Transatlantic Holdings, Inc.
Transatlantic Holdings, Inc.
Incorporated: 1986 as PREINCO Holdings, Inc.
Total Assets: $3.2 billion
Stock Exchanges: New York
SICs: 6331 Fire, Marine, and Casualty Insurance; 6719
Holding Companies, Not Elsewhere Classified
Transatlantic Holdings, Inc. (TRH) is an insurance holding company that provides property and casualty reinsurance to other insurance and reinsurance firms in the United States and internationally through its Transatlantic Reinsurance Company and Putnam Reinsurance Company subsidiaries. As of 1993, over 45 percent of TRI’s stock was held by American International Group, Inc., the leading U.S.-based international insurance organization and the country’s largest underwriter of commercial and industrial coverages. With $631 million in 1993 net premiums written, TRH ranked as the seventh-largest reinsurance organization in the United States. At that time, one-fifth of the company’s 1993 premiums were non-U.S. risks. The company’s principal lines of reinsurance include general, professional, and automobile liability, medical malpractice, and workers’ compensation in the casualty segment. Moreover, the growth of environmentally-focused businesses has encouraged the company to offer specialty coverages of the environmental liabilities of remediation contractors, asbestos abatement contractors, and toxic waste treatment, storage, and disposal facilities. TRH’s property lines emphasize fire and inland marine coverages. Casualty reinsurance, which protects the insured against losses arising due to an obligation to others, has historically constituted the majority of the company’s annual premiums written. The company has been characterized as a cautious investor: the majority of its investments (approximately 65 percent) were in municipal bonds at the end of 1993.
Reinsurance is essentially an agreement between two insurance companies, whereby the reinsurer assumes all or part of the liabilities of another insurer or reinsurer (known in the industry as the ceding company). This reduced obligation on individual policies can permit ceding firms to underwrite more policies than their assets would otherwise allow. Reinsurance also helps protect primary insurers from catastrophic losses and their devastating financial consequences. Reinsurance agreements are provided in one of two forms: pro rata, or proportional, and excess of loss, or nonproportional. In a pro rata reinsurance contract, the reinsurer and the ceding company share the premiums and the losses in an agreed-upon proportion. Excess of loss reinsurance stipulates that the reinsurer will assume losses within certain limits (for example, amounts over $10,000 on a $100,000 policy).
TRH was formed by American International Group (AIG) in June 1986 as PREINCO Holdings, Inc., a private company. The new company’s chairperson, M. R. Greenberg, who had served as AIG’s president since 1967 and chief executive officer since 1969, was named chairperson of PREINCO. AIG contributed all the common stock of an inactive subsidiary, Putnam Reinsurance Company, to the new entity, along with additional consideration in exchange for a 20 percent interest in PREINCO. Over 70 percent of PREINCO’s early business reinsured AIG and its subsidiaries, and PREINCO was given the right of first acceptance of virtually all of AIG’s reinsurance requirements since that time. Eventually, PREINCO’s dependance on AIG would decline; while, in its first full year of business, the new company derived over 70 percent of its gross premiums from AIG, that figure declined to 61 percent in 1988 and held steady at 54 percent in 1989 and 1990. All of PREINCO’s stock was held institutionally for the first four years of its existence—founding shareholders included AIG (with over 40 percent), American Express Company, Lambert Brussels Financial Corporation, Transatlantic Reinsurance Co., among other companies.
PREINCO was launched during an up cycle in the reinsurance industry, when low capacity coincided with high demand to effect rising premiums. As more companies entered the market, however, competition ensued. PREINCO’s revenues declined from $169.88 million in 1987 to $145.66 million in 1988. Nevertheless, the company’s conservative investment strategy kept its profits on a strong upward trend, from $8.01 million to $11.97 million. Property and casualty insurance in the late 1980s and early 1990s was also characterized by record catastrophic losses. Almost annual natural disasters, including Hurricane Hugo and a devastating earthquake in California, plagued underwriting ratios. Still, PREINCO’s revenues from 1988 to 1989 rose 28 percent, to $186.6 million, and profits grew more than 60 percent, to $19.4 million.
In April 1990, PREINCO acquired the Transatlantic Reinsurance Company. Transatlantic had been launched in 1953 and acquired by AIG in 1967; just prior to the time its acquisition by of PREINCO, Transatlantic was 49.99 percent owned by AIG. Transatlantic was the first non-Japanese professional reinsurer to be licensed in that country, and the company also boasted offices in London, Hong Kong, and Toronto. Moreover, the addition of Transatlantic more than tripled the holding company’s annual revenues and profits over 1989, which topped $580.10 million and $61.9 million, respectively, for the 1990 fiscal year. To reflect the international activities of its new and substantially larger subsidiary, PREINCO changed its name to Transatlantic Holdings, Inc. (TRH). The company also then gained a listing on the New York Stock Exchange, selling about 35 percent of its shares to the public.
TRH’s prudent underwriting and conservative investing helped it thrive in an insurance market besieged by natural and financial catastrophes in the early 1990s. Typhoons in Japan, a hurricane in the eastern United States, and devastating fires in Oakland, California, took their toll on property insurers. However, TRH’s emphasis on casualty (rather than property) underwriting helped offset its share of these losses. Around the same time, companies throughout the insurance industry were taken to task for gambling assets on junk bonds and other risky investments. Although the ensuing bad publicity affected the public image of the industry as a whole, TRH profited from the “flight to quality” that followed. By the end of fiscal 1991, it ranked as the second largest publicly traded reinsurance group based in the United States, with revenues of $618.75 million and profits of $70.55 million. The following year, the insurance industry experienced its worst losses in history, estimated at $23 billion. Hurricanes Andrew and Iniki were the most damaging and cost TRH $20 million. TRH’s revenues declined slightly from 1991 to 1992, but its net income actually rose to $71.66 million.
During this time, such major competitors as Transamerica and Continental Reinsurance began exiting the difficult property and casualty reinsurance market. Analyst Graham Tanaka of Tanaka Capital Management praised TRH’s conservative underwriting, noting that the company hadn’t “chased after the kinds of risky business that others have” in a 1992 Business Week article. Wall Street recognized TRH’s growth and stability as well; the company’s stock rose 44 percent from 1991 to 1992 to over $56. Analysts surmised that other U.S. and foreign rivals would abandon the segment as well, leaving TRH to choose the best risks left behind. Moreover, problems at Lloyd’s of London opened the door to more business for the holding company’s United Kingdom office, which more than doubled its premiums from 1991 to 1992. In that year, the London operations led foreign branch premium growth of over 50 percent, as Transatlantic targeted the global reinsurance market for growth. In 1993, the company established an office in Miami to increase Latin American business.
Although TRH counted its relationship with AIG as a strength, the larger company’s contribution to annual premium income continued to decline from about 50 percent in 1991 to 40 percent in 1992 and 32 percent in 1993. TRH had made impressive strides in the reinsurance market; its annual revenues quadrupled, and profits multiplied sixteen-fold from 1986 to 1993. The company outperformed the S&P Property-Casualty Insurance Index by 110 percent and the S&P 500 Index by 104 percent in the early 1990s, as its share value (with dividends reinvested) nearly doubled from mid-1990 to year end 1993.
Transatlantic Reinsurance Co.; Putnam Reinsurance Co.
Marcial, Gene G., “Transatlantic is Cruising,” Business Week, December 28, 1992, p. 78.
“Transatlantic Cites Impact of Cat Losses,” National Underwriter, March 15, 1993, p. 23.
“Transatlantic Holdings Posts Record Net Income,” National Underwriter, April 13, 1992, p. 23.
—April Dougal Gasbarre