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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ______________
COMMISSION FILE NUMBER 0-22376
TRANSNATIONAL RE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3731572
(STATE OR OTHER JURISDICTION OF (I.R.S.EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
399 THORNALL STREET
EDISON, NEW JERSEY 08837
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(908) 906-8100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
As of August 13, 1996, 5,365,400 shares of Class A Common Stock, $.01
par value per share, and 1,535,948 shares of Class B Common Stock, $.01 par
value per share, of the Registrant were outstanding.
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TRANSNATIONAL RE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets
at June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income and Stockholders' Equity
for the three and six months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flow
for the three and six months ended June 30, 1996 and 1995 5
Notes to Consolidated Interim Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION 20
2
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<PAGE>
TRANSNATIONAL RE CORPORATION
Consolidated Balance Sheets
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------- ------------
<S> <C> <C>
Assets Investments:
Fixed maturities, available for sale, at fair value
(amortized cost $161,297,000 and $151,158,000, respectively) $ 160,671,999 $ 154,073,267
------------- -------------
Short-term investments 23,040,237 26,357,481
Total investments 183,712,236 180,430,748
Cash 773,113 1,924,121
Accrued investment income 1,928,971 1,873,205
Receivables:
Unreported premiums: PXRE 4,772,272 4,631,112
Non-affiliates 1,446,230 4,924,574
Balances due from intermediaries and brokers: PXRE 4,411,056 1,016,420
Non-affiliates 111,926 2,584,877
Deferred acquisition costs 1,309,803 1,009,994
Income tax recoverable 2,015,330 904,997
Deferred income tax benefit 2,323,700 960,069
Investment in equity of Cat Fund, L.P. 2,058,736 2,024,195
Other assets 1,273,723 156,986
------------- -------------
Total assets $ 206,137,096 $ 202,441,298
============= =============
Liabilities
Losses and loss expenses: PXRE $ 13,812,705 $ 8,966,592
Non-affiliates 7,166,275 15,833,499
Unearned premiums 7,082,317 5,499,201
Contingent commissions payable 5,411,617 3,396,809
Deferred incentive liability 3,582,841 2,998,847
Payable to PXRE 336,557 443,469
Other liabilities 376,517 431,920
------------- -------------
Total liabilities 37,768,829 37,570,337
------------- -------------
Stockholders' Equity
Serial preferred stock, $.01 par value --
5,000,000 shares authorized; no shares issued and
outstanding 0 0
Class A common stock, $.01 par value --
20,000,000 shares authorized; 5,750,000 shares
issued 57,500 57,500
Class B common stock, $.01 par value --
5,000,000 shares authorized; 1,535,948 shares
issued and outstanding 15,359 15,359
Additional paid-in capital 120,708,243 120,708,243
Net unrealized (depreciation) appreciation on investments,
net of deferred income tax (benefit) expense
of ($219,000) and $1,020,000 (406,203) 1,894,945
Retained earnings 55,767,635 47,449,119
Treasury stock at cost (384,600 and 270,100 shares, respectively) (7,774,267) (5,254,205)
------------- -------------
Total stockholders' equity 168,368,267 164,870,961
------------- -------------
Total liabilities and stockholders' equity $ 206,137,096 $ 202,441,298
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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<PAGE>
TRANSNATIONAL RE CORPORATION
Consolidated Statements of Income and Stockholders' Equity
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Net premiums earned: PXRE $ 6,006,875 $ 6,063,392 $ 11,629,096 $ 11,679,700
Non-affiliates 6,905,612 10,922,965 15,206,124 21,765,554
Net investment income 2,708,472 2,249,318 5,278,308 4,284,088
Net realized investment losses (74,398) (559,208) (123,951) (581,253)
------------- ------------- ------------- -------------
15,546,561 18,676,467 31,989,577 37,148,089
------------- ------------- ------------- -------------
Losses and
Expenses
Losses and loss expenses incurred: PXRE 5,854,442 1,061,813 8,591,832 4,821,261
Non-affiliates 1,116,785 1,605,323 2,049,077 3,319,484
Commissions and brokerage: PXRE 1,010,301 352,423 1,666,850 934,793
Non-affiliates 1,777,136 1,991,095 3,377,664 3,355,397
Management fee expense - PXRE 634,933 849,319 1,341,761 1,672,263
Other operating expenses 798,256 661,116 1,732,018 1,903,138
------------- ------------- ------------- -------------
11,191,853 6,521,089 18,759,202 16,006,336
------------- ------------- ------------- -------------
Income before income taxes 4,354,708 12,155,378 13,230,375 21,141,753
Income tax provision 1,248,000 4,090,000 4,216,000 7,145,000
------------- ------------- ------------- -------------
Net income $ 3,106,708 $ 8,065,378 $ 9,014,375 $ 13,996,753
============= ============= ============= =============
Per Share
Net income per share $ 0.45 $ 1.14 $ 1.30 $ 1.96
============= ============= ============= =============
Weighted average shares outstanding 6,907,348 7,057,457 6,961,473 7,142,147
