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 June 30, 1997 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 June 30, 1997
Common stock, par value $.01
6,688,340
Gryphon Holdings Inc.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for
the three and six months ended
June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 and 1996 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 4 Submission of Matters to a vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
EXHIBIT 27 Financial Data Schedule 15
Gryphon Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, December 31,
1997 1996
Assets (Dollars in thousands)
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: 6/30/97 - $271,407;
12/31/96 - $274,515) $276,154 $280,164
Short-term investments, at cost, which
approximates market 307 307
Total investments 276,461 280,471
Cash and cash equivalents 19,244 23,398
Accrued investment income 3,898 3,919
Premiums receivable 20,820 18,509
Reinsurance recoverable on paid losses 14,373 14,326
Reinsurance recoverable on unpaid losses 157,820 137,952
Prepaid reinsurance premiums 14,561 18,965
Deferred policy acquisition costs 13,533 12,415
Deferred income taxes 10,919 10,282
Other assets 7,972 6,747
Total assets $539,601 $526,984
Liabilities and Stockholders' Equity
Policy liabilities:
Unpaid losses and loss
adjustment expenses $335,365 $309,259
Unearned premiums 66,887 68,683
Total policy liabilities 402,252 377,942
Reinsurance balances payable 6,154 16,207
Income taxes payable 833 55
Long-term debt 22,875 24,625
Other liabilities 8,229 13,019
Total liabilities 440,343 431,848
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 30,753 30,847
Foreign currency translation adjustment,
net of tax (231) (219)
Net unrealized investment gains, net of tax 3,086 3,672
Deferred compensation (246) (257)
Retained earnings 90,609 86,271
Treasury stock, at cost; shares
1997:1,459,710; 1996:1,487,075 (24,794) (25,259)
Total stockholders' equity 99,258 95,136
Total liabilities and stockholders' equity$539,601 $526,984
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 Six months ended
June 30, June 30,
1997 1996 1997 1996
(Dollars and shares in thousands,
except per-share data)
Revenues
Gross premiums written $40,747 $39,017 $76,398 $73,936
Net premiums written 27,209 22,585 51,632 43,798
Net premiums earned 25,917 21,180 49,018 43,131
Net investment income 4,315 3,921 8,485 8,080
Realized gains (losses)
on investments 12 (190) 29 612
Other income 256 285 498 555
Total revenues 30,500 25,196 58,030 52,378
Expenses
Losses and loss adjustment
expenses 16,460 15,102 29,967 27,955
Underwriting, acquisition,
and insurance expenses 11,156 9,952 22,018 19,186
Interest expense 409 436 830 873
Total expenses 28,025 25,490 52,815 48,014
Income (loss) before
income taxes 2,475 (294) 5,215 4,364
Provision for income taxes (benefit):
Current 880 (541) 1,198 952
Deferred (572) (90) (321) (430)
Total income taxes 308 (631) 877 522
______ ______ ______ ______
Net income $2,167 $337 $4,338 $3,842
Net income per-share data
Net income $0.32 $0.05 $0.65 $0.58
Weighted average shares
outstanding 6,688 6,656 6,676 6,652
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
Six months ended June 30,
1997 1996
(Dollars in thousands)
Operating activities
Net income $4,338 $3,842
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in net policy liabilities 8,799 11,962
Increase in premiums receivable (2,311) (5,676)
Increase in deferred
policy acquisition costs (1,118) (209)
Deferred income tax provision (321) (430)
Decrease (increase) in other
assets and liabilities (4,999) 1,366
Amortization and depreciation 372 236
Amortization of bond discount, net 273 267
Realized gains on investments (29) (612)
(Decrease) increase in reinsurance
balances payable (10,053) 1,288
(Increase) decrease in accrued
investment income 21 (118)
Net cash provided by (used in)
operating activities (5,028) 11,916
Investing activities
Sales of fixed maturities 167,960 132,463
Purchases of fixed maturities (165,090) (143,863)
Maturities or calls of fixed maturities 900
Capital expenditures (576) (1,252)
Net cash provided by (used in)
investing activities 2,294 (11,752)
Financing activities
Principal payment on long-term debt (1,750)
