1
COMPENSATION OF DIRECTORS
Directors of the Company who are employees of the Company or
its affiliates receive no directors' fees. Non-employee
Directors are paid an annual retainer of $20,000, plus $1,000 per
day for attendance at each Board of Directors meeting and for
attendance at meetings of committees of the Board of Directors
occurring on days other than days of Board meetings. The
Chairmen of the Audit Committee, the Compensation Committee and
the Investment Committee receive an annual fee of $3,000 for
serving in such capacity. The Chairman of the Board receives,
effective as of January 1, 1996, an additional annual retainer of
$20,000 for services rendered in such capacity. Non-employee
Directors receive $500 for each meeting of the Board of
Directors, and each meeting of its committees occurring on days
other than days of Board meetings, in which they participate by
telephone. In addition, all Directors are reimbursed for their
reasonable travel expenses incurred in attending these meetings.
Under the terms of the 1995 Non-Employee Director Stock
Option Plan (the "Directors' Plan"), each Director of the Company
who is not an employee of the Company or its affiliates is
entitled to the grant, on the later of (i) May 12, 1995 or (ii)
the date on which such Director is first elected to the Board, of
an initial option to purchase 10,000 shares of Common Stock.
Options under the Directors' Plan are granted at the fair market
value of such shares on the date of grant and become exercisable
in four equal annual installments commencing on the day
immediately preceding the second anniversary of the date of
grant. Options remain outstanding for ten years from the date of
grant, unless terminated earlier in the event of death,
disability, retirement or other circumstances detailed in the
Directors' Plan. On the fifth anniversary of the date of the
initial grant, and continuing on each subsequent anniversary of
such date during a Director's tenure on the Board, such Director
will be granted an option to purchase an additional 2,000 shares
of Common Stock or such lesser proportionate amount as then
remains available for grant. An aggregate of 100,000 shares of
Common Stock have been authorized for issuance upon the exercise
of options under the terms of the Directors' Plan.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee, which is composed of four
independent outside Directors, is responsible for the
establishment and review of the overall compensation policy of
the Company, the general oversight of the employee benefits plans
maintained by the Company and the specific terms and conditions
of employment of senior executives of the Company.
It is the overall policy of the Compensation Committee to
align the interests of management with those of the Shareholders
by making a significant portion of executive compensation depend
upon the Company's performance. The Company's compensation
programs emphasize the following basic principles:
Compensation should be linked to the creation of value for
Shareholders, and executives should be encouraged to acquire
ownership in the Company;
Compensation programs should be designed to attract,
motivate and retain executives with the requisite skills to
effectively pursue the Company's strategic objectives; and
Compensation programs should reward individual performance
through an appropriate balance of base salary, annual bonus
awards and long-term equity incentives.
2
Compensation Program
The Company's executive compensation program consists of
three major components: base salary, annual bonus awards and long-
term equity incentives. Each of these components supports the
Company's overall compensation policy, which relates pay to
performance.
Base Salary
Amounts paid in base salary, including periodic increases,
are determined primarily by the scope of the executive's
responsibilities, his performance and the salaries offered within
the industry for comparable positions. In connection with its
overall evaluation of the foregoing factors, the Compensation
Committee draws upon its members' general knowledge of
compensation practices within the insurance and financial
services industries and periodically reviews compensation data
regarding other insurance companies, including a peer group of
comparably sized property and casualty insurance companies
established by the Compensation Committee specifically for this
purpose.
Annual Bonus Awards
Annual bonus awards earned by executives are based upon
their achievement of performance objectives established by the
Compensation Committee at the beginning of each fiscal year that
link potential bonus awards to the enhancement of Company
earnings and overall profitability. The Compensation Committee
believes that the use of predetermined performance objectives
provides an excellent link between the value created for
Shareholders and the incentives paid to executives.
Long-Term Equity Incentives
Certain executives of the Company may earn equity-based
incentive awards, the ultimate value of which is related to the
long-term performance of the Company's Common Stock. Long-term
equity incentives may take the form of stock options or
restricted stock.
Stock options have been the principal vehicle of the Company
for the payment of long-term incentive compensation. Stock
options granted to executives under the Company's 1993 Stock
Option Plan provide incentives to executives by giving them a
strong economic interest in building value for Shareholders.
Stock options become exercisable in annual installments
commencing two years after the date of grant, and the exercise
price of each option is the fair market value of the Company's
Common Stock on the date of grant. As a result, executives
benefit from options only through a rise over time in the market
value of the underlying shares.
Restricted stock also motivates executives by providing
incentives tied to Shareholder value. Restricted stock granted
to executives under the Company's Restricted Stock Plan is
subject to restrictions on its transfer that lapse in annual
installments commencing two years following the date of grant.
Accordingly, the ultimate value of restricted stock awards is
linked to the performance of the Company's Common Stock over an
extended period.
Long-term equity incentives are granted by the Compensation
Committee based upon an executive's position and his or her
ability to contribute to the future performance of the Company.
The Compensation Committee is responsible for determining the
form and terms of all such awards.
3
Compensation of the Chief Executive Officer
The overall compensation of the Chief Executive Officer (the
"CEO") reflects the Compensation Committee's evaluation of (i)
the Company's performance as measured by operating, financial and
strategic objectives, viewed from both a short-term and a long-
term perspective, (ii) the CEO's individual performance in
pursuing the foregoing objectives and (iii) the compensation paid
to chief executive officers of other companies of similar size
and complexity in the insurance and financial services
industries.