============= ============= ============= =============
Stockholders' equity
Stockholders' equity at beginning of period $ 166,477,171 $ 142,900,074 $ 164,870,961 $ 136,304,764
Change in unrealized (depreciation) appreciation on
investments net of deferred income tax (870,545) 1,964,138 (2,301,148) 4,171,216
Repurchase of common stock 0 (2,761,062) (2,520,062) (4,304,205)
Net income 3,106,708 8,065,378 9,014,375 13,996,753
Dividends to stockholders (345,067) 0 (695,859) 0
------------- ------------- ------------- -------------
Stockholders' equity at end of period $ 168,368,267 $ 150,168,528 $ 168,368,267 $ 150,168,528
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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<PAGE>
Transnational Re Corporation
Consolidated Statements of Cash Flow
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flow Net income $3,106,708 $8,065,378 $9,014,375 $13,996,753
from operating Adjustments to reconcile net income to net cash
activities provided by operating activities:
Losses and loss expenses 1,838,321 (533,837) (3,821,111) (959,593)
Unearned premiums (5,311,617) (7,159,128) 1,583,116 4,423,606
Deferred acquisition costs 833,575 1,064,663 (299,809) (1,076,360)
Receivables 3,485,177 2,542,336 4,430,308 (1,835,977)
Due to/from affiliates (67,032) 145,151 (92,944) 193,905
Current income tax (4,404,905) (2,833,007) (1,109,884) 477,806
Other 173,941 273,434 (655,550) 323,855
--------------- -------------- --------------- --------------
Net cash (used) provided by operating (345,832) 1,564,990 9,048,501 15,543,995
activities -------------- -------------- --------------- --------------
Cash flow Cost of fixed maturity investments (7,069,304) (28,554,787) (20,530,036) (33,154,086)
from investing Fixed maturity investments matured/disposed 5,477,919 21,448,374 10,229,204 28,055,391
activities Investment in joint venture 0 0 0 (2,000,000)
Payable for securities (5,548,999) 0 0 0
Net change in short-term investments 6,094,785 8,802,246 3,317,244 (2,813,793)
------------- ------------- --------------- --------------
Net cash (used) provided by investing (1,045,599) 1,695,833 (6,983,588) (9,912,488)
activities ------------- ------------- --------------- --------------
Cash flow from Cost of treasury stock 0 (2,761,062) (2,520,062) (4,304,205)
financing Dividends (345,067) 0 (695,859) 0
activities ------------- ------------- --------------- --------------
Net cash used by financing activities (345,067) (2,761,062) (3,215,921) (4,304,205)
------------- -------------- --------------- --------------
Net change in cash (1,736,498) 499,761 (1,151,008) 1,327,302
Cash, beginning of period 2,509,611 1,768,664 1,924,121 941,123
------------- ------------- --------------- --------------
Cash, end of period $773,113 $2,268,425 $773,113 $2,268,425
============= ============= =============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
5
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Transnational Re NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Corporation
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1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP").
These statements reflect the consolidated operations of Transnational Re
Corporation and its subsidiaries Transnational Reinsurance Company
("Transnational Reinsurance") and TREX Trading Corporation (collectively
referred to as "Transnational Re"). All material transactions between the
consolidated companies have been eliminated in preparing these financial
statements.
The interim consolidated financial statements are unaudited; however, in
the opinion of management, the foregoing consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim period. These
interim statements should be read in conjunction with the 1995 audited
consolidated financial statements and related notes. The preparation of interim
consolidated financial statements relies significantly upon estimates. Use of
such estimates, and the seasonal nature of a portion of the reinsurance
business, necessitates caution in drawing specific conclusions from interim
results.
2. PREMIUMS ASSUMED AND CEDED
Premiums on reinsurance business assumed are recorded as earned on a pro
rata basis over the contract period based on estimated subject premiums.
Adjustments based on actual subject premium are recorded once ascertained. The
portion of premiums written relating to unexpired coverages at the end of the
period is recorded as unearned premiums. Reinsurance premiums ceded are recorded
as incurred on a pro rata basis over the contract period.
3. LOSSES AND LOSS EXPENSE LIABILITIES
Liabilities for losses and loss expenses are established in amounts
estimated to settle incurred losses. Losses and loss expense liabilities are
based on individual case estimates provided for reported losses for known events
and estimates of incurred but not reported losses. Losses and loss expense
liabilities are necessarily based on estimates and the ultimate liabilities may
vary from such estimates primarily because of the significant delay in losses
being reported to insurance carriers, reinsurers and finally retrocessionaires,
such as Transnational Re. Any adjustments to these estimates are reflected in
income when known.
