Transatlantic Holdings (TRH)

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 September 30, 2011

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

(Exact name of registrant as specified in its charter)

(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 x               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):

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 September 30, 2011. 61,644,506.

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

i

Part I — Item 1

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

1

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

2

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

3

TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

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

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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, 2010.

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 and premium revenues, 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.

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

The below error and related corrections had no impact on the current period and did not have a material effect on any prior period and thus, prior period financial statements have not been restated.

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 ($80.1 million relating to fixed maturities and $18.0 million relating to equities) 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).  The related components of other comprehensive income (loss) (“OCI”) were similarly affected, with no net effect on OCI. The error discussed above had no net effect on AOCI, stockholders’ equity, net income, comprehensive income or cash flows for the full-year 2009 or any of its quarters.

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

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

For all interim and annual periods subsequent to December 31, 2009, the amortized cost of fixed maturities and cost of equities available for sale that are denominated in functional currencies were properly translated into the reporting currency using period-end foreign currency exchange rates. However, as the correction of the treatment discussed earlier occurred in the first quarter of 2010, the increase in net unrealized appreciation of investments, net of tax, for the first nine months of 2010 was reduced by $63.7 million in the Statement of Comprehensive Income related to this correction and unrealized currency translation gain, net of tax, was increased by such amount, with no net effect on OCI. In addition, this correction had no net impact on AOCI and stockholders’ equity as of September 30, 2010 and December 31, 2010, nor did it have any net impact on net income, comprehensive income or cash flows for the nine months ended September 30, 2010.

2. Merger Agreement with Allied World Assurance Company Holdings, AG (“Allied World”) and Other Strategic Review Activities and Related Costs

In the third quarter and first nine months of 2011, TRH was involved in strategic review activities. Results for the third quarter and first nine months of 2011 include approximately $57.3 million and $63.8 million, respectively, of costs related to strategic review activities, principally as part of “other expenses, net.” Of such costs, $48.3 million in the third quarter and first nine months of 2011 represent amounts paid to Allied World as discussed in Note 2(a). See Note 14 for legal proceedings related to strategic review activities.

(a) Termination of Merger Agreement with Allied World

On June 12, 2011, Allied World and the Company agreed to a “merger of equals” business combination of the two companies pursuant to the terms of an Agreement and Plan of Merger, dated as of June 12, 2011 (the “Allied World Merger Agreement”), between Allied World, the Company and GO Sub, LLC, a wholly-owned subsidiary of Allied World (“GO Sub”).  Pursuant to the terms of the Allied World Merger Agreement, GO Sub would merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Allied World. Upon completion of the merger, Allied World would have been the parent company of the Company and Allied World’s name would have changed to “TransAllied Group Holdings, AG”.  Pursuant to the terms and conditions of the Allied World Merger Agreement, stockholders of the Company would have been entitled to receive 0.88 common shares of Allied World for each share of the Company’s common stock (and cash in lieu of any fractional shares).

On September 15, 2011, the Company, Allied World and GO Sub, entered into a termination agreement (the “Termination Agreement”) pursuant to which the parties mutually terminated the Allied World Merger Agreement.  Pursuant to the Termination Agreement, the Company paid Allied World $48.3 million, consisting of a termination fee of $35.0 million and expense reimbursements of $13.3 million. The Company has also agreed to pay Allied World an additional fee of $66.7 million in the event that, prior to September 15, 2012, the Company enters into any definitive agreement in respect of any Competing Transaction (as defined in the Allied World Merger Agreement) or recommends or submits a Competing Transaction to its stockholders for adoption, or a transaction in respect of a Competing Transaction is consummated.

(b) Unsolicited Offer from Validus Holdings, Ltd. (“Validus”)

On July 12, 2011, Validus delivered an unsolicited offer to the Company to combine the Company and Validus, with Validus acquiring all the outstanding common shares of the Company (the “Validus Proposal”). Under the Validus Proposal, the Company’s stockholders would receive 1.5564 shares of Validus voting common shares and $8.00 in cash in exchange for each share of the Company’s common stock they own. The $8.00 in cash per share would be paid by the Company as a special dividend immediately prior to the closing of a merger.

