1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1996 Commission file number
0-5537
Gryphon Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3287060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Wall Street, New York, New York 10005-2201
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:(212) 825-1200
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
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class
Outstanding at March 31, 1996
Common stock, par value $.01
6,648,050
Gryphon Holdings Inc.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income for the three months ended
March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
Gryphon Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, December 31,
1996 1995
Assets (Dollars in thousands)
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: 3/31/96 - $256,014; 12/31/95 - $248,324) $260,188 $260,728
Short-term investments, at cost, which approximates market 537 537
Total investments 260,725 261,265
Cash and cash equivalents 30,000 27,337
Accrued investment income 4,144 4,080
Premiums receivable 18,431 17,475
Reinsurance recoverable on paid losses 20,676 24,489
Reinsurance recoverable on unpaid losses 142,745 152,975
Prepaid reinsurance premiums 18,110 20,434
Deferred policy acquisition costs 12,201 12,182
Deferred income taxes 9,802 6,582
Other assets 4,407 4,170
Total assets $521,241 $530,989
Liabilities and Stockholders' Equity
Policy liabilities:
Unpaid losses and loss adjustment expenses$301,927 $308,886
Unearned premiums 60,412 63,472
Total policy liabilities 362,339 372,358
Reinsurance balances payable 23,285 29,373
Income taxes payable 1,881 387
Long-term debt 25,500 25,500
Other liabilities 16,840 10,149
Total liabilities 429,845 437,767
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized;
none issued or outstanding
Common stock, $.01 par value; 15,000,000 shares
authorized; 8,148,050 shares issued 81 81
Additional paid-in capital 30,850 30,850
Foreign currency translation adjustment, net of tax (202) (209)
Net unrealized investment gains, net of tax 2,712 8,063
Deferred compensation (180) (193)
Retained earnings 83,613 80,108
Treasury stock, at cost; 1,500,000 shares (25,478) (25,478)
Total stockholders' equity 91,396 93,222
Total liabilities and stockholders' equity$521,241 $530,989
See accompanying notes to consolidated financial statements.
These statements are subject to year-end audit.
Gryphon Holdings Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended March 31,
1996 1995
(Dollars and shares in thousands,
except per-share data)
Revenues
Gross premiums written $34,919 $35,209
Net premiums written 21,213 17,872
Net premiums earned 21,951 17,697
Net investment income 4,159 3,666
Realized gains on investments 802 276
Other income 270 ______
Total revenues 27,182 21,639
Expenses
Losses and loss adjustment expenses 12,853 10,343
Underwriting, acquisition, and insurance expenses 9,234 7,558
Interest expense 437 ______
Total expenses 22,524 17,901
Income before income taxes 4,658 3,738
Provision for income taxes (benefit):
Current 1,493 892
Deferred (340) (156)
Total income taxes 1,153 736
______ ______
Net income $3,505 $3,002
Net income per-share data ______ ______
Net income $0.53
$0.37
Weighted average shares outstanding 6,648 8,148
See accompanying notes to consolidated financial statements.
These statements are subject to year-end audit.
Gryphon Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended March 31,
1996 1995
(Dollars in thousands)
Operating activities
Net income $3,505 $3,002
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase (decrease) in net policy liabilities 6,348 (994)
(Increase) decrease in premiums receivable(956) 1,649
Increase in deferred policy acquisition costs (19) (208)
Deferred income tax provision (340) (156)
Decrease (increase) in other assets and liabilities7,920 (140)
Amortization and depreciation 126 90
Amortization of bond discount, net 156 79
Realized gains on investments (802) (276)
(Decrease) increase in reinsurance balances payable(6,088) 2,402
(Increase) decrease in accrued investment income (64) 65
Net cash provided by operating activities 9,786 5,513
Investing activities
Sales of fixed maturities 66,387 79,490
Purchases of fixed maturities (74,331) (89,943)
Maturities or calls of fixed maturities 900 197
Capital expenditures (86) (129)
Net cash used by investing activities (7,130) (10,385)
Financing activities
Effect of exchange rate changes on cash 7 7
Increase (decrease) in cash and cash equivalents 2,663 (4,865)
Cash and cash equivalents at beginning of year 27,337 28,908
Cash and cash equivalents at end of year$30,000 $24,043
Supplemental disclosure of cash flow information
Income taxes paid $300
Interest paid $437
See accompanying notes to consolidated financial statements.
