10-Q 1 a10-8242_110q.htm 10-Q

Table of Contents

 

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended March 31, 2010

 

or

 

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Transition Period From                to               

 

Commission File Number    1-10545

 

Transatlantic Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-3355897

(State or other jurisdiction of incorporation or

 

(I.R.S. Employer Identification Number)

organization)

 

 

 

 

 

80 Pine Street, New York, New York

 

10005

(Address of principal executive offices)

 

(Zip Code)

 

(212) 365-2200

(Registrant’s telephone number, including area code)

 

None

Former name, former address and former fiscal year, if changed since last report.

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES x                   NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES o                    NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES o                    NO x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 31, 2010. 64,311,063.

 

 

 



Table of Contents

 

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

Page

Part I — Financial Information

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (unaudited)

1

 

 

 

 

Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited)

3

 

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2010 and 2009 (unaudited)

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

5

 

 

 

Cautionary Statement Regarding Forward-Looking Information

28

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

53

 

 

 

Item 4.

Controls and Procedures

54

 

 

 

Part II — Other Information

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

 

 

 

Item 6.

Exhibits

55

 

 

 

Signatures

55

 

 

i



Table of Contents

 

Part I — Item 1

 

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of March 31, 2010 and December 31, 2009

(Unaudited)

 

 

 

2010

 

2009

 

 

 

(in thousands, except share data)

 

ASSETS

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

Held to maturity, at amortized cost (fair value: 2010-$1,269,508; 2009-$1,271,397)

 

$

1,213,120

 

$

1,214,238

 

Available for sale, at fair value (amortized cost: 2010-$9,670,084; 2009-$9,281,934)

 

9,816,653

 

9,454,772

 

Equities, available for sale, at fair value (cost: 2010-$449,701; 2009-$440,924)

 

507,294

 

506,612

 

Other invested assets

 

255,299

 

256,437

 

Short-term investments, at cost (approximates fair value)

 

385,970

 

883,336

 

Total investments

 

12,178,336

 

12,315,395

 

Cash and cash equivalents

 

423,784

 

195,723

 

Accrued investment income receivable

 

147,867

 

148,055

 

Premium balances receivable, net

 

661,345

 

591,300

 

Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses

 

739,586

 

747,073

 

Deferred policy acquisition costs

 

243,181

 

237,466

 

Prepaid reinsurance premiums

 

95,625

 

60,251

 

Deferred tax assets, net

 

426,250

 

454,483

 

Other assets

 

218,434

 

193,913

 

Total assets

 

$

15,134,408

 

$

14,943,659

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

8,706,265

 

$

8,609,105

 

Unearned premiums

 

1,243,803

 

1,187,526

 

Senior notes

 

1,033,193

 

1,033,087

 

Other liabilities

 

166,033

 

79,561

 

Total liabilities

 

11,149,294

 

10,909,279

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value; shares authorized: 10,000,000; none issued

 

 

 

Common stock, $1.00 par value; shares authorized: 200,000,000;
shares issued: 2010-67,526,663; 2009-67,431,121

 

67,527

 

67,431

 

Additional paid-in capital

 

289,908

 

283,036

 

Accumulated other comprehensive income

 

124,365

 

69,701

 

Retained earnings

 

3,641,780

 

3,639,200

 

Treasury stock, at cost: 2010-3,215,600; 2009-1,048,500 shares of common stock

 

(138,466

)

(24,988

)

Total stockholders’ equity

 

3,985,114

 

4,034,380

 

Total liabilities and stockholders’ equity

 

$

15,134,408

 

$

14,943,659

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

1



Table of Contents

 

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

 

 

(in thousands, except per share data)

 

Revenues:

 

 

 

 

 

Net premiums written

 

$

1,026,299

 

$

1,047,102

 

Increase in net unearned premiums

 

(33,704

)

(70,571

)

Net premiums earned

 

992,595

 

976,531

 

 

 

 

 

 

 

Net investment income

 

112,610

 

109,818

 

 

 

 

 

 

 

Realized net capital losses:

 

 

 

 

 

Total other-than-temporary impairments

 

(13,045

)

(45,473

)

Less: other-than-temporary impairments recognized in other comprehensive income

 

6,713

 

 

Other-than-temporary impairments charged to earnings

 

(6,332

)

(45,473

)

Other realized net capital gains (losses)

 

4,443

 

(15,098

)

Total realized net capital losses

 

(1,889

)

(60,571

)

 

 

 

 

 

 

Gain on early extinguishment of debt

 

 

9,878

 

Total revenues

 

1,103,316

 

1,035,656

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Net losses and loss adjustment expenses

 

786,324

 

669,814

 

Net commissions

 

234,512

 

244,188

 

Increase in deferred policy acquisition costs

 

(5,500

)

(17,365

)

Other underwriting expenses

 

44,129

 

32,726

 

Interest on senior notes

 

17,086

 

10,362

 

Other expenses, net

 

7,685

 

5,655

 

Total expenses

 

1,084,236

 

945,380

 

 

 

 

 

 

 

Income before income taxes

 

19,080

 

90,276

 

Income taxes

 

3,205

 

15,040

 

Net income

 

$

15,875

 

$

75,236

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

Basic

 

$

0.24

 

$

1.13

 

Diluted

 

0.24

 

1.13

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.20

 

$

0.19

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

65,879

 

66,364

 

Diluted

 

66,551

 

