2
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, 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 March 31, 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
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income for the three months ended
March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 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 6. Exhibits and Reports on Form 8-K 12
Signatures 12
EXHIBIT 27 Financial Data Schedule 13
Gryphon Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, December 31,
1997 1996
Assets (Dollars in thousands)
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: 3/31/97 - $267,186;
12/31/96 - $274,515) $267,162 $280,164
Short-term investments, at cost,
which approximates market 307 307
Total investments 267,469 280,471
Cash and cash equivalents 29,918 23,398
Accrued investment income 4,092 3,919
Premiums receivable 18,137 18,509
Reinsurance recoverable on paid losses 13,766 14,326
Reinsurance recoverable on unpaid losses 141,890 137,952
Prepaid reinsurance premiums 14,584 18,965
Deferred policy acquisition costs 13,222 12,415
Deferred income taxes 12,019 10,282
Other assets 6,921 6,747
Total assets $522,018 $526,984
Liabilities and Stockholders' Equity
Policy liabilities:
Unpaid losses and loss adjustment expenses $315,684 $309,259
Unearned premiums 65,631 68,683
Total policy liabilities 381,315 377,942
Reinsurance balances payable 14,636 16,207
Income taxes payable 337 55
Long-term debt 23,750 24,625
Other liabilities 8,021 13,019
Total liabilities 428,059 431,848
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 (240) (219)
Net unrealized investment gains (losses), net of tax (16) 3,672
Deferred compensation (267) (257)
Retained earnings 88,442 86,271
Treasury stock, at cost; shares 1997:1,459,710;
1996: 1,487,075 (24,794) (25,259)
Total stockholders' equity 93,959 95,136
Total liabilities and stockholders' equity $522,018 $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 March 31,
1997 1996
(Dollars and shares in thousands,
except per-share data)
Revenues
Gross premiums written $35,651 $34,919
Net premiums written 24,423 21,213
Net premiums earned 23,101 21,951
Net investment income 4,170 4,159
Realized gains on investments 17 802
Other income 242 270
Total revenues 27,530 27,182
Expenses
Losses and loss adjustment expenses 13,507 12,853
Underwriting, acquisition,
and insurance expenses 10,862 9,234
Interest expense 421 437
Total expenses 24,790 22,524
Income before income taxes 2,740 4,658
Provision for income taxes (benefit):
Current 318 1,493
Deferred 251 (340)
Total income taxes 569 1,153
Net income $2,171 $3,505
Net income per-share $0.33 $0.53
Weighted average shares outstanding 6,663 6,648
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,
1997 1996
(Dollars in thousands)
Operating activities
Net income $2,171 $3,505
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in net policy liabilities 4,376 6,348
Decrease (increase) in
premiums receivable 372 (956)
Increase in deferred
policy acquisition costs (807) (19)
Deferred income tax provision 251 (340)
(Increase) decrease in other
assets and liabilities (4,801) 7,920
Amortization and depreciation 182 126
Amortization of bond discount, net 155 156
Realized gains on investments (17) (802)
Decrease in reinsurance
balances payable (1,571) (6,088)
Increase in accrued investment income (173) (64)
Net cash provided by operating activities 138 9,786
Investing activities
Sales of fixed maturities 74,984 66,387
Purchases of fixed maturities (67,804) (74,331)
Maturities or calls of fixed maturities 900
Capital expenditures (244) (86)
Net cash used by investing activities 6,936 (7,130)
Financing activities
Principle payment on long-term debt (875)
Issuance of common stock 371
Deferred compensation (29)
Net cash provided by financing activities(533)
Effect of exchange rate changes on cash (21) 7
Increase in cash and cash equivalents 6,520 2,663
Cash and cash equivalents
at beginning of year 23,398 27,337
Cash and cash equivalents
at end of year $29,918 $30,000
Supplemental disclosure of cash flow information
Interest paid $421 $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, 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 categories of net investment income are summarized
as follows:
For the three months
ended March 31,
1997 1996
(Dollars in thousands)
Fixed maturities $4,154 $4,125
Cash, cash equivalents and
short-term investments 262 295
Total investment income 4,416 4,420
Less related expenses 246 261
Net investment income $4,170 $4,159
The gross realized gains and losses from sales of fixed
maturity securities are as follows:
For the three months
ended March 31,
1997 1996
(Dollars in thousands)
Gross realized gains $472 $1,184
Gross realized losses (455) (382)
Net realized gain on sales $17 $802
At March 31, 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)
March 31, 1997
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $61,845 $89 $(861) $61,073
Debt securities issued by