These statements are subject to year-end audit.
1. Basis of Presentation
Gryphon Holdings Inc. (the "Company") operates through its
main subsidiary, Gryphon Insurance Group Inc., as a specialty
property and casualty underwriting organization. The Company's
wholly owned insurance company subsidiaries are Associated
International Insurance Company and Calvert Insurance Company.
The accompanying financial statements include, for all periods
presented, the accounts and operations of Gryphon Holdings Inc.
and its subsidiaries.
2. Principles of Consolidation
The accompanying consolidated financial statements have been
prepared on the basis of generally accepted accounting principles
("GAAP"), which as to the two wholly owned insurance company
subsidiaries differ from the statutory accounting practices
prescribed or permitted by regulatory authorities, and include
the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
3. Investments
Fair values are based on quoted market prices, when
available, or estimates based on market prices for similar
securities, when quotes are not available. Short-term
investments are carried at cost, which approximates their fair
value. Realized gains and losses from the sales or liquidation
of investments are determined on the basis of the specific
identification method and are included in net income. Investment
income is recognized when earned. The amortization of premium
and accretion of discount for fixed maturity securities are
computed utilizing the interest method.
The major components of net investment income are summarized
as follows:
For the three months
ended March 31,
1996 1995
(Dollars in thousands)
Fixed maturities $4,125 $3,472
Cash, cash equivalents and short-term investments 295
536
Total investment income 4,420 4,008
Less related expenses 261 342
Net investment income $4,159 $3,666
The gross and net realized gains and losses from sales of
fixed income securities are as follows:
For the three months
ended March 31,
1996 1995
(Dollars in thousands)
Gross realized gains $1,184 $750
Gross realized losses (382) (474)
Net realized gain on sales $802 $276
At March 31, 1996 and December 31, 1995, the amortized cost
and estimated fair values of investments in fixed maturities, by
categories of securities, and short-term investments were as
follows:
Gross Gross Estimated
AmortizedUnrealizedUnrealizedFair
Cost Gains Losses Value
(Dollars in thousands)
March 31, 1996
U.S. Treasury securities and obligations of
U.S. government corporations and agencies$45,308$1,062 $(457) $45,913
Debt securities issued by foreign governments5,794 89 (86) 5,797
Tax-exempt obligations of states and
political subdivisions 135,806 4,013 (648) 139,171
Mortgage-backed securities 35,912 385 (307) 35,990
Corporate securities 33,194 531 (408) 33,317
256,014 6,080 (1,906) 260,188
Short-term investments 537 537
$256,551 $6,080 $(1,906) $260,725
Gross Gross Estimated
AmortizedUnrealizedUnrealizedFair
Cost Gains Losses Value
(Dollars in thousands)
December 31, 1995
U.S. Treasury securities and obligations of
U.S. government corporations and agencies$48,292$3,101 $(8) $51,385
Debt securities issued by foreign governments4,078 158 4,236
Tax-exempt obligations of states and
political subdivisions 124,073 6,702 (40) 130,735
Mortgage-backed securities 36,616 976 37,592
Corporate securities 35,265 1,571 (56) 36,780
248,324 12,508 (104) 260,728
Short-term investments 537 537
$248,861 $12,508 $(104) $261,265
4. Long-Term Debt
In September 1995, the Company purchased 1.5 million shares
of its Common Stock beneficially owned by Willis Corroon Group
plc ("Willis Corroon") for a purchase price of $25.5 million,
including related expenses. The Company financed its purchase
with commercial lending institutions through an unsecured term
loan. This loan matures in varying amounts through 2002 with
interest payable at least quarterly. The term loan interest rate
is equivalent to either the bank's prime rate or the London
Interbank Offered Rate ("LIBOR") plus 1%, at the discretion of
the Company. The term-loan agreement contains certain
restrictive covenants, including restrictions on the Company's
ability to declare or pay any cash dividends to its shareholders.
As of March 31, 1996, the weighted average interest rate was
6.85%, and the fair value of the loan approximated the carrying
value.
