1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998 Commission file number
0-5537
Gryphon Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3287060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Wall Street, New York, New York 10005-2201
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:(212) 825-1200
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class
Outstanding at March 31, 1998
Common stock, par value $.01
6,739,506
Gryphon Holdings Inc.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997......... 3
Consolidated Statements of Income for the
three months ended March 31, 1998 and 1997... 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 1998
and 1997..................................... 5
Notes to Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 11
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-................. 16
Signatures................................................ 16
EXHIBIT 27 Financial Data Schedule....................... 17
Gryphon Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, December 31,
1998 1997
(Dollars in Thousands)
Assets
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: 3/31/98-$293,665; 12/31/97-$274,506) $298,388 $280,553
Short-term investments, at cost,
which approximates market 257 257
Total investments 298,645 280,810
Cash and cash equivalents 16,909 32,272
Accrued investment income 4,028 4,071
Premiums receivable 19,061 16,151
Reinsurance recoverable on paid losses 21,538 18,261
Reinsurance recoverable on unpaid losses 154,050 140,810
Prepaid reinsurance premiums 17,029 16,573
Deferred policy acquisition costs 10,970 11,849
Deferred income taxes 11,694 10,569
Other assets 7,683 7,619
Total assets $561,607 $538,985
Liabilities and Stockholders' Equity
Policy liabilities:
Unpaid losses and loss adjustment expenses 343,869 $328,911
Unearned premiums 60,664 62,351
Total policy liabilities 404,533 391,262
Reinsurance balances payable 19,711 12,179
Income taxes payable 1,285 389
Long-term debt 20,250 21,125
Other liabilities 10,012 9,521
Total liabilities 455,791 434,476
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 30,592 30,742
Accumulated other comprehensive income, net of tax 2,732 3,585
Deferred compensation (284) (151)
Retained earnings 96,620 95,065
Treasury stock, at cost; shares 1998: 1,408,544;
1997: 1,461,169 (23,925) (24,813)
Total stockholders' equity 105,816 104,509
Total liabilities and stockholders' equity $561,607 $538,985
See accompanying notes to consolidated financial statements.
The interim financial statements are unaudited.
Gryphon Holdings Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended March 31,
1998 1997
(Dollars and shares in thousands,
except per-share data)
Revenues
Gross premiums written $ 34,011 $ 35,651
Net premiums written 20,357 24,423
Net premiums earned 22,515 23,101
Net investment income 4,202 4,170
Realized gains on investments 1,011 17
Other income 19 242
Total revenues 27,747 27,530
Expenses
Losses and loss adjustment expenses 14,952 13,507
Underwriting, acquisition, and insurance expenses 10,649 10,862
Interest expense 367 421
Total expenses 25,968 24,790
Income before income taxes 1,779 2,740
Provision for income taxes (benefit):
Current 884 318
Deferred (660) 251
Total income taxes 224 569
Net income $ 1,555 $ 2,171
Other comprehensive income, net of tax:
Unrealized investment losses, net of
reclassification adjustments (862) (3,688)
Foreign currency translation adjustments 9 (21)
Comprehensive income $ 702 $ (1,538)
Basic net earnings per share $ 0.23 $ 0.33
Basic comprehensive income per share $ 0.10 $(0.23)
Weighted average shares outstanding 6,697 6,663
See accompanying notes to consolidated financial statements.
These statements are unaudited.
Gryphon Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended March 31,
1998 1997
(Dollars in thousands)
Operating activities
Net income $1,555 $2,171
Adjustments to reconcile net income
to net cash provided by operating activities:
(Decrease) increase in net policy liabilities (3,702) 4,376
(Increase) decrease in premiums receivable (2,910) 372
Decrease (increase) in deferred
policy acquisition costs 879 (807)
Deferred income tax provision (660) 251
Decrease (increase) in other assets
and liabilities 1,275 (4,801)
Amortization and depreciation 234 182
Amortization of bond discount, net 239 155
Realized gains on investments (1,011) (17)
Increase (decrease) in reinsurance
balances payable 7,532 (1,571)
Decrease (increase) in accrued
investment income 43 (173)
Net cash provided by operating activities 3,474 138
Investing activities
Sales of fixed maturities 231,383 74,984
Purchases of fixed maturities (249,753) (67,804)
Capital expenditures (192) (244)
Net cash (used in) provided by
investing activities (18,562) 6,936
Financing activities
Principal payment on long-term debt (875) (875)
Issuance of common stock 739 371
Deferred compensation (148) (29)
Net cash used by financing activities (284) (533)
Effect of exchange rate changes on cash 9 (21)
(Decrease) increase in cash and cash equivalents (15,363) 6,520
Cash and cash equivalents at beginning of period 32,272 23,398
Cash and cash equivalents at end of period $16,909 $29,918
Supplemental disclosure of cash flow information
Interest paid $367 $421
See accompanying notes to consolidated financial statements.