foreign governments 9,575 93 (174) 9,494
Tax-exempt obligations of states and
political subdivisions 121,276 2,822 (401) 123,697
Mortgage-backed securities 25,410 113 (950) 24,573
Corporate securities 49,080 61 (816) 48,325
267,186 3,178 (3,202) 267,162
Short-term investments 307 307
$267,493 $3,178 $(3,202) $267,469
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 March 31, 1997, the
weighted average interest rate was 6.84%, 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 $2,625
1998 3,625
1999 4,125
2000 4,625
2001 5,000
Thereafter 3,750
Total $23,750
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, 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 March 31,
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
First Quarter of 1997 Compared with the First Quarter of 1996
Gross Premiums Written. Gross premiums written were $35.7
million for the first quarter of 1997, compared with $34.9
million for the first 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 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 $0.8 million increase in Architects' &
Engineers' liability due to expanded marketing and enhanced
coverages offered; and a $0.7 million increase in Difference in
Conditions (DIC) premiums, which were affected by increased
competition with respect to certain types of DIC risks. Such
increases were partially offset by a $1.1 million decrease in
other property due to increased competition; a $0.4 million
decrease in commercial automobile due to the non-renewal of a
truck leasing program, mitigated in part by new business written;
and a $0.2 million decrease in Specialty Lines.
Net Premiums. Net premiums written increased 15.1% to $24.4
million for the first quarter of 1997 from $21.2 million for the
first quarter of 1996, primarily as a result of a new reinsurance
program, effective in the fourth quarter of 1996, which reduced
reinsurance costs, mainly by increasing net retentions to
$500,000 per risk in most lines of business.
Net premiums earned increased by 5.2% to $23.1 million for
the first quarter of 1997 from $22.0 million for the first
quarter of 1996, as a result of most of the factors described
above.
Net Investment Income. Net investment income was $4.2
million for the first quarter of 1997 compared with $4.2 million
for the first 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 first
quarter of 1996.
Net Realized Gains on Investments. In the first quarter of
1997, the Company realized a net gain of seventeen thousand
dollars, compared with a net gain of $0.8 million in the first
quarter of 1996. Portfolio sales were effected in each period to
optimize the mix of taxable and tax-exempt investments.
Other Income. For the first quarter of 1997, the Company's
other income was $0.2 million, compared with $0.3 million for the
first 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 by 5.1% to $13.5 million for the
first quarter of 1997 from $12.9 million for the first quarter of
1996, primarily due to increased earned premium exposures.
Losses and loss adjustment expenses were 58.5% of net premiums
earned in the first quarter of 1997, compared with 58.6% in the
first quarter of 1996.
Underwriting, Acquisition, and Insurance Expenses.
Underwriting, acquisition, and insurance expenses increased by
17.6% to $10.9 million for the first quarter of 1997 from $9.2
million for the first quarter of 1996, largely due to increased
acquisition costs, primarily net commission expenses and premium
taxes.
Interest Expense. For the first quarter of 1997 interest
expense was $0.4 million compared with $0.4 million for the first
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 $.6 million for the first
quarter of 1997, compared with income taxes of $1.2 for the first
quarter of 1996.
Net Income. Net income was $2.2 million for the first
quarter of 1997, compared with $3.5 million for the first quarter
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. Net cash
provided by operations was $0.1 million for the first three
months of 1997, compared with $9.8 million for the first three
months of 1996.
At March 31, 1997, the Company maintained cash and cash
equivalents of $29.9 million to meet 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, 1997 were held by its subsidiaries.
Reinsurance recoverables on unpaid losses were $141.9
million at March 31, 1997 and $138.0 million at December 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 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 first 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Description Page No.
Ex-27 Financial Data Schedule 13
b) No reports on Form 8-K were filed during the first three
months 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: May 8, 1997 Stephen A. Crane
Stephen A. Crane
President & Chief Executive Officer
Date: May 8, 1997 Robert P. Cuthbert
Robert P. Cuthbert
Senior Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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