Principal payments due on the term loan are as follows:
Principal Amount
Year ending December 31, (Dollars in thousands)
1996 $ 875
1997 3,500
1998 3,625
1999 4,125
2000 4,625
Thereafter 8,750
Total $25,500
In October of 1995, the Company entered into an interest
rate swap agreement with a commercial lending institution in
order to reduce the impact of interest rate fluctuations on the
Company's term loan. The interest rate swap was effected with
respect to the first $15.5 million of scheduled principal
amortizations of the $25.5 million loan. The impact of the swap
was to create an effective fixed rate of 6.97% on the $15.5
million principal amount. As of March 31, 1996, the fair value
of the interest rate swap approximated the carrying value.
5. Earnings Per Share
Earnings per common share are based on the average number of
shares outstanding during each period; the exercise of
outstanding stock options would have no significant dilutive
effect on earnings per share.
6. Unaudited Consolidated Financial Statements
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
necessary to present fairly the results of operations and
financial position of the Company for the periods ended March 31,
1996 and 1995. The unaudited consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes to financial statements as contained
in the Company's 1995 Annual Report on Form 10-K. The results of
operations for the period presented are not necessarily
indicative of the results to be expected for the entire year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
The Company is a holding company that, through its
subsidiaries, underwrites specialty property and casualty
insurance in sectors of the insurance industry that are generally
considered difficult to insure. Many of the coverages written by
the Company can be categorized as excess and surplus lines, which
generally means that the risks are nonstandard or that the
policies in respect of the risks are written with unusual limits
or at deviated rates. The property and casualty insurance
industry is highly cyclical. The excess and surplus lines
sectors of the property and casualty insurance industry are often
subject to greater cyclicality and volatility than the industry
in general. During soft markets, large standard lines insurers
often utilize excess capacity to assume risks in excess and
surplus and specialty lines. During hard markets, such insurers
tend to abandon the excess and surplus and specialty lines to the
carriers that concentrate in these sectors. Thus, capacity in
these lines will fluctuate substantially, often with fluctuations
in revenues or profits, or both.
Results of Operations
First Quarter of 1996 Compared with the First Quarter of 1995
Gross Premiums Written. Gross premiums written were $34.9
million for the first quarter of 1996, compared with $35.2
million for the first quarter of 1995. The decrease in gross
premiums written was primarily attributable to a $2.0 million
decrease in Difference in Conditions ("DIC") premiums resulting
from timing differences and processing delays in the booking of
premiums, the sharing of premiums with a companion carrier, and,
to a lesser extent, an increase in competition with respect to
certain types of DIC risks. Other Property decreased by $0.3
million due to the processing delays mentioned above, as well as
increased competition, mitigated in part by new business from
plate glass and fire policies. Such decreases were partially
offset by a $0.8 million increase in premiums from Specialty
Lines, due to new business, and a $0.7 million increase in
Casualty premiums, resulting from new program business marketed
by the Company. Architects' & Engineers' Liability premiums
increased by $0.6 million due to enhanced coverages offered,
although the underlying market conditions remain soft.
Net Premiums. Net premiums written increased 18.7% to $21.2
million for the first quarter of 1996 from $17.9 million for the
first quarter of 1995, primarily as a result of reduced
reinsurance costs for Casualty and Specialty Lines, increased
retention levels in the Commercial Automobile and Other Property
business and a change in the mix of business written.
Net premiums earned increased by 24.0% to $22.0 million for
the first quarter of 1996 from $17.7 million for the first
quarter of 1995, as a result of most of the factors described
above.
Net Investment Income. Net investment income increased
13.4% to $4.2 million for the first quarter of 1996 from $3.7
million for the first quarter of 1995. The increase is primarily
due to additional funds available for investment in 1996.
Net Realized Gains on Investments. In the first quarter of
1996, the Company realized a net gain of $0.8 million,
principally from the sale of taxable securities. The Company is
shifting its portfolio in 1996 towards a lower percentage of
taxable securities to optimize the mix of taxable and tax-exempt
investments.
Other Income. For the quarter ended March 31, 1996, the
Company recorded $0.3 million of underwriting management fees for
DIC business underwritten on behalf of a companion carrier.
