Transatlantic Holdings (TRH)

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Bohea Suh

Transatlantic Holdings (NYSE: TRH) is the holding company of the wholly-owned companies TRC, Trans Re Zurich (TRZ) and Putnam which offer reinsurance products throughout the 50 United States and all throughout the world. American International Group (AIG), the insurance company, as of 2008 had become the beneficial owner of 59% of TRH's common stock ^[1]. The company also owns 40% of Kuwait Reinsurance Company (K.S.C)("Kuwait Re"). TRH offers their products indirectly through brokers as well as directly to insurance, and reinsurance companies. The reinsurance business has two major classes: treaty reinsurance and facultative reinsurance. Treaty insurance is the automatic re-insuring of a type or category of risks that has been underwritten by the ceding company, while facultative insurance deals with individual risks. Some other liabilities covered by Transatlantic Holdings are directors’ and officers’ liability (“D&O”), errors and omissions liability (“E&O”) and general casualty, medical malpractice, ocean marine and aviation, auto liability (including non-standard risks), accident and health (“A&H”) and surety and credit in the casualty lines, and fire, allied lines, and auto physical damage and homeowners multiple peril lines in the property lines.

• TRC and Putnam agreed on a quota share reinsurance program where Putnam receives 5% of TRC's assumed reinsurance
• Putnam
• Trans Re Zurich (TRZ) in total, had 9% ($366.7 million) of net premiums written for 2007.

TRH also holds a 40% stake in the Kuwait Reinsurance Company offers property, casualty, and life insurance throughout the Middle East and North Africa.

In 2007, the businesses underwritten by TRH's branches outside of the United States accounted for 51% of worldwide net premiums written that year, with the London branch accounting for 21% ($813.2 million) of worldwide net premiums written that year. TRH maintains a close relationship with AIG, with AIG assuming in 2007, $555 million (13%) of TRH underwritings ^[2].

Company Overview

Financial Performance

Key Trends and Forces

TRH has a close relationship with AIG which may impact TRH's financial condition

American International Group, Inc. ("AIG") beneficially owned approximately 59% of the Common Stock of TRH as of March 31, 2009.^[10] In September 2008, AIG experienced a severe strain on its liquidity that resulted in AIG entering into an $85 billion credit agreement, subsequently reduced to $60 billion with the Federal Reserve Bank of New York. AIG agreed to issue 100,000 shares of its Series C Perpetual, Convertible, Participating Preferred tock to a trust for the benefit of the U.S. Treasury. This Credit Agreement is secured by, among other things, 17.1 million shares of TRH common stock held directly by AIG. AIG also stated on September 29, 2008 that "AIG is exploring all strategic alternatives in connection with a potential disposition or other monetization of its...interest in the Company" and in October 2008, AIG announced a restructuring of its operations which led to a creation of the "Special Committee" to evaluate proposals regarding possible dispositions of transactions, including AIG's 59% beneficial ownership of TRH as well as any related business combination transactions involving TRH's outstanding shares. In February 2009, AIG deemed TRH to not be a "restricted subsidiary" which prevents TRH to be subject to various restrictive covenants and compliance obligations under AIG's Fed Credit Agreement. TRH also not dot receive any benefit of any funding from AIG's Fed Credit Agreement. If AIG's sells its interest in TRH, it could result in a chage of control of TRH under a significant portion of TRH's reinsurance agreements. If a change in control occurs, TRH may be required to provide collateral to secure premium and reserve balances or be required to cancel and commute contracts, subject to an agreement between the parties that may be setteled in arbitration.^[11]

Increased competition after terrorist attacks

Following the terrorist attacks in the United States in 2001, the insurance and reinsurance markets experienced a considerable hardening of rates as well as terms and conditions. These improvements peaked in late 2003 / early 2004 and from then, global rates began moving downard although terms and conditions remain strong. The property rate has been decreasing, outpacing casualty rate decreases and insurance rate decreases outpacing reinsurance rate decreases. The improvement in the U.S. property marketplace resulted in new companies being formed in Bermuda as well as the entrance of additional capacity from the capital markets through sidecars, catastrophe bonds and other derivative products. This new capacity eroded property insurance and reinsurance rates in 2007 and the first half of 2008, although the marketplace generally remained favorable. In the second half of 2008, the global credit and financial crisis began to significantly impact the insurance and reinsurance markets. Many alternative reinsurance solutions were terminated or not renewed and the impairment of company balance sheets meant historical risk levels in many cases increased significantly making reinsurance difficult.^[12]

Government regulations and difficult economic crisis create uncertainty for TRH's position

The U.S. Federal Reserve has taken action through reduced federal funds rate and the expansion of acceptable collateral for its loans to provide additional liquidity in response to the financial crises affecting the credit and financial markets and the ongoing viability of of financial institutions. In February 2009, the U.S. Congress passed a $787 billion "economic stimulus" plan to provide capital to numerous financial institutions in the form of emergency loans and direct Treasury equity investments. There is a potential "cram-down legislation" currently under consideration in the U.S. Congress and if passed, this legislation would reallocate losses from defaults on the underlying residential mortgages across all tranches of the security, which TRH has investments in. If this legislation does become law, the certain securities held by TRH at December 31, 2008 could be put at greater risk for loss and could be downgraded to below investment grade by one or more rating agencies. Also, the company's reinsurance subsidiaries are subject to extensive regulation and supervision in the jurisdictions in which they conduct business. These regulations are generally designed to protect the interests of policyholders, as opposed to the reinsurers and their stockholders and other investors. The regulations in the financial services industry and insurance and reinsurance companies are usually conducted in an organized and structured manner with a significant amount of time for review, but due to the displacement in the financial markets, legislators and regulators may feel compelled to pass new rules in an expedited manner without the the normal review periods. These expedited regulatory rulesThe impact of all the possible governmental actions on the general financial markets or on TRH's financial condition is uncertain.

Competition

• Everest Re Group LTD
• Partnerre LTD

References

1. ↑ TRH Transatlantic Holdings Annual Statement, "Business", p. 1
2. ↑ TRH Transatlantic Holdings Annual Statement, "General", p. 3
3. ↑ Transatlantic Holdings 10-K "Transatlantic Holding Company Financials", Pg. 60
4. ↑ Transatlantic Holdings 10-K "Transatlantic Holding Company Financials", Pg. 60
5. ↑ | Seeking Alpha "Transatlantic Holding Company Financials"
6. ↑ | Wall Street Journal "Transatlantic Holding Company Financials"
7. ↑ | Wall Street Journal "Transatlantic Holding Company Financials"
8. ↑ | Seeking Alpha, "Balance Sheet"
9. ↑ | Seeking Alpha, "Balance Sheet"
10. ↑ stock:Transatlantic_Holdings_(TRH)/Recent Actions Aig Impact Trh#A007 Transatlantic Holdings, Inc. (TRH) Form 10-Q FY 2009 "Management's Discussion and Analysis" Page 22
11. ↑ Transatlantic Holdings, Inc. (TRH) Form 10-Q "Management's Discussion and Analysis of Financial Condition and Results of Operations" Page 39
12. ↑ stock:Transatlantic_Holdings_(TRH)/Segment Results#item7 Transatlantic Holdings, Inc. (TRH) Form 10-K "Management's Discussion and Analysis of Financial Condition and Results of Operations" Page 42