6
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Transnational Re NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Corporation
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4. INVESTMENTS
Fixed maturity investments are considered available for sale and are
reported at fair value. Unrealized gains and losses as a result of temporary
changes in fair value over the period such investments are held are reflected
net of income taxes in stockholders' equity. Unrealized losses which are not
temporary are charged to operations. Short-term investments are carried at
amortized cost which approximates fair value. Realized gains or losses on
disposition of investments are determined on the basis of specific
identification. The amortization of premiums and accretion of discounts for
fixed maturity investments are computed utilizing the interest method. The
effective yield under the interest method is adjusted for anticipated
prepayments.
5. DEFERRED ACQUISITION COSTS
Acquisition costs consist of commissions, fees and brokerage expenses
incurred in connection with contract issuance. These costs are deferred and
amortized over the period in which the related premiums are earned. Deferred
acquisition costs are reviewed periodically to determine that they do not exceed
recoverable amounts after allowing for anticipated investment income.
6. TREASURY STOCK
In November 1994, Transnational Re was authorized to repurchase up to
500,000 shares of its stock. Transnational Re repurchased 114,500 shares of its
stock during the first quarter of 1996. Since inception of its stock repurchase
plan, Transnational Re has repurchased a total of 384,600 shares of its common
stock in the open market.
7. PROPOSED TRANSACTION
In May 1996, Transnational Re received a proposal from PXRE for a
business strategic combination of PXRE and Transnational Re designated to be on
a tax-free basis. Under the proposal, PXRE would enter into a merger agreement
with Transnational Re pursuant to which PXRE, or a newly organized subsidiary of
PXRE, would exchange shares of PXRE common stock for each share of Transnational
Re common stock, $.01 par value.
7
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Transnational Re NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Corporation
- --------------------------------------------------------------------------------
The proposal is conditioned upon the negotiation and execution of a
definitive merger agreement mutually satisfactory to PXRE and Transnational Re
and is further conditioned upon the effectiveness of the registration of PXRE
securities to be issued in the merger, the receipt of all regulatory approvals
and third-party consents necessary or advisable to accomplish the transaction
and approvals by the boards of directors of PXRE and Transnational Re (including
a committee of Transnational Re's independent directors) and by the shareholders
of both companies.
Merger discussions are ongoing.
8
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<PAGE>
Transnational Re MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Corporation FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
Transnational Re was incorporated on August 30, 1993 in the State of
Delaware and commenced operations in November 1993 following the November 9,
1993 closing of its initial public offering (the "Offering"). Transnational Re,
through its subsidiary Transnational Reinsurance, specializes in providing
brokered property retrocessional reinsurance in the United States and
international markets, currently focusing primarily on property catastrophe
retrocessional coverages.
Transnational Re derives its business from its affiliation with PXRE
Reinsurance Company ("PXRE Reinsurance"), a wholly-owned subsidiary of PXRE
Corporation ("PXRE"), a publicly traded reinsurance group with a primary focus
on brokered property reinsurance, including catastrophe related coverages, in
both the United States and international markets. Pursuant to the Management
Agreement by and among Transnational Re, Transnational Reinsurance and PXRE
Reinsurance that has been in effect since November 8, 1993, PXRE Reinsurance has
responsibility for the day-to-day operations of Transnational Re and
Transnational Reinsurance, including all the reinsurance operations of
Transnational Reinsurance. Transnational Re and Transnational Reinsurance do not
have any operating properties, systems or paid employees. Pursuant to the
Management Agreement, PXRE Reinsurance provides all the operating facilities,
systems, equipment and management and clerical employees required to conduct the
businesses of Transnational Re and Transnational Reinsurance.
Under the terms of the Management Agreement, Transnational Reinsurance
shares in certain specified business of PXRE Reinsurance that is classified as
property retrocessional reinsurance business, marine and aviation retrocessional
reinsurance or marine and aviation reinsurance and facultative reinsurance.
Transnational Reinsurance is also entitled to share in other property
reinsurance business, if any, which PXRE Reinsurance may, from time-to-time,
propose that Transnational Reinsurance underwrite and which Transnational
Reinsurance's Board of Directors may approve.
CERTAIN RISKS AND UNCERTAINTIES
Pursuant to the Management Agreement, PXRE provides underwriting and
supervisory services relating to the reinsurance operations of Transnational Re,
and provides management and administrative services. Transnational Re does not
have any operating properties, systems or paid employees. There is no assurance
that Transnational Re can renew the Management Agreement with PXRE or with
comparable terms.
9
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<PAGE>
As a reinsurer principally of property catastrophe retrocessional
coverages in both the international and domestic markets, Transnational Re's
operating results in any given period depend to a large extent on the number and
magnitude of natural and man-made catastrophes such as hurricanes, windstorms,
floods, earthquakes, spells of severely cold weather, fires and explosions.