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

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

On July 19, 2011, the Company’s Board of Directors (the “Board”) concluded that the Validus Proposal did not constitute a “Superior Proposal” under the Allied World Merger Agreement and the Board reaffirmed its recommendation of, and its declaration of advisability with respect to, the Allied World Merger Agreement. However, the Board also determined that the Validus Proposal is reasonably likely to lead to a “Superior Proposal” and that the failure to enter into discussions regarding the Validus Proposal would result in a breach of its fiduciary duties under applicable law.  As a result, the Board determined that the Company should offer to engage in discussions and exchange information with Validus, subject to and in accordance with the Allied World  Merger Agreement. The Company and Validus did not agree on the terms of a confidentiality agreement and therefore did not commence discussions or exchange information at that time.

On July 25, 2011, Validus sent a letter to the Board informing them that Validus was commencing an exchange offer that morning for all of the outstanding shares of common stock of the Company for 1.5564 Validus voting common shares and $8.00 in cash per share of the Company’s common stock (the “Validus Exchange Offer”).  Validus also issued a press release containing the abovementioned letter and announcing the commencement of an exchange offer and filed a prospectus/offer to exchange with the Securities and Exchange Commission (the “SEC”).

On July 28, 2011, the Company filed with the SEC a Schedule 14D-9 solicitation/recommendation statement recommending that the Company’s stockholders reject the Validus Exchange Offer.  Also on July 28, 2011, the Company issued a press release announcing the adoption of a stockholder rights plan with a one year term and beneficial ownership threshold of 10% and certain amendments to its bylaws related to the conduct of stockholder meetings.

On September 23, 2011, the Company and Validus entered into a confidentiality agreement, with a limited standstill that expired on October 31, 2011, and commenced discussions.

On November 1, 2011, Validus issued a press release announcing the extension of the Validus Exchange Offer to November 25, 2011, unless further extended by Validus.

On November 2, 2011, Validus sent a letter to the Board informing them that Validus was amending the terms of the Validus Exchange Offer to include offer consideration of 1.5564 Validus voting common shares and $11.00 in cash per share of the Company’s common stock (the “Amended Validus Exchange Offer”), and to permit the Company to pay up to a $2.00 per share special dividend (to be reduced on a dollar-for-dollar basis for any funds used by the Company for share repurchases made after October 31, 2011)  prior to the expiration time of the Amended Validus Exchange Offer. In addition, the letter requested that the Board fix a record date in connection with the Validus Consent Solicitation. On November 3, 2011, Validus issued a press release containing the above mentioned letter and announcing the amended exchange offer, and filed amended documents with the SEC.

On November 4, 2011, the Company filed with the SEC an amendment to the solicitation/recommendation statement on Schedule 14D-9 recommending that the Company’s stockholders reject the Amended Validus Exchange Offer.

(c) Proposals from National Indemnity Company (“National Indemnity”)

On August 5, 2011, National Indemnity, a member of the group of insurance companies of Berkshire Hathaway, Inc., delivered an unsolicited offer to the Company to acquire all of the Company’s outstanding common stock for $52 per share (the “National Indemnity Offer”).

On August 8, 2011, the Board concluded that the National Indemnity Offer did not constitute a “Superior Proposal” under the Allied World Merger Agreement and the Board reaffirmed its recommendation of, and its declaration of advisability with respect to, the Allied World Merger Agreement. However, the Board also determined that the National Indemnity Offer is reasonably likely to lead to a “Superior Proposal” and that the failure to enter into discussions regarding the National Indemnity Offer would result in a breach of its fiduciary duties under applicable law.

On August 12, 2011, the Company entered into a confidentiality agreement and commenced discussions with National Indemnity.

On September 16, 2011, the Company received a letter from National Indemnity reinstating National Indemnity’s previous proposal to acquire the Company for $52.00 per share in cash.  The letter from National Indemnity stated that the offer was open for acceptance until the close of business on Monday, September 19, 2011 and that National Indemnity would not be renewing its offer.  On September 19, 2011, the Company announced that the Board believes that selling the Company for cash at the substantial discount to book value represented by the National Indemnity proposal would not deliver fair value to its stockholders and that National Indemnity has not shown interest in conducting full due diligence or holding discussions that could lead to a higher offer.

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

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

(a) Adoption of new accounting guidance on disclosures about fair value measurements (Accounting Standards Update (“ASU”) 2010-06)

In January 2010, the Financial Accounting Standards Board (“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.

