
<RESERVE-CLOSE> 2,383,528
<CUMULATIVE-DEFICIENCY> 7,724
</TABLE>