The estimation of losses for catastrophe retrocessional reinsurers is
inherently less reliable than for reinsurers of risks which have an established
historical pattern of losses. In addition, insured events which occur near the
end of a reporting period, as well as the significant delay in losses being
reported to insurance carriers, reinsurers and finally, retrocessionaires such
as Transnational Re, require Transnational Re to make estimates of losses based
on limited information from ceding companies and based on its own underwriting
data. Because of the uncertainty in the process of estimating its losses from
insured events, there is a risk that Transnational Re's liabilities for losses
and loss expenses could prove to be inadequate, with a consequent adverse impact
on future earnings and stockholders' equity. Additionally, as a consequence of
its emphasis on property retrocessional reinsurance, Transnational Re may forgo
potential investment income because property losses are typically settled within
a short period of time.
Because Transnational Re's current focus is primarily on catastrophe
retrocessional coverages which can involve significantly increased exposures,
principally as a consequence of the retrocessionaire's exposure to an
aggregation of losses from the same catastrophic event, and underwriting
limitations associated with retrocessional business, the occurrence of one or
more major catastrophes in any given period (such as hurricanes Andrew and Iniki
in 1992 and the Northridge earthquake in 1994) could have a material adverse
impact on Transnational Re's result of operations and financial condition and
result in substantial liquidation of investments and outflows of cash as losses
are paid.
As Transnational Re underwrites risks from a large number of insurers
based on information generally supplied by retrocessional brokers, there is a
risk of developing a concentration of exposure to loss in certain geographic
areas prone to specific types of catastrophes. Transnational Re has systems and
software tools to monitor and manage the accumulation of its exposure to such
losses. Management has established guidelines for maximum tolerable losses from
a single or multiple catastrophic event based on historical data; however no
assurance can be given that these maximums will not be exceeded in some future
catastrophe.
Premiums on reinsurance business assumed are recorded as earned on a pro
rata basis over the contract period based upon estimated subject premiums.
Management must estimate the subject premiums associated with the treaties in
order to determine the level of earned premiums for a reporting period. Such
estimates are based on information from brokers which can be subject to change
as new information becomes available. Because of the inherent uncertainty in
this process, there is the risk that premiums and related receivable balances
may turn out to be higher or lower than reported.
10
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Although Transnational Re's investment guidelines stress conservation of
principal, diversification of risk, and liquidity, investments are subject to
market-wide risks and fluctuations, as well as to risk inherent in particular
securities. Accordingly, the estimated fair value of Transnational Re's
investments does not necessarily represent the amount which could be realized
upon future sale, particularly if Transnational Re were required to liquidate a
substantial portion of its portfolio to fund losses from catastrophic events.
Premium receivables and loss reserves include business denominated in
currencies other than U.S. dollars. Transnational Re is exposed to the
possibility of significant claims in currencies other than U.S. dollars. While
Transnational Re holds positions denominated in foreign currencies to mitigate,
in part, the effects of currency fluctuations on its results of operations, it
does not hedge its currency exposures before a catastrophic event which may
produce a claim.
Transnational Re (parent company) relies primarily on cash dividends and
net tax allocation payments from its subsidiary Transnational Reinsurance to pay
its operating expenses and to pay common stock dividends to Transnational Re's
stockholders. The payment of dividends by Transnational Reinsurance to
Transnational Re (parent company) is subject to limits imposed under the
insurance laws and regulations of Connecticut, the state of incorporation and
domicile of Transnational Reinsurance. In the event the amount of dividends
available, together with other sources of funds, are not sufficient to permit
Transnational Re to pay cash dividends, it would be necessary to obtain the
approval of the Connecticut Insurance Commissioner prior to Transnational
Reinsurance's payment of additional dividends. If such approval were not
obtained, Transnational Re would have to adopt one or more alternatives, such as
seeking additional equity. There can be no assurance that these strategies could
be effected on satisfactory terms, if at all.
The reinsurance business is increasingly competitive and is undergoing a
variety of challenging developments. The industry has in recent years moved
toward greater consolidation as ceding companies have placed increased
importance on size and financial strength in the selection of reinsurers.
Additionally, reinsurers are tapping new markets and complementing their range
of traditional reinsurance products with innovative new products which bring
together capital markets and reinsurance experience. Transnational Re competes
with numerous major international and domestic reinsurance companies, many of
which have substantially greater financial, marketing and management resources
than Transnational Re.
11
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COMPARISON OF SECOND QUARTER RESULTS FOR
1996 WITH 1995
Net premiums written for the three months ended June 30, 1996 decreased
22.7% to $7,601,000 from $9,827,000 for the corresponding period of 1995. Gross
premiums written for the second quarter of 1996 decreased 19.0% to $7,959,000
from $9,827,000 for the comparable period of 1995. Net premiums earned for the
second quarter of 1996 decreased 24.0% to $12,912,000 from $16,986,000 in the
corresponding period of 1995. Gross written, net written and net earned premiums
for the second quarter of 1996 declined from prior year levels as Transnational
Re continued its planned response to the increased competitive trends that have
characterized the retrocessional reinsurance market since 1995. Second quarter
net premiums written were, as expected, significantly less than those of the
first quarter of 1996 since a substantial portion of Transnational Re's written
premiums in the first quarter represented semi-annual premium payments.
