-ii-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Gryphon Holdings Inc.
30 Wall Street
New York, New York 10005-2201
(212) 825-1200
Commission file number 0-5537
State of Incorporation: Delaware
I.R.S. Employer Identification No. 13-3287060
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock NASDAQ National Market
(par value $.01 per share)
Securities registered pursuant to Section 12(g) of the Act: None
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 than 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 by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of this chapter)
is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [ ]
As of March 13, 1997, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $94,731,229.
As of March 13, 1997, the number of shares outstanding of the
Registrant's Common Stock, par value $.01 per share, was
6,668,340.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for the Annual Meeting of Shareholders to be
held on May 8, 1997, which is incorporated into Part III of this
Form 10-K.
FORM 10-K
TABLE OF CONTENTS
Page
Part I
Item 1. Business 1
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security
Holders 21
Part II
Item 5. Market for Company's Common Equity and
Related Stockholder Matters 22
Item 6. Selected Consolidated Financial Data 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 30
Part III 30
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 30
PART I
ITEM 1. BUSINESS.
(a) General Development of Business.
Gryphon Holdings Inc. (the "Company") was incorporated
under the laws of the State of Delaware in 1983. The Company is
a holding company that, through its subsidiaries, underwrites
specialized commercial property and casualty insurance coverages
in selected niche markets. The Company has developed expertise
in lines of insurance typically not emphasized by standard lines
insurers, including architects' and engineers' professional
liability ("A&E"), difference in conditions ("DIC") (primarily
earthquake coverage), and various other specialty coverages. The
Company focuses on providing coverage for small to medium-sized
insureds.
The Company employs a disciplined approach to underwriting
to achieve an overall underwriting profit, even if it is
necessary to limit premium growth at times. The Company
emphasizes quality service in all areas of its operations and
believes that this approach has enabled the Company to maintain
strong relationships with its insurance producers, which are
primarily excess and surplus lines brokers and general agents.
On December 28, 1993 and January 6, 1994, Willis Corroon
Group plc, a public company organized under the laws of England
and Wales ("Willis Corroon"), through a wholly owned subsidiary
sold 4,500,000 shares and 632,100 shares, respectively, of the
outstanding common stock (the "Common Stock"), par value $.01 per
share, of the Company to the public pursuant to the initial
public offering (the "Offering") of the Company. The Company did
not receive any proceeds from the Offering. As a result of the
Offering, Willis Corroon's ownership was reduced from 100% to
36.1%. In September 1995, the Company purchased 1.5 million
shares of its Common Stock from Willis Corroon for a purchase
price of $25.5 million, including related expenses, in a private
transaction. This transaction reduced Willis Corroon's ownership
in the Company to 21.6%. In November 1995, Willis Corroon sold
its remaining ownership interest in the Company in transactions
that were effected on the NASDAQ stock exchange. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Liquidity and Capital Resources."
Historically, the Company's insurance subsidiaries,
Associated International Insurance Company, a California-
domiciled insurance corporation ("Associated"), and Calvert
Insurance Company, a Pennsylvania-domiciled insurance corporation
("Calvert"), operated primarily as independent, indirect
subsidiaries of Willis Corroon, each having its own underwriting,
marketing, claims processing and administrative staff.
Associated is an admitted carrier in California and an approved
excess and surplus lines insurer in 48 other states. Calvert is
a specialty property and casualty carrier that is admitted in all
states, the District of Columbia and Canada and all of its
provinces.
Business Plan
Since the Offering, the Company has pursued a business
plan that has emphasized a more coordinated and integrated
approach to the businesses of its two major underwriting
subsidiaries. Through this strategy, the Company has endeavored
to better utilize the complementary state licensing of the
subsidiaries by making available to all underwriting personnel of
the Company the policy issuance capability of either its admitted
insurance company subsidiary, Calvert, or its non-admitted
subsidiary, Associated. In addition, the Company has attempted
to enhance profitability by increasing the net per-risk
retentions of its smaller subsidiary, Calvert, by making
available to it the financial resources of the Company's larger
subsidiary, Associated.
In pursuit of these objectives, the Company has
implemented two significant changes, effective January 1, 1996.
On that date, all of the operating-level personnel previously
employed by Associated and Calvert, became employees of a new
management and service subsidiary, Gryphon Insurance Group Inc.
("GIG"). The consolidation into a single company has created a
more efficient organization, has facilitated a more uniform
approach to underwriting and related operations, with freer
access to either issuing company, and has encouraged a single-
company culture. Secondly, the Company has put into place a
pooling arrangement between Associated and Calvert through which
the financial resources of the two subsidiaries are, in effect,
combined into one larger and stronger entity. This arrangement
has enhanced various operating ratios and facilitated the use of
higher net retentions in selected lines of business.
Underwriting Strategy
The Company seeks to optimize underwriting profitability
regardless of market conditions by providing specialty insurance
products to small and medium-sized commercial insureds. Using
its expertise in specialized lines of insurance, the Company
endeavors to maintain adequate pricing by exercising underwriting
discipline, particularly during times of excess underwriting
capacity and greater competition among insurers. The principal
elements of this strategy are set forth below.
Focus on Specialized Lines. The Company focuses on
specialized lines of insurance where the Company expects
that its particular expertise in evaluating and pricing
risks will give it a competitive advantage. By underwriting
a variety of specialty insurance programs, the Company
diversifies its risk among lines of insurance.
Underwriting Discipline. The Company seeks to write
insurance at prices and terms that it believes will generate
overall underwriting profits. In underwriting, the Company
typically reviews the type of risk, the attractiveness of
the pricing and terms relative to the risk and the Company's
aggregate exposure to similar risks.
Opportunistic Approach. The Company changes its mix
of business as market conditions change and opportunities
arise. The Company generally emphasizes insurance products
which have greater potential for underwriting profitability.
The Company avoids underwriting a line of business if the
line cannot be priced profitably. The Company does not
emphasize market share.
Commitment to Service. The Company focuses on
providing consistent, high quality service to its insurance
producers and insureds in both underwriting and claims
handling. The Company believes its producers and insureds
benefit from the extensive experience of its underwriting
and claims personnel.
Use of Sophisticated Computer Modeling Techniques.
In addition to employing standard insurance underwriting
techniques, the Company's underwriters utilize the
Insurance/Investment Risk Assessment System ("IRAS"), a
sophisticated computer model which estimates the probable
maximum loss ("PML") from earthquakes of varying frequency
and severity, to quantify the risk of and assist in
determining the price and terms of DIC coverage. The
Company also uses IRAS on an ongoing basis to monitor
aggregate earthquake exposure.
Emphasis on Relationships with Producers. The
Company utilizes select excess and surplus lines producers,
including general agents and wholesale brokers, to
distribute its insurance products, expand market reach and
provide specialized knowledge of particular coverages,
markets and customers. The Company generally seeks to be a
substantial underwriter for its producers, in order to
enhance the likelihood of receiving the most desirable
underwriting opportunities.
(b) Financial Information about Industry Segments.
The Company operates in only one industry segment, the
property and casualty insurance industry.
(c) Narrative Description of Business.
Principal Business Lines and Products
The following tables set forth the gross and net premiums
written by principal lines of business of the Company for the
periods indicated:
Gross Premiums Written by Principal Lines of Business
(Dollars in thousands)
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
Premiums Percent Premiums Percent Premiums Percent Premiums Percent Premiums Percent
Lines of Business
Architects'& Engineers'
Liability $17,843 11.4% $14,452 9.2% $15,910 11.4% $16,677 14.9% $18,539 20.0%
Casualty 29,234 18.6 26,902 17.2 21,284 15.3 19,680 17.6 18,381 19.9
Commercial
Automobile 18,337 11.7 18,580 11.8 14,258 10.3 3,201 2.9
Difference in
Conditions 38,500 24.5 45,213 28.8 43,259 31.1 34,035 30.5 26,914 29.1
Other
Property 24,192 15.4 27,601 17.6 18,424 13.2 13,159 11.8 9,792 10.6
Specialty
Lines 28,831 18.4 24,232 15.4 26,014 18.7 24,588 22.0 17,507 18.9
Run-Off Business 2 323 .3 1,424 1.5
_______ _____ _______ _____ _______ _____ _______ _____ _______ _____
TOTAL $156,937 100.0% $156,980 100.0% $139,151 100.0% $111,663 100.0% $92,557 100.0
Net Premiums Written by Principal Lines of Business
(Dollars in thousands)
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
Premiums Percent Premiums Percent Premiums Percent Premiums Percent Premiums Percent
Lines of Business
Architects' & Engineers'
Liability $12,884 13.6% $10,576 11.7% $11,381 16.5% $12,302 19.8% $14,971 28.3%
Casualty 20,775 22.0 17,266 19.2 14,611 21.1 12,538 20.2 13,080 24.8
Commercial
Automobile 13,947 14.7 13,111 14.5 6,022 8.7 2,341 3.7
Difference in
Conditions 20,238 21.4 22,497 25.0 17,247 24.9 18,008 29.0 11,372 21.5
Other
Property 9,843 10.4 10,454 11.6 4,916 7.1 3,724 6.0 4,541 8.6
Specialty
Lines 16,920 17.9 16,271 18.0 15,008 21.7 12,931 20.8 7,558 14.3
Run-Off Business 2 323 .5 1,324 2.5
_______ _____ _______ _____ _______ _____ _______ _____ _______ _____
TOTAL $94,607 100.0% $90,175 100.0% $69,187 100.0% $62,167 100.0% $52,846 100.0%
Architects' and Engineers' Liability. A&E insurance
protects architects, engineers and other design professionals
against liability to third parties due to the insured's
negligence. A&E policies are written by the Company exclusively
as claims-made coverage. A&E policies written by the Company
protect insureds for up to $5 million.
The Company generally concentrates on smaller
architectural and engineering firms (i.e., those with $10 million
or less in annual billings) where the principals actively
participate in the operations of the business. Based upon gross
premiums written, approximately 49.0% and 54.1% of the A&E
insurance was written for firms located in California for the
years ended December 31, 1996 and 1995, respectively.
The Company has generated its A&E business exclusively
through Risk Administration & Management Company ("RAMCO") for
over 9 years. RAMCO has been granted binding authority, subject
to A&E underwriting guidelines specified by the Company. The
Company may cancel any policy, subject to applicable insurance
regulations, if it is inconsistent with such guidelines. All A&E
claims are handled by RAMCO with oversight by the Company. The
Company conducts semi-annual audits of RAMCO's underwriting files
and reviews claims with RAMCO on a quarterly basis.
As compensation for A&E insurance produced by RAMCO, the
Company pays RAMCO commissions based upon a percentage of gross
A&E premiums written. RAMCO also receives a contingent
commission based upon the profitability of A&E insurance policies
it produces.
Casualty. The Company specializes in casualty policies
which provide coverage above an insured's self-insured retention
("SIR policies"), umbrella and buffer or excess layer casualty
coverage, including general liability and products liability
coverage. SIR policies have minimum attachment points of
$100,000 on automobile liability and $50,000 on general
liability. The Company's commercial umbrella coverage is
generally written in excess of primary liability insurance
coverage provided by other insurance carriers. The Company also
writes primary general liability and commercial multi-peril
package policies.
Commercial Automobile. The Company underwrites commercial
automobile policies for owner-operators and small commercial
fleets for local, intermediate and long-haul trucking risks
produced through selected general agents. The policies provide
liability, physical damage and cargo insurance with liability
protection up to $1 million.
Difference in Conditions. Substantially all of the DIC
policies written by the Company are for California earthquake
coverage. The Company uses IRAS, a computer modeling program, in
connection with underwriting DIC coverage to estimate PML from
earthquakes of varying severity. IRAS evaluates seismic hazard
by matching structural information provided by the Company
regarding a particular building, group of exposures or portfolio
with the IRAS database, which includes information concerning
earthquake severity and frequency, soil composition, and
proximity to known faults. Although IRAS is available to other
property and casualty insurers, the Company believes that the
amount and quality of information input into IRAS by the Company
results in more effective utilization of IRAS' capabilities. The
Company further believes that its use of IRAS prior to actual
risk selection enables the Company to differentiate its pricing
and terms with respect to particular risks on DIC coverage.
Other Property. The Company's other property coverage
consists primarily of fire insurance, inland marine and plate
glass insurance written on either a primary or an excess and
surplus basis. The Company also writes course-of-construction
coverage on engineering projects, national accounts, railroad and
utilities coverage on an excess-of-loss basis.
Specialty Lines. Other specialty insurance products
provided by the Company include liquor liability insurance,
special events insurance (for events such as concerts and
contests), directors' and officers' liability insurance for
"not-for-profit" organizations, fiduciary liability insurance for
pension fund trustees, public officials liability and
miscellaneous errors and omissions. The Company has expanded its
specialty lines business to diversify its risk exposure.
Marketing
The Company writes business through wholesale excess and
surplus lines brokers and general agents. The Company believes
that close working relationships with these insurance producers
are essential to its success. These producers provide
specialized knowledge of particular products, markets and
customers, and enable the Company to capitalize on underwriting
opportunities. The Company seeks to be a substantial underwriter
for its producers in order to enhance the likelihood of receiving
the most desirable underwriting opportunities.
The Company pays brokers and agents commissions based on
the amount of premiums and types of business underwritten. These
payments constitute part of the Company's acquisition costs and
are included in its underwriting expenses. The Company also pays
RAMCO and other general agents contingent commissions based upon
the profitability of the policies they produce for the Company.
See "Principal Business Lines and Products--Architects' and
Engineers' Liability."
Gross premiums written in the State of California amounted
to approximately 43.7% and 48.7% of the aggregate gross premiums
written by the Company for the years ended December 31, 1996 and
1995, respectively. In the State of New York, the Company's
gross premiums written were 7.6% and 12.8% of total premiums for
the years ended December 31, 1996 and 1995, respectively. Gross
premiums written in any other state did not exceed 10% of gross
premiums written during 1996 or 1995.
Management emphasizes quality service in all phases of its
operations and believes that this approach has enabled the
Company to maintain strong relationships with its producers. To
deliver prompt service while ensuring consistent disciplined
underwriting, the Company has granted selected general agents the
authority to sell and bind insurance coverages in accordance with
detailed procedures and limitations established by the Company.
The Company promptly reviews coverages bound by these agents,
decides whether the insurance is written in accordance with such
procedures and limitations and may cancel policies that are not
in compliance with such procedures and limitations.
Approximately 35.6% and 25.4% of the Company's gross premiums for
the years ended December 31, 1996 and 1995, respectively, were
written by general agents with binding authority.
Underwriting
The Company employs a disciplined approach to underwriting
to achieve an overall underwriting profit, even if it is
necessary to limit premium growth at times.
At December 31, 1996, the Company's thirty-three
underwriters had an average of 19 years of underwriting
experience. By focusing on specialized classes of insurance, the
Company is able to take advantage of its underwriters' experience
to underwrite complicated insurance risks on a case-by-case
basis. In accepting risks, each underwriter is required to
comply with risk parameters, retention limits and rates
prescribed by the Company. Compensation of senior underwriters
depends in part on the profitability of the lines of business for
which they are responsible.
The Company's computer systems are capable of generating
specific risk reports, which include a variety of historical data
regarding individual risks underwritten by the Company. These
reports inform the underwriters of the historical annual premium
quoted with respect to the risk, the reported losses and loss
adjustment expenses ("LAE") relating to the risk, cumulative
underwriting profitability and other relevant information.
The Company's underwriters generally perform a complete
underwriting evaluation of applicants and determine premiums and
coverage provisions before an insurance quotation is issued.