66,576

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

2



Table of Contents

 

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

 

 

(in thousands)

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

220,460

 

$

244,584

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds of fixed maturities available for sale sold

 

192,086

 

285,647

 

Proceeds of fixed maturities available for sale redeemed or matured

 

215,414

 

114,335

 

Proceeds of equities available for sale sold

 

88,080

 

115,413

 

Purchase of fixed maturities available for sale

 

(834,647

)

(610,581

)

Purchase of equities available for sale

 

(69,173

)

(92,432

)

Net sale (purchase) of other invested assets

 

1,961

 

(24,994

)

Net sale of short-term investments

 

492,339

 

12,616

 

Change in other liabilities for securities in course of settlement

 

58,808

 

156,415

 

Other, net

 

 

(15,152

)

Net cash provided by (used in) investing activities

 

144,868

 

(58,733

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Dividends to stockholders

 

(13,294

)

(12,609

)

Common stock issued

 

(2,408

)

 

Acquisition of treasury stock

 

(113,478

)

 

Repurchase of senior notes

 

 

(15,479

)

Other, net

 

(1,014

)

(429

)

Net cash used in financing activities

 

(130,194

)

(28,517

)

Effect of exchange rate changes on cash and cash equivalents

 

(7,073

)

(2,220

)

Change in cash and cash equivalents

 

228,061

 

155,114

 

Cash and cash equivalents, beginning of period

 

195,723

 

288,920

 

Cash and cash equivalents, end of period

 

$

423,784

 

$

444,034

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Income taxes (paid), net

 

$

(10,047

)

$

(7,180

)

Interest (paid) on senior notes

 

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3



Table of Contents

 

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

 

 

(in thousands)

 

 

 

 

 

 

 

Net income

 

$

15,875

 

$

75,236

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Net unrealized (depreciation) appreciation of investments, net of tax:

 

 

 

 

 

Net unrealized holding losses of fixed maturities on which other-than-temporary impairments were taken

 

(6,713

)

 

Net unrealized holding (losses) gains on all other securities

 

(14,273

)

104,941

 

Reclassification adjustment for (gains) losses included in net income

 

(13,112

)

55,846

 

Deferred income tax benefit (charge)

 

11,934

 

(56,276

)

 

 

(22,164

)

104,511

 

 

 

 

 

 

 

Net unrealized currency translation gain (loss), net of tax:

 

 

 

 

 

Net unrealized currency translation gain (loss)

 

118,198

 

(70,652

)

Deferred income tax (charge) benefit

 

(41,370

)

24,728

 

 

 

76,828

 

(45,924

)

 

 

 

 

 

 

Other comprehensive income

 

54,664

 

58,587

 

 

 

 

 

 

 

Comprehensive income

 

$

70,539

 

$

133,823

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4



Table of Contents

 

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

 

These unaudited condensed consolidated financial statements do not include all disclosures required by generally accepted accounting principles in the U.S. (“GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements and the related notes included in the Annual Report on Form 10-K of Transatlantic Holdings, Inc. (the “Company”, and collectively with its subsidiaries, “TRH”) for the year ended December 31, 2009.

 

In the opinion of management, these condensed consolidated financial statements contain the normal recurring adjustments necessary for a fair statement of the results presented herein.  All material intercompany accounts and transactions have been eliminated.

 

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts and related disclosures.   TRH relies on historical experience and on various other assumptions that it believes to be reasonable, under the circumstances, to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ materially from these estimates.

 

TRH believes its most critical accounting estimates are those with respect to loss reserves, fair value measurements of certain financial assets, other-than-temporary impairments (“OTTI”) of investments, premium revenues and deferred policy acquisition costs, as they require management’s most significant exercise of judgment on both a quantitative and qualitative basis in the preparation of TRH’s condensed consolidated financial statements and footnotes.  The accounting estimates that result require the use of assumptions about certain matters that are highly uncertain at the time of estimation.  To the extent actual experience differs from the assumptions used, TRH’s results of operations and financial condition would be affected, possibly materially.

 

Subsequent events through the time of filing of this Form 10-Q were evaluated for potential recognition or disclosure in the financial statements.

 

Certain reclassifications and format changes have been made to prior period amounts to conform to the current period presentation.

 

(a) Correction of Amortized Cost or Cost of Certain Fixed Maturities and Equities Denominated in Functional Currencies

 

In the first quarter of 2010, it was determined that as of December 31, 2009, the amortized cost of fixed maturities and cost of equities available for sale that were denominated in functional currencies were incorrectly translated into the reporting currency (i.e., U.S. dollars) using historical, rather than period-end, foreign currency exchange rates.  This practice, which began in the third quarter of 2009, resulted in an understatement of amortized cost or cost of such investments of $98.1 million as of December 31, 2009.  Thus, net unrealized appreciation of investments, net of tax, (a component of accumulated other comprehensive income (“AOCI”) on the Balance Sheet) was overstated by $63.7 million as of December 31, 2009 with an equal and offsetting overstatement of net unrealized currency translation loss, net of tax, (also a component of AOCI) with no net effect on AOCI or stockholders’ equity in total.  In addition, this understatement of amortized cost or cost had no net effect on net income, comprehensive income or cash flows for the full-year 2009 or any of its quarters.