Until 1996, Transnational Reinsurance had not maintained any
retrocessional coverage for its exposures on business written since the closing
of the Offering and had established its underwriting guidelines based upon the
assumption that it would not purchase retrocessional coverage. However, as the
cost of catastrophe retrocessional facilities has declined, Transnational
Reinsurance has begun selectively to purchase such coverages in 1996. Ceded
premiums written for the three months ended June 30, 1996 was $358,000 compared
to $0 for the corresponding period of 1995.
The underwriting results of a property and casualty insurer are
discussed frequently by reference to its loss ratio, underwriting expense ratio
and combined ratio. The loss ratio is the result of dividing losses and loss
expenses incurred by net premiums earned. The underwriting expense ratio is the
result of dividing underwriting expenses by net premiums written for purposes of
statutory accounting practices ("SAP") and net premiums earned for purposes of
GAAP. The combined ratio is the sum of the loss ratio and the underwriting
expense ratio. A combined ratio under 100% indicates underwriting profits and a
combined ratio exceeding 100% indicates underwriting losses. The combined ratio
does not reflect the effect of investment income on operating results. The
ratios discussed below have been calculated on a GAAP basis.
The loss ratio was 54.0% for the three months ended June 30, 1996
compared with 15.7% for the corresponding period of 1995. The loss ratio for the
second quarter of 1996 reflected net incurred catastrophic losses of $6,144,000
for 1996 and prior accident years as compared with $1,135,000 in the same period
of 1995 for 1995 and prior accident years.
12
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Significant losses affecting the second quarter of 1996 loss ratio are
as follows:
<TABLE>
<CAPTION>
Loss Event Amount of Losses
---------- ----------------
(in thousands)
<S> <C>
Hurricane Luis $3,450
Large risk losses 2,150
Hurricane Marilyn 457
</TABLE>
Significant events affecting the same period of 1995 loss ratio included
the following:
<TABLE>
<CAPTION>
Loss Event Amount of Losses
---------- ----------------
(in thousands)
<S> <C>
Northridge Earthquake $1,000
</TABLE>
During the second quarter of 1996, Transnational Re experienced a
deficiency of $4,981,000 net for prior year losses and loss expenses primarily
due to development on Hurricanes Marilyn and Luis, which are now expected to
have exceeded specified market loss thresholds. The loss ratio for the
comparable quarter in 1995 was unfavorably affected by increases to reserves of
$1,519,000 net for prior year losses and loss expenses.
The underwriting expense ratio was 32.7% for the three months ended June
30, 1996 compared with 22.7% for the corresponding period of 1995. The increase
was principally due to an increase in contingent commissions payable to clients
related to profitable business and the decline in premiums earned. As a result
of the above, the combined ratio was 86.7% for the second quarter 1996 compared
with 38.4% for the corresponding period of 1995.
Under the terms of the Management Agreement with PXRE Reinsurance,
Transnational Re incurred management fees of $398,000 (5% of gross written
premiums) for the second quarter of 1996 compared to $491,000 in the second
quarter of 1995. These fees are expensed as the related premiums are earned, and
accordingly management fee expense for the second quarter of 1996 was $635,000
compared to $849,000 in the second quarter of 1995.
13
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<PAGE>
Other operating expenses increased to $798,000 for the three months
ended June 30, 1996 from $661,000 for the corresponding period of 1995. Other
operating expenses reflect foreign currency exchange gains of $10,000 for the
second quarter of 1996 compared to gains of $170,000 for the corresponding
period of 1995. Officers incentive compensation decreased to $202,000 in the
second quarter of 1996 from $360,000 in the second quarter of 1995. Furthermore,
Transnational Re incurred $100,000 of expenses in the second quarter of 1996 in
connection with a proposed strategic merger.
Net investment income for the three months ended June 30, 1996 increased
20.4% to $2,708,000 from $2,249,000 for the corresponding period of 1995. The
increase in net investment income was caused by an increase in average
investments for the second quarter of 1996 compared with the year-earlier period
and an increase in Transnational Re's pre-tax investment yield to 6.0% for the
second quarter of 1996 from 5.8% in the corresponding period of 1995, both
calculated using amortized cost and investment income gross of investment
expenses. Net realized investment losses for the second quarter of 1996 were
$74,000 compared with $559,000 for the corresponding period of 1995.
For the reasons discussed above, net income was $3,107,000 for the three
months ended June 30, 1996 compared to $8,065,000 for the corresponding period
of 1995. Net income per common share available to Transnational Re's Class A and
Class B common stockholders for the second quarter 1996 was $0.45 based on
average shares outstanding of approximately 6,907,000 compared to $1.14 in the
second quarter of 1995 based on average shares outstanding of approximately
7,057,000.
COMPARISON OF YEAR-TO-DATE RESULTS FOR
1996 WITH 1995
Net premiums written for the six months ended June 30, 1996 decreased
24.8% to $28,418,000 from $37,790,000 for the corresponding period of 1995.