While the Company's business is primarily underwritten in-house
(except for A&E coverage, which is underwritten exclusively by
RAMCO), the Company has granted selected agents binding authority
to underwrite programs for the Company, subject to specific
guidelines that have been established by the Company. See
"Marketing."
Claims Management and Administration
In accordance with its emphasis on underwriting
profitability, the Company has an active approach to claims
management that is designed to investigate claims as soon as
practicable, manage and anticipate developments and service
producing brokers and insureds throughout the process. The
Company maintains an experienced claims management staff at each
of its major offices, with eight claims examiners in Woodland
Hills, California and five claims examiners in Hoboken, New
Jersey.
Claims in respect of A&E insurance written by the Company
are administered by RAMCO under the Company's supervision. Each
of the A&E policies written by the Company is on a claims-made
basis and includes defense costs within the policy limit. Due to
the nature of this line of professional liability coverage, the
Company generally has needed to retain counsel for a majority of
its A&E claims. When the estimated value of a claim exceeds the
Company's attachment level on a particular policy, RAMCO provides
the Company with documentation and a caption report, recommends
appropriate reserve levels and sends requests for claims payments
directly to the Company for processing. The Company reviews each
claim that is submitted and makes the payment it believes is
appropriate.
Reserves
The Company's loss reserves are estimates of amounts that
may be needed in the future to pay losses as well as expenses
related to the final adjustment of those losses. Reserves for
losses and LAE have been estimated by the Company utilizing its
own historical experience as well as that of the industry. These
estimates include two components: case reserves and non-case
reserves. Case reserves are estimates of losses and LAE for
reported claims and are established by the Company's claims
departments. Non-case reserves, which include a provision for
losses that have occurred but have not been reported to the
Company as well as development on reported claims, are the
difference between (i) the sum of case reserves and paid losses
and (ii) estimated ultimate incurred losses. Ultimate incurred
losses are an estimate of total losses and LAE necessary for the
ultimate settlement of all reported claims, including amounts
already paid and incurred but not reported claims. The Company
engages independent actuarial consultants to perform periodic
loss and LAE reserve analyses.
The Company's management believes its loss and LAE
reserves are adequate for the ultimate net cost of all losses
incurred by the Company. The Company does not discount its
reserves. The Company will continue to make additional
adjustments to loss and LAE reserve calculations based on
additional analyses and information as available.
Notwithstanding the foregoing, the Company can give no assurances
as to the ultimate accuracy of current reserves for losses or
LAE, or that additional development will not occur in the future
since the process of establishing and estimating loss and LAE
reserves is, by its nature, imprecise.
The following loss and LAE development table illustrates
the change over time of reserves established for
property-liability losses and LAE at the end of various calendar
years. The amounts shown for each year on the top line of the
table represent the Company's estimate of its gross liability for
future payments of losses and LAE as of the balance sheet date as
originally reported. The next line represents the amount of
ceded reserves recoverable from reinsurers for losses and LAE for
the same period, followed by the net losses and LAE unpaid on the
Company's business. The upper half of the table includes re-
estimates of the original balance sheet net liability for unpaid
losses and LAE at the end of each period following the original
report date. The estimates change as more information is known
about the frequency and severity patterns of claims for each
year. A redundancy (deficiency) exists when the reserve as
originally reported is greater (less) than the amount
re-estimated at each December 31. The cumulative redundancy
(deficiency) depicted in the table for a particular calendar year
shows the aggregate change in estimates over the period of years
subsequent to the original calendar year. As of December 31,
1996, the cumulative deficiency of $4,298,000 resulted
principally from additional loss and LAE development from a truck
leasing program and a used car dealers program, each in run-off,
which during 1996 produced $5.3 million and $2.2 million of
losses, respectively, in excess of existing reserves; and an
increase of $2.2 million in reserves for environmental and
asbestos-related exposures on business written prior to 1985.
Such increases were partially offset by favorable development of
A&E reserves and a re-estimation of IBNR reserves pertaining to
other property business. The lower portion of the table shows
the cumulative amount of the original net liability that has been
paid in each succeeding year.
In evaluating the information in the table, it should be
noted that each column includes the effects of all changes in
amounts for prior periods. The table does not present accident
year or policy year development data. Conditions and trends that
have affected the development of liabilities in the past may not
necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies
based on this table.
Analysis of Loss and Loss Adjustment Expense Development
(Dollars in thousands)
December 31,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Gross liability for
unpaid losses
and LAE $93,492 $109,557 $115,796 $151,952 $163,818 $201,057 $231,415 $275,660 $315,691 $308,886 $309,259
Deduct: reinsurance
recoverable on unpaid
losses and LAE 53,077 58,396 57,097 83,574 77,334 87,927 104,352 133,783 169,889 152,975 137,952
_______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______
Net liability for unpaid
losses and LAE $40,415 $51,161 $58,699 $68,378 $86,484 $113,130 $127,063 $141,877 $145,802 $155,911 $171,307
Liability re-estimated
as of:
One year later 40,627 49,839 61,040 67,584 83,630 111,197 125,372 133,367 146,194 160,209
Two years late 41,233 52,808 58,037 66,774 82,672 110,056 118,354 128,675 143,131
Three years later 44,159 51,360 57,297 66,244 82,271 102,436 114,577 123,942
Four years later 44,876 51,188 56,583 65,745 76,339 98,812 110,989
Five years later 45,712 52,219 55,042 61,067 72,766 96,907
Six years later 45,845 50,122 51,921 58,220 71,686
Seven years later 44,728 48,719 48,290 58,509
Eight years later 43,354 45,261 50,370
Nine years later 39,938 48,154
Ten years later 42,619
_______ _______ _______ _______ _______ _______ _______ _______ _______ _______ ________
Cumulative redundancy
(deficiency) $(2,204) $3,007 $8,329 $9,869 $14,798 $16,223 $16,074 $17,935 $2,671 $(4,298) $0
Cumulative liability
paid as of:
One year later $6,186 $9,321 $8,854 $8,253 $2,692 $16,014 $16,692 $24,152 $28,911 $30,784
Two years later 12,541 16,078 13,539 11,135 12,648 27,223 34,302 42,402 47,380
Three years later 17,772 20,020 15,143 17,906 20,788 39,657 45,587 53,752
Four years later 21,114 20,936 18,221 21,485 28,381 46,314 52,959
Five years later 21,939 23,453 19,748 26,127 33,633 51,038
Six years later 22,775 23,847 22,641 29,941 36,714
Seven years later 22,939 25,571 25,814 32,322
Eight years later 23,470 28,348 27,552
Nine years later 25,986 29,682
Ten years later 27,321
Prior to June 30, 1985, the Company wrote casualty
insurance coverage at high attachment levels on an excess-of-loss
basis. The Company's net retention was generally $50,000 per
risk on such coverage. As was customary for the insurance
industry at that time, such policies sometimes included coverage
for sudden and accidental, as well as cumulative, environmental
impairment and asbestos-related risks that involve significant
unresolved issues regarding liability, policy coverage and other
matters. Given the nature of this business, the pre-1985
casualty book of business has an extremely long tail, creating
uncertainty in the estimation of ultimate losses to be paid. The
Company generally establishes reserves for such claims if it
believes that the attachment level of such policies is likely to
be reached.
The Company's reserves also reflect certain facultative
and treaty casualty and professional liability reinsurance
assumed (written) prior to 1985. The inherent uncertainties in
estimating reserves are greater for reinsurance than for primary
insurance due to the diversity of the development patterns among
different types of reinsurance contracts, the longer period
between the occurrence of a claim and the reporting of such claim
to the reinsurer, the necessary reliance on ceding companies or
reinsurance intermediaries for information regarding reported
claims and different reserving practices among ceding companies.
A reinsurer's internal data is often supplemented with industry
data to provide the basis for reserve analysis. Thus,
management's judgments about the applicability of industry data
to the Company's reinsurance assumed business adds an additional
element of uncertainty to the reserving process. The Company no
longer writes this business.
The insurance industry experienced a number of reinsurance
company failures in the 1980's and certain of the Company's
treaty reinsurers relating to the pre-1985 book of casualty
business have become insolvent or are financially impaired. The
Company has written off all debts due from insolvent companies
and all receivables for paid losses and LAE and reserves ceded to
companies it believes to be financially impaired.
Since 1985, the Company has changed the type of casualty
insurance it writes and the risks it covers and has amended the
policy forms it uses to expressly exclude from the coverage any
risks directly associated with pollution and asbestos.
Associated revised its casualty coverage to meet the
severity of loss requirements of sophisticated commercial
insureds by providing coverage over an SIR together with first
layer umbrella and buffer/excess layer policies. The policies
generally have minimum SIR's of $50,000 for general liability and
$100,000 for commercial automobile. As a result, coverage now
attaches at much lower levels and the reporting tail for claims
is much shorter than for the pre-1986 book of business. The
Company has also developed specialty programs which focus on
lower-severity business and, in addition, writes A&E coverage
only on a claims-made basis and includes defense costs within A&E
policy limits.
The following table provides a reconciliation of beginning
and ending loss and LAE reserve balances of the Company for each
of the years in the three-year period ended December 31, 1996, as
computed in accordance with GAAP.
Reconciliation of Liability for Loss and Loss Adjustment Expenses
(Dollars in thousands)
Year ended December 31,
1996 1995 1994
Gross reserves for losses and LAE at the beginning of the year $308,886 $315,691 $275,660
Ceded reserves for losses and LAE at the beginning of the year 152,975 169,889 133,783
________ ________ ________
Net reserves for losses and LAE at the beginning of the year 155,911 145,802 141,877
-------- -------- --------
Add:Provision for losses and LAE for claims occurring in:
The current year 53,402 50,424 49,047
Prior years 4,298 392 (8,510)
-------- -------- --------
Total net incurred losses and LAE 57,700 50,816 40,537
-------- -------- --------
Less:Losses and LAE payments for claims occurring in:
The current year 11,520 11,796 12,460
Prior years 30,784 28,911 24,152
-------- -------- --------
Total net paid losses and LAE 42,304 40,707 36,612
-------- -------- --------
Reserves for net losses and LAE at end of year 171,307 155,911 145,802
Reinsurance recoverable on unpaid losses 137,952 152,975 169,889
-------- -------- --------
Reserves for gross losses and LAE at end of year $309,259 $308,886 $315,691
The following table provides a reconciliation of beginning
and ending loss and LAE reserve balances of the Company for each
of the years in the three-year period ended December 31, 1996 for
environmental impairment and asbestos-related liabilities.
Reconciliation of Environmental Impairment and Asbestos-related
Liability for Loss and Loss Adjustment Expenses
(Dollars in thousands)
Year ended December 31,
1996 1995 1994
Environmental Impairment Liability
Gross reserves for losses and LAE at the beginning of the year $11,938 $14,200 $15,000
Ceded reserves for losses and LAE at the beginning of the year 3,958 5,100 5,000
------- ------- -------
Net reserves for losses and LAE at the beginning of the year 7,980 9,100 10,000
Add: Provision for losses and LAE
for claims occurring in prior years 1,598 3 (58)
Less: Losses and LAE payments for claims occurring in prior years 774 1,123 842
------- ------- -------
Reserves for net losses and LAE at end of year 8,804 7,980 9,100
Reinsurance recoverable on unpaid losses 4,177 3,958 5,100
------- ------- -------
Reserves for gross losses and LAE at end of year $12,981 $11,938 $14,200
Year ended December 31,
1996 1995 1994
Asbestos-related Liability
Gross reserves for losses and LAE at the beginning of the year $1,700 $4,050 $5,000
Ceded reserves for losses and LAE at the beginning of the year 1,060 3,350 4,250
Net reserves for losses and LAE at the beginning of the year 640 700 750
Add: Provision for losses and LAE for claims occurring in the
prior years 583 612 (158)
Less: Losses and LAE payments for claims occurring in the prior
years 212 672 (108)
Reserves for net losses and LAE at end of year 1,011 640 700
Reinsurance recoverable on unpaid losses 3,110 1,060 3,350
Reserves for gross losses and LAE at end of year $4,121 $1,700 $4,050
At December 31, 1996, the reserve for unpaid environmental
impairment losses and related loss adjustment expenses was
approximately $8.8 million, net of reinsurance recoverables
deemed probable of collection by the Company of approximately
$4.2 million. The range of gross reserves for unpaid
environmental impairment losses and loss adjustment expenses is
estimated to be $13.0 million to $22.0 million and the range of
reserves, net of reinsurance recoverable, for unpaid
environmental impairment losses and loss adjustment expenses is
estimated to be approximately $8.8 million to $13.3 million.
At December 31, 1996, the reserve for unpaid asbestos-
related losses and related loss adjustment expenses was $1.0
million, net of reinsurance recoverables deemed probable of
collection by the Company of approximately $3.1 million. The
range of gross reserves for unpaid asbestos-related losses and
loss adjustment expenses is estimated to be $4.1 million to $8.3
million and the range of reserves, net of reinsurance
recoverable, for unpaid asbestos-related losses and loss
adjustment expenses is estimated to be approximately $1.0 million
to $2.0 million.
At December 31, 1996, reserves for incurred but not
reported losses and LAE for environmental impairment and asbestos-
related claims were $5.3 million and $0.8 million, respectively.
The range of reserves, net of reinsurance recoverable, for
unpaid environmental impairment and asbestos-related losses and
loss adjustment expenses is estimated to be approximately
$9.8 million to $15.3 million.
At December 31, 1996 and 1995, the Company had 232 and 229
environmental impairment liability claims, respectively, covering
154 and 103 policyholders, respectively. At December 31, 1996
and 1995, the Company had 66 and 61 asbestos claims,
respectively, covering 53 and 39 policyholders, respectively.
The Company disputes coverage on substantially all of its
environmental impairment and asbestos-related claims since such
underlying policies were generally written with certain coverage
exclusions. In a majority of cases, coverage is being determined
through judicial interpretation, which can vary from jurisdiction
to jurisdiction.
There are significant uncertainties in estimating the
amount of the Company's environmental impairment and asbestos-
related liabilities resulting from a lack of historical data,
long reporting delays, uncertainty as to the number and identity
of insureds with potential exposure, and complex, unresolved
legal issues regarding policy coverage and the extent and timing
of any such contractual liability. Courts have reached different
and sometimes inconsistent conclusions as to when a loss occurred
and what policies provide coverage, what claims are covered,
whether there is an insured obligation to defend, how policy
limits are determined, how policy exclusions are applied and
interpreted, and whether cleanup costs are includible as insured
property damage. These issues are not likely to be resolved in
the near future. As a result of these issues, the ultimate
number and cost of these claims may generate losses that vary
materially from the amounts currently recorded and could have a
material adverse effect on the Company's results of operations
and financial condition. While management believes the Company's
reserves for these coverages are appropriately established,
because of the uncertainty of circumstances surrounding many
critical factors that affect environmental impairment and
asbestos-related liabilities, there can be no assurance that the
Company's reserves for and losses from these claims will not
increase in the future.
Investments
The Company's investment policy has an overall objective
of enhancing after-tax return, through allocations among a range
of investment-grade securities having varying tax
characteristics, maturities and ratings. The precise allocation
varies depending upon investment opportunities, economic
conditions and tax considerations. The Company's investment
portfolio continues to be professionally managed with emphasis on
municipal bonds, U.S. Treasury securities and corporate bonds.
As of December 31, 1996, the portfolio had an estimated effective
modified duration of approximately 5 years.