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. TRH adopted this portion of the guidance prospectively in the first quarter of 2011.  The adoption of this guidance had no effect on TRH’s consolidated financial condition, results of operations or cash flows.

(b) Future Application of Accounting Standards

(1)           In October 2010, the FASB issued new accounting guidance on accounting for costs associated with acquiring or renewing insurance contracts (ASU 2010-26). This guidance specifies that incremental direct costs of contract acquisition and certain costs directly related to certain acquisition activities performed by the insurer for the contract should be capitalized. All other acquisition-related costs should be charged to expense as incurred.

For TRH, this guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 and shall be applied prospectively. TRH does not currently expect the implementation of this guidance to be material to TRH’s consolidated financial condition, results of operations or cash flows.

(2)          In May 2011, the FASB issued new accounting guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) (ASU 2011-4).  These amendments provide guidance on how to measure fair value and improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS.

For TRH, this guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 and shall be applied prospectively. TRH does not currently expect the implementation of this guidance to be material to TRH’s consolidated financial condition, results of operations or cash flows.

(3)           In June 2011, the FASB issued new accounting guidance on the presentation of comprehensive income (ASU 2011-05).  This guidance specifies that a reporting entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements.

For TRH, this guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 and shall be applied retrospectively. TRH does not currently expect the implementation of this guidance to be material to TRH’s consolidated financial condition, results of operations or cash flows.

(4)           In September 2011, the FASB issued new accounting guidance on the testing of goodwill for impairment (ASU 2011-08). This guidance provides an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit.

For TRH, this guidance is effective for annual and interim periods for fiscal years beginning after December 15, 2011. TRH does not currently expect the implementation of this guidance to be material to TRH’s consolidated financial condition, results of operations or cash flows.

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

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

4. 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 short-term investments. The fair value of a financial instrument is the amount that would be received to sell an asset or settle a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date.

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 fair 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 from 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 obtained from brokers for selected securities 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.

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

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

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.

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) Short-Term Investments

Short-term investments are carried at cost or 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 consists of 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 (collectively, “municipal bonds”); corporate bonds; residential mortgage-backed securities (“RMBS”); commercial mortgage-backed securities (“CMBS”); other asset-backed securities; and short-term investments.

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

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

·                  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 September 30, 2011 and December 31, 2010 and indicates the level of the fair value measurement based on the levels of the inputs used:

(1) Represents only items measured at fair value.

(2) Primarily private equities.

(3) Short-term investments in Level 2 are carried at cost or amortized cost, which approximates fair value.

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

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

During the third quarter of 2011, there were no transfers in or out of Level 1, no transfers into Level 2 from Level 3 and $18.8 million of transfers out of Level 2 into Level 3.  During the first nine months of 2011, there were no transfers in or out of Level 1, $25.8 million of transfers into Level 2 from Level 3 and $37.8 million of transfers out of Level 2 into Level 3. The transfers into Level 2 from Level 3 in the first nine months of 2011 were due to an increase in observable inputs related to the valuation of such securities. The transfers out of Level 2 into Level 3 in the third quarter and first nine months of 2011 were due to a decrease in the observability of the significant inputs used in determining the fair value of the securities.  During the third quarter of 2010, there were no transfers in or out of Level 1, $23.8 million of transfers into Level 2 from Level 3 and $8.3 million of transfers out of Level 2 into Level 3. During the first nine months of 2010, there were no transfers in or out of Level 1 and $23.8 million of transfers into Level 2 from Level 3 and $10.8 million of transfers out of Level 2 into Level 3.

At September 30, 2011 and December 31, 2010, Level 3 assets totaled $214.3 million and $230.0 million, respectively, representing 1.6% and 2.0%, respectively, of total assets measured at fair value on a recurring basis.

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 September 30, 2011 and December 31, 2010 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 September 30, 2011 and December 31, 2010 approximated $24.2 million and $6.7 million, respectively.

The following tables present analyses of the changes during the three and nine month periods ended September 30, 2011 and 2010 in Level 3 assets measured at fair value on a recurring basis:

(1)          There were no unrealized losses recorded in realized net capital gains (losses) in the three months ended September 30, 2011 on instruments still held at September 30, 2011.

(2)          Primarily private equities.

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TRANSATLANTIC HOLDINGS, INC. AND SUBSIDIARIES

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