Issuance of common stock 371 71
Deferred compensation (29) ______
Net cash provided by (used in)
financing activities (1,408) 71
Effect of exchange rate changes on cash (12) 6
Increase (decrease) in cash and
cash equivalents (4,154) 241
Cash and cash equivalents at
beginning of year 23,398 27,337
Cash and cash equivalents at
end of year $19,244 $27,578
Supplemental disclosure of cash flow information
Income taxes paid $260 $1,701
Interest paid 830 870
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, 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 For the six months
ended June 30, ended June 30,
1997 1996 1997 1996
(Dollars in thousands)
Fixed maturities $3,907 $3,925 $8,061 $8,050
Cash, cash equivalents and
short-term investments 650 295 912 590
Total investment income 4,557 4,220 8,973 8,640
Less related expenses 242 299 488 560
Net investment income $4,315 $3,921 $8,485 $8,080
The gross realized gains and losses from sales of fixed
income securities are as follows:
For the three months For the six months
ended June 30, ended June 30,
1997 1996 1997 1996
(Dollars in thousands)
Gross realized gains $696 $722 $1168 $1,906
Gross realized losses (684) (912) (1139) (1,294)
Net realized gain (loss) on sales $12 $(190) $29 $612
At June 30, 1997 and December 31, 1996, 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
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
June 30, 1997
U.S. Treasury securities and obligations of
U.S. government corporations
and agencies $62,816 $615 $(83) $63,348
Debt securities issued by
foreign governments 7,613 140 (61) 7,692
Tax-exempt obligations of states and
political subdivisions 117,043 4,053 (29) 121,067
Mortgage-backed securities 55,912 370 (127) 56,155
Corporate securities 28,023 160 (291) 27,892
271,407 5,338 (591) 276,154
Short-term investments 307 307
$271,714 $5,338 $(591) $276,461
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
December 31, 1996
U.S. Treasury securities and obligations of
U.S. government corporations
and agencies $55,845 $826 $(87) $56,584
Debt securities issued by
foreign governments 5,747 186 (10) 5,923
Tax-exempt obligations of states and
political subdivisions 141,686 4,718 (69) 146,335
Mortgage-backed securities 43,381 294 (214) 43,461
Corporate securities 27,856 345 (340) 27,861
274,515 6,369 (720) 280,164
Short-term investments 307 307
$274,822 $6,369 $(720) $280,471
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 for a purchase price of $25.5 million, including related
expenses. The Company financed its purchase through an unsecured
term loan from commercial lending institutions. 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 June 30, 1997, the weighted
average interest rate was 6.86 %, 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)
1997 $1,750
1998 3,625
1999 4,125
2000 4,625
2001 5,000
Thereafter 3,750
Total $22,875
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 June 30, 1997, 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 June 30,
1997 and 1996. 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 1996 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
Second Quarter of 1997 Compared with the Second Quarter of 1996
Gross Premiums Written. Gross premiums written were $40.7
million for the second quarter of 1997, compared with $39.0
million for the second quarter of 1996. In 1997, the Company's
gross premiums written experienced increases in the following
lines of business: a $1.0 million increase in premiums from two
specialty programs; a $0.9 million increase in Difference in
Conditions (DIC) premiums, mitigated in part by increased
competition with respect to certain types of DIC risks; a $0.6
million increase in Architects' and Engineers' liability, due to
expanded marketing and enhanced coverages offered; a $0.6 million
increase in casualty premiums, primarily due to new programs but
offset in part by business lost because of competitive market
conditions in other casualty business written; and a $0.6
million increase in commercial automobile, due to new business
written. Such increases were offset by a $1.9 million decrease
in other property, due to increased competition, primarily in the
Company's national accounts business.