 

As of March 31, 2010, the amortized cost of fixed maturities and cost of equities available for sale that are denominated in functional currencies were translated into the reporting currency using period-end foreign currency exchange rates. In making this correction, net unrealized (depreciation) appreciation of investments, net of tax, was decreased by $63.7 million in the first quarter 2010 Consolidated Statement of Comprehensive Income and net unrealized currency translation gain, net of tax, was increased by such amount, with no net effect on other comprehensive income (“OCI”). In addition, this correction had no net impact on AOCI and stockholders’ equity as of March 31, 2010 nor did it have any net impact on net income, comprehensive income or cash flows for the three months ended March 31, 2010.

 

The practice in certain periods of 2009 described above and its correction in the first quarter of 2010 did not have a material effect on the current or any prior period and thus amounts reported in prior periods have not been restated.

 

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Table of Contents

 

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

2. Recent Accounting Standards

 

(a) Recently Adopted Accounting Standards

 

(1)  Adoption of new accounting guidance on OTTI

 

In April 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on OTTI. This guidance amended prior OTTI guidance for fixed maturities to make it more operational and to improve presentation and disclosure of OTTI on fixed maturity and equity securities in the financial statements. This guidance also requires recognition of OTTI on a fixed maturity in an unrealized loss position if (a) an entity intends to sell the security; (b) it is more likely than not the entity will be required to sell the security prior to an anticipated recovery in fair value in order to meet a liquidity, regulatory or other business need; or (c) an entity determines it will not recover the entire amortized cost basis of the security. If an impaired fixed maturity security is designated for sale, or if it is more likely than not it will have to be sold, the total amount of the unrealized loss position is recognized in earnings as a realized capital loss.

 

For all other impaired fixed maturities, this guidance requires entities to develop a best estimate of the present value of expected cash flows on a security by security basis. Entities must recognize OTTI equal to the difference between the present value of expected cash flows and the amortized cost basis of the security, if the results of the cash flow analysis indicate the entity will not recover the full amount of its amortized cost basis in the investment. This amount is the credit component of the OTTI and is recorded in earnings as a realized capital loss. The difference between the total unrealized loss position on the security and the OTTI amount recognized in earnings is non-credit related and is recorded in OCI as “net unrealized holding losses of fixed maturities on which other-than-temporary impairments were taken”.

 

TRH adopted this guidance effective April 1, 2009. Upon adoption, this guidance required entities to assess the credit versus non-credit components of previously recognized OTTI on fixed maturities still held, and for which the entity did not intend to sell or more likely than not would not be required to sell prior to an anticipated recovery in fair value. The cumulative amount of non-credit related OTTI amounts on these securities, net of income tax effect, was recorded as an increase to retained earnings and an equal and offsetting reduction to AOCI as of April 1, 2009, with no net change to total stockholders’ equity. TRH recorded a cumulative effect adjustment (“CEA”) in 2009 of $110.1 million, or $71.6 million, net of tax, related to its adoption of this guidance. The adoption of this guidance did not have a material effect on TRH’s consolidated financial condition, results of operations, comprehensive income or cash flows.

 

(2)          Adoption of new accounting guidance on subsequent events (Accounting Standards Update (“ASU”) 2010-09)

 

In February 2010, the FASB issued an amendment to certain recognition and disclosure requirements on subsequent events.  An entity that is a Securities and Exchange Commission filer is required to evaluate subsequent events through the date that the financial statements are issued.  The entity is not required to disclose the date through which subsequent events have been evaluated.

 

TRH adopted this guidance in the first quarter of 2010. The adoption of this guidance had no effect on TRH’s consolidated financial condition, results of operations or cash flows.

 

(3)          Adoption of new accounting guidance on disclosures about fair value measurements (ASU 2010-06)

 

In January 2010, the FASB issued new accounting guidance on disclosures about fair value measurements. This guidance requires the amounts and reasons for significant transfers in and out of Levels 1 and 2 to be discussed. In addition, a greater level of disaggregation of asset and liability classes is required in fair value measurement disclosures. For fair value measurements that fall in either Level 2 or Level 3, a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. TRH adopted this portion of the guidance in the first quarter of 2010.  The adoption of this guidance had no effect on TRH’s consolidated financial condition, results of operations or cash flows.

 

6



Table of Contents

 

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

In addition, for activity within Level 3, this guidance requires that purchases, sales, issuances and settlements be presented separately rather than as one net amount, as currently permitted. For TRH, these disclosures are effective for interim and annual periods beginning after December 15, 2010.  The adoption of this guidance is expected to have no effect on TRH’s results of operations, financial position or cash flows.

 

(4)          Adoption of new accounting guidance on the consolidation of variable interest entities (“VIE”) (ASU 2009-17)

 

In June 2009, the FASB issued new accounting guidance on the consolidation of VIE. This guidance makes significant changes to an enterprise’s analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. This guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a VIE with an approach focused on identifying which enterprise has the power to direct the activities of a VIE that most significantly impacts the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, this guidance adds an additional reconsideration event for determining whether an entity is a VIE, requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE and requires additional disclosures about an enterprise’s involvement in VIE. TRH adopted this guidance in the first quarter of 2010 with its provisions applied prospectively. The adoption of this guidance did not have a material effect on TRH’s consolidated financial condition, results of operations or cash flows.

 

(5)          Adoption of new accounting guidance on accounting for transfers of financial assets (ASU 2009-16)

 

In June 2009, the FASB issued new accounting guidance on accounting for transfers of financial assets. This guidance changes financial reporting for transfers of financial assets by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, comparability and consistency in accounting for transferred financial assets will be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This guidance requires enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Also, this guidance clarifies and improves certain prior accounting provisions that have resulted in inconsistencies in application.