The Company utilizes outside professional investment
managers who currently invest substantially all of the Company's
invested assets. The outside investment managers consult
frequently with management regarding the Company's tax position
and aggregate portfolio characteristics. The Investment
Committee of the Company's Board of Directors meets quarterly
with management to review and amend investment policy and monitor
the performance of the Company's investment managers.
The Company's investment portfolio is subject to several
risks, including interest rate and reinvestment risk. Fixed
maturity security values generally fluctuate inversely with
movements in interest rates. The Company's corporate and
municipal bond investments may contain call and sinking fund
features which may result in early redemptions and the Company's
mortgage-backed securities are subject to prepayment risk.
Declines in interest rates could cause early redemptions or
prepayments, which would require the Company to reinvest at lower
rates.
Effective January 1, 1994, the Company changed its method
of accounting for investments, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under the
accounting pronouncement, the Company's securities are classified
as available for sale and reported at fair value, with unrealized
gains and losses, net of deferred income taxes, included in
stockholders' equity.
The following table summarizes the investment results of
the Company for the periods indicated.
Investment Results
(Dollars in thousands)
Year ended December 31,
1996 1995 1994
Average invested assets $287,210 $263,674 $244,296
Net investment income 16,453 15,839 13,099
Realized gains (losses) on investments 1,203 3,647 (2,046)
Pre-tax yield on average assets (excluding
realized gains on investments) 5.7% 6.0% 5.4%
The following table summarizes the Company's fixed
maturity portfolio, excluding short-term investments, by sector
as of December 31, 1996.
Fixed Maturity Portfolio by Sector
(Dollars in thousands)
December 31, 1996
Amortized Percent of Fair
Cost Total Value
U.S. Government and government agencies $55,845 20.3% $56,584
Debt securities issued by foreign governments 5,747 2.1 5,923
States and political subdivisions 141,686 51.6 146,335
Corporate securities 27,856 10.2 27,861
Mortgage-backed securities 43,381 15.8 43,461
Total $274,515 100.0% $280,164
The following table summarizes the Company's fixed
maturity portfolio by rating as of December 31, 1996.
Fixed Maturity Portfolio by Rating (1)
(Dollars in thousands)
December 31, 1996
Fair Percent of
Value Total
U.S. Government and government agencies $84,910 30.3%
Aaa 107,743 38.5
Aa 49,030 17.5
A 30,059 10.7
Baa 8,422 3.0
Total $280,164 100.0%
(1) Ratings as assigned by Moody's. Such ratings are generally
assigned upon the issuance of the securities, subject to
revision on the basis of ongoing evaluations. Bonds rated
Aaa by Moody's are judged to be of the best quality and are
considered to carry the smallest degree of investment risk.
The following table summarizes the Company's fixed
maturity portfolio by years to stated maturity as of December 31,
1996.
Fixed Maturity Portfolio by Stated Maturity
(Dollars in thousands)
December 31, 1996
Fair Percent of
Value Total
1 year or less $5,148 1.8%
Over 1 year through 5 47,012 16.8
Over 5 years through 10 years 78,610 28.1
Over 10 years through 20 years 97,808 34.9
Over 20 years 8,125 2.9
Mortgage-backed securities 43,461 15.5
Total $280,164 100.0%
At December 31, 1996, investments in Federal National
Mortgage Association securities aggregating approximately $24.7
million represented the only investments in any entity in excess
of 10% of stockholders' equity other than those investments
issued or guaranteed by the U.S. Government.
The Company is subject to state laws and regulations that
require diversification of its investment portfolio and limit the
amount of investments in certain investment categories. As of
December 31, 1996, the Company's investments complied with all
such laws and regulations.
Reinsurance
Insurance companies purchase reinsurance to spread risk on
individual exposures, protect against catastrophic losses and
increase their capacity to write insurance. Reinsurance involves
an insurance company transferring, or ceding, all or a portion of
its exposure on insurance to a reinsurer. The reinsurer assumes
the exposure in return for a portion of the premium received by
the insurance company. Reinsurance does not discharge the
insurer from its obligations to its insureds. If the reinsurer
fails to meet its obligations, the ceding insurer remains liable
to pay the insured.
The Company cedes a material amount of its business to
reinsurers to spread risk and limit loss per exposure. During
1996, 1995 and 1994, the Company ceded premiums of $62.3
million, $66.8 million and $70.0 million, respectively, which
constituted 39.7%, 42.6%, and 50.3% respectively, of gross
premiums written in each year. Management seeks to mitigate
exposure to adverse reinsurance pricing conditions and its credit
risk by maintaining a diversity of reinsurers.
Catastrophe reinsurance protects an insurer from
significant aggregate loss exposure arising from a single event
such as an earthquake, hurricane, riot, tornado or other
extraordinary event. The Company uses IRAS to evaluate its
earthquake exposure in connection with purchasing catastrophe
reinsurance coverage.
Effective January 1, 1997, The Company maintains a six-
layer catastrophe reinsurance program covering its DIC writings.
The catastrophe reinsurance program covers 95% of the annual
aggregate amount of property claims up to $138 million per
occurrence, subject to a retention of $2.5 million per
occurrence. The Company limits its net retention to $100,000 per
risk for DIC.
Most other exposures, including Casualty, A&E, Specialty
Lines, Commercial Auto and certain Other Property risks have been
consolidated in a new three-layer reinsurance program arranged in
late 1996. The new program provides for indemnity of $24.5
million in excess of an increased net retention of $500,000 per
risk. In addition to per-risk coverage, the new program provides
casualty clash & contingency and certain non-DIC property
catastrophe protection on an occurrence basis, subject to the
same net retention. The new program was effective as of October
1, 1996 but will not incorporate some of the lines of business
until the expiration of previously existing reinsurance contracts
in the first half of 1997.
Effective January 1, 1997, the Company entered into an
aggregate stop loss reinsurance agreement with Scandinavian
Reinsurance Company, Ltd. This agreement is for a three-year
term and automatically renews annually unless canceled by either
party at the end of any fiscal year. Under the terms of the
agreement, the reinsurer provides indemnity if accident-year loss
and LAE ratios exceed 55%, subject to an aggregate limit of
approximately $45,000,000 over the three-year term. Certain
terms apply which may increase the loss and LAE threshold to 60%
of the Company's net earned premiums for the 1999 accident year.
The Company continually evaluates the credit risk related
to its reinsurers and has established a minimum A.M. Best rating
of "A-" for its domestic and Bermuda-based reinsurers and also
requires at least $50 million of policyholder surplus for all
domestic and foreign reinsurers. The Company works with
intermediaries to continually monitor the financial condition of
its reinsurers, as appropriate. If a reinsurer of the Company
were to become insolvent or unable to make payments under the
terms of a reinsurance agreement, it could have a material
adverse effect on the Company.
Competition
The property and casualty insurance industry is highly
competitive. The Company competes with national and smaller
regional insurers in each state in which it operates, as well as
with monoline specialty insurers. Certain of these competitors
are larger and have greater financial resources than the Company.
Among other things, competition may take the form of lower
prices, broader coverage, greater product flexibility, higher
quality services or an insurer's rating by independent rating
agencies. The Company competes with admitted insurers, surplus
line insurers, new forms of insurance organizations such as risk
retention groups, and alternative self-insurance mechanisms.
Increased public and regulatory concerns regarding the
financial stability of participants in the insurance industry
have resulted in greater emphasis being placed by policyholders
upon insurance company ratings and have created some measure of
competitive advantage for insurance carriers with higher ratings.
Associated's and Calvert's financial strength and claims-paying
ability are currently rated "A p (Excellent)" by A.M. Best.
Also, A.M. Best has assigned the financial size category of Class
VII to both companies under its pooling arrangement. In
evaluating a company's financial and operating performance,
A.M. Best reviews the company's profitability, leverage and
liquidity as well as the company's book of business, the adequacy
and soundness of its reinsurance, the quality and estimated
market value of its assets, the adequacy of its loss reserves and
the experience and competence of the management. The ratings
assigned by A.M. Best are based upon factors of concern to
policyholders, agents and intermediaries and are not directed
toward the protection of investors.
Cyclicality
Historically, the overall financial performance of the
property and casualty industry has tended to fluctuate in
cyclical market patterns. These cycles can be more pronounced for
insurance companies, such as the Company, that underwrite
business on a surplus lines basis. During a soft market,
heightened competition for premiums not only increases
competition among surplus lines insurers, but also causes
admitted insurers to offer coverages for risks generally
underwritten by the surplus lines insurers. During a hard market,
the constriction of available capital among admitted carriers,
combined with the opportunity for increased underwriting profit
in their more traditional lines of business, tends to cause
admitted carriers to reduce their underwriting of surplus lines
coverages. This may increase the overall number of risks
submitted to the surplus lines insurers and consequently may
enhance the opportunity of surplus lines companies to increase
premium volume and improve pricing.
Surplus lines insurance is generally placed by wholesale
brokers and general agents who specialize in particular lines of
coverage or classes of insureds. These insureds tend to be
sophisticated and price-conscious insurance purchasers. As a
result, surplus lines insurers may experience increased premium
rate competition and volume competition in soft markets.
At present, the property and casualty insurance industry
is experiencing a prolonged soft market.
Employees
As of December 31, 1996, the Company employed
approximately 130 persons, all in the United States. None of its
employees is represented by a labor union, and the Company
believes that its employee relations are excellent.
Regulation and Other Matters
As a general rule, an insurance company must be licensed
to transact insurance business in each jurisdiction in which it
operates, and almost all significant operations of a licensed
insurer are subject to regulatory scrutiny. Licensed insurance
companies are generally known as "admitted" insurers. Most
states provide a limited exemption from licensing for insurers
issuing insurance coverages that generally are not available from
admitted insurers. These coverages are referred to as "surplus
lines" insurance and these insurers are referred to as surplus
lines or "non-admitted" companies.
The Company's admitted insurance businesses are subject to
comprehensive, detailed regulation throughout the United States
and Canada. Various jurisdictions have established supervisory
agencies with broad authority to regulate, among other things,
licenses to transact business, premium rates for certain
coverages, trade practices, agent licensing, policy forms,
cancellation and renewal practices, underwriting and claims
practices, reserve adequacy and insurer solvency. Many
jurisdictions also regulate investment activities on the basis of
quality, distribution and other quantitative criteria. Further,
most jurisdictions in the United States require admitted
insurance companies to participate in their respective guaranty
funds. Insurers admitted to transact business in such
jurisdictions are required to cover losses of insolvent insurers
and are generally subject to annual assessments of 1% to 2% of
direct premiums written in that jurisdiction to pay claims of
insolvent insurers. In addition, most jurisdictions compel
participation in, and regulate the composition of, various shared
and residual market mechanisms under which insurers are induced
to provide certain coverages.
Generally, non-admitted insurers are subject to less
regulatory scrutiny than admitted companies. The eligibility of
the Company to write insurance on a surplus lines basis in most
jurisdictions is dependent on its compliance with certain
financial standards, including the maintenance of a requisite
level of capital and surplus and the establishment of certain
statutory deposits. State surplus lines laws typically:
(i) require the insurance producer placing the business to show
that he or she was unable to place the coverage with admitted
insurers; (ii) establish minimum financial requirements for
surplus lines insurers operating in the state; and (iii) require
the insurance producer to obtain a special surplus lines license.
In recent years, many jurisdictions have increased the minimum
financial standards applicable to surplus lines eligibility.
State insurance regulators have the discretionary
authority, in connection with the licensing of an insurance
company, to limit or prohibit writing new business within their
jurisdiction when, in the state's judgment, the insurance company
is not maintaining adequate statutory surplus or capital. The
Company does not currently anticipate that any regulator would
limit the amount of new business that Associated or Calvert may
write, given their respective current levels of statutory
surplus.
Most states have enacted legislation that regulates
insurance holding company systems, including acquisitions,
dividends, the terms of surplus notes, the terms of affiliate
transactions and other related matters. Typically, such statutes
require the Company to periodically file information with the
state insurance commissioner, including information concerning
its capital structure, ownership, financial condition and general
business operations. Under the terms of applicable state
statutes, any person or entity desiring to purchase a specified
percentage (commonly 10% or more) of the Company's outstanding
voting securities would be required to obtain prior regulatory
approval of the purchase. Further, state insurance statutes
typically place limitations on the amount of dividends or other
distributions payable by insurance companies, in order to protect
their solvency. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The insurance industry has been subject to increased
scrutiny. A number of state legislatures have considered or
enacted legislative proposals that alter and, in many cases,
increase the authority of state agencies to regulate insurance
companies and holding company systems. In addition, legislation
has been introduced in several of the past sessions of Congress
which, if enacted, could result in the federal government
assuming some role in the regulation of the insurance industry.
Several committees of Congress have made inquiries and conducted
hearings as part of a broad study of the regulation of United
States insurance companies.
The National Association of Insurance Commissioners (the
"NAIC") and insurance regulators continue to re-examine existing
laws and regulations and their application to insurance
companies. In particular, this re-examination has focused on
insurance company investment and solvency issues and, in some
instances, has resulted in new interpretations of existing law,
the development of new laws and the implementation of
non-statutory guidelines. The NAIC has formed groups to study and
formulate regulatory proposals on such diverse issues as the use
of surplus debentures, accounting for reinsurance transactions,
and the adoption of risk-based capital rules. In connection with
its accreditation of states and as part of its program to monitor
the solvency of insurance companies, the NAIC requires states to
adopt model NAIC laws and regulations on specific topics, such as
holding company regulations and the definition of extraordinary
dividends. The NAIC adopted a new system for assessing the
adequacy of statutory capital and surplus for all property and
casualty insurers. Based on the NAIC guidelines and computations
made by the Company in conformity with such risk-based capital
guidelines, Associated and Calvert satisfy the required levels of
capital. There can be no assurance, however, that capital
requirements applicable to the Company's businesses will not
increase in the future.
The NAIC has developed through the years a set of
financial relationships or "tests" called the Insurance
Regulatory Information System ("IRIS") that are designed for
early identification of companies which may require special
attention by insurance regulatory authorities. Insurance
companies submit data on an annual basis to the NAIC, which in
turn analyzes the data. Generally, an insurance company will
become subject to regulatory scrutiny if it fails to satisfy NAIC
standards for such factors as leverage, profitability, liquidity
and loss reserve development. Failure to satisfy these standards
may result in action by regulatory authorities to constrain a
company's underwriting capacity. No such action has been taken
with respect to the Company.
It is not possible to predict the future impact of
changing state and federal regulations on the Company's
operations.
ITEM 2. PROPERTIES.
The Company leases approximately 49,500 square feet of
office space, including its corporate headquarters located in New
York, New York and underwriting offices located in Woodland
Hills, California and Hoboken, New Jersey, respectively. The
headquarters in New York, which consists of 3,900 square feet, is
leased for a term ending in the year 1999. The Woodland Hills
office space consists of 30,275 square feet and is leased for a
term ending in the year 2008. The Hoboken office space consists
of 13,525 square feet and is leased for a term ending in the year
2000. The Company also leases small regional offices in Grand
Rapids, Michigan and Denver, Colorado.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to litigation and arbitration in
the normal course of its business. The Company does not believe
that any pending litigation or arbitration to which it is a
party, or of which any of its property is the subject, is likely
to have a material adverse effect on its consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ
National Market under the symbol "GRYP". The following table
reflects the high and low prices for the quarterly periods during
the years ended December 31,1996 and 1995, as furnished by the
NASDAQ National Market:
1996 1995
High Low High Low
First Quarter $20 1/4 $16 7/8 $14 1/4 $12 5/8
Second Quarter 19 1/2 14 5/8 16 5/8 13 1/2
Third Quarter 15 1/4 12 17 14 3/8
Fourth Quarter 16 12 1/2 19 3/8 15
As of February 10, 1997, there were approximately 45
record holders of the Common Stock, which does not include
beneficial owners of shares registered in nominee or street name.