These statements are unaudited.
1. Basis of Presentation
Gryphon Holdings Inc. (the "Company") operates through its
main subsidiary, Gryphon Insurance Group Inc., as a specialty
property and casualty underwriting organization. The Company's
wholly owned insurance company subsidiaries are Associated
International Insurance Company ("Associated") and Calvert
Insurance Company ("Calvert"). The accompanying consolidated
financial statements include, for all periods presented, the
accounts and operations of Gryphon Holdings Inc. and its
subsidiaries.
2. Principles of Consolidation
The accompanying consolidated financial statements have been
prepared on the basis of generally accepted accounting
principles, which as to the two wholly owned insurance company
subsidiaries differ from the statutory accounting practices
prescribed or permitted by regulatory authorities, and include
the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
3. Investments
Fair values are based on quoted market prices, when
available, or estimates based on market prices for similar
securities, when quotes are not available. Short-term
investments are carried at cost, which approximates their fair
value. Realized gains and losses from the sales or liquidation
of investments are determined on the basis of the specific
identification method and are included in net income. Investment
income is recognized when earned. The amortization of premium
and accretion of discount for fixed maturity securities are
computed utilizing the interest method.
The major categories of net investment income are summarized
as follows:
For the three months
ended March 31,
1998 1997
(Dollars in thousands)
Fixed maturities $4,228 $4,154
Cash, cash equivalents and
short-term investments 326 262
Total investment income 4,554 4,416
Less related expenses 352 246
Net investment income $4,202 $4,170
The gross realized gains and losses from sales of fixed
maturity securities are as follows:
For the three months
ended March 31,
1998 1997
(Dollars in thousands)
Gross realized gains $1,214 $ 472
Gross realized losses (203) (455)
Net realized gain on sales $1,011 $ 17
At March 31, 1998 and December 31, 1997, the amortized cost
and estimated fair values of investments in fixed maturities, by
categories of securities, and short-term investments were as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
March 31, 1998
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 75,749 $ 652 $ (247) $ 76,154
Debt securities issued by
foreign governments 4,858 131 4,989
Tax-exempt obligations of
states and political
subdivisions 135,936 3,665 (112) 139,489
Mortgage-backed securities 40,677 428 (100) 41,005
Corporate securities 36,445 444 (138) 36,751
293,665 5,320 (597) 298,388
Short-term investments 257 257
$293,922 $5,320 (597) $298,645
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
December 31, 1997
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 78,623 $ 667 $ (22) $ 79,268
Debt securities issued by
foreign governments 5,857 130 ( 6) 5,981
Tax-exempt obligations of states
and political subdivisions 108,194 4,322 112,516
Mortgage-backed securities 47,488 501 (47) 47,942
Corporate securities 34,344 617 (115) 34,846
274,506 6,237 (190) 280,553
Short-term investments 257 257
$274,763 $6,237 $(190) $280,810
4. Long-Term Debt
In September 1995, the Company purchased 1.5 million shares
of its Common Stock beneficially owned by Willis Corroon Group
plc for a purchase price of $25.5 million, including related
expenses. The Company financed its purchase through an unsecured
term loan from commercial lending institutions. This loan
matures in varying amounts through 2002 with interest payable at
least quarterly. The term loan interest rate is equivalent to
either the bank's prime rate or the London Interbank Offered Rate
("LIBOR") plus 1%, at the discretion of the Company. The term
loan agreement contains certain restrictive covenants, including
restrictions on the Company's ability to declare or pay any cash
dividends to its shareholders. As of March 31, 1998, the
weighted average interest rate was 6.95%, and the fair value of
the loan approximated the carrying value.