Gross premiums written for the six months ended June 30, 1996 decreased 23.5% to
$28,902,000 from $37,790,000 for the comparable period of 1995. Net premiums
earned for the first six months of 1996 decreased 19.8% to $26,835,000 from
$33,445,000 in the corresponding period of 1995. Gross written, net written and
net earned premiums for the six months ended June 30, 1996 declined from prior
year levels as Transnational Re continued its planned response to the increased
competitive trends that have characterized the retrocessional reinsurance market
since 1995.
14
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<PAGE>
Until 1996, Transnational Reinsurance had not maintained any
retrocessional coverage for its exposures on business written since the closing
of the Offering, and had established its underwriting guidelines based upon the
assumption that it would not purchase retrocessional coverage. However, as the
cost of catastrophe retrocessional facilities has declined, Transnational
Reinsurance has begun selectively to purchase such coverages in 1996. Ceded
premiums written for the six months ended June 30, 1996 was $484,000 compared to
$0 for the corresponding period of 1995.
The loss ratio was 39.7% for the six months ended June 30, 1996 compared
with 24.3% for the corresponding period of 1995. The loss ratio for the first
six months of 1996 reflected net incurred catastrophic losses of $5,886,000 for
1996 and prior accident years as compared with $4,394,000 in the same period of
1995 for 1995 and prior accident years.
Significant losses affecting the six months ended June 30, 1996 loss
ratio are as follows:
<TABLE>
<CAPTION>
Loss Event Amount of Losses
---------- ----------------
(in thousands)
<S> <C>
Hurricane Luis $3,450
Large risk losses 2,150
Hurricane Marilyn 457
</TABLE>
Significant events affecting the same period of 1995 included the
following:
<TABLE>
<CAPTION>
Loss Event Amount of Losses
---------- ----------------
(in thousands)
<S> <C>
Kobe, Japan Earthquake $4,000
Northridge Earthquake 1,312
</TABLE>
During the six months ended June 30, 1996, Transnational Re experienced
a deficiency of $5,618,000 net for prior year losses and loss expenses primarily
due to development on Hurricanes Marilyn and Luis, which are now expected to
have exceeded specified market loss thresholds. The loss ratio for the
comparable period in 1995 was unfavorably affected by increases to reserves of
$2,112,000 net for prior year losses and loss expenses.
15
<PAGE>
<PAGE>
The underwriting expense ratio was 30.3% for the six months ended June
30, 1996 compared with 23.5% for the corresponding period of 1995. The increase
was principally due to an increase in contingent commissions payable to clients
related to profitable business and the decline in premiums earned. As a result
of the above, the combined ratio was 70.0% for 1996 compared with 47.8% for
1995.
Under the terms of the Management Agreement with PXRE Reinsurance,
Transnational Re incurred management fees of $1,445,000 (5% of gross written
premiums) for the six months ended June 30, 1996 compared to $1,890,000 in the
corresponding period of 1995. These fees are expensed as the related premiums
are earned, and accordingly management fee expense for the first six months of
1996 was $1,342,000 compared to $1,672,000 in the corresponding period of 1995.
Other operating expenses decreased to $1,732,000 for the six months
ended June 30, 1996 from $1,903,000 for the corresponding period of 1995. Other
operating expenses reflect foreign currency exchange losses of $130,000 for the
six months ended June 30, 1996 compared to gains of $14,000 for the
corresponding period of 1995. Officers incentive plan expenses amounted to
$584,000 in the first six months of 1996 compared with $949,000 in the similar
period last year. Furthermore, Transnational Re incurred $100,000 of expenses in
the second quarter of 1996 in connection with a proposed strategic merger.
Net investment income for the six months ended June 30, 1996 increased
23.2% to $5,278,000 from $4,284,000 for the corresponding period of 1995. The
increase in net investment income was caused by an increase in average
investments for the first six months of 1996 compared with the year-earlier
period and an increase in Transnational Re's pre-tax investment yield to 5.9%
for the first six months of 1996 from 5.6% in the corresponding period of 1995,
both calculated using amortized cost and gross of investment expenses. Net
realized investment losses for the six months ended June 30, 1996 were $124,000
compared with $581,000 for the corresponding period of 1995.
For the reasons discussed above, net income was $9,014,000 for the six
months ended June 30, 1996 compared to $13,997,000 for the corresponding period
of 1995. Net income per common share available to Transnational Re's Class A and
Class B common stockholders for the six months ended June 30, 1996 was $1.30
based on average shares outstanding of approximately 6,961,000 compared to $1.96
based on average shares outstanding of approximately 7,142,000 in the year
earlier period.
LIQUIDITY AND CAPITAL RESOURCES
Transnational Reinsurance's results may be influenced by a variety of
factors, including changes in the property and casualty reinsurance market,
insurance regulatory changes and changes in general economic conditions.
Transnational Reinsurance's ability to pay dividends to Transnational Re is
subject to provisions of the Connecticut insurance
16
<PAGE>
<PAGE>
law restricting the ability of Connecticut insurance companies to make certain
dividends and distributions without prior regulatory notification and approval.