Since the Offering, the Company has not paid any cash dividends
on its Common Stock and does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's
term-loan agreement contains a covenant restricting its ability
to declare or pay any cash dividends to its shareholders.
Because the Company is a holding company and operates through its
subsidiaries, its cash flow and consequent ability to pay
dividends are dependent upon the earnings of its subsidiaries and
the distribution of those earnings to the Company. Also, the
ability of the Company's subsidiaries to pay dividends to the
Company is subject to certain regulatory restrictions. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and Note
9 of Notes to Consolidated Financial Statements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth selected consolidated
financial data of the Company for the periods indicated. The
selected consolidated financial data for the five years ended
December 31, 1996 set forth below are derived from the audited
consolidated financial statements of the Company. The selected
statutory data have been derived from the financial statements of
Associated and Calvert prepared in accordance with statutory
accounting practices ("SAP") and filed with insurance regulatory
authorities. The following information should be read in
conjunction with the Consolidated Financial Statements and the
notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", included
elsewhere herein.
Gryphon Holdings Inc.
Selected Consolidated Financial Data
Year ended December 31,
1996 1995 1994 1993 1992
(Dollars and shares in thousands, except per-share amounts)
Statement of Operations Data:
Gross premiums written $156,937 $156,980 $139,151 $111,663 $92,557
Net premiums written $94,607 $90,175 $69,187 $62,167 $52,846
Net premiums earned $87,929 $83,399 $61,605 $57,933 $53,511
Net investment income 16,453 15,839 13,099 12,216 12,367
Realized gains (losses) on investments 1,203 3,647 (2,046) 5,163 2,377
Other income 1,059
Total revenues 106,644 102,885 72,658 75,312 68,255
Losses and loss adjustment expenses 57,700 50,816 40,537 37,065 32,535
Underwriting, acquisition, and insurance expenses 40,967 34,590 25,721 18,481 17,771
Proposition 103 settlement expense 2,000(1)
Bonuses paid by Willis Corroon 2,670(2)
Interest expenses 1,761 595 172 437
Total expenses 100,428 86,001 66,258 60,388 50,743
Income before income taxes 6,216 16,884 6,400 14,924 17,512
Provision for income taxes 53 3,959 169 2,772(3) 5,014
Net income $6,163 $12,925 $6,231 $12,152 $12,498
Net income per share $.93 $1.69 $.77 $1.62 $1.67
Weighted average shares outstanding 6,656 7,648 8,132 7,485 7,478
Pro forma net income per share(4) $1.51 $1.57
GAAP Ratios:
Loss and loss adjustment expense ratio 65.6% 60.9% 65.8% 64.0% 60.8%
Underwriting expense ratio,
excluding Proposition 103 settlement 46.6 41.5 41.8 31.9 33.2
Combined ratio, excluding
Proposition 103 settlement 112.2 102.4 107.6 95.9 94.0
Proposition 103 settlement 3.5(1)
Combined ratio 112.2% 102.4% 107.6% 99.4% 94.0%
Selected Statutory Data:
Statutory net income $7,298 $13,876 $5,296 $7,459(1)(5)$11,091
Statutory surplus (at end of period) 82,566 83,433 72,220 69,161 59,123
Ratio of net premiums
written to surplus 1.1:1 1.1:1 1.0:1 0.9:1 0.9:1
Balance Sheet Data (at end of period):
Investments, including cash and cash equivalents $303,869 $288,602 $245,242 $237,442 $204,094
Total assets 526,984 530,989 492,717 432,080 362,201
Loss and loss adjustment expense reserves 309,259 308,886 315,691 275,660 231,415
Long-term debt 24,625 25,500 6,690
Stockholders' equity 95,136 93,222 93,773 91,489 68,254
Book value per share 14.28 14.02 11.51 11.25 9.13
____________________
(1) As part of a stipulation and consent order with the
California Department of Insurance to settle outstanding
obligations under Proposition 103, the Company refunded to
policyholders $2.0 million, including interest. This
amount has been reflected as a charge to net income for
the year ended December 31, 1993.
(2) In connection with the Offering, Willis Corroon paid
bonuses to certain executives. The bonuses, consisting of
cash and common stock and aggregating approximately
$2,670,000, are shown as an expense and were offset by a
capital contribution equal to the after-tax cost of such
bonuses.
(3) Includes the effect of the Company's adoption of SFAS No.
109, which resulted in a one-time cumulative tax benefit
of $0.7 million ($.09 per share) for the year ended
December 31, 1993.
(4) After giving pro forma effect to the cancellation of an
intercompany loan in the amount of $7.9 million and the
issuance of 651,833 shares of Common Stock in connection
with the Offering.
(5) Includes the effect of $5.0 million of additional
environmental impairment and asbestos-related reserves
recorded in GAAP financial statements in prior periods.
The effect of such addition was to increase the 1993
statutory combined ratio from 97.7% to 106.3%.
ITEM 7. 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
Year Ended December 31, 1996 Compared with Year Ended December
31, 1995
Gross Premiums Written. Gross premiums written were
$156.9 million for the year ended December 31, 1996 compared to
$157.0 million for the year ended December 31, 1995. In 1996, the
Company's gross premiums written experienced increases in the
following lines of business: a $4.6 million increase in premiums
from specialty lines, primarily due to a new animal mortality
program; a $3.4 million increase in A&E liability due to expanded
marketing and enhanced coverages offered; and a $2.3 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. Such increases
were offset by a $6.7 million decrease in DIC premiums, resulting
from the sharing of premiums with a companion carrier and, to a
lesser extent, from an increase in competition with respect to
certain types of DIC risks; a $3.4 million decrease in premiums
from other property, due to increased competition, mitigated in
part by new business from plate glass and fire policies; and a
$0.2 million decrease in commercial automobile, where the non-
renewal of a truck leasing program offset growth resulting from
new business written.
Net Premiums. Net premiums written increased 4.9% to
$94.6 million for the year ended December 31, 1996 from $90.2
million for the year ended December 31, 1995. This resulted
primarily from a shift in the mix of business toward lines with
higher net retention levels. Also, the Company paid $2.2 million
of catastrophe reinsurance reinstatement premiums in 1995, which
had the effect of increasing ceded premiums and reducing net
premiums written.
Net premiums earned increased by 5.4% to $87.9 million in
the year ended December 31, 1996 from $83.4 million in the year
ended December 31, 1995.
Net Investment Income. Net investment income increased
3.9% to $16.5 million for the year ended December 31, 1996 from
$15.8 million for the year ended December 31, 1995. The increase
is primarily due to additional funds available for investment in
1996 and was partially 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. For the year ended
December 31, 1996, the Company realized a net gain of $1.2
million, compared with a net gain of $3.6 million for the year
ended December 31, 1995. Portfolio sales were effected in each
year to optimize the mix of taxable and tax-exempt securities.
Other Income. For the year ended December 31, 1996, the
Company recorded $1.1 million of underwriting management fees for
DIC business underwritten on behalf of a companion carrier.
Losses and Loss Adjustment Expenses. Losses and LAE
increased by 13.5% to $57.7 million for the year ended
December 31, 1996 from $50.8 million for the year ended
December 31, 1995, due to additional losses and reserve
strengthening for a truck leasing program ($5.3 million) and used-
car dealers program ($2.2 million), each discontinued during
1995; an increase of $2.2 million in reserves for environmental
impairment and asbestos-related exposures on business written
prior to 1985; other reserve increases pertaining to previous
accident years; and, more generally, increases in earned premium
exposures. Such increases were partially offset by reserve
redundancies resulting from favorable development of A&E case
reserves and a re-estimate of other property liabilities. In
1995, the Company recorded catastrophe losses of $1.9 million
related to hailstorms and the Northridge earthquake of 1994.
Underwriting, Acquisition, and Insurance Expenses.
Underwriting, acquisition, and insurance expenses increased by
18.4% to $41.0 million for the year ended December 31, 1996 from
$34.6 million for the year ended December 31, 1995. The expense
growth was primarily attributable to increased acquisition costs,
resulting from a change in the mix of business written; additions
to staff, related to new business; and new facilities for the
operating companies. Also, in 1996, the Company expensed an
additional $1.4 million of deferred acquisition costs.
Interest Expense. Interest expense was $1.8 million for
the year ended December 31, 1996, compared with $0.6 million for
the year ended December 31, 1995. Interest expense resulted from
a term loan of $25.5 million borrowed in 1995 to finance the
purchase of 1.5 million shares of the Company's common stock.
Interest expense was lower in 1995 because it accrued only from
the date of the take-down, in September.
Income Taxes. Income taxes were $53,000 for the year
ended December 31, 1996, compared with $4.0 million for 1995. In
1996, income taxes were reduced by the tax benefit from
additional reserve strengthening on discontinued lines of
business, increased underwriting expenses and tax-exempt
investment income. In 1995, the income tax expense was reduced
by the tax benefit from net claims costs and reinstatement
premiums relating to the Northridge earthquake and tax-exempt
investment income.
Net Income. Net income was $6.2 million for the year
ended December 31, 1996, compared with $12.9 million for the year
ended December 31, 1995.
Weighted Average Shares Outstanding. Average shares
outstanding were 6.7 million in 1996, compared with 7.6 million
in 1995, reflecting the effect of the purchase by the Company of
1.5 million shares of the Company's Common Stock in September of
1995.
Year Ended December 31, 1995 Compared with Year Ended December
31, 1994
Material Event. The Company writes a substantial amount
of DIC coverage in California, including the San Fernando Valley
area, which was struck by a major earthquake on January 17, 1994.
As a result of losses sustained in that event, the Company
recorded net pre-tax costs of $8.2 million for the year ended
December 31, 1994. The costs consisted of $4.3 million of claims
expense and $3.9 million of reinsurance reinstatement premiums.
In 1995, the Company recorded additional net pre-tax charges of
$3.0 million for expected additional loss development. These
charges consisted of $0.8 million of claims costs and $2.2
million of reinsurance reinstatement premiums.
Gross Premiums Written. Gross premiums written increased
12.8% to $157.0 million for the year ended December 31, 1995 from
$139.2 million for the year ended December 31, 1994. The
increase in gross premiums written was attributable to a $9.2
million increase in premiums from other property, due to new
business and a hardening of property markets; a $5.6 million
increase in casualty premiums, resulting from additional general
liability policies written; a $4.3 million increase in commercial
automobile premiums, resulting from new policies written; and a
$2.0 million increase in DIC premiums, resulting from changes in
market conditions for earthquake coverages. Such increases were
partially offset by a $1.8 million decrease in premiums from
specialty lines, due to the discontinuance of a used car dealers
program, and a $1.5 million decrease in premiums caused by
competitive market conditions in the A&E business.
Net Premiums. Net premiums written increased 30.3% to
$90.2 million for the year ended December 31, 1995 from $69.2
million for the year ended December 31, 1994 as a result of most
of the factors described above, which were enhanced by increased
retention levels in commercial automobile policies and plate
glass policies. Also, catastrophe reinsurance reinstatement
premiums ceded with respect to DIC policies decreased by $1.7
million in 1995.
Net premiums earned increased by 35.4% to $83.4 million in
the year ended December 31, 1995 from $61.6 million in the year
ended December 31, 1994.
Net Investment Income. Net investment income increased
20.9% to $15.8 million for the year ended December 31, 1995 from
$13.1 million for the year ended December 31, 1994. The increase
is primarily due to additional funds available for investment in
1995. To a lesser extent, net investment income, which is
reported before taxes, increased as a result of a greater
component of taxable securities in 1995 than in 1994.
Net Realized Gains (Losses) on Investments. For the year
ended December 31, 1995, the Company realized a net gain of $3.6
million compared to a net loss of $2.0 million for the year ended
December 31, 1994. Portfolio sales were effected in each year
to optimize the mix of taxable and tax-exempt securities.
Losses and Loss Adjustment Expenses. Losses and LAE
increased by 25.4% to $50.8 million for the year ended
December 31, 1995 from $40.5 million for the year ended
December 31, 1994, primarily due to increases in earned premium
exposures and catastrophe losses of $1.9 million, from Texas
hailstorms and additional reserves for the Northridge earthquake.
In 1994, the Company recorded net claims costs of $4.3 million
from the Northridge earthquake and additional reserves for
specialty lines, partially offset by favorable development in
other property reserves, as well as A&E coverages.
Underwriting, Acquisition, and Insurance Expenses.
Underwriting, acquisition, and insurance expenses increased by
34.5% to $34.6 million for the year ended December 31, 1995 from
$25.7 million for the year ended December 31, 1994, primarily due
to increased acquisition costs and additions to staff related to
new business.
Interest Expense. For the year ended December 31, 1995,
the Company recorded $0.6 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 $4.0 million for the year
ended December 31, 1995, compared with $0.2 million for 1994. In
1994, the income tax expense was impacted by net claims costs and
reinstatement premiums relating to the Northridge earthquake, net
realized losses on investments, and a shift from taxable to tax-
exempt investments.
Net Income. Net income was $12.9 million for the year
ended December 31, 1995, compared with $6.2 million for the year
ended December 31, 1994.
Weighted Average Shares Outstanding. Average shares
outstanding were 7.6 million in 1995, compared with 8.1 million
in 1994, reflecting the effect of the purchase by the Company of
1.5 million shares of the Company's Common Stock in September 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 $24.7 million in 1996, $22.0 million in 1995,
and $17.8 million in 1994.
At December 31, 1996, the Company maintained cash and cash
equivalents of $23.4 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
December 31, 1996 were held by its subsidiaries.
Reinsurance recoverables on unpaid losses were $138.0
million at December 31, 1996 and $153.0 million at December 31,
1995. Because of the high limits on many policies relative to
the Company's 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 expenses increased by approximately $1.8 million.
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. The Company's subsidiaries are subject to state
insurance laws that restrict their ability to collectively pay
dividends. See "Regulation and Other Matters." 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. In
1996, 1995 and 1994, the aggregate dividends paid by the two
subsidiaries were $4.7 million, $2.0 million and $1.3 million,
respectively.
The NAIC has 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 1996, 1995 and 1994.
However, there can be no assurance that inflation will not have a
material impact on the Company's operations in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
An index to financial statements and required financial
statement schedules is set forth at Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
The information required in Part III (Items 10, 11, 12 and
13) is hereby incorporated by reference from the Company's
definitive Proxy Statement, which is expected to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934
not later than 120 days after the end of the fiscal year covered
by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) Financial Statements. See the index
immediately following the signature pages.
(b) Reports on Form 8-K. The Company did not file any
reports on Form 8-K during the last quarter of the
year ended December 31, 1996.
(c) Exhibits.
All exhibits listed below are filed with this Annual
Report on Form 10-K unless specifically stated to be incorporated
by reference to other documents previously filed with the
Securities and Exchange Commission.
Exhibit No.
3.1 Amended and Restated Certificate of Incorporation
incorporated herein by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 (the "Registration
Statement") filed with the Securities and Exchange
Commission (the "SEC") on September 23, 1993.
3.2 Amended and Restated By-Laws incorporated herein
by reference to Exhibit 3.2 of the 1995 Form 10-K.
4.1 Specimen Common Stock certificate incorporated
herein by reference to Exhibit 4.1 to Amendment No. 3 to
the Registration Statement filed with the SEC on December
14, 1993.