Principal payments due on the term loan are as follows:
Principal Amount
Year ending December 31, (Dollars in thousands)
1998 $ 2,750
1999 4,125
2000 4,625
2001 5,000
2002 3,750
Total $20,250
In October 1995, the Company entered into an interest rate
swap agreement with a commercial lending institution in order to
reduce the impact of interest rate fluctuations on the Company's
term loan. The interest rate swap was effected with respect to
the first $15.5 million of scheduled principal amortizations of
the $25.5 million loan. The impact of the swap was to create an
effective fixed rate of 6.97% on the $15.5 million principal
amount. As of March 31, 1998, the fair value of the interest
rate swap approximated the carrying value.
5. Earnings Per Share
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," which the Company
implemented in 1997. SFAS No. 128 establishes standards for
computing and presenting earnings per share. Primary earnings
per share have been replaced by basic earnings per share and
calculated by dividing income available to common stockholders by
the weighted average number of common shares outstanding during
the period. Fully diluted earnings per share have been replaced
by diluted earnings per share and calculated by including
additional common shares that would have been outstanding if
potentially dilutive shares had been issued during the period.
Prior period earnings per share were not affected by the adoption
of SFAS No. 128.
6. Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes
standards for the reporting and presentation of comprehensive
income and its components in a full set of financial statements.
Comprehensive income encompasses all changes in shareholders'
equity (except those arising from transactions with shareholders)
and includes net income, net unrealized capital gains or losses
on available-for-sale securities and foreign currency translation
adjustments, net of taxes. This new standard only changes the
presentation of certain information in the financial statements
and does not affect the Company's financial position or results
of operations.
The summary of the Accumulated other comprehensive income,
net of tax, as reported in the Consolidated Balance Sheets are as
follows:
For the three months
ended March 31,
1998 1997
(Dollars in thousands)
Unrealized investment gains,
net of tax $ 3,069 $ 3,931
Foreign currency translation
adjustments, net of tax (337) (346)
Accumulated other comprehensive
income, net of tax $ 2,732 $ 3,585
The following table provides a summary of the components of net
unrealized investment losses, as reported in the Consolidated
Statements of Income:
For the three months
ended March 31,
1998 1997
(Dollars in thousands)
Unrealized investment losses
arising during the period
(net of taxes of $109 in 1998
and $1,980 in 1997) $(204) $ (3,677)
Less: reclassification adjustments
for realized gains included in
net income (net of taxes of $353
in 1998 and $6 in 1997) (658) (11)
Net unrealized investment losses
on securities $ (862) $ (3,688)
7. New Accounting Standards
In June 1997, the FASB issued SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information".
SFAS No. 131 redefines how operating segments are determined
and requires disclosure of certain financial and
descriptive information about a company's operating
segments. This statement relates to presentation of
information and will have no impact on results of operations
or financial condition. An annual presentation is required
for the year ending December 31, 1998 and interim financial
information will be required beginning in 1999 (with
comparative 1998 information). The Company is currently
evaluating the segment information disclosures required by
SFAS No. 131.
In December 1997, the American Institute of Certified Public
Accountants issued Statement of Position No. 97-3 "Accounting by
Insurance and Other Enterprises for Insurance-related
Assessments" ("SOP 97-3"). SOP 97-3 establishes standards for
accounting for guaranty-fund and certain other insurance related
assessments. SOP 97-3 is effective for fiscal years beginning
after December 15, 1998 and requires any impact of adoption to be
reported as a change in accounting principle. The adoption of
this statement is not expected to have a material effect on the
Company's results of operations or financial condition.
8. Material Event
In February 1998, the Company agreed to acquire The First
Reinsurance Company of Hartford and Oakley Underwriting Agency
from Dearborn Risk Management, Inc. for a combination of cash and
preferred stock valued at $43.6 million, plus certain other
performance-driven contingent consideration.