 

TRH adopted this guidance in the first quarter of 2010 with its provisions applied prospectively. The adoption of this guidance did not have a material effect on TRH’s consolidated financial condition, results of operations or cash flows.

 

(b) Future Application of Accounting Standards

 

In April 2010, the FASB issued new accounting guidance on stock compensation (ASU 2010-13). This guidance clarified the accounting for certain employee share-based payment awards. Awards with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades would not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.

 

This accounting guidance is effective for accounting periods beginning on or after December 15, 2010, with earlier application permitted. TRH intends to adopt this guidance in the second quarter of 2010, as permitted by the guidance. The adoption of this accounting guidance is not expected to have a material effect on TRH’s consolidated financial condition, results of operations or cash flows.

 

3. Fair Value Measurements

 

(a) Fair Value Measurements on a Recurring Basis

 

TRH measures at fair value on a recurring basis financial instruments included principally in its available for sale securities portfolios and certain short-term investments. The fair value of a financial instrument is the amount that would be received to sell an asset in an orderly transaction between willing, able and knowledgeable market participants at the measurement date.

 

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Table of Contents

 

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An active market is one in which transactions for the asset being valued occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or in which little information is released publicly for the asset being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and general market conditions.

 

TRH management is responsible for the determination of the value of the financial assets and the supporting methodologies and assumptions. With respect to securities, TRH employs independent third party valuation service providers to gather, analyze and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. When TRH’s valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote, which is generally non-binding, or by employing widely accepted internal valuation models.

 

Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted internal valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested under the terms of service agreements. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates, and other market observable information, as applicable. The valuation models take into account, among other things, market observable information as of the measurement date as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other issue or issuer specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased.

 

TRH employs specific control processes to determine the reasonableness of the fair values of TRH’s financial assets. TRH’s processes are designed to ensure that the values received or internally estimated are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. TRH assesses the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, TRH may validate the reasonableness of fair values by comparing information obtained from TRH’s valuation service providers to other third party valuation sources for selected securities. TRH also validates prices for selected securities obtained from brokers through reviews by those who have relevant expertise and who are independent of those charged with executing investing transactions.

 

A further discussion of the most significant categories of investments carried at fair value on a recurring basis follows:

 

(1) Fixed Maturity and Equity Securities Available for Sale

 

TRH maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Whenever available, TRH obtains quoted prices in active markets for identical assets at the balance sheet date to measure at fair value fixed maturity and marketable equity securities in its available for sale portfolios. Market price data generally are obtained from exchange or dealer markets.

 

TRH estimates the fair value of fixed maturity securities not traded in active markets by referring to traded securities with similar attributes, using dealer quotations and matrix pricing methodologies, discounted cash flow analyses or internal valuation models. This methodology considers such factors as the issuer’s industry, the security’s rating and tenor, its coupon rate, its position in the capital structure of the issuer, yield curves, credit curves, prepayment rates and other relevant factors. For fixed maturity securities that are not traded in active markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments generally are based on available market evidence. In the absence of such evidence, management’s best estimate is used.

 

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

Fair values for fixed maturity securities based on observable market prices for identical or similar instruments implicitly include the incorporation of counterparty credit risk. Fair values for fixed maturity securities based on internal models would incorporate counterparty credit risk by using discount rates that take into consideration cash issuance spreads for similar instruments or other observable information.

 

(2) Certain Short-Term Investments

 

Short-term investments are carried at amortized cost, which approximates fair value, and principally include money market instruments, treasury bills and commercial paper. These instruments are typically not traded in active markets; however, their fair values are based on market observable inputs.

 

(b) Fair Value Measurements on a Non-Recurring Basis

 

TRH also measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually, or when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. These assets primarily include held-to-maturity fixed maturities, which are carried on the balance sheet at amortized cost, and equity method investments. When TRH determines that the carrying value of these assets may not be recoverable, TRH records the assets at fair value with the loss recognized in income as a realized capital loss. In such cases, TRH measures the fair value of these assets using the techniques discussed above for fixed maturity and equity securities.

 

(c) Fair Value Hierarchy

 

Assets recorded at fair value in the consolidated balance sheet are measured and classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

 

·                  Level 1:  Fair value measurements that are quoted prices (unadjusted) in active markets that TRH has the ability to access for identical assets. Market price data generally is obtained from exchange or dealer markets. Assets measured at fair value on a recurring basis and classified as Level 1 principally include actively traded listed common stocks and mutual funds (which are included on the balance sheet in equities available for sale).

 

·                  Level 2:  Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly. Level 2 inputs include quoted prices for similar assets in active markets and inputs other than quoted prices that are observable for the asset, such as interest rates and yield curves that are observable at commonly quoted intervals. Assets measured at fair value on a recurring basis and classified as Level 2 generally include most government and government agency securities, state, municipal and political subdivision obligations, investment-grade and high-yield corporate bonds, most residential mortgage-backed securities (“RMBS”), most commercial mortgage-backed securities (“CMBS”), certain other asset-backed securities and most short-term investments.