10.1 Loan Agreement, dated September 8, 1995, in the
principal amount of $25,500,000 by and among Gryphon
Holdings Inc., CIBC Inc. and Canadian Imperial Bank of
Commerce incorporated herein by reference to Exhibit 10.1
of the 1995 Form
10-K.
10.2 Tax Sharing Agreement among Willis Corroon Group
plc, the Company and certain other parties thereto
incorporated herein by reference to Exhibit 10.2 to
Amendment No. 1 to the Registration Statement.
10.3 General Indemnity Agreement between Willis Corroon
Group plc and the Company incorporated herein by
reference to Exhibit 10.3 to Amendment No. 1 to the
Registration Statement.
10.4 Form of Indemnification Agreement between the
Company and each of its directors and executive officers
incorporated herein by reference to Exhibit 10.4 to the
Registration Statement.
10.5 1993 Stock Option Plan of the Company incorporated
herein by reference to Exhibit 10.5 to Amendment No. 1 to
the Registration Statement.
10.6 Contractual Management Subsidiary Agreement, dated
July 1, 1987, between Associated and RAMCO incorporated
herein by reference to Exhibit 10.6 to the Registration
Statement.
10.7 Non-Competition and Confidentiality Agreement,
dated January 15, 1993, among Willis Corroon Group plc
and Stewart Smith (Canada) Limited, in favor of
Wellington Insurance Company incorporated herein by
reference to Exhibit 10.7 to the Registration Statement.
10.8 Severance and Confidentiality Agreement among the
Company, Willis Corroon Group plc and John F. Iannucci
incorporated herein by reference to Exhibit 10.30 of
Amendment No. 1 to the Registration Statement.
10.9 Severance and Confidentiality Agreement among the
Company, Willis Corroon Group plc and John H. Walton
incorporated herein by reference to Exhibit 10.31 of
Amendment No. 1 to the Registration Statement.
10.10 Severance and Confidentiality Agreement between the
Company and Stephen A. Crane incorporated herein by
reference to Exhibit 10.32 of Amendment No. 1 to the
Registration Statement.
10.11 Loan Cancellation Agreement between Willis Corroon Group
plc and the Company incorporated herein by reference to
Exhibit 10.33 of Amendment No. 1 to the Registration
Statement.
10.12 Restricted Stock Plan of the Company incorporated herein
by reference to Exhibit 10.34 of Amendment No. 1 to the
Registration Statement.
10.13 Severance and Confidentiality Agreement dated as of March
21, 1994 between the Company and Robert P. Cuthbert
incorporated herein by reference to Exhibit 10.35 of the
Company's Annual Report on Form 10-K for 1994 (the "1994
Form 10-K").
10.14 Severance and Confidentiality Agreement dated as of
November 11, 1994 between the Company and Robert M.
Coffee incorporated herein by reference to Exhibit 10.36
of the 1994 Form 10-K.
10.15 Amendment to Severance and Confidentiality Agreement
dated as of November 11, 1994 between the Company and
Stephen A. Crane incorporated herein by reference to
Exhibit 10.37 of the 1994 Form 10-K.
10.16 Amendment to Severance and Confidentiality Agreement
dated as of November 11, 1994 between the Company and
Robert P. Cuthbert incorporated herein by reference to
Exhibit 10.38 of the 1994 Form 10-K.
10.17 Amendment to Severance and Confidentiality Agreement
dated as of November 11, 1994 by and among Willis Corroon
Group plc, the Company and John F. Iannucci incorporated
herein by reference to Exhibit 10.39 of the 1994 Form 10-
K.
10.18 Amendment to Severance and Confidentiality Agreement
dated as of November 11, 1994 by and among Willis Corroon
Group plc, the Company and John H. Walton incorporated
herein by reference to Exhibit 10.40 of the 1994 Form 10-
K.
10.19 Casualty First Excess of Loss Reinsurance Agreement,
effective July 1, 1994, among Calvert and various
reinsurers incorporated herein by reference to Exhibit
10.41 of the 1994 Form 10-K.
10.20 Casualty Second Excess of Loss Reinsurance Agreement,
effective July 1, 1994, among Calvert and various
reinsurers incorporated herein by reference to Exhibit
10.42 of the 1994 Form 10-K.
10.21 Casualty Clash and Contingency, First Excess of Loss
Reinsurance Agreement, effective July 1, 1993, as
amended, among Calvert and various reinsurers
incorporated herein by reference to Exhibit 10.43 of the
1994 Form 10-K.
10.22 Casualty Clash and Contingency, Second Excess of Loss
Reinsurance Agreement, effective July 1, 1993, as
amended, among Calvert and various reinsurers
incorporated herein by reference to Exhibit 10.44 of the
1994 Form 10-K.
10.23 Casualty Quota Share Treaty, effective December 1, 1994,
among Calvert and various reinsurers incorporated herein
by reference to Exhibit 10.45 of the 1994 Form 10-K.
10.24 Property Quota Share Reinsurance Contract, effective July
1, 1994, among Calvert and various reinsurers
incorporated herein by reference to Exhibit 10.46 of the
1994 Form 10-K.
10.25 Property Quota Share Reinsurance Contract, effective July
1, 1993, as amended, among Calvert and various reinsurers
incorporated herein by reference to Exhibit 10.47 of the
1994 Form 10-K.
10.26 New York Trucking Quota Share Treaty, effective December
31, 1993, among Calvert and various reinsurers
incorporated herein by reference to Exhibit 10.48 of the
1994 Form 10-K.
10.27 Property Excess Per Risk Reinsurance Contract, effective
January 1, 1995, among Associated, Calvert and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.49 of the 1994 Form 10-K.
10.28 Preliminary Property Excess Per Risk Reinsurance
Contract, effective January 1, 1996, among Associated,
Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.44 of the
1995 Form 10-K.
10.29 Combined Coded Inside Excess Per Risk and Quota Share
Reinsurance Contract, effective October 1, 1992 through
June 30, 1994, among Associated and various reinsurers
stated therein incorporated herein by reference to
Exhibit 10.50 of the 1994 Form 10-K.
10.30 Property Excess & Surplus Lines Excess Per Risk
Reinsurance Contract, effective July 1, 1994, among
Associated, Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.51 of the
1994 Form 10-K.
10.31 Excess Catastrophe Reinsurance Contract, effective
January 1, 1994, among Associated, Calvert and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.52 of the 1994 Form 10-K.
10.32 External Third through Sixth Excess Catastrophe
Reinsurance Contract, effective January 1, 1996, among
Associated, Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.53 of the
1994 Form 10-K.
10.32 External Third through Sixth Excess Catastrophe
Reinsurance Contract, effective January 1, 1995, among
Associated, Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.49 of the
1995 Form 10-K.
10.34 Casualty Excess of Loss Reinsurance Contract, effective
July 1, 1994, among Associated, Calvert and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.54 of the 1994 Form 10-K.
10.35 Casualty Excess of Loss Reinsurance Contract, effective
July 1, 1995, among Associated, Calvert, Timberline
Insurance Company and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.51 of the
1995 Form 10-K.
10.36 First Excess Multiple Line Reinsurance Contract,
effective July 1, 1994, among Associated, Calvert and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.55 of the 1994 Form 10-K.
10.37 Second Excess Multiple Line Reinsurance Contract,
effective July 1, 1994, among Associated, Calvert and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.56 of the 1994 Form 10-K.
10.38 Form of Stock Option Agreement under the 1995 Non-
Employee Directors Stock Option Plan incorporated herein
by reference to Exhibit 10.54 of the 1995 Form 10-K.
10.39 Combined Casualty 1st Excess of Loss and Quota Share
Reinsurance Contract, effective July 1, 1995, among
Associated, Calvert, Timberline Insurance Company and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.55 of the 1995 Form 10-K.
10.40 Casualty Second Excess of Loss Reinsurance Agreement,
effective July 1, 1995, among Associated, Calvert,
Timberline Insurance Company and various reinsurers
stated therein incorporated herein by reference to
Exhibit 10.56 of the 1995 Form 10-K.
10.41 Multi-Line Excess of Loss Reinsurance Contract, effective
July 1, 1995, among Associated, Calvert, Timberline
Insurance Company and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.57 of the
1995 Form 10-K.
10.42 First Contingency Excess of Loss Reinsurance Contract,
effective July 1, 1995, among Associated, Calvert,
Timberline Insurance Company and various reinsurers
stated therein incorporated herein by reference to
Exhibit 10.58 of the 1995 Form 10-K.
10.43 Second Contingency Excess of Loss Reinsurance
Contract, effective July 1, 1995, among Associated,
Calvert, Timberline Insurance Company and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.59 of the 1995 Form 10-K.
10.44 First Excess Casualty Contingency Reinsurance Contract,
effective July 1, 1994, among Associated, Calvert and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.60 of the 1995 Form 10-K.
10.45 Second Excess Casualty Contingency Reinsurance Contract,
effective July 1, 1994, among Associated, Calvert and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.61 of the 1995 Form 10-K.
10.46 Casualty Excess of Loss Reinsurance Contract, effective
July 1, 1993, among Associated, Calvert and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.62 of the 1995 Form 10-K.
10.47 First Excess Casualty Contingency Reinsurance Contract,
effective October 1, 1992, among Associated and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.63 of the 1995 Form 10-K.
10.48 Second Excess Casualty Contingency Reinsurance Contract,
effective October 1, 1992, among Associated and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.64 of the 1995 Form 10-K.
10.49 First Excess Casualty Contingency Reinsurance Contract,
effective July 1, 1993, among Associated and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.65 of the 1995 Form 10-K.
10.50 Second Excess Casualty Contingency Reinsurance Contract,
effective July 1, 1993, among Associated and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.66 of the 1995 Form 10-K.
10.51 External Third through Fifth Excess Catastrophe
Reinsurance Contract, effective January 1, 1994, among
Associated, Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.67 of the
1995 Form 10-K.
10.52 Preliminary Property Excess and Surplus Lines Excess Per
Risk Reinsurance Contract, effective January 1, 1996,
among Associated, Calvert, all other subsidiaries of the
Company (the "Subsidiaries") and various reinsurers
stated therein incorporated herein by reference to
Exhibit 10.68 of the 1995 Form 10-K.
10.53 Preliminary Property Excess and Surplus Lines Excess
Carve Out Reinsurance Contract, effective January 1,
1996, among Associated, Calvert, the Subsidiaries and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.69 of the 1995 Form 10-K.
10.54 Preliminary Franchise Excess of Loss Reinsurance
Contract, effective January 1, 1996, among Associated,
Calvert, the Subsidiaries and various reinsurers stated
therein incorporated herein by reference to Exhibit 10.70
of the 1995 Form 10-K.
10.55 Property Quota Share Reinsurance Agreement, dated July 1,
1995, among Calvert and various reinsurers stated therein
incorporated herein by reference to Exhibit 10.71 of the
1995 Form 10-K.
10.56 Property First Per Risk Excess Reinsurance Agreement,
dated July 1, 1995, among Calvert and various reinsurers
stated therein incorporated herein by reference to
Exhibit 10.72 of the 1995 Form 10-K.
10.57 First Catastrophe Excess Reinsurance Agreement, dated
July 1, 1995, among Calvert and various reinsurers stated
therein incorporated herein by reference to Exhibit 10.73
of the 1995 Form 10-K.
10.58 Second Catastrophe Excess Reinsurance Agreement, dated
July 1, 1995, among Calvert and various reinsurers stated
therein incorporated herein by reference to Exhibit 10.74
of the 1995 Form 10-K.
10.59 Third Catastrophe Excess Reinsurance Agreement, dated
July 1, 1995, among Calvert and various reinsurers stated
therein incorporated herein by reference to Exhibit 10.75
of the 1995 Form 10-K.
10.60 Fourth Catastrophe Excess Reinsurance Agreement, dated
July 1, 1995, among Calvert and various reinsurers stated
therein incorporated herein by reference to Exhibit 10.76
of the 1995 Form 10-K.
10.61 Casualty First Excess of Loss Reinsurance Contract, dated
July 1, 1995, among Calvert, the Company and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.77 of the 1995 Form 10-K.
10.62 Casualty Second Excess of Loss Reinsurance Contract,
dated July 1, 1995, among Calvert, the Company and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.78 of the 1995 Form 10-K.
10.63 Casualty Third Excess of Loss Reinsurance Contract, dated
July 1, 1995, among Calvert, the Company and various
reinsurers stated therein incorporated herein by
reference to Exhibit 10.79 of the 1995 Form 10-K.
10.64 Casualty Fourth Excess of Loss Reinsurance Contract,
dated July 1, 1995, among Calvert, the Company and
various reinsurers stated therein incorporated herein by
reference to Exhibit 10.80 of the 1995 Form 10-K.
10.65 Property Excess Per Risk Reinsurance Contract, dated
January 1, 1997 between the subsidiaries of the Company
and various reinsurers stated therein.
10.66 Property Excess and Surplus Lines Excess Per Risk
Reinsurance Contract, dated January 1, 1997 between the
subsidiaries of the Company and various reinsurers stated
therein.
10.67 Franchise Excess Loss Reinsurance Contract, dated January
1, 1997 between the subsidiaries of the Company and
various reinsurers stated therein.
10.68 External Third Through Seventh Catastrophe Excess
Reinsurance Contract, dated January 1, 1997 between the
subsidiaries of the Company and various reinsurers stated
therein.
10.69 Aggregate Excess of Loss Reinsurance Contract, dated
January 1, 1997 between the subsidiaries of the Company
and various reinsurers stated therein.
10.70 Per Event Reinsurance Contract, dated October 1, 1996
between the subsidiaries of the Company and various
reinsurers stated therein.
10.71 "Working" Per Event Reinsurance Contract, dated October
1, 1996 between the subsidiaries of the Company and
various reinsurers stated therein.
10.72 Excess Per Event Reinsurance Contract, dated October 1,
1996 between the subsidiaries of the Company and various
reinsurers stated therein.
21.1 Subsidiaries of the Company (included in Notes to the
Consolidated Financial Statements).
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule
(d) Financial Statement Schedules
The financial statement schedules required by
Regulation S-K are incorporated by reference to Item 14(a).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Gryphon Holdings Inc. has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
GRYPHON HOLDINGS INC.
Dated: March 25, 1997
By: Stephen A. Crane
Stephen A. Crane
President
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
Signature Title Date
Stephen A. Crane Director and President March 25, 1997
Stephen A. Crane (Chief Executive Officer)
Robert P. Cuthbert Chief Financial Officer March 25, 1997
Robert P. Cuthbert and Chief Accounting Officer
John F. Iannucci Executive Vice President March 25, 1997
John F. Iannucci and Director
Robert M. Baylis Director March 25, 1997
Robert M. Baylis
Franklin L. Damon Director March 25, 1997
Franklin L. Damon
Robert R. Douglass Director March 25, 1997
Robert R. Douglass
David H. Elliott Director March 25, 1997
David H. Elliott
Hadley C. Ford Director March 25, 1997
Hadley C. Ford
Richard W. Hanselman Director March 25, 1997
Richard W. Hanselman
Joe M. Rodgers Director March 25, 1997
Joe M. Rodgers
George L. Yeager Director March 25, 1997
George L. Yeager
Form 10-K--Item 14(a)(1) and (2)
Gryphon Holdings Inc. and Subsidiaries
Index of Financial Statements and Financial Statement Schedules
Page
Reports of Independent Auditors:
KPMG Peat Marwick LLP F-2
Ernst & Young LLP F-3
The following audited consolidated financial statements of
Gryphon Holdings Inc. and subsidiaries are included in Item 8:
Consolidated Balance Sheets at December 31, 1996 and 1995 F-4
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-8
The following consolidated financial statement schedules of
Gryphon Holdings Inc. and subsidiaries are included in Item
14(d):
Schedules
I Summary of Investments -- Other Than Investments in Related
Parties S-1
II Condensed Financial Information of Registrant S-2
III Supplemental Insurance Information S-4
IV Reinsurance S-5
VI Supplemental Information Concerning Property/Casualty
Insurance Operations S-6
All other schedules to the consolidated financial statements required
by Article 7 of Regulation S-X are not required under the related
instructions or are not applicable and, therefore, have been omitted.