The purchase consideration of $43.6 million consists of
$31.9 million of cash and $11.7 million fair value of a new issue
of Gryphon perpetual convertible preferred stock. The preferred
stock, which will have a face amount of $14.4 million, will be
convertible into 643,672 shares of the Company's common stock,
reflecting a conversion price of $22.44 per share. No cash
dividends will be paid or owed during the first four and one-half
years; a cash dividend at a rate of 4.0% of the face amount will
be paid thereafter. The preferred shares, which are non-callable
for three years, have no sinking fund or mandatory redemption
features. In connection with the transaction, Gryphon intends
to enter into a $55 million credit facility with a group of
financial institutions, the proceeds of which will be used to pay
the cash portion of the purchase price and to repay existing bank
borrowings.
The acquisition will be accounted for by the purchase method
of accounting under Opinion No. 16, "Business Combinations," of
the Accounting Principles Board of the American Institute of
Certified Public Accountants. Under this accounting method, any
excess of purchase price over the fair market value of
identifiable assets acquired less liabilities assumed will be
recorded as goodwill.
The transaction, which is subject only to regulatory
approvals and other customary conditions, is expected to close
during the second quarter of 1998.
9. Unaudited Consolidated Financial Statements
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
necessary to present fairly the results of operations and
financial position of the Company for the periods ended March 31,
1998 and 1997. The unaudited consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes to financial statements as contained
in the Company's 1997 Annual Report on Form 10-K. The results of
operations for the period presented are not necessarily
indicative of the results to be expected for the entire year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
The Company is a holding company that, through its
subsidiaries, underwrites specialty property and casualty
insurance in sectors of the insurance industry that are generally
considered difficult to insure. Many of the coverages written by
the Company can be categorized as excess and surplus lines, which
generally means that the risks are nonstandard, or that the
policies in respect of the risks are written with unusual limits
or at deviated rates. The property and casualty insurance
industry is highly cyclical. The excess and surplus lines
sectors of the property and casualty insurance industry are often
subject to greater cyclicality and volatility than the industry
in general. During soft markets, large standard lines insurers
often utilize excess capacity to assume risks in excess and
surplus and specialty lines. During hard markets, such insurers
tend to abandon the excess and surplus and specialty lines to the
carriers that concentrate in these sectors. Thus, capacity in
these lines will fluctuate substantially, often with fluctuations
in revenues or profits, or both.
Results of Operations
First Quarter of 1998 Compared with the First Quarter of 1997
Gross Premiums Written. Gross premiums written were $34.0
million for the first quarter of 1998, compared with $35.7
million for the first quarter of 1997. In 1998, the Company's
gross premiums written decreased due to business lost as a result
of competition for premiums, which has affected the following
lines of business: a $1.4 million decrease in Casualty premiums;
a $0.9 million decrease in Other Property, primarily in the
Company's national accounts business; and a $0.7 million decrease
in Specialty Lines. Such decreases were partially offset by a
$0.7 million increase in Difference in Conditions ("DIC")
premiums; a $0.4 million increase in Commercial Automobile; and a
$0.3 million increase in Architects' & Engineers' Liability.
Net Premiums. Net premiums written decreased to $20.4
million for the first quarter of 1998 from $24.4 million for the
first quarter of 1997. Net premiums written were affected in
1998 by most of the factors described above. In addition,
Commercial Automobile and DIC net premiums written decreased due
to increased ceded premiums from quota share reinsurance
agreements entered into in 1998. The Commercial Automobile quota
share treaty reduced the net retention to $250,000 per risk from
$500,000 per risk, and in DIC a companion carrier was replaced by
a quota share reinsurer.
Net premiums earned decreased by 2.5% to $22.5 million for
the first quarter of 1998 from $23.1 million in the first quarter
of 1997.
Net Investment Income. Net Investment income was $4.2
million for the first quarter of 1998 compared with $4.2 million
for the first quarter of 1997. In 1998, net investment income
was affected by additional funds available for investment, but
also by lower average interest rates compared with the first
quarter of 1997.
Net Realized Gains on Investments. During the first quarter
of 1998, the Company realized a net gain of $1.1 million,
compared with a net gain of seventeen thousand dollars for the
first quarter of 1997. Portfolio sales were effected in each
period to optimize the mix of taxable and tax-exempt investments.