Net Premiums. Net premiums written increased 20.5% to $27.2
million for the second quarter of 1997 from $22.6 million for the
second quarter of 1996, primarily as a result of a new
reinsurance program, effective in the fourth quarter of 1996,
which reduced reinsurance premiums ceded, by increasing net
retentions to $500,000 per risk in most lines of business.
Net premiums earned increased 22.4% to $25.9 million for the
second quarter of 1997 from $21.2 million for the second quarter
of 1996, as a result of most of the factors described above.
Net Investment Income. Net investment income increased
10.0% to $4.3 million for the second quarter of 1997 from $3.9
million for the second quarter of 1996. In 1997, net investment
income was affected by additional funds available for investment,
but also by lower average interest rates compared with the second
quarter of 1996.
Net Realized Gains (Losses) on Investments. In the second
quarter of 1997, the Company realized a net gain of twelve
thousand dollars, compared to a net loss of $0.2 million in the
second quarter of 1996. Portfolio sales were effected in each
period to optimize the mix of taxable and tax-exempt investments.
Other Income. For the second quarter of 1997, the Company's
other income was $0.3 million, compared with $0.3 million for the
second quarter of 1996. The Company receives underwriting
management fees for DIC business underwritten on behalf of a
companion carrier.
Losses and Loss Adjustment Expenses. Losses and loss
adjustment expenses increased 9% to $16.5 million for the second
quarter of 1997 from $15.1 million for the second quarter of
1996, primarily due to increased earned premium exposures. In
1996, the Company strengthened reserves by $2.6 million with
respect to a truck leasing program and a used car dealers
program, each discontinued during 1995. Losses and loss
adjustment expenses were 63.5% of net premiums earned in the
second quarter of 1997, compared with 71.3% in the second quarter
of 1996.
Underwriting, Acquisition, and Insurance Expenses.
Underwriting, acquisition, and insurance expenses increased 12.1%
to $11.2 million for the second quarter of 1997 from $10.0
million for the second quarter of 1996, largely due to increased
acquisition costs, primarily net commission expenses and premium
taxes. Also, in 1996, the Company increased the provision for
bad debts by $0.3 million.
Interest Expense. For the second quarter of 1997, interest
expense was $0.4 million compared with $0.4 million for the
second quarter of 1996. Interest expense resulted from a term
loan used to purchase 1.5 million shares of the Company's common
stock in 1995.
Income Taxes. Income taxes were $0.3 million for the second
quarter of 1997, compared with an income tax benefit of $0.6 for
the second quarter of 1996. In 1996, the income tax benefit
resulted from an operating loss, net realized losses on
investments, and a shift from taxable to tax-exempt investments.
Net Income. Net income was $2.2 million for the second
quarter of 1997, compared with $0.3 million for the second
quarter of 1996.
Six Months Ended June 30, 1997 Compared with the Six Months Ended
June 30, 1996
Gross Premiums Written. Gross premiums written were $76.4
million for the six months ended June 30, 1997, compared with
$73.9 million for the six months ended June 30, 1996. In 1997,
the Company's gross premiums written experienced increases in the
following lines of business: a $1.6 million increase in casualty
premiums, primarily due to new programs but offset in part by
business lost because of competitive market conditions in other
casualty business written; a $1.6 million increase in Difference
in Conditions (DIC) premiums, mitigated in part by increased
competition with respect to certain types of DIC risks; a $1.4
million increase in Architects' and Engineers' liability, due to
expanded marketing and enhanced coverages offered; and a $0.8
million increase in premiums from two specialty programs. Such
increases were offset by a $3.1 million decrease in other
property, due to increased competition, primarily in the
Company's national accounts business.
Net Premiums. Net premiums written increased 17.9% to $51.6
million for the six months ended June 30, 1997 from $43.8 million
for the six months ended June 30, 1996, primarily as a result of
a new reinsurance program, effective in the fourth quarter of
1996, which reduced reinsurance premiums ceded, partly as a
result of increasing net retentions to $500,000 per risk in most
lines of business.