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Gryphon Holdings Inc.
We have audited the accompanying consolidated balance sheets of
Gryphon Holdings Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the
two-year period then ended. In connection with our audits of the
consolidated financial statements, we have also audited the
financial statement schedules, as of and for the years ended
December 31, 1996 and 1995, as listed in the accompanying index.
These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Gryphon Holdings Inc. and subsidiaries as of December
31, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the two-year period then
ended, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedules as of and for the year ended December 31,
1996 and 1995, when considered in relation to the basic
consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
New York, New York
February 14, 1997
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Gryphon Holdings Inc.
We have audited the accompanying consolidated statements of
income, stockholders' equity, and cash flows of Gryphon Holdings
Inc. and subsidiaries (the "Company") for the year ended
December 31, 1994. Our audit also included the financial
statement schedules for the year ended December 31, 1994 listed
in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of Gryphon
Holdings Inc. and subsidiaries referred to above present fairly,
in all material respects, the consolidated results of their
operations and their cash flows for the year ended December 31,
1994, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements,
the Company made an accounting change in 1994.
Ernst & Young LLP
New York, New York
February 21, 1995
Gryphon Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
1996 1995
(Dollars in thousands)
Assets
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: 1996 - $274,515; 1995 - $248,324) $280,164 $260,728
Short-term investments, at cost, which approximates market 307 537
Total investments 280,471 261,265
Cash and cash equivalents 23,398 27,337
Accrued investment income 3,919 4,080
Premiums receivable 18,509 17,475
Reinsurance recoverable on paid losses 14,326 24,489
Reinsurance recoverable on unpaid losses 137,952 152,975
Prepaid reinsurance premiums 18,965 20,434
Deferred policy acquisition costs 12,415 12,182
Deferred income taxes 10,282 6,582
Other assets 6,747 4,170
Total assets $526,984 $530,989
Liabilities and Stockholders' Equity
Policy liabilities:
Unpaid losses and loss adjustment expenses $309,259 $308,886
Unearned premiums 68,683 63,472
Total policy liabilities 377,942 372,358
Reinsurance balances payable 16,207 29,373
Income taxes payable 55 387
Long-term debt 24,625 25,500
Other liabilities 13,019 10,149
Total liabilities 431,848 437,767
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 30,847 30,850
Foreign currency translation adjustment, net of tax (219) (209)
Net unrealized investment gains, net of tax 3,672 8,063
Deferred compensation (257) (193)
Retained earnings 86,271 80,108
Treasury stock, at cost; shares 1996: 1,487,075:
1995: 1,500,000 (25,259) (25,478)
Total stockholders' equity 95,136 93,222
Total liabilities and stockholders' equity $526,984 $530,989
See accompanying notes to consolidated financial statements.
Gryphon Holdings Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31,
1996 1995 1994
(Dollars and shares in thousands,
except per-share data)
Revenues
Net premiums earned $87,929 $83,399 $61,605
Net investment income 16,453 15,839 13,099
Realized gains (losses) on investments 1,203 3,647 (2,046)
Other income 1,059
Total revenues 106,644 102,885 72,658
Expenses
Losses and loss adjustment expenses 57,700 50,816 40,537
Underwriting, acquisition, and insurance expenses 40,967 34,590 25,721
Interest expense 1,761 595
Total expenses 100,428 86,001 66,258
Income before income taxes 6,216 16,884 6,400
Provision for income taxes (benefit):
Current 1,389 2,969 507
Deferred (1,336) 990 (338)
Total income taxes 53 3,959 169
Net income $6,163 $12,925 $6,231
Net income per-share $.93 $1.69 $.77
Weighted average shares outstanding 6,656 7,648 8,132
See accompanying notes to consolidated financial statements.
Gryphon Holdings Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Foreign
Additional Currency Unrealized
Common Paid-in Translation Investment Deferred Retained Treasury
Stock Capital Adjustment Gains (Losses) Compensation Earnings Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balances at January 1, 1994 $81 $30,602 $(146) $60,952 $91,489
Add (deduct):
Net income 6,231 6,231
Translation adjustment (113) (113)
Cumulative effect of a change
in accounting principle $6,143 6,143
Net unrealized investment
losses, net of tax (9,983) (9,983)
Stock award plans 248 $(242) 6
Balances at December 31, 1994 81 30,850 (259) (3,840) (242) 67,183 93,773
Add (deduct):
Net income 12,925 12,925
Translation adjustment 50 50
Stock award plans 49 49
Net unrealized investment
gains, net of tax 11,903 11,903
Purchase of common stock
for treasury $(25,478) (25,478)
Balances at December 31, 1995 81 30,850 (209) 8,063 (193) 80,108 (25,478) 93,222
Add (deduct):
Net income 6,163 6,163
Translation adjustment (10) (10)
Stock award plans (3) (64) 219 152
Net unrealized investment
losses, net of tax (4,391) (4,391)
Balances at December 31, 1996 $81 $30,847 $(219) $3,672 $(257) $86,271 $(25,259) $95,136
See accompanying notes to consolidated financial statements.
Gryphon Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31,
1996 1995 1994
(Dollars in thousands)
Operating activities
Net income $6,163 $12,925 $6,231
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in net policy liabilities 32,239 4,958 2,854
Increase in premiums receivable (1,034) (3,196) (3,073)
Increase in deferred policy acquisition costs (233) (2,388) (2,853)
Deferred income tax provision (1,336) 990 (338)
Decrease (increase) in other assets and liabilities 1,543 (539) 5,169
Amortization and depreciation 595 402 389
Amortization of bond discount, net 944 370 1,332
Realized (gains) losses on investments (1,203) (3,647) 2,046
Increase (decrease) in reinsurance balances payable (13,166) 12,341 5,874
Decrease (increase) in accrued investment income 161 (175) 169
Net cash provided by operating activities 24,673 22,041 17,800
Investing activities
Sales of fixed maturities 281,728 221,026 159,484
Purchases of fixed maturities (310,660) (249,119) (185,184)
Maturities or calls of fixed maturities 3,000 4,775 3,010
Net sales of Short-term investments 230
Capital expenditures (2,111) (366) (540)
Net cash used by investing activities (27,813) (23,684) (23,230)
Financing activities
Proceeds from long-term debt 25,500
Common stock acquired for treasury (25,478)
Principal payment on long-term debt (875)
Issuance of common stock 217
Deferred compensation (131)
Net cash provided by financing activities (789) 22
Effect of exchange rate changes on cash (10) 50 (113)
Decrease in cash and cash equivalents (3,939) (1,571) (5,543)
Cash and cash equivalents at beginning of year 27,337 28,908 34,451
Cash and cash equivalents at end of year $23,398 $27,337 $28,908
Supplemental disclosure of cash flow information
Income taxes paid $1,701 $2,783 $245
Interest paid 1,761 586
See accompanying notes to consolidated financial statements.
1. Summary of Significant Accounting Policies
The significant accounting policies followed by Gryphon
Holdings Inc. (the "Company") are summarized below.
Basis of Presentation and Principles of Consolidation
Gryphon Holdings Inc.'s wholly owned insurance company
subsidiaries are Associated International Insurance Company
("Associated") and Calvert Insurance Company ("Calvert"), which
operate in the property and casualty insurance industry.
Associated writes the majority of its property and casualty
insurance policies in the State of California. Calvert writes
property and casualty insurance policies throughout the United
States and Canada.
The accompanying consolidated financial statements have
been prepared on the basis of generally accepted accounting
principles ("GAAP"), which as to the two insurance subsidiaries
differ from the statutory accounting practices ("SAP") 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.
The preparation of the financial statements in conformity
with GAAP requires the use of estimates and assumptions that
affect amounts reported in the financial statements and the
accompanying notes. Actual results could differ from such
estimates.
Premium Revenues
Direct, assumed and ceded property and liability insurance
premiums written are recognized as earned on a pro rata basis
over the terms of the policies. Unearned premiums are calculated
principally by the application of pro rata fractions and
represent the portion of premiums written that is applicable to
unexpired terms of policies in force.
Recoverable policy acquisition costs that vary with and
are directly related to the production of business, consisting of
commissions, premium taxes and other underwriting expenses
incurred, net of ceding allowances, are deferred and amortized to
income as the related premiums are earned. The Company does not
consider anticipated investment income when determining the
recoverability of amounts deferred. Amortization of policy
acquisition costs amounted to $30.1 million, $26.7 million, and
$18.1 million for the years ended December 31, 1996, 1995 and
1994, respectively.
Reinsurance
Assumed reinsurance premiums written, commissions and
unpaid losses and loss adjustment expenses are accounted for
based principally on the reports received from the ceding
insurance companies and in a manner consistent with the terms of
the related reinsurance agreements.
To limit its risks, the Company acquires reinsurance
coverage with retentions and limits that management believes are
appropriate for the circumstances. Reinsurance arrangements
effected under quota-share reinsurance contracts and excess-of-
loss reinsurance contracts provide for greater diversification of
business, allow management to control exposure to potential
losses arising from large risks, and provide additional capacity
for growth. The accompanying consolidated financial statements
reflect premiums earned, losses and loss adjustment expenses
(LAE) and underwriting, acquisition and insurance expenses, net
of reinsurance ceded. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability
associated with the reinsured policies.
Contingent commissions and retrospectively-rated premiums
are accounted for on an earned basis and are accrued, in
accordance with the terms of the applicable reinsurance
agreement, based on the estimated ultimate level of profitability
relating to such reinsured business. Accordingly, the
profitability of the reinsured business is continually reviewed
and as adjustments become necessary, such adjustments are
reflected in current operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Investments
Effective January 1, 1994, the Company changed its method
of accounting for investments, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under the
accounting pronouncement, the Company's debt and equity
securities are classified as available for sale and reported at
fair value, with unrealized gains and losses, net of deferred
income taxes, included in stockholders' equity.
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 sales or liquidations 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.
Losses and Loss Adjustment Expenses
The liabilities for unpaid losses and loss adjustment
expenses are based on the Company's estimates of the ultimate
cost of unpaid losses reported prior to the close of the
accounting period, incurred but not reported losses, and the
related loss adjustment expenses. These liabilities are
estimated by management utilizing methods and procedures which it
believes are reasonable and necessarily are subject to the impact
of future changes in claim severity and frequency, as well as
numerous other factors. Although management believes that the
estimated liabilities for losses and loss adjustment expenses are
reasonable, because of the extended period of time over which
such losses are reported and settled, the subsequent development
of these liabilities may not conform to the assumptions inherent
in their determination and, accordingly, may vary from the
estimated amounts included in the accompanying consolidated
financial statements. To the extent that the actual emerging
loss experience varies from the assumptions used in the
determination of these liabilities, they are adjusted to reflect
actual experience. Such adjustments, to the extent they occur,
are reported in the period recognized.
The Company's liabilities for unpaid losses and loss
adjustment expenses include estimates for certain types of latent
exposures, such as environmental impairment and asbestos-related
claims, relating to business written prior to 1985 and which are
generally difficult to establish with traditional reserving
techniques.
The Company wrote environmental impairment and
asbestos-related coverages at high attachment levels and obtained
reinsurance coverage reducing its net retention to $50,000 per
occurrence. Among the complications of reserving for this type
of business are a lack of sufficient historical data, long
reporting delays, uncertainty as to the number and identity of
insureds with potential exposure, and complex, unresolved legal
issues regarding policy coverage and the extent and timing of any
such contractual liability. Courts have reached different and
sometimes inconsistent conclusions as to when a loss occurred and
which policies provide coverage, which claims are covered,
whether there is an insured obligation to defend, how policy
limits are determined, how policy exclusions are applied and
interpreted, and whether clean-up costs are includible as insured
property damage. These legal issues are not likely to be
resolved in the near future.
The establishment of appropriate reserves is an inherently
uncertain process, and there can be no assurance that the
ultimate liability, particularly with respect to latent exposures
such as environmental impairment and asbestos, will not
materially exceed the Company's current liability for unpaid loss
and loss adjustment expense reserve estimates and have a material
adverse effect on its future results of operations and financial
condition. Furthermore, due to the inherent uncertainty of
estimating such liabilities, particularly with respect to such
latent exposures, it has been, and may over time continue to be,
necessary to revise such estimated liabilities. However, on the
basis of the Company's internal procedures, which analyze, among
other things, its experience with similar cases and historical
trends such as reserving patterns, loss payments, pending levels
of unpaid claims, and product mix, as well as court decisions,
economic conditions and public attitudes, management believes
that adequate provision has been made for the Company's
liabilities for unpaid losses and loss adjustment expenses.
Foreign Currency
Transactions denominated in foreign currencies are
translated at the rate of exchange at the transaction date.
Revenues and expenses are translated at average exchange rates.
Assets and liabilities are translated at the exchange rates in
effect at the balance sheet date.
Earnings per Share
Earnings per common share are based on the average number
of shares outstanding during each year; the exercise of
outstanding stock options would have no significant dilutive
effect on earnings per share.
2. Investments
The major categories of net investment income are
summarized as follows:
Year ended December 31
1996 1995 1994
(Dollars in thousands)
Fixed maturities $16,256 $15,245 $12,471
Cash, cash equivalents and
short-term investments 1,117 1,610 1,455
Total investment income 17,373 16,855 13,926
Less related expenses (920) (1,016) (827)
Net investment income $16,453 $15,839 $13,099
The gross realized gains and losses from sales of fixed
maturity securities are as follows:
Year ended December 31
1996 1995 1994
(Dollars in thousands)
Gross realized gains $3,074 $4,306 $1,666
Gross realized losses (1,871) (659) (3,712)
Net realized gains (losses) on sales $1,203 $3,647 $(2,046)
At December 31, 1996 and 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)
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
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
At December 31, 1996, the amortized cost and estimated
fair value of fixed maturities, by contractual maturity, are
shown below. Expected maturities, which are best estimates, will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without prepayment
penalties.
December 31, 1996
Amortized Fair
Cost Value
(Dollars in thousands)
Due in one year or less $5,108 $5,148
Due after one year through five years 46,142 47,012
Due after five years through ten years 76,941 78,610
Due after ten years 102,943 105,933
231,134 236,703
Mortgage-backed securities 43,381 43,461
Total $274,515 $280,164
At December 31, 1996, investments in Federal National
Mortgage Association securities aggregating $24.7 million
represented the only investments in any entity in excess of 10.0%
of stockholders' equity other than those investments issued or
guaranteed by the U.S. government.
Securities on Deposit
At December 31, 1996 and 1995, securities with a fair
value of approximately $18.6 million and $16.2 million,
respectively were on deposit with various state or governmental
insurance departments in order to comply with statutory insurance
laws.
3. Losses and Loss Adjustment Expenses
The following table provides a reconciliation of beginning
and ending loss and LAE reserve balances of the Company for each
of the years in the three-year period ended December 31, 1996 as
computed in accordance with GAAP.