Losses and Loss Adjustment Expenses. Losses and loss
adjustment expenses increased by 24.3% to $12.9 million for the
first quarter of 1996 from $10.3 million for the first quarter of
1995, primarily due to earned premium exposures. Losses and loss
adjustment expenses were 58.6% of net premiums earned in the
first quarter of 1996, compared with 58.4% in the first quarter
of 1995.
Underwriting, Acquisition, and Insurance Expenses.
Underwriting, acquisition, and insurance expenses increased by
22.2% to $9.2 million for the first quarter of 1996 from $7.6
million for the first quarter of 1995, primarily due to increased
acquisition costs and additions to staff related to new business.
Interest Expense. For the quarter ended March 31, 1996, the
Company recorded $0.4 million for interest expense associated
with a term loan of $25.5 million in connection with the purchase
of 1.5 million shares of its common stock in September of 1995.
Income Taxes. Income taxes were $1.2 million for the first
quarter of 1996, compared with income taxes of $0.7 for the first
quarter of 1995.
Net Income. Net income was $3.5 million for the first
quarter of 1996, compared with $3.0 million for the first quarter
of 1995.
Liquidity and Capital Resources
The Company receives cash from premiums and, to a lesser
extent, investment income. The principal cash outflows are for
the payment of claims, reinsurance premiums, policy acquisition
costs, and general and administrative expenses. Net cash
provided by operations was $9.8 million for the first three
months of 1996, compared with $5.5 million for the first three
months of 1995.
At March 31, 1996, the Company maintained cash and cash
equivalents of $30.0 million to meet current payment obligations.
In addition, the Company's investment portfolio could be
substantially liquidated without any material financial impact.
Substantially all of the cash and investments of the Company at
March 31, 1996 were held by its subsidiaries.
Reinsurance recoverables on unpaid losses decreased from
$153.0 million at December 31, 1995 to $142.7 million at March
31, 1996. Because of the high limits on the Company's issued
policies relative to net retentions, reinsurance recoverable on
unpaid losses can fluctuate significantly depending upon the
emergence and severity of reported and unreported losses.
In September 1995, the Company purchased 1.5 million shares
of its common stock from Willis Corroon for a total purchase
price of $25.5 million, including related expenses. The Company
financed its purchase of such shares through the proceeds of
borrowing from commercial lending institutions. As a result of
the interest on this indebtedness, the Company's corporate
overhead expense will increase by approximately $1.8 million in
1996.
As a holding company, the Company depends principally on
dividends from its insurance company subsidiaries to pay
corporate overhead expenses, including principal and interest on
its borrowings. These subsidiaries are subject to state
insurance laws that restrict their ability to pay dividends.
Under the insurance code of Pennsylvania, dividends from Calvert
are limited to the greater of 10% of surplus as regards
policyholders as of the preceding year end or the net income for
the previous year, without prior approval from the Pennsylvania
Department of Insurance. Under the insurance code of California,
dividends from Associated are limited to the greater of 10% of
policyholders' statutory surplus as of the preceding year end or
the Company's statutory net income from operations for the
previous year, without prior approval from the California
Department of Insurance.
The National Association of Insurance Commissioners (NAIC)
adopted a risk-based capital system for assessing the adequacy of
statutory capital and surplus for all property and casualty
insurers. Based on computations made by the Company in
conformity with such guidelines, Associated and Calvert have
exceeded the required levels of capital. There can be no
assurance that capital requirements applicable to the Company's
business will not increase in the future.
The Company has no present plans to make any significant
capital expenditures in the foreseeable future.
The Company has no off-balance-sheet obligations that are
not disclosed in its financial statements. The Company believes
that retained earnings will be sufficient to satisfy its long-
term capital requirements to fund growth.
Effects of Inflation
There was no significant impact on the Company's operations
as a result of inflation during the first quarter of 1996.
However, there can be no assurance that inflation will not have a
material impact on the Company's operations in the future.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits. - None
b) The following report on Form 8-K was filed during the first
three months of 1996.
1. Form 8-K dated March 12, 1996, reporting a change in the
Registrant's By-Laws.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Gryphon Holdings Inc.
(Registrant)
Date: May 9, 1996 Stephen A. Crane
Stephen A. Crane
President & Chief Executive Officer
Date: May 9, 1996 Robert P. Cuthbert
Robert P. Cuthbert
Senior Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
