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 September 30, 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 September 30, 1996
Common stock, par value $.01
6,659,725
Gryphon Holdings Inc.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
three and nine months ended
September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 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 13
Signatures 13
EXHIBIT 27 Financial Data Schedule 14
PART I - FINANCIAL INFORMATION
Gryphon Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
1996 1995
Assets (Dollars in thousands)
Investments:
Fixed maturities, available
for sale, at fair value
(amortized cost: 9/30/96 - $267,127;
12/31/95 - $248,324) $270,413 $260,728
Short-term investments, at cost,
which approximates market 537 537
Total investments 270,950 261,265
Cash and cash equivalents 22,997 27,337
Accrued investment income 4,169 4,080
Premiums receivable 22,421 17,475
Reinsurance recoverable on paid losses 17,084 24,489
Reinsurance recoverable on unpaid losses 156,463 152,975
Prepaid reinsurance premiums 20,000 20,434
Deferred policy acquisition costs 13,643 12,182
Deferred income taxes 10,201 6,582
Income taxes receivable 116
Other assets 7,067 4,170
Total assets $545,111 $530,989
Liabilities and Stockholders' Equity
Policy liabilities:
Unpaid losses and loss adjustment expenses$322,173 $308,886
Unearned premiums 69,578 63,472
Total policy liabilities 391,751 372,358
Reinsurance balances payable 20,256 29,373
Long-term debt 25,500 25,500
Income taxes payable 387
Other liabilities 14,357 10,149
Total liabilities 451,864 437,767
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 30,852 30,850
Foreign currency translation
adjustment, net of tax (202) (209)
Net unrealized investment gains, net of tax 2,136 8,063
Deferred compensation (276) (193)
Retained earnings 85,936 80,108
Treasury stock, at cost;
shares 1996: 1,488,325; 1995: 1,500,000 (25,280) (25,478)
Total stockholders' equity 93,247 93,222
Total liabilities and stockholders' equity$545,111 $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 Nine months ended
September 30, September 30,
1996 1995 1996 1995
(Dollars and shares in thousands,
except per-share data)
Revenues
Gross premiums writt $44,807 $43,747 $118,743 $122,400
Net premiums written 28,165 25,086 71,963 68,661
Net premiums earned 22,292 20,324 65,423 59,040
Net investment income 4,065 4,030 12,145 11,829
Realized gains on investments 4 736 616 2,566
Other income 389 ______ 944 ______
Total revenues 26,750 25,090 79,128 73,435
Expenses
Losses and loss
adjustment expenses 13,958 13,318 41,913 37,080
Underwriting, acquisition,
and insurance expenses 10,099 8,957 29,285 25,188
Interest expense 444 145 1,317 145
Tota0l expenses 24,501 22,420 72,515 62,413
Income before income taxes 2,249 2,670 6,613 11,022
Provision for income taxes (benefit):
Current 262 (42) 1,214 2,369
Deferred 1 357 (429) (189)
Total income taxes 263 315 785 2,180
______ ______ ______ ______
Net income $1,986 $2,355 $5,828 $8,842
Net income per-share data
Net income $0.30 $0.31 $0.88 $1.11
Weighted average shares
outstanding 6,660 7,648 6,655 7,981
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
Nine months ended September 30,
1996 1995
(Dollars in thousands)
Operating activities
Net income $5,828 $8,842
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred compensation 48 37
Increase in net policy liabilities 23,744 3,061
Increase in premiums receivable (4,946) (3,619)
Increase in deferred
policy acquisition costs (1,461) (2,813)
Deferred income tax provision (429) (189)
Decrease (increase) in other
assets and liabilities 2,313 (235)
Amortization and depreciation 445 294
Amortization of bond discount, net 736 258
Realized gains on investments (616) (2,566)
(Decrease) increase in
reinsurance balances payable (9,117) 8,635
Increase in accrued investment income (89) (173)
Net cash provided by operating activities 16,456 11,532
Investing activities
Sales of fixed maturities 183,008 132,652
Purchases of fixed maturities (204,130) (206,562)
Maturities or calls of fixed maturities 2,200 47,678
Capital expenditures (1,950) (343)
Net cash used by investing activities (20,872) (26,575)
Financing activities
Issuance of common stock 69
Proceeds from long-term debt 25,500
Common stock acquired for treasury (25,443)
Net cash provided by financing activities 69 57
Effect of exchange rate changes on cash 7 57
Decrease in cash and cash equivalents (4,340) (14,929)
Cash and cash equivalents
at beginning of year 27,337 28,908
Cash and cash equivalents at end of year$22,997 $13,979
Supplemental disclosure of cash flow information
Income taxes paid $1,701 $2,783
Interest paid 1,317 38
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 For the nine months
ended September 30, ended September 30,
1996 1995 1996 1995
(Dollars in thousands)
Fixed maturities $4,007 $4,052 $12,057 $11,310
Cash, cash equivalents
and short-term investments 279 243 869 1,283
Total investment income 4,286 4,295 12,926 12,593
Less related expenses 221 265 781 764
Net investment income $4,065 $4,030 $12,145 $11,829