Reconciliation of Liability for Loss and Loss Adjustment Expenses
(Dollars in thousands)
Year ended December 31,
1996 1995 1994
Gross reserves for losses and LAE at the beginning of the year $308,886 $315,691 $275,660
Ceded reserves for losses and LAE at the beginning of the year 152,975 169,889 133,783
Net reserves for losses and LAE at the beginning of the year 155,911 145,802 141,877
Add:Provision for losses and LAE for claims occurring in:
The current year 53,402 50,424 49,047
Prior years 4,298 392 (8,510)
Total net incurred losses and LAE 57,700 50,816 40,537
Less:Losses and LAE payments for claims occurring in:
The current year 11,520 11,796 12,460
Prior years 30,784 28,911 24,152
Total net paid losses and LAE 42,304 40,707 36,612
Reserves for net losses and LAE at end of year 171,307 155,911 145,802
Reinsurance recoverable on unpaid losses 137,952 152,975 169,889
Reserves for gross losses and LAE at end of year $309,259 $308,886 $315,691
The provision for losses and LAE for claims occurring in
prior years shows an unfavorable development of $4.3 million in
1996. The unfavorable development resulted principally from
additional losses and reserve strengthening for a truck leasing
program ($5.3 million) and used-car dealers program ($2.2
million), each discontinued during 1995; and an increase of $2.2
million in reserves for environmental impairment and asbestos-
related exposures on business written prior to 1985. Such
increases were partially offset by favorable development of A&E
reserves and a re-estimation of IBNR reserves pertaining to other
property business.
The following table provides a reconciliation of beginning
and ending loss and LAE reserve balances of the Company for each
of the years in the three-year period ended December 31, 1996 for
environmental impairment and asbestos-related liabilities.
Reconciliation of Environmental Impairment and Asbestos-related
Liability for Loss and Loss Adjustment Expenses
(Dollars in thousands)
Year ended December 31,
Environmental Impairment Liability 1996 1995 1994
Gross reserves for losses and LAE at the beginning of the year $11,938 $14,200 $15,000
Ceded reserves for losses and LAE at the beginning of the year 3,958 5,100 5,000
Net reserves for losses and LAE at the beginning of the year 7,980 9,100 10,000
Add: Provision for losses and LAE for claims
occurring in prior years 1,598 3 (58)
Less: Losses and LAE payments for claims
occurring in prior years 774 1,123 842
Reserves for net losses and LAE at end of year 8,804 7,980 9,100
Reinsurance recoverable on unpaid losses 4,177 3,958 5,100
Reserves for gross losses and LAE at end of year $12,981 $11,938 $14,200
Year ended December 31,
Asbestos-related Liability 1996 1995 1994
Gross reserves for losses and LAE at the beginning of the year $1,700 $4,050 $5,000
Ceded reserves for losses and LAE at the beginning of the year 1,060 3,350 4,250
Net reserves for losses and LAE at the beginning of the year 640 700 750
Add: Provision for losses and LAE for claims occurring in the
prior years 583 612 (158)
Less: Losses and LAE payments for claims occurring in the prior
years 212 672 (108)
Reserves for net losses and LAE at end of year 1,011 640 700
Reinsurance recoverable on unpaid losses 3,110 1,060 3,350
Reserves for gross losses and LAE at end of year $4,121 $1,700 $4,050
At December 31, 1996, the reserve for unpaid environmental
impairment losses and related loss adjustment expenses was
approximately $8.8 million, net of reinsurance recoverables
deemed probable of collection by the Company of approximately
$4.2 million. The range of gross reserves for unpaid
environmental impairment losses and loss adjustment expenses is
estimated to be $13.0 million to $22.0 million and the range of
reserves, net of reinsurance recoverable, for unpaid
environmental impairment losses and loss adjustment expenses is
estimated to be approximately $8.8 million to $13.3 million.
At December 31, 1996, the reserve for unpaid asbestos-
related losses and related loss adjustment expenses was $1.0
million, net of reinsurance recoverables deemed probable of
collection by the Company of approximately $3.1 million. The
range of gross reserves for unpaid asbestos-related losses and
loss adjustment expenses is estimated to be $4.1 million to $8.3
million and the range of reserves, net of reinsurance
recoverable, for unpaid asbestos-related losses and loss
adjustment expenses is estimated to be approximately $1.0 million
to $2.0 million.
There are significant uncertainties in estimating the
amount of the Company's environmental impairment and asbestos-
related liabilities resulting from a lack of historical data,
long reporting delays, uncertainty as to the number and identity
of insureds with potential exposure, and complex, unresolved
legal issues regarding policy coverage and the extent and timing
of any such contractual liability. Courts have reached different
and sometimes inconsistent conclusions as to when a loss occurred
and what policies provide coverage, what claims are covered,
whether there is an insured obligation to defend, how policy
limits are determined, how policy exclusions are applied and
interpreted, and whether cleanup costs are includible as insured
property damage. These issues are not likely to be resolved in
the near future. As a result of these issues, the ultimate
number and cost of these claims may generate losses that vary
materially from the amounts currently recorded and could have a
material adverse effect on the Company's results of operations
and financial condition. While management believes the Company's
reserves for these coverages are appropriately established,
because of the uncertainty of circumstances surrounding many
critical factors that affect environmental impairment and
asbestos-related liabilities, there can be no assurance that the
Company's reserves for and losses from these claims will not
increase in the future.
4. Reinsurance
Certain premiums and losses are assumed from and ceded to
other insurance companies under various reinsurance agreements.
The Company cedes a portion of its business through quota share
treaties, excess of loss treaties and facultative placements, and
generally retains net amounts of risk ranging from $100,000 to
$500,000 per risk.
The Company continually evaluates the credit risk related
to its reinsurers and has established a minimum A.M. Best rating
of "A-" for its domestic and Bermuda-based reinsurers and also
requires at least $50 million of policyholder surplus for all
domestic and foreign reinsurers. The Company works with
intermediaries to continually monitor the financial condition of
its reinsurers, as appropriate. If a reinsurer of the Company
were to become insolvent or unable to make payments under the
terms of a reinsurance agreement, it could have a material
adverse effect on the Company.
The following table sets forth the significant reinsurance
receivables due from reinsurers as of December 31, 1996.
Year ended December 31, 1996
(Dollars in thousands)
Reinsurance A.M. Best's
Reinsurer Receivables Rating
Munich American Reinsurance Company $18,411 A+
Kemper Reinsurance Company 13,590 A-
Odyssey Reinsurance Corporation 11,454 A-
St. Paul Fire and Marine Insurance Company 11,366 A+
Lloyd's Underwriters 11,329 *
Signet Star Reinsurance Corporation 10,994 A
American Re-Insurance Company 9,653 A+
Western Atlantic Reinsurance Corporation 7,869 A
* A.M. Best does not assign ratings to Lloyd's syndicates.
The amount and cost of reinsurance available to companies
specializing in property and casualty insurance are subject, in
large part, to prevailing market conditions beyond the control of
the Company. The Company's ability to provide insurance at
competitive premium rates and coverage limits on a continuing
basis depends to a significant extent upon its ability to obtain
adequate reinsurance in amounts and at rates that will not
adversely affect its competitive position.
For the years ended December 31, 1996, 1995 and 1994,
amounts relating to assumed and ceded reinsurance premiums
written and earned and losses and loss adjustment expenses
incurred reflected in the accompanying consolidated statements of
income approximated the following:
Year ended December 31,
1996 1995 1994
(Dollars in thousands)
Premiums Written:
Assumed $2,390 $2,076 $3,638
Ceded 62,330 66,805 69,964
Premiums Earned:
Assumed $2,209 $1,715 $3,661
Ceded 63,824 66,064 68,221
Losses & LAE Incurred:
Assumed $4,455 $2,585 $4,803
Ceded 42,052 52,089 92,796
At December 31, 1996 the Company held letters of credit of
approximately $9.1 million securing amounts due from reinsurers.
During 1996, Associated maintained a five-layer property
catastrophe reinsurance program which covered 95% of the annual
aggregate amount of property claims up to $115.0 million per
occurrence, subject to a retention of $2.5 million per
occurrence.
During 1996, Calvert maintained a four-layer property
catastrophe reinsurance program which covered 95% of any one
property loss occurrence exceeding $0.6 million, up to $5.5
million of any one occurrence, and up to a $10.0 million annual
aggregate loss.
Associated limits its net retention to $100,000 per risk
for difference in conditions ("DIC"). Until October 1, 1996,
Associated retained $250,000 per risk for casualty, architects'
and engineers' professional liability, specialty lines, and
commercial auto and up to $500,000 per risk for non-DIC property
policies. Calvert reinsured various lines of business through
quota share treaties, excess of loss treaties and facultative
placements which limited Calvert's net retention per risk to a
maximum of $200,000 for property and casualty.
Effective October 1, 1996, the Company's reinsurance
program was restructured to provide protection for loss events
covering property and casualty classes of business, excluding DIC
and certain other property business. The program provides for
$24.5 million of coverage in excess of the Company's retention of
$500,000 for each and every event. Certain businesses that are
excluded from this agreement are covered by quota share treaties
that limit the Company's net retention per risk to a maximum of
$250,000.
Reinsurance ceded contracts do not relieve the Company of
its obligations to policyholders. The Company remains liable to
its policyholders for the portion reinsured to the extent that
any reinsurer does not meet its obligations for reinsurance ceded
to it under the reinsurance agreements. Failure of reinsurers to
honor their obligations could result in losses to the Company.
In addition, as is often the case in the normal course of
business, the Company is involved in disputes with reinsurers
regarding certain loss recoverables. Although the Company
believes that such issues will be resolved in the Company's
favor, there can be no assurance that the Company will prevail.
5. Federal Income Taxes
Effective January 1, 1993, the Company adopted SFAS
No. 109, "Accounting for Income Taxes." SFAS No. 109 establishes
an asset and liability approach for financial accounting and
reporting for income taxes as compared to the concept of matching
tax expense to pretax income. Under the liability method,
deferred tax assets and liabilities are recorded based on the
difference between the financial statement and tax bases of
assets and liabilities and the tax rates in effect when these
temporary differences are expected to reverse. The principal
assets and liabilities giving rise to such differences are loss
and LAE reserves, unearned premiums, deferred policy acquisition
costs, and net unrealized investment gains (losses).
The components of the net deferred income tax asset are as
follows:
Year ended December 31,
1996 1995
(Dollars in thousands)
Discount on loss reserves $12,270 $12,239
Unearned premium reserve 3,477 3,015
Alternative minimum tax credit 1,099 56
Other, net 129 110
Deferred income tax asset 16,975 15,420
Deferred policy acquisitions costs (4,345) (4,264)
Unrealized gains on investments (1,977) (4,341)
Other, net (371) (233)
Deferred income tax liability (6,693) (8,838)
Net deferred income tax asset $10,282 $6,582
The Company has not established a valuation reserve
because the Company believes it is more likely than not that the
net deferred tax asset will be fully realized.
A reconciliation of income taxes computed at the statutory
federal income tax rate to the income tax provision is presented
below:
1996 1995 1994
% of Pre-Tax % of Pre-Tax % of Pre-Tax
Amount Income Amount Income Amount Income
------- --------- ------ -------- ------ --------
(Dollars in thousands)
Taxes based on statutory
federal income tax rate $2,176 35.0% $5,909 35.0% $2,240 35.0%
Add (deduct):
Tax-exempt interest (2,338) (37.6) (2,131) (12.6) (2,230) (34.8)
Other, net 215 3.5 181 1.1 159 2.4
Total income taxes $53 .9% $3,959 23.5% $169 2.6%
6. Long-Term Debt
In September 1995, the Company purchased 1.5 million
shares of its common stock beneficially owned by Willis Corroon
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 December 31, 1996, the
weighted average interest rate was 6.91%, and the fair value of
the loan approximated the carrying value.
Principal payments due on the term loan are as follows:
Year ending December 31, Principal Amount
(Dollars in thousands)
1997 $3,500
1998 3,625
1999 4,125
2000 4,625
2001 5,000
Thereafter 3,750
Total $24,625
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 December 31, 1996, the fair
value of the interest rate swap approximated the carrying value.
7. Fair Value of Financial Instruments
The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 119 "Disclosure
about Derivative Financial Instruments and Fair Value of
Financial Instruments." SFAS No. 119 requires disclosure of an
estimate of the fair value of financial instruments. The
Statement defines the fair value of financial instruments as the
amount at which the instruments could be exchanged in a current
transaction between willing parties. The following table
summarizes the carrying amount and estimated fair value of the
Company's financial instruments at December 31, 1996 and 1995.
Year ended December 31
1996 1995
(Dollars in thousands)
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial assets:
Investments and cash $303,869 $303,869 $288,602 $288,602
Financial liabilities:
Long-term debt 24,625 24,651 25,500 25,713
The following methods and assumptions were used to
estimate the fair value of each class of financial instrument:
Investments and cash
The fair values of fixed maturities are based on quoted
market prices. The fair value of short-term instruments
approximate amortized cost. The fair value of cash and cash
equivalents approximates amortized cost.
Long-term debt
The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or
similar issues or on current rates offered to the Company for
debt of the same maturities. The fair value includes
the effect of the interest rate swap.
8. Commitments and Contingencies
Leases
The Company and its subsidiaries lease certain office
facilities and computer equipment. Minimum rental commitments for
these leases, exclusive of escalations due to real estate taxes
and operating expenses, are as follows:
Year ending December 31, (Dollars in thousands)
1997 $1,157
1998 1,163
1999 1,130
2000 964
2001 755
Thereafter 5,512
$10,681
Total rent expense for all leases was $1,310,000, $959,000
and $856,000 in 1996, 1995 and 1994, respectively.
9. Dividends and Stockholders' Equity
Dividends
Associated, a California domiciled company, and Calvert, a
Pennsylvania domiciled company, are required to file with the
Department of Insurance of various states an annual convention
statement, which is prepared in conformity with accounting
practices prescribed or permitted by the respective states.
These practices vary from GAAP principally in that policy
acquisition costs are charged to expense when incurred, deferred
federal income taxes are not recognized, investments are
reflected at amortized cost, and nonadmitted assets are excluded
from the balance sheet.
Under state insurance laws of Pennsylvania, the maximum
amount of dividends which can be paid by Pennsylvania domiciled
insurance companies without prior approval of the Insurance
Commissioner is limited to the greater of 10% of surplus as
regards policyholders as of the preceding year end or the
insurance company's net income for the previous year. Under
state insurance laws of California, Associated is permitted to
pay as dividends to the Company, after advance notice to the
California Insurance Department, an amount equal to the greater
of 10% of Associated's policyholders surplus at the end of the
preceding year or its statutory net income for the preceding
year. Dividends in excess of these amounts require the prior
approval of the California Insurance Department. Dividends may
be paid only out of earned surplus. As such, at December 31,
1996, the maximum amount of dividends that Associated could pay
in 1997 without California Insurance Department approval amounted
to approximately $6.6 million and the maximum amount of dividends
that Calvert could pay in 1997 without Pennsylvania Insurance
Department approval amounted to approximately $1.7 million.