Connecticut insurance law provides that the maximum amount of dividends or other
distributions that Transnational Reinsurance may declare or pay to Transnational
Re within any twelve-month period, without regulatory approval, is limited to
the lesser of (a) earned surplus or (b) the greater of 10% of policyholder'
surplus at December 31, of the preceding year or 100% of net income for the
twelve-month period ended December 31 of the preceding year, all determined in
accordance with SAP. As of December 31, 1995, Transnational Reinsurance had
earned surplus of approximately $35,004,000, policyholder' surplus of
$151,924,000 and its net income for 1995 was $26,674,000. The maximum amount of
dividends or distributions that Transnational Reinsurance may declare and pay in
1996, without regulatory approval, is therefore $26,674,000. Transnational
Reinsurance paid $5,000,000 in dividends to Transnational Re during the first
six months of 1996.
Transnational Re files federal income tax returns for itself and all of
its direct or indirect domestic subsidiaries that satisfy the stock ownership
requirements for consolidation for federal income tax purposes (collectively,
the "Subsidiaries"). Transnational Re is party to an Agreement Concerning Filing
of Consolidated Federal Income Tax Returns (the "Tax Allocation Agreement")
pursuant to which each Subsidiary makes tax payments to Transnational Re in an
amount equal to the federal income tax payment that would have been payable by
such Subsidiary for such year if it had filed a separate income tax return for
such year. Transnational Re is required to provide for payment of the
consolidated federal income tax liability for the entire group. If the aggregate
amount of tax payments made in any tax year by a Subsidiary is less than (or
greater than) the annual tax liability for such Subsidiary on a stand-alone
basis for such year, such Subsidiary will be required to make up such deficiency
(or receive a credit if payments exceed the separate return tax liability) to
(from) Transnational Re.
Management expects that Transnational Reinsurance's capitalization will
provide it with sufficient resources to meet its liquidity requirements on both
a short-term and long-term basis, although no assurances can be given that such
expectation will prove to be correct.
For the six months ended June 30, 1996 and 1995, Transnational Re's net
cash flow provided by operations was $9,048,000 and $15,544,000, respectively.
The six months ended June 30, 1996 reflected lower premiums written and higher
loss payments, offset by the timing of other underwriting and operating
payments.
Transnational Re's management has established general procedures and
guidelines for its investment portfolio and oversees investment management
carried out by Phoenix Duff & Phelps Corporation, a public majority-owned
subsidiary of Phoenix Home Life Mutual Insurance Company, under an investment
advisory agreement. Although these investment guidelines stress conservation of
principal, diversification of risk, and liquidity, investments are subject to
market-wide risks and fluctuations, as well as, risk inherent in particular
securities. As at June 30, 1996, Transnational Re's investment portfolio
17
<PAGE>
<PAGE>
consisted solely of fixed maturities and short-term investments. Although
Transnational Re's investment portfolio does not currently include any equity
securities, Transnational Re may in the future determine to invest a portion of
its investment portfolio in equity securities. The investment policies and all
investments of Transnational Re are approved by its Board of Directors.
Of Transnational Re's fixed maturities portfolio as at June 30, 1996,
98.8% of the fair value was in obligations rated "Aa" or "AA" or better by
Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively,
or in government or government-backed securities. Mortgage-backed and
asset-backed securities (principally GNMAs) accounted for 24.2% of fixed
maturities based on fair value at June 30, 1996. In addition, Transnational Re
has no investments in real estate or commercial mortgage loans. The average
market yield to maturity of Transnational Re's fixed maturities portfolio at
June 30, 1996 and 1995 was 6.0% and 5.8%, respectively.
Fixed maturity investments are reported at fair value, with the net
unrealized gain or loss, net of tax, reported as a separate component of
stockholders' equity. Transnational Re recorded directly to equity a $2,301,000
after-tax unrealized decline in the value of its portfolio ($0.33 book value per
share) during the first six months of 1996, including a $871,000 decline in the
second quarter of 1996 ($0.13 book value per share), reflecting the effect of
increasing interest rates during the period. Short-term investments are carried
at amortized cost which approximates fair value. Transnational Re's short-term
investments (principally high grade commercial paper) were $23,040,000 at June
30, 1996 compared to $26,357,000 at December 31, 1995.
Book value per common share was $24.40 at June 30, 1996.
Transnational Re may be subject to gains and losses resulting from
currency fluctuations because substantially all of its investments are
denominated in U.S. dollars, while some of its net liability exposure is in
currencies other than U.S. dollars. Transnational Re expects to hold currency to
mitigate, in part, the effects of currency fluctuations on its results of
operations. Currency holdings and investments denominated in foreign currencies
do not constitute a material portion of Transnational Re's investment portfolio
and, in the opinion of Transnational Re's management, are sufficiently liquid
for its needs.