 

·                  Level 3:  Fair value measurements based on valuation techniques that use significant inputs that are unobservable. These measurements may be made under circumstances in which there is little, if any, market activity for the asset. TRH’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, TRH considers factors specific to the asset. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assets measured at fair value on a recurring basis and classified as Level 3 principally include certain RMBS, CMBS, other-asset backed securities and other invested assets.

 

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

(d) Assets Measured at Fair Value on a Recurring Basis

 

The following table presents information about assets measured at fair value on a recurring basis at March 31, 2010 and December 31, 2009 and indicates the level of the fair value measurement based on the levels of the inputs used:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in millions)

 

As of March 31, 2010

 

 

 

 

 

 

 

 

 

Assets(1):

 

 

 

 

 

 

 

 

 

Fixed maturities available for sale:

 

 

 

 

 

 

 

 

 

U.S. Government and government agencies

 

$

 

$

796.7

 

$

 

$

796.7

 

States, municipalities and political subdivisions

 

 

5,547.1

 

 

5,547.1

 

Foreign governments

 

 

593.3

 

 

593.3

 

Corporate

 

 

2,501.4

 

 

2,501.4

 

Asset-backed:

 

 

 

 

 

 

 

 

 

RMBS

 

 

233.5

 

19.2

 

252.7

 

CMBS

 

 

58.5

 

33.9

 

92.4

 

Other asset-backed

 

 

16.7

 

16.3

 

33.0

 

Total fixed maturities available for sale

 

 

9,747.2

 

69.4

 

9,816.6

 

Equities available for sale

 

499.8

 

 

7.5

 

507.3

 

Other invested assets(2)

 

 

 

67.7

 

67.7

 

Short-term investments(3)

 

 

386.0

 

 

386.0

 

Other assets

 

 

 

2.4

 

2.4

 

Total

 

$

499.8

 

$

10,133.2

 

$

147.0

 

$

10,780.0

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2009

 

 

 

 

 

 

 

 

 

Assets(1):

 

 

 

 

 

 

 

 

 

Fixed maturities available for sale:

 

 

 

 

 

 

 

 

 

U.S. Government and government agencies

 

$

 

$

528.8

 

$

 

$

528.8

 

States, municipalities and political subdivisions

 

 

5,668.8

 

 

5,668.8

 

Foreign governments

 

 

552.1

 

1.4

 

553.5

 

Corporate

 

 

2,317.1

 

 

2,317.1

 

Asset-backed:

 

 

 

 

 

 

 

 

 

RMBS

 

 

239.9

 

18.6

 

258.5

 

CMBS

 

 

60.5

 

32.7

 

93.2

 

Other asset-backed

 

 

17.3

 

17.6

 

34.9

 

Total fixed maturities available for sale

 

 

9,384.5

 

70.3

 

9,454.8

 

Equities available for sale

 

481.5

 

17.6

 

7.5

 

506.6

 

Other invested assets(2)

 

 

 

72.2

 

72.2

 

Short-term investments(3)

 

 

846.3

 

 

846.3

 

Total

 

$

481.5

 

$

10,248.4

 

$

150.0

 

$

10,879.9

 


(1)

 

Represents only items measured at fair value.

(2)

 

Primarily private equities.

(3)

 

Short-term investments in Level 2 are carried at cost which approximates fair value.

 

During the first quarter of 2010, there were no significant transfers in or out of Level 1 and Level 2.  During the first quarter of 2009, there were no significant transfers in or out of Level 1 and $15.4 million of transfers out of Level 2 into Level 3.

 

At March 31, 2010 and December 31, 2009, Level 3 assets totaled $147.0 million and $150.0 million, respectively, representing 1.4% and 1.4%, respectively, of total assets measured at fair value on a recurring basis.

 

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. As a result, the unrealized gains and losses on instruments held at March 31, 2010 and December 31, 2009 may include changes in fair value that were attributable to both observable inputs (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities).

 

Net unrealized depreciation related to Level 3 investments at March 31, 2010 and December 31, 2009 approximated $17.4 million and $23.9 million, respectively.

 

The following tables present analyses of the changes during the three month periods ended March 31, 2010 and 2009 in Level 3 assets measured at fair value on a recurring basis:

 

 

 

 

 

Net realized/unrealized

 

Purchases,

 

 

 

 

 

 

 

 

 

gains (losses) included in:

 

sales,

 

 

 

 

 

 

 

 

 

 

 

Realized

 

 

 

issuances

 

 

 

 

 

 

 

Balance

 

Net

 

net

 

 

 

and

 

Transfers

 

Balance

 

Three Months Ended

 

January 1,

 

investment

 

capital

 

 

 

settlements,

 

in (out)

 

March 31,

 

March 31, 2010

 

2010

 

income

 

(losses)(1)

 

AOCI

 

net

 

of Level 3

 

2010

 

 

 

(in millions)

 

Fixed maturities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign governments

 

$

1.4

 

$

 

$

 

$

0.2

 

$

(1.6

)

$

 

$

 

Asset-backed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

18.6

 

(0.4

)

(6.1

)

8.8

 

(1.7

)

 

19.2

 

CMBS

 

32.7

 

(0.1

)

 

1.7

 

(0.4

)

 

33.9

 

Other asset-backed

 

17.6

 

 

 

0.3

 

(1.6

)

 

16.3

 

Equities available for sale

 

7.5

 

 

 

 

 

 

7.5

 

Other invested assets(2)

 

72.2

 

(3.2

)

 

0.2

 

(1.5

)

 

67.7

 

Other assets

 

 

 

 

 

2.4

 

 

2.4

 

Total

 

$

150.0

 

$

(3.7

)

$

(6.1

)

$

11.2

 

$

(4.4

)

$

 

$

147.0

 


(1)

 

There were $6.1 million of OTTI related to RMBS fixed maturities available for sale that was recorded in realized net capital losses in the three months ended March 31, 2010 on instruments still held at March 31, 2010.