Stockholders' Equity
A reconciliation of the two insurance subsidiaries' net
income and stockholders' equity for each of the years in the
three years ended December 31, 1996 and as of December 31, 1996
and 1995, as reported to the various regulatory authorities in
accordance with SAP, to the related GAAP amounts included in the
accompanying consolidated financial statements is as follows:
Stockholders'
Net Income Equity
1996 1995 1994 1996 1995
(Dollars in thousands)
Associated's and Calvert's statutory-
basis amounts $7,298 $13,876 $5,296 $82,566 $83,433
Add (deduct):
Deferred policy acquisition costs 233 2,388 2,853 12,415 12,182
Deferred income taxes 341 (728) (12) 11,175 10,835
Nonadmitted assets 3,090 950
Unauthorized reinsurance 3,980 1,977
Foreign currency translation adjustment (68) (110) (74)
Unrealized investment gains 816 3,672 8,063
Other, net (67) 25 (33)
Associated's and Calvert's
GAAP amounts 8,553 15,451 8,063 116,865 117,440
Holding Company:
Non-insurance company expenses (2,390) (2,526) (1,832)
GAAP equity (21,729) (24,218)
Consolidated amounts -- GAAP basis $6,163 $12,925 $6,231 $95,136 $93,222
10. Shareholder Rights Plan
In June 1995, the Board of Directors declared a dividend
of one right for each outstanding share of Common Stock. Each
right entitles the holder to purchase from the Company a unit
consisting of 1/100 of a share of Junior Participating Cumulative
Preferred Stock at a price of $50 per unit. Initially, the
rights will not be exercisable and will trade with the Common
Stock. In the event a person or group acquires 20% or more of
the Common Stock, or commences a tender offer for the outstanding
shares, the rights become exercisable.
If a person or group acquires 20% or more of the Common
Stock, the rights will entitle a holder (other than the acquiring
person or group of acquiring persons) to buy shares of Common
Stock having a market value of twice the exercise price of the
right. If the Company is subsequently involved in a merger or
other business combination with a holder of 20% or more of the
stock of the Company, the rights will entitle a holder to buy
shares of common stock of the acquiring corporation having a
market value of twice the exercise price of the right.
The rights may be redeemed by the Company at $.001 per
right at any time prior to the acquisition by any person or group
of 20% or more of the Company's shares. The rights have no
voting power and will expire in June 2005, if not previously
redeemed.
11. Property and Equipment
Property and equipment is classified with other assets in
the accompanying balance sheets and is stated at cost, net of
accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated useful
lives of the related property and equipment and ranges
principally from three to seven years.
Property and equipment, included in other assets in the
balance sheet, is comprised of the following:
Year ended December 31,
1996 1995
(Dollars in thousands)
Furniture, fixtures and
leasehold improvements $2,475 $1,168
Computers 1,011 1,328
Office equipment 354 273
3,840 2,769
Less: Accumulated depreciation
and amortization 1,116 1,690
$2,724 $1,079
12. Stock Option and Restricted Stock Plans
The Company's stock option plans provide for granting of
stock options to key employees and non-employee directors.
Options are granted at a price not less than the market price on
the date of grant. Options that have been granted under the
plans will become exercisable in four annual installments of 25%
each commencing on the second anniversary of the date of grant
and will expire ten years from the date of grant.
The Company's restricted stock award plan provides for the
granting of up to 100,000 shares of common stock to key
employees, subject to restrictions as to continuous employment
except in the case of death or normal retirement. Restrictions
generally expire over a five-year period from date of grant.
Compensation expense is recognized over the restriction period.
As of December 31, 1996, 26,000 shares were outstanding under the
plan.
The Financial Accounting Standards Board has issued SFAS
No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123
provides an option either to continue the Company's current
method of accounting for stock-based compensation, or to adopt
the fair value method of accounting for stock-based employee
compensation plans, which would require the Company to expense
the fair value of its stock options at the date of grant over the
vesting period.
The Company has elected to follow Accounting Principle
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its
stock option and restricted stock plans. Accordingly, no
compensation expense has been recognized for its stock-based
compensation plans other than for restricted stock awards.
Although the Company elected to continue to follow APB No. 25, it
is required to provide additional disclosures including pro forma
net income and earnings per share as if the Company adopted the
new fair value method for recognition purposes in 1995.
A summary of stock option activity during the three years
ended December 31, 1996, follows:
Available Weighted
for Grant Outstanding Average of
Exercise Price
of Outstanding
Options
-------- ----------- -------------
Balance, December 31, 1993 92,500 307,500 $13.00
Granted (59,500) 59,500 14.11
Canceled 1,000 (1,000) 13.88
Balance, December 31, 1994 34,000 366,000 13.18
Authorized 100,000
Granted (114,000) 114,000 14.89
Canceled 21,000 (21,000) 13.07
Balance, December 31, 1995 41,000 459,000 13.61
Authorized 250,000
Granted (162,500) 162,500 17.44
Exercised (3,925) 13.00
Canceled 59,250 (59,250) 15.03
Balance, December 31, 1996 187,750 558,325 $14.58
The following table summarizes outstanding and exercisable
options as of December 31, 1996.
Options Outstanding Options Excersiable
--------------------- ---------------------
Weighted
Year Range Number Average Weighted Number Weighted
of of Outstanding Remaining Average Exercisable Average
Grant Exercise Contractual Exercise Exercise
Prices Life Price Price
1993 $13 254,825 7.00 $13.00 125,450 $13.00
1994 $13 - $15 57,500 7.45 14.11 14,375 14.11
1995 $13 - $16 109,000 8.49 14.92 14.92
1996 $14 - $20 137,000 9.36 17.44 17.44
558,325 139,825
The pro forma net income and earnings per share determined
consistent with SFAS No. 123 is as follows:
Pro forma (1) 1996 1995
Net income $5,974 $12,880
Earnings per share $.90 $1.68
(1) During the initial phase-in period of SFAS No. 123, the
effects of applying the standard for either recognizing
compensation cost or providing pro forma disclosures are not
likely to be representative of the effects on reported net income
for future years, based on the fact that options vest over
several years and additional awards generally are made each year.
The weighted average fair value of options granted during
1996 and 1995 were $7.64 and $6.29, respectively. The Black-
Scholes option-pricing model was used with the following weighted
average assumptions: volatility of 24.3%, risk-free interest rate
of 6.81% in 1996 and 6.18% in 1995, and expected life of 7 years.
13. Employee Benefits and Incentive Bonus Plans
The Company maintains a defined contribution retirement
401(k) & Profit Sharing Plan. Participation in the plan is
available to all employees upon their satisfaction of specified
eligibility requirements. Under the 401(k) component of the
plan, the Company matches, on a dollar-for-dollar basis, each
employee's contribution up to 3% of eligible compensation. Under
the profit sharing component of the plan, annual contributions
may be authorized by the Board of Directors based upon the
Company's performance for the relevant year. The Company's costs
are charged to income and amounted to $0.5 million in 1996, $0.4
million in 1995 and $0.3 million in 1994.
The Company maintains an annual incentive bonus plan for
officers and other key employees. Bonuses are based upon
predetermined objectives established by the Compensation
Committee. The Company's total incentive bonus plan expense for
the years ended December 31, 1996, 1995 and 1994 was $0.6
million, $1.6 million and $1.2 million, respectively.
14. Concentrations of Business
Gross premiums written in the State of California amounted
to approximately $68,663,000, $76,396,000 and $73,943,000 in
1996, 1995 and 1994, respectively. In the State of New York, the
Company's gross premiums written were $11,975,000, $20,141,000
and $16,821,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Gross premiums written in any other state do
not exceed 10% of gross premiums written.
The Company's architects' and engineers' professional
liability insurance business is produced by Risk Administration
and Management Company ("RAMCO"), an unaffiliated managing
general agent. For the years ended December 31, 1996, 1995 and
1994, direct premiums written by RAMCO for the Company amounted
to approximately $17,843,000, $14,452,000 and $15,910,000,
respectively.
15. Quarterly Financial Information (unaudited)
Quarterly financial information (unaudited) for the year
ended December 31, 1996 is presented below:
Three months ended
March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996
(Dollars and shares in thousands, except per share amounts)
Gross premiums written $34,919 $39,017 $44,807 $38,194
Net premiums written 21,213 22,585 28,165 22,644
Net premiums earned 21,951 21,180 22,292 22,506
Net investment income 4,159 3,921 4,065 4,308
Realized gains (losses)
on investments 802 (190) 4 587
Other income 270 285 389 115
Total revenues 27,182 25,196 26,750 27,516
Income (loss) before
income taxes 4,658 (294) 2,249 (397)
Net income 3,505 337 1,986 335
Net income per share $.53 $.05 $.30 $.05
Weighted average shares
outstanding 6,648 6,656 6,660 6,661
Quarterly financial information (unaudited) for the year
ended December 31, 1995 is presented below:
Three months ended
March 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995
(Dollars and shares in thousands, except per share amounts)
Gross premiums written $35,209 $43,444 $43,747 $34,580
Net premiums written 17,872 25,703 25,086 21,514
Net premiums earned 17,697 21,019 20,324 24,359
Net investment income 3,666 4,133 4,030 4,010
Realized gains on investments 276 1,554 736 1,081
Total revenues 21,639 26,706 25,090 29,450
Income before income taxes 3,738 4,614 2,670 5,862
Net income 3,002 3,485 2,355 4,083
Net income per share $.37 $.43 $.31 $.61
Weighted average shares
outstanding 8,148 8,148 7,648 6,648
As a result of the Company's purchase of its Common Stock,
the average number of shares outstanding varies from quarter
to quarter, and the sum of the quarterly earnings per common
share may not equal the total for the year.
At December 31, 1996
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN
RELATED PARTIES
COLUMN COLUMN COLUMN COLUMN
A B C D
Amount at
which
shown in
the balance
Type of Investment Cost Value sheet
(Dollars in thousands)
Fixed maturities:
Bonds:
United States Government and
government agencies and authorities $55,845 $56,584 $56,584
States, municipalities and political
subdivisions 141,686 146,335 146,335
Foreign governments 5,747 5,923 5,923
Mortgage-backed securities 43,381 43,461 43,461
Corporate bonds 27,856 27,861 27,861
Total fixed maturities 274,515 280,164 280,164
Short-term investments 307 307 307
Total investments $274,822 $280,471 $280,471
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Balance Sheets
December 31,
1996 1995
(Dollars in thousands)
Assets
Cash and cash equivalents $289 $469
Investment in subsidiaries 118,336 118,970
Income tax recoverable 439 660
Deferred income taxes 1,084 89
Other assets 268 215
Total assets $120,416 $120,403
Liabilities and stockholders' equity
Liabilities:
Other liabilities 655 $1,681
Long-term debt 24,625 25,500
Total liabilities 25,280 27,181
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 30,847 30,850
Foreign currency translation
adjustment, net of tax (219) (209)
Net unrealized gains, net of tax 3,672 8,063
Deferred compensation (257) (193)
Retained earnings 86,271 80,108
Treasury stock, at cost;
shares 1996: 1,487,075:
1995: 1,500,000 (25,259) (25,478)
Total stockholders' equity 95,136 93,222
Total liabilities and
stockholders' equity $120,416 $120,403
Statements of Income
Year ended December 31,
1996 1995 1994
(Dollars in thousands)
Revenue
Net investment income $24 $28 $11
Total revenues 24 28 11
Expenses
Operating expenses 1,921 3,282 2,563
Interest expense 1,761 595
Total expenses 3,682 3,877 2,563
Loss before income taxes
and equity in undistributed
income of subsidiaries (3,658) (3,849) (2,552)
Income tax benefit 1,268 1,323 720
Loss before equity in undistributed income
of subsidiaries (2,390) (2,526) (1,832)
Equity in undistributed income
of subsidiaries 8,553 15,451 8,063
Net income $6,163 $12,925 $6,231
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Statements of Cash Flows
Year ended December 31,
1996 1995 1994
(Dollars in thousands)
Operating activities
Loss before equity in undistributed
income of subsidiaries $(2,390) $(2,526) $(1,832)
Adjustments to reconcile net income to
net cash provided by operating activities:
Decrease (increase) in
income tax recoverable (487) 796
Deferred income tax provision (995) 261 (350)
Amortization and depreciation 68 85 88
Decrease (increase) in other
assets and liabilities (798) 825 (80)
Net cash used by operating activities (4,115) (1,842) (1,378)
Investing activities
Capital expenditures (2) (5) (114)
Net cash used by investing activities (2) (5) (114)
Financing activities
Dividends received 4,726 2,000 1,250
Proceeds from long-term debt 25,500
Common stock acquired for treasury (25,478)
Issuance of common stock 217
Deferred compensation (131)
Principal payment on long term debt (875)
Net cash provided
by financing activities 3,937 2,022 1,250
Increase (decrease) in cash and cash equivalents(180) 175 (242)
Cash and cash equivalents at beginning of year 469 294 536
Cash and cash equivalents at end of year $289 $469 $294
Year ended December 31,
SCHEDULE III--SUPPLEMENTAL INSURANCE INFORMATION
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J
Future
Policy Other
Benefits, Policy Benefits, Underwriting,
Deferred Losses, Claims Claims Acquisition,
Policy Claims and Net Losses & and
Year and Acquisition and Loss Unearned Benefits Premium Investment Settlement Insurance Premiums
Segment Costs Expenses Premiums Payable Revenue Income Expenses Expense Written
- -------- --------- -------- -------- -------- ------- -------- --------- --------- --------
(Dollars in thousands)
1996
Property/Casualty $12,415 $309,259 $68,683 $0 $87,929 $16,453 $57,700 $40,967 $94,607
Total $12,415 $309,259 $68,683 $0 $87,929 $16,453 $57,700 $40,967 $94,607
1995
Property/Casualty $12,182 $308,886 $63,472 $0 $83,399 $15,839 $50,816 $34,590 $90,175
Total $12,182 $308,886 $63,472 $0 $83,399 $15,839 $50,816 $34,590 $90,175
1994
Property/Casualty $9,794 $315,691 $55,979 $0 $61,605 $13,099 $40,537 $25,721 $69,187
Total $9,794 $315,691 $55,979 $0 $61,605 $13,099 $40,537 $25,721 $69,187
Year ended December 31,
SCHEDULE IV--REINSURANCE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Percentage
Assumed of Amount
Ceded to from Assumed
Direct Other Other Net to
Amount Companies Companies Amount Net
(Dollars in thousands)
1996
Premiums:
Property/Casualty
Insurance $154,547 $62,330 $2,390 $94,607 2.5%
Total Premiums $154,547 $62,330 $2,390 $94,607 2.5%
1995
Premiums:
Property/Casualty
Insurance $154,904 $66,805 $2,076 $90,175 2.3%
Total Premiums $154,904 $66,805 $2,076 $90,175 2.3%
1994
Premiums:
Property/Casualty
Insurance $135,513 $69,964 $3,638 $69,187 5.3%
Total Premiums $135,513 $69,964 $3,638 $69,187 5.3%
Year ended December 31,
SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
Reserves for Claims & Claim Amortization
Unpaid Discount, Adjustment Expenses of
Deferred Claims if any, Incurred Related to Deferred Paid Claims
Affiliation Policy and Claim Deducted Net (1) (2) Policy and Claim
with Acquisition Adjustment in Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
Company Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses Written
(Dollars in thousands)
1996
Consolidated Property/
Casualty Entities $12,415 $309,259 $-0- $68,683 $87,929 $16,453 $53,402 $4,298 $30,062 $42,304 $94,607
1995
Consolidated Property/
Casualty Entities $12,182 $308,886 $-0- $63,472 $83,399 $15,839 $50,424 $392 $26,706 $40,707 $90,175
1994
Consolidated Property/
Casualty Entities $9,794 $315,691 $-0- $55,979 $61,605 $13,099 $49,047 $(8,510) $18,085 $36,612 $69,187