Other Income. For the first quarter of 1997, the Company
recorded $0.2 million of underwriting management fees for DIC
business underwritten on behalf of a companion carrier. In 1998,
the companion carrier was replaced by a quota share reinsurer.
Losses and Loss Adjustment Expenses. Losses and loss
adjustment expenses ("LAE") increased by 10.7% to $15.0 million
for the first quarter of 1998 from $13.5 million for the first
quarter of 1997, due to increased exposures from a change in the
Company's mix of business, increased target loss ratios for
certain Casualty lines, and reserve increases of $2.3 million for
Casualty and Specialty Lines. Losses and LAE were 66.4% of net
premiums earned in the first quarter of 1998, compared with 58.5%
in the first quarter of 1997.
Underwriting, Acquisition, and Insurance Expenses.
Underwriting, acquisition, and insurance expenses were $10.6
million for the first quarter of 1998, compared with $10.9
million for the first quarter of 1997. The expense decrease was
primarily attributable to lower acquisition costs, resulting from
reduced business written.
Interest Expense. Interest expense was $0.4 million for the
first quarter of 1998, compared with $0.4 million for the first
quarter of 1997. 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. The outstanding
balance as of March 31, 1998 is $20.3 million.
Income Taxes. Income taxes were $0.2 million for the first
quarter of 1998, compared with $0.6 million for the first
quarter of 1997.
Net Income. Net income was $1.6 million for the first
quarter of 1998, compared with $2.2 million for the first quarter
of 1997.
Weighted Average Shares Outstanding. Average shares
outstanding were 6.7 million in 1998 and 1997. The Company's
basic earnings per share are calculated by dividing income
available to common stockholders by the weighted average number
of common shares outstanding during the period.
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 $3.5 million for the first three months of
1998, compared with $0.1 million for the first three months of
1997.
At March 31, 1998, the Company maintained cash and cash
equivalents of $16.9 million to meet current payment obligations.
In addition, the Company's investment portfolio could be
substantially liquidated without any material financial impact.
Substantially all of the cash and investments of the Company at
March 31, 1998 were held by its subsidiaries.
Reinsurance recoverables on unpaid losses were $154.1
million at March 31, 1998 and $140.8 million at December 31,
1997. Due to the high limits on the Company's issued policies
relative to net retentions, reinsurance recoverable on unpaid
losses can fluctuate significantly depending upon the emergence
and severity of reported and unreported losses.
In September 1995, the Company purchased 1.5 million shares
of its Common Stock from Willis Corroon Group plc for a total
purchase price of $25.5 million, including related expenses. The
Company financed its purchase of such shares through the proceeds
of borrowing from commercial lending institutions.
As a holding company, the Company depends principally on
dividends from its insurance company subsidiaries to pay
corporate overhead expenses, including principal and interest on
its borrowings. The Company's subsidiaries are subject to state
insurance laws that restrict their ability to collectively pay
dividends. Under the insurance code of Pennsylvania, dividends
from Calvert are limited to the greater of 10% of surplus as
regards policyholders as of the preceding year end or the net
income for the previous year, without prior approval from the
Pennsylvania Department of Insurance. Under the insurance code
of California, dividends from Associated are limited to the
greater of 10% of policyholders' statutory surplus as of the
preceding year end or the Company's statutory net income for the
previous year, without prior approval from the California
Department of Insurance.
The National Association of Insurance Commissioners adopted
a risk-based capital system for assessing the adequacy of
statutory capital and surplus for all property and casualty
insurers. Based on the guidelines and computations made by the
Company in conformity with such guidelines, Associated and
Calvert have exceeded the required levels of capital. There can
be no assurance that capital requirements applicable to the
Company's business will not increase in the future.
Recently, there has been significant public discussion
regarding the potential inability of computer programs and
systems to adequately store and process data after December 31,
1999, due to the inability of such programs and systems to
identify correct dates subsequent to December 31, 1999.
The Company has completed an assessment of its core
financial and operational software systems and believes it will
be in compliance with the requirements necessary to avoid the
"Year 2000" problem. The Company will test these systems to
confirm their compliance. If for any reason these systems are
not in compliance by December 31, 1999, the Year 2000 issue could
have a material impact on the Company's ability to meet financial
and reporting requirements and to support its insurance
operations.