(2)

 

Primarily private equities.

 

 

 

 

 

Net realized/unrealized

 

 

 

 

 

 

 

 

 

 

 

gains (losses) included in:

 

Purchases,

 

 

 

 

 

 

 

 

 

 

 

Realized

 

 

 

sales,

 

 

 

 

 

 

 

 

 

 

 

net

 

 

 

issuances

 

 

 

 

 

 

 

Balance

 

Net

 

capital

 

 

 

and

 

Transfers

 

Balance

 

Three Months Ended

 

January 1,

 

investment

 

gains

 

 

 

settlements,

 

in (out)

 

March 31,

 

March 31, 2009

 

2009

 

income

 

(losses)(1)

 

AOCI

 

net

 

of Level 3

 

2009

 

 

 

(in millions)

 

Fixed maturities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States, municipalities and political subdivisions

 

$

 

$

 

$

 

$

(0.1

)

$

11.4

 

$

 

$

11.3

 

Foreign governments

 

0.7

 

 

 

(0.1

)

 

 

0.6

 

Asset-backed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

35.1

 

1.1

 

(8.8

)

3.9

 

(2.2

)

 

29.1

 

CMBS

 

36.7

 

(0.1

)

0.1

 

(0.8

)

(0.2

)

1.0

 

36.7

 

Other asset-backed

 

12.9

 

(0.3

)

 

1.5

 

(0.3

)

9.4

 

23.2

 

Equities available for sale

 

2.5

 

 

 

 

 

5.0

 

7.5

 

Other invested assets(2)

 

33.2

 

1.0

 

 

(1.9

)

25.0

 

 

57.3

 

Other assets

 

 

 

 

 

5.3

 

 

5.3

 

Total

 

$

121.1

 

$

1.7

 

$

(8.7

)

$

2.5

 

$

39.0

 

$

15.4

 

$

171.0

 


(1)

 

There were no unrealized losses recorded in realized net capital losses in the three months ended March 31, 2009 on instruments still held at March 31, 2009.

(2)

 

Primarily private equities.

 

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

(e) Assets Measured at Fair Value on a Non-Recurring Basis

 

None of TRH’s assets were written down to fair value on a non-recurring basis during the three month periods ended March 31, 2010 and 2009.

 

4. Investments

 

(a) Statutory Deposits

 

Investments with carrying values of $623 million and $606 million at March 31, 2010 and December 31, 2009, respectively, were deposited with governmental authorities as required by law. The substantial majority of these deposits are fixed maturities and equities available for sale.

 

(b) Gross Unrealized Gains and Losses

 

The amortized cost and fair value of fixed maturities at March 31, 2010 and December 31, 2009 are summarized as follows:

 

 

 

Amortized

 

Gross Unrealized

 

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

OTTI(1)

 

 

 

(in thousands)

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities held to maturity and carried at amortized cost:

 

 

 

 

 

 

 

 

 

 

 

States, municipalities and political subdivisions

 

$

1,213,120

 

$

58,885

 

$

(2,497

)

$

1,269,508

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities available for sale and carried at fair value:

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and government agencies

 

$

793,540

 

$

5,646

 

$

(2,449

)

$

796,737

 

$

 

States, municipalities and political subdivisions

 

5,398,813

 

180,172

 

(31,826

)

5,547,159

 

 

Foreign governments

 

588,230

 

6,369

 

(1,319

)

593,280

 

 

Corporate

 

2,433,621

 

73,793

 

(6,029

)

2,501,385

 

(386

)

Asset-backed:

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

317,652

 

201

 

(65,094

)

252,759

 

(113,820

)

CMBS

 

103,424

 

2,714

 

(13,767

)

92,371

 

 

Other asset-backed

 

34,804

 

 

(1,842

)

32,962

 

 

Total

 

$

9,670,084

 

$

268,895

 

$

(122,326

)

$

9,816,653

 

$

(114,206

)


(1)

 

Represents the non-credit portion of OTTI, not adjusted for subsequent changes in unrealized gains or losses, taken on securities still held as of period-end (including the pre-tax CEA recorded in 2009), pursuant to accounting guidance adopted on April 1, 2009. See Note 2(a) for additional information.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

 

Amortized

 

Gross Unrealized

 

 

 

 

 

 

 

Cost(1)

 

Gains

 

Losses

 

Fair Value

 

OTTI(2)

 

 

 

(in thousands)

 

December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities held to maturity and carried at amortized cost:

 

 

 

 

 

 

 

 

 

 

 

States, municipalities and political subdivisions

 

$

1,214,238

 

$

59,959

 

$

(2,800

)

$

1,271,397

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities available for sale and carried at fair value:

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and government agencies

 

$

528,290

 

$

3,414

 

$

(2,896

)

$

528,808

 

$

 

States, municipalities and political subdivisions

 

5,513,019

 

189,987

 

(34,178

)

5,668,828

 

 

Foreign governments

 

543,011

 

18,876

 

(8,346

)

553,541

 

 

Corporate

 

2,228,438

 

120,554

 

(31,951

)

2,317,041

 

(386

)

Asset-backed:

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

334,226

 

707

 

(76,488

)

258,445

 

(107,107

)

CMBS

 

99,436

 

6,836

 

(13,081

)

93,191

 

 

Other asset-backed

 

35,514

 

1,006

 

(1,602

)

34,918

 

 

Total

 

$

9,281,934

 

$

341,380

 

$

(168,542

)

$

9,454,772

 

$

(107,493

)


(1)

 

See Note 1 of Notes to Condensed Consolidated Financial Statements.