During the second quarter of 1996, Transnational Re declared a quarterly
dividend on its common stock of $0.05 per share. The expected annual dividend,
based on shares outstanding at June 30, 1996, is approximately $1,380,000.
In November 1994, Transnational Re's Board of Directors authorized the
repurchase of up to 500,000 shares of its Class A Common Stock from time-to-time
in open market or private block purchase transactions. Through June 30, 1996,
Transnational Re has expended approximately $7,774,000 to repurchase a total of
384,600 shares. No shares were repurchased in the second quarter of 1996.
18
<PAGE>
<PAGE>
In March 1995, Transnational Re and PXRE entered into a joint venture
arrangement to trade in catastrophe futures and options contracts on the CBOT.
Transnational Re and PXRE have each contributed $2.5 million to capitalize this
venture. Although the joint venture has developed a number of trading
strategies, the low level of activity in the CBOT market for catastrophe futures
has kept trade volume to a minimum through June 30, 1996.
As of June 30, 1996, Transnational Re had no material commitments for
capital expenditures.
INCOME TAXES
Transnational Re's effective tax rate for the six months ended June 30,
1996 and 1995 was 31.9% and 34.0%, respectively. The effective tax rates differ
from the applicable federal statutory tax rates due to tax exempt interest
income and state and local taxes.
19
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 15, 1996 a putative class action lawsuit was filed in the Court
of Chancery of the State of Delaware which names Transnational Re, the directors
of Transnational Re and PXRE as defendants. The action alleges, among other
things, that PXRE's proposal to merge Transnational Re with and into PXRE at an
exchange ratio of .98 shares of PXRE Common Stock for each publicly held share
of Transnational Re's Class A Common Stock is grossly unfair and inadequate,
that the directors of Transnational Re have violated their fiduciary duties to
Transnational Re and that PXRE has violated its alleged fiduciary duties as a
controlling stockholder of Transnational Re. The action seeks, among other
things, to enjoin the proposed combination of Transnational Re and PXRE and/or
to recover damages.
Item 4. Submission of Matters to a Vote of Security Holders
At Transnational Re's Annual Meeting of Shareholders held on May 21,
1996, the holders of Common Stock of Transnational Re approved the following (in
each case, with no broker non-votes):
(i) the election (by the holder of Transnational Re's Class B Common
Stock) of Gerald L. Radke as Class III director to serve until
the 1999 Annual Meeting of Shareholders and until his successor
has been elected and has qualified, by the vote of 1,535,948
votes for and 0 against/withheld;
(ii) the appointment of Price Waterhouse LLP as Transnational Re's
independent public accountants for the fiscal year ending
December 31, 1996, by the vote of 6,200,541 votes for, 35,200
votes against and 670 abstentions; and
(iii) the adoption of Transnational Re's Director Stock Option Plan, by
the vote of 5,752,466 votes for, 121,450 votes against and
362,500 abstentions.
20
<PAGE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
10.1- Transnational Re Corporation Director
Stock Option Plan (incorporated
herein by reference to Appendix A to
the Proxy Statement of Transnational
Re dated April
25, 1996).
(b) Reports on Form 8-K
Transnational Re filed a Current Report on Form 8-K with the Securities
and Exchange Commission on May 17, 1996 containing, under the heading "Other
Events", a description of the lawsuit described in Item 1 above and a press
release dated May 17, 1996 regarding the same.
21
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report or amendment thereto to be signed on its
behalf by the undersigned thereunto duly authorized.
TRANSNATIONAL RE CORPORATION
August 13, 1996 By: /s/ Sanford M. Kimmel
-------------------------
Sanford M. Kimmel
Senior Vice President, Treasurer
and Chief Financial Officer
22
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 161,296,927
<DEBT-CARRYING-VALUE> 160,671,999
<DEBT-MARKET-VALUE> 160,671,999
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 183,712,236
<CASH> 773,113
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,309,803
<TOTAL-ASSETS> 206,137,096
<POLICY-LOSSES> 20,978,980
<UNEARNED-PREMIUMS> 7,082,317
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 72,859
0
0
<OTHER-SE> 168,295,408
<TOTAL-LIABILITY-AND-EQUITY> 206,137,096
26,835,220
<INVESTMENT-INCOME> 5,278,308
<INVESTMENT-GAINS> (123,951)
<OTHER-INCOME> 0
<BENEFITS> 10,640,909
<UNDERWRITING-AMORTIZATION> 5,044,514
<UNDERWRITING-OTHER> 3,073,779
<INCOME-PRETAX> 13,230,375
<INCOME-TAX> 4,216,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,014,375
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
<RESERVE-OPEN> 24,800,091
<PROVISION-CURRENT> 5,020,871
<PROVISION-PRIOR> 5,620,038
<PAYMENTS-CURRENT> 645,137
<PAYMENTS-PRIOR> 13,816,883
<RESERVE-CLOSE> 20,978,980
<CUMULATIVE-DEFICIENCY> 5,620,038
</TABLE>