Net premiums earned increased 13.6% to $49.0 million for the
six months ended June 30, 1997 from $43.1 million for the six
months ended June 30, 1996, as a result of most of the factors
described above.
Net Investment Income. Net investment income increased 5.0%
to $8.5 million for the six months ended June 30, 1997 from $8.1
million for the six months ended June 30, 1996. In 1997, net
investment income was affected by additional funds available for
investment, but also by lower average interest rates compared
with the six months ended June 30, 1996.
Net Realized Gains on Investments. In the six months ended
June 30, 1997, the Company realized a net gain of twenty nine
thousand dollars, compared to a net gain of $0.6 million in 1996.
Portfolio sales were effected in each period to optimize the mix
of taxable and tax-exempt investments.
Other Income. For the six months ended June 30, 1997, the
Company's other income was $0.5 million, compared with $0.6
million for 1996. The Company receives underwriting management
fees for DIC business underwritten on behalf of a companion
carrier.
Losses and Loss Adjustment Expenses. Losses and loss
adjustment expenses increased 7.2% to $30.0 million for the six
months ended June 30, 1997 from $28.0 million for the six months
ended June 30, 1996, primarily due to earned premium exposures.
In 1996, the Company strengthened reserves by $2.6 million with
respect to a truck leasing program and a used car dealers
program, each discontinued during 1995. Losses and loss
adjustment expenses were 61.1% of net premiums earned in the six
months ended June 30, 1997, compared with 64.8% in the six months
ended June 30, 1996.
Underwriting, Acquisition, and Insurance Expenses.
Underwriting, acquisition, and insurance expenses increased 14.8%
to $22.0 million for the six months ended June 30, 1997 from
$19.2 million for the six months ended June 30, 1996, largely due
to increased acquisition costs, primarily net commission expenses
and premium taxes. Also, in 1996, the Company increased the
provision for bad debts by $0.3 million.
Interest Expense. For the six months ended June 30, 1997,
interest expense was $0.8 million compared with $0.9 million for
the six months of 1996. Interest expense resulted from a term
loan used to purchase 1.5 million shares of the Company's common
stock in 1995.
Income Taxes. Income taxes were $0.9 million for the six
months ended June 30, 1997, compared with income taxes of $0.5
million for the six months ended June 30, 1996.
Net Income. Net income was $4.3 million for the six months
ended June 30, 1997, compared with $3.8 million for the six
months ended June 30, of 1996.
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.
At June 30, 1997, the Company maintained cash and cash
equivalents of $19.2 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
June 30, 1997 were held by its subsidiaries.
Reinsurance recoverables on unpaid losses increased from
$137.9 million at December 31, 1996 to $157.8 million at June 30,
1997. 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 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 for the previous year, without
prior approval from the California Department of Insurance.
The National Association of Insurance Commissioners adopted
a risk-based capital system for assessing the adequacy of
statutory capital and surplus for all property and casualty
insurers. Based on the guidelines and 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 second quarter of 1997.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
a) The Annual Meeting of Shareholders of Gryphon Holdings Inc.
was held on Thursday, May 8, 1997.
b) Class I Directors elected at the Annual Meeting of
Shareholders:
Votes Votes
For Withheld
Robert M. Baylis 5,670,726 64,350
Hadley C. Ford 5,670,726 64,350
John F. Iannucci 5,670,726 64,350
c) Other Directors of the Registrant whose terms of office
continued after the Annual Meeting: Stephen A. Crane, Franklin L.
Damon, Robert R. Douglass, David H. Elliott, Richard W.
Hanselman, Joe M. Rodgers and George L. Yeager.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Description Page No.
27 Financial Data Schedule 15
b) No reports on Form 8-K were filed during the second quarter
of 1997.
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: August 7, 1997 Stephen A. Crane
/s/ Stephen A. Crane
President & Chief Executive Officer
Date: August 7, 1997 Robert P. Cuthbert
/s/ Robert P. Cuthbert
Senior Vice President & Chief Financial Officer
(Principal Financial and
Accounting Officer)
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