(2)

 

Represents the non-credit portion of OTTI, not adjusted for subsequent changes in unrealized gains or losses, taken on securities still held as of period-end (including the pre-tax CEA), pursuant to accounting guidance adopted on April 1, 2009. See Note 2(a) for additional information.

 

At March 31, 2010 and December 31, 2009, net unrealized appreciation (depreciation) of equities available for sale included gross gains of $59.5 million and $67.8 million, respectively, and gross losses of ($1.9) million and ($2.1) million, respectively. (See Note 1 of Notes to Condensed Consolidated Financial Statements.)

 

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

(c) Contractual Maturities of Fixed Maturities

 

The amortized cost and fair value of fixed maturities at March 31, 2010 by contractual maturity are 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.

 

 

 

As of March 31, 2010

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

 

 

(in thousands)

 

Fixed maturities held to maturity:

 

 

 

 

 

Due after one through five years

 

$

26,333

 

$

28,756

 

Due after five years through ten years

 

195,958

 

206,061

 

Due after ten years

 

990,829

 

1,034,691

 

Total

 

$

1,213,120

 

$

1,269,508

 

 

 

 

 

 

 

Fixed maturities available for sale:

 

 

 

 

 

Non-asset backed:

 

 

 

 

 

Due in one year or less

 

$

375,300

 

$

379,221

 

Due after one through five years

 

1,942,331

 

1,999,686

 

Due after five through ten years

 

2,206,280

 

2,281,263

 

Due after ten years

 

4,690,293

 

4,778,390

 

Asset-backed (1)

 

455,880

 

378,093

 

Total

 

$

9,670,084

 

$

9,816,653

 


(1)

 

Asset-backed fixed maturities by their nature do not generally have single maturity dates.

 

(d) Net Investment Income

 

An analysis of net investment income follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

 

 

(in thousands)

 

Fixed maturities

 

$

108,661

 

$

106,108

 

Equities

 

2,563

 

4,095

 

Other invested assets (including alternative investments)

 

1,909

 

(2,051

)

Other

 

2,658

 

4,051

 

Total investment income

 

115,791

 

112,203

 

Investment expenses

 

(3,181

)

(2,385

)

Net investment income

 

$

112,610

 

$

109,818

 

 

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

(e) Investment Gains and Losses

 

Realized net capital losses are summarized as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

 

 

(in thousands)

 

Realized net capital (losses) gains resulted from:

 

 

 

 

 

Total OTTI

 

$

(13,045

)

$

(45,473

)

Less: OTTI recognized in OCI

 

6,713

 

 

OTTI charged to earnings

 

(6,332

)

(45,473

)

Sales and redemptions of securities

 

19,444

 

(10,372

)

Net foreign currency transaction losses

 

(15,001

)

(4,726

)

Total

 

$

(1,889

)

$

(60,571

)

 

 

 

 

 

 

Realized net capital (losses) gains by source:

 

 

 

 

 

Fixed maturities

 

$

(1,737

)

$

(10,288

)

Equity securities available for sale

 

14,848

 

(45,563

)

Net foreign currency transaction losses

 

(15,001

)

(4,726

)

Other

 

1

 

6

 

Total

 

$

(1,889

)

$

(60,571

)

 

The change in net unrealized (depreciation) appreciation of investments is summarized as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2010

 

2009

 

 

 

(in thousands)

 

Change in net unrealized (depreciation) appreciation of investments, before deferred income tax effect:

 

 

 

 

 

Fixed maturities carried at amortized cost

 

$

(771

)

$

32,515

 

Fixed maturities carried at fair value(1)

 

(26,269

)

173,847

 

Equity securities available for sale carried at fair value(1)

 

(8,095

)

(8,570

)

Other

 

266

 

(4,490

)

Total

 

$

(34,869

)

$

193,302

 


(1)

 

See Note 1 of Notes to Condensed Consolidated Financial Statements.

 

Gross realized gains and gross realized losses on sales and redemptions of TRH’s available for sale securities were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2010

 

2009

 

 

 

Gross

 

Gross

 

Gross

 

Gross

 

 

 

Realized

 

Realized

 

Realized

 

Realized

 

 

 

Gains

 

Losses

 

Gains

 

Losses

 

 

 

(in millions)

 

Fixed maturities

 

$

6.8

 

$

(2.2

)

$

11.4

 

$

(0.9

)

Equity securities

 

15.4

 

(0.6

)

6.1

 

(26.8

)

 

Equity securities sold at a loss in the first quarter of 2010 and 2009 were in a continuous unrealized loss position for 12 months or less and did not meet the conditions of TRH’s accounting policy to be considered OTTI at any quarter-end prior to the time of sale. (See Note 4(g) for the criteria TRH uses to evaluate if an equity investment is considered OTTI.)