The gross and net realized gains and losses from sales of
fixed income securities are as follows:
For the three months For the nine months
ended September 30, ended September 30,
1996 1995 1996 1995
(Dollars in thousands)
Gross realized gains $244 $761 $2,150 $3,203
Gross realized losses (240) (25) (1,534) (637)
Net realized gain on sales $4 $736 $616 $2,566
At September 30, 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
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
September 30, 1996
U.S. Treasury securities and obligations of
U.S. government corporations
and agencies $53,546 $554 $(147) $53,953
Debt securities issued by
foreign governments 8,662 104 (116) 8,650
Tax-exempt obligations of states and
political subdivisions 144,866 3,760 (345) 148,281
Mortgage-backed securities 45,486 205 (435) 45,256
Corporate securities 14,567 109 (403) 14,273
267,127 4,732 (1,446) 270,413
Short-term investments 537 537
$267,664 $4,732 $(1,446) $270,950
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
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 governments 4,078 158 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 lead 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 September 30, 1996, the weighted average interest rate was
6.89%, 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 September 30, 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 September
30, 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
Third quarter of 1996 Compared with the Third quarter of 1995
Gross Premiums Written. Gross premiums written were $44.8
million for the third quarter of 1996, compared with $43.7
million for the third quarter of 1995. The increase in gross
premiums written was primarily attributable to increases in
Casualty premiums of $1.6 million, resulting from new business
written, and a $0.6 million increase in Architects' & Engineers'
Liability premiums, due to enhanced coverages offered. Such
increases were partially offset by a $0.6 million decrease in
Difference in Conditions ("DIC") premiums, resulting from the
sharing of premiums with a companion carrier and an increase in
competition with respect to certain types of DIC risks.
Commercial Automobile premiums decreased by $0.5 million due to
the non-renewal of a truck leasing program, mitigated in part by
new business written.
Net Premiums. Net premiums written increased 12.3% to $28.2
million for the third quarter of 1996 from $25.1 million for the
third quarter of 1995. In addition to the factors described
above, net premiums written were also enhanced by increased
retention levels and changes in the mix of business. Also, in
the third quarter of 1995, ceded catastrophe reinsurance
reinstatement premiums, caused by additional losses from the
January 17, 1994 Northridge earthquake, reduced net premiums
written by $1.5 million.
Net premiums earned increased 9.7% to $22.3 million for the
third quarter of 1996 from $20.3 million for the third quarter of
1995.
Net Investment Income. Net investment income for the third
quarter of 1996 was $4.1 million compared with $4.0 million for
the third quarter of 1995. The increase is primarily due to
additional funds available for investment in 1996 and was
mitigated by lower average pre-tax interest rates in 1996 than in
1995, resulting from a greater component of tax-exempt securities
in 1996.
Net Realized Gains on Investments. In the third quarter of
1996, the Company realized a net gain of four thousand dollars
compared with $0.7 million in the third quarter of 1995.
Portfolio sales were effected in each period to optimize the mix
of taxable and tax-exempt investments.
Other Income. For the quarter ended September 30, 1996, the
Company recorded $0.4 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 4.8% to $14.0 million for the
third quarter of 1996 from $13.3 million for the third quarter of
1995, primarily due to increases in earned premium exposures and
additional reserves for Commercial Automobile and Specialty
lines. In the third quarter of 1995, the Company recorded
additional net claims costs of $0.5 million from the Northridge
earthquake.
Underwriting, Acquisition, and Insurance Expenses.
Underwriting, acquisition, and insurance expenses increased by
12.7% to $10.1 million for the third quarter of 1996 from $9.0
million for the third quarter of 1995, due to increased
acquisition costs resulting from a change in the mix of business
written and additions to staff related to new business.
Interest Expense. For the quarter ended September 30, 1996,
the Company recorded $0.4 million in interest expense, compared
with $0.1 million for the quarter ended September 30, 1995.
Interest expense resulted from a term loan of $25.5 million taken
down in September 1995 to finance the purchase of 1.5 million
shares of the Company's common stock.
Income Taxes. The Company recorded a tax expense of $0.3
million in the third quarter of 1996, compared with an income tax
expense of $0.3 for the third quarter of 1995. Income tax
expense was reduced in both periods by tax-exempt investment
income.