The Company is in the process of initiating discussions with
significant suppliers, business partners, customers and other
third parties to determine the extent to which the Company may be
vulnerable to the failure of these parties to address and correct
their own Year 2000 issues. However, there can be no guarantee
that the systems of other companies that support the Company's
operations will be timely converted or that a failure by these
companies to correct their Year 2000 problems would not have a
material adverse effect on the Company.
The Company is currently assessing what changes may be
appropriate in insurance coverages it currently markets in light
of the Year 2000 problem. In this connection, management is
consulting with Insurance Services Offices, Inc. and others
regarding possible modifications and/or exclusions to policy
forms that could be implemented in connection with future
insurance policies that will extend coverage beyond December 31,
1999.
The costs incurred to date by the Company in connection with
its Year 2000 compliance initiative have been nominal, and the
Company currently has no indication that the costs associated
with any remaining remedial actions in connection with this
matter will be material.
In February 1998, the Company agreed to acquire The First
Reinsurance Company of Hartford and Oakley Underwriting Agency
from Dearborn Risk Management, Inc. for a combination of cash and
preferred stock valued at $43.6 million, plus certain other
performance-driven contingent consideration.
The purchase consideration of $43.6 million consists of
$31.9 million of cash and $11.7 million fair value of a new issue
of Gryphon perpetual convertible preferred stock. The preferred
stock, which will have a face amount of $14.4 million, will be
convertible into 643,672 shares of the Company's common stock,
reflecting a conversion price of $22.44 per share. No cash
dividends will be paid or owed during the first four and one-half
years; a cash dividend at the rate of 4.0% of the face amount
will be paid thereafter. The preferred shares, which are non-
callable for three years, have no sinking fund or mandatory
redemption features. In connection with the transaction, Gryphon
intends to enter into a $55 million credit facility with a group
of financial institutions, the proceeds of which will be used to
pay the cash portion of the purchase price and to repay existing
bank borrowings.
The acquisition will be accounted for by the purchase method
of accounting under Opinion No. 16, "Business Combinations," of
the Accounting Principles Board of the American Institute of
Certified Public Accountants. Under this accounting method, any
excess of purchase price over the fair market value of
identifiable assets acquired less liabilities assumed will be
recorded as goodwill.
The transaction, which is subject only to regulatory
approvals and other customary conditions, is expected to close
during the second quarter of 1998.
In connection with the pending acquisition and management
changes, a restructuring of Gryphon Insurance Group, the
Company's main operating unit, will be undertaken. This will
result in a charge that will be included in the second quarter
results of 1998.
The Company regularly evaluates opportunities for the
acquisitions of books of business, of specialty insurance
companies or companies in related businesses and for business
combinations or joint ventures with other specialty insurance
companies. There can be no assurance, however, that any
suitable business opportunities will arise. In the event
that such opportunities do arise, the Company may incur
indebtedness for borrowed money in connection with the
consummation of any such transaction. Such indebtedness, under
certain circumstances, could adversely affect the Company's
liquidity and capital resources.
The Company's management has undertaken a comprehensive
review of its current and previous business, including a review
of reserve issues relating to older business. This process
should be substantially complete by the end of the second quarter
of 1998. If, in the opinion of management, any reserve charges
are warranted, they will be included in second quarter results.
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 organic growth.
Effects of Inflation
There was no significant impact on the Company's operations
as a result of inflation during the first quarter of 1998.
However, there can be no assurance that inflation will not have a
material impact on the Company's operations in the future.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Description Page No.
Ex-27 Financial Data Schedule 17
b) A Form 8-K was filed by the Company on February 23, 1998, in
connection with the execution of a Stock Purchase Agreement
by and between the Company and Dearborn Risk Management,
Inc. ("Dearborn") and relating to the acquisition by the
Company of The First Reinsurance Company of Hartford and
Oakley Underwriting Agency from Dearborn.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Gryphon Holdings Inc.
(Registrant)
Date: May 12, 1998 Stephen A. Crane
Stephen A. Crane
President & Chief
Executive Officer
Date: May 12, 1998 Robert P. Cuthbert
Robert P. Cuthbert
Senior Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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