 

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

TRH’s equity security investment strategy includes the intent to optimize total investment return through active management, which can lead to selling securities at a gain or loss due to changing market conditions and as market opportunities arise.  In the first quarter of 2009, securities in the equities available for sale portfolio were sold for a number of reasons, including the desire over time to take advantage of tax-basis capital loss carry-backs and the repositioning of TRH’s equity portfolio with respect to the changes in the investment and credit markets during the first quarter of 2009.

 

As discussed in Note 4(g), the OTTI amounts on certain fixed maturities are separated into credit loss and non-credit loss components. The credit loss impairments are recognized in earnings as realized capital losses, while the non-credit loss impairments are recorded in OCI. Pursuant to accounting guidance adopted on April 1, 2009, the following table sets forth the amount of credit loss impairments on fixed maturities held by TRH as of March 31, 2010, for which a portion of the OTTI amount was recorded in OCI.

 

 

 

Three Months Ended
March 31, 2010

 

 

 

(in millions)

 

Beginning balance

 

$

4.5

 

New securities subject to credit impairment losses

 

6.3

 

Ending balance

 

$

10.8

 

 

(f) Aging of Gross Unrealized Losses

 

As of March 31, 2010 and December 31, 2009, the aging of the gross unrealized losses with respect to all fixed maturities and equities, grouped by months in a continuous unrealized loss position, was as follows:

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(in millions)

 

March 31, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and government agencies

 

$

401

 

$

(3

)

$

 

$

 

$

401

 

$

(3

)

States, municipalities and political subdivisions

 

501

 

(7

)

445

 

(27

)

946

 

(34

)

Foreign governments

 

237

 

(1

)

 

 

237

 

(1

)

Corporate

 

458

 

(3

)

157

 

(3

)

615

 

(6

)

Asset-backed:

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

52

 

(4

)

198

 

(61

)

250

 

(65

)

CMBS

 

3

 

*

 

51

 

(14

)

54

 

(14

)

Other asset-backed

 

4

 

(1

)

29

 

(1

)

33

 

(2

)

Total fixed maturities

 

1,656

 

(19

)

880

 

(106

)

2,536

 

(125

)

Equities available for sale

 

56

 

(2

)

 

 

56

 

(2

)

Total

 

$

1,712

 

$

(21

)

$

880

 

$

(106

)

$

2,592

 

$

(127

)


*

 

Rounds to less than $1 million.

 

16



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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(in millions)

 

December 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and government agencies

 

$

298

 

$

(3

)

$

 

$

 

$

298

 

$

(3

)

States, municipalities and political subdivisions

 

470

 

(7

)

451

 

(30

)

921

 

(37

)

Foreign governments

 

227

 

(5

)

16

 

(3

)

243

 

(8

)

Corporate

 

593

 

(9

)

244

 

(23

)

837

 

(32

)

Asset-backed:

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

75

 

(52

)

101

 

(24

)

176

 

(76

)

CMBS

 

1

 

*

 

45

 

(13

)

46

 

(13

)

Other asset-backed

 

3

 

*

 

13

 

(2

)

16

 

(2

)

Total fixed maturities

 

1,667

 

(76

)

870

 

(95

)

2,537

 

(171

)

Equities available for sale

 

81

 

(2

)

 

 

81

 

(2

)

Total

 

$

1,748

 

$

(78

)

$

870

 

$

(95

)

$

2,618

 

$

(173

)


*

 

Rounds to less than $1 million.

 

At March 31, 2010, the carrying value of TRH’s fixed maturity and equity securities aggregated $11.54 billion with aggregate pre-tax gross unrealized losses of $127 million. Additional information about these securities is as follows:

 

·                  Securities with gross unrealized losses were valued, in the aggregate, at approximately 95.3% of their current cost or amortized cost.

 

·                  Approximately 96.2% of these securities had unrealized losses of less than or equal to 20% of their current cost or amortized cost.

 

·                  Approximately 2.6% of the fixed maturity securities had issuer credit ratings which were below investment grade or not rated.

 

At March 31, 2010, TRH held 395 and 47 individual fixed maturity and equity investments, respectively, that were in an unrealized loss position, of which, 138 individual fixed maturity investments were in a continuous unrealized loss position for 12 months or more.

 

As of March 31, 2010 and December 31, 2009, no single issuer accounted for more than 13% and 10%, respectively, of the aggregate gross unrealized losses.

 

17



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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

At March 31, 2010 and December 31, 2009, the gross unrealized losses for all fixed maturities and equities available for sale included the following concentrations:

 

 

 

Concentration as of

 

 

 

March 31, 2010

 

December 31, 2009

 

 

 

(in millions)

 

RMBS

 

$

65

 

$

76

 

States, municipalities and political subdivisions

 

34

 

37

 

CMBS

 

14

 

13

 

Banking and financial institutions

 

5

 

30

 

Others

 

9

 

17

 

Total

 

$

127

 

$

173

 

 

The fair value of fixed maturities in an unrealized loss position at March 31, 2010 and December 31, 2009, by contractual maturity, is shown below:

 

 

 

March 31, 2010

 

December 31, 2009

 

 

 

(in millions)

 

Non-asset backed:

 

 

 

 

 

Due in one year or less

 

$

65

 

$

116

 

Due after one year through five years

 

539

 

536

 

Due after five through ten years

 

340

 

515

 

Due after ten years

 

1,255

 

1,132

 

Asset-backed (1)

 

337

 

238