Net Income. Net income was $2.0 million for the third
quarter of 1996, compared with $2.4 million for the third quarter
of 1995.
Nine months Ended September 30, 1996 Compared with the Nine
months Ended September 30, 1995
Gross Premiums Written. Gross premiums written were $118.7
million for the nine months ended September 30, 1996, compared
with $122.4 million for the nine months ended September 30, 1995.
The decrease in gross premiums written was primarily attributable
to a $6.8 million decrease in Difference in Conditions ("DIC")
premiums resulting from 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. Also, there was a $1.6
million decrease in Other Property due to increased competition,
mitigated in part by new business from plate glass and fire
policies. Such decreases were partially offset by a $1.8 million
increase in Casualty premiums, resulting from new business
written; a $1.5 million increase in Architects' & Engineers'
Liability premiums, due to enhanced coverages offered; a $1.0
million increase in premiums from Specialty Lines, due to new
business; and a $0.5 million increase in Commercial Automobile
premiums.
Net Premiums. Net premiums written increased to $72.0
million for the nine months ended September 30, 1996 from $68.7
million for the nine months ended September 30, 1995. Net
premiums written increased while gross premiums written
decreased, primarily as a result of a change in the mix of
business written, increased retention levels and, in the third
quarter of 1995, $1.5 million of ceded catastrophe reinsurance
reinstatement premiums from the January 17, 1994 Northridge
earthquake, which had the effect of reducing net premiums written
for that period.
Net premiums earned increased by 10.8% to $65.4 million for
the nine months ended September 30, 1996 from $59.0 million for
the nine months ended September 30, 1995, as a result of most of
the factors described above.
Net Investment Income. Net investment income increased 2.7%
to $12.1 million for the nine months ended September 30, 1996
from $11.8 million for the nine months ended September 30, 1995.
The increase is primarily due to additional funds available for
investment in 1996 and was mitigated by lower average pre-tax
interest rates in 1996 than in 1995, resulting from a greater
component of tax-exempt securities in 1996.
Net Realized Gains on Investments. In the nine months ended
September 30, 1996, the Company realized a net gain of $0.6
million, compared with $2.6 million in the first nine months of
1995. Portfolio sales were effected in each period to optimize
the mix of taxable and tax-exempt investments.
Other Income. For the nine months ended September 30, 1996,
the Company recorded $0.9 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 13% to $41.9 million for the
nine months ended September 30, 1996 from $37.1 million for the
nine months ended September 30, 1995, primarily due to increased
earned premium exposures and reserve increases in a truck leasing
program and a used car dealers program, each discontinued in
1995, as well as additional reserves for Commercial Automobile
and Specialty lines. In 1995, the Company recorded catastrophe
losses from hail storms in Texas as well as additional reserves
for the Northridge earthquake, totaling $1.6 million.
Underwriting, Acquisition, and Insurance Expenses.
Underwriting, acquisition, and insurance expenses increased by
16.3% to $29.3 million for the nine months ended September 30,
1996 from $25.2 million for the nine months ended September 30,
1995, primarily due to increased acquisition costs, additions to
staff related to new business and an increase in the provision
for bad debts.
Interest Expense. For the nine months ended September 30,
1996, the Company recorded $1.3 million in interest expense,
compared with $0.1 million for the nine months ended September
30, 1995. Interest expense resulted from a term loan of $25.5
million taken down in September 1995 to finance the purchase of
1.5 million shares of the Company's common stock.
Income Taxes. Income taxes were $0.8 million for the nine
months ended September 30, 1996, compared with income taxes of
$2.2 million for the nine months ended September 30, 1995. In
1996, the decrease in income tax expense resulted from higher
operating expenses and a shift from taxable to tax-exempt
investment income.
Net Income. Net income was $5.8 million for the nine months
ended September 30, 1996, compared with $8.8 million for the nine
months ended September 30, 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 $16.5 million for the first nine
months of 1996, compared with $11.5 million for the first nine
months of 1995.
At September 30, 1996, the Company maintained cash and cash
equivalents of $23.0 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
September 30, 1996 were held by its subsidiaries.
Reinsurance recoverables on unpaid losses increased from
$153.0 million at December 31, 1995 to $156.5 million at
September 30, 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 with a loan 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 nine months 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
Exhibit No. Description Page No.
27 Financial Data Schedule 14
b) No reports on Form 8-K were filed during the third quarter of
1996.
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: November 13, 1996 /s/Stephen A. Crane
Stephen A. Crane
President &
Chief Executive Officer
Date: November 13, 1996 /s/Robert P. Cuthbert
Robert P. Cuthbert
Senior Vice President &
Chief Financial Officer
(Principal Financial
and Accounting Officer)