Mr. Crane's base salary for 1997 was $330,000. The
Compensation Committee determined this figure based upon a review
of the compensation paid to CEOs of other insurance companies,
including a peer group of comparably sized property and casualty
insurance companies established by the Compensation Committee
specifically for this purpose. The Compensation Committee
considered the Company's overall performance as measured by
operating, financial and strategic objectives established in
connection with annual bonus awards for 1997 and determined that
no such awards would be granted to any of the executive officers
of the Company for 1997. The Committee also determined that no
additional long-term incentive awards would be granted during
1997 to the executive officers of the Company.
Internal Revenue Code Section 162(m)
Section 162 (m) of the Internal Revenue Code of 1986, as
amended (the "Code"), generally disallows a tax deduction to
public companies for compensation over $1 million paid to the CEO
or to any of the other highly compensated executive officers
named in the Company's annual proxy statement. Qualifying
"performance-based compensation" and compensation paid pursuant
to plans or agreements adopted or entered into prior to a
company's initial public offering of securities or subsequently
approved by its shareholders will not be subject to the foregoing
deduction limitation, if certain requirements are met. The
Compensation Committee believes that the compensation to be paid
in 1998 to any of the Company's executive officers will not
exceed the foregoing deduction limitation.
The Company has established and maintains compensation
programs that align the interests of management with those of the
Shareholders and that comply with the principles set forth in
this report. The Compensation Committee intends to take
appropriate actions consistent with such principles to avoid the
unnecessary loss of future deductions under Section 162(m) of the
Code.
COMPENSATION COMMITTEE
Robert R. Douglass, Chairman
Hadley C. Ford
Richard W. Hanselman
Joe M. Rodgers
4
EXECUTIVE COMPENSATION
The following information relates to the annual and long-
term compensation paid by the Company and its subsidiaries in
connection with the three fiscal years ending December 31, 1997,
1996 and 1995 to the Chief Executive Officer of the Company and
the three other executive officers of the Company whose earnings
exceeded $100,000 for the fiscal year ended December 31, 1997.
Long-Term
Annual Compensation Compensation Awards
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(3)
Stephen A. Crane 1997 $330,000 $ 0 0 $18,768
President &
Chief Executive Officer 1996 330,000 0 25,000 18,794
1995 300,000 300,000 0 18,880
John F. Iannucci (1) 1997 257,500 0 0 19,932
Executive Vice President 1996 245,000 0 20,000 19,890
1995 235,000 263,313(2) 0 19,440
Robert M. Coffee 1997 148,750 0 0 14,948
Senior Vice President & 1996 140,000 0 5,000 14,077
General Counsel 1995 132,500 32,500 0 10,263
Robert P. Cuthbert 1997 193,833 0 0 14,831
Senior Vice President & 1996 188,000 0 5,000 14,940
Chief Financial Officer 1995 180,000 108,000 0 11,686
_____________________
(1) Mr. Iannucci resigned on December 31, 1997 as an officer and
Director of the Company and its subsidiaries.
(2) In accordance with the terms of the Annual Incentive Plan
for Key Employees of Gryphon Holdings Inc. and its
Subsidiaries, the portion of the bonus payable to Mr.
Iannucci for 1995 that exceeded his base salary for 1995 was
paid to him in shares of Common Stock. Accordingly, Mr.
Iannucci received 1,500 shares of Common Stock based upon
the fair market value of the shares on March 4, 1996, the
date of the award. These shares, which are not subject to
forfeiture, may not be sold or otherwise transferred by Mr.
Iannucci pending the lapse of a restriction on their
transfer. This restriction will lapse with respect to 25%
of the shares on the second anniversary of the date of the
award and with respect to an additional 25% of the shares on
each of the next three anniversaries of such date. Pending
the lapse of this restriction, Mr. Iannucci enjoys all other
rights of a Shareholder of the Company with respect to such
shares.
(3) These amounts for 1997, 1996 and 1995, respectively,
represent (i) premiums paid by the Company for term life
insurance policies as follows: Mr. Crane $1,440, $1,440 and
$1,440; Mr. Coffee $991, $1,207 and $881; Mr. Cuthbert
$839, $870 and $766; Mr. Iannucci $1,440, $1,320 and $864;
(ii) contributions by the Company under the Gryphon Holdings
401(k) & Profit Sharing Plan as follows: Mr. Crane $13,992,
$14,070 and $14,076; Mr. Coffee $13,957, $12,870 and
$9,382; Mr. Cuthbert $13,992, $14,070 and $10,920; and Mr.
Iannucci $13,992, $14,070 and $14,076; and (iii) the value
attributed to the use of a Company automobile as follows:
Mr. Crane $3,336, $3,364 and $3,364; and, Mr. Iannucci
$4,500, $4,500 and $4,500.
5
During the Company's last fiscal year ending December 31,
1997, no options, stock appreciation rights or other long term
incentive awards were granted to, or exercised by, any of the
persons named in the Summary Compensation Table set forth on page
8. The following table sets forth for each person named in the
Summary Compensation Table the specified information with respect
to all options outstanding on December 31, 1997.
FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Options at Fiscal
Year-End Year-End(1)
Name Exercisable Unexercisable Exercisable Unexercisable
Stephen A. Crane 56,250 43,750 $210,938 $70,313
John F. Iannucci 37,500 32,500 140,625 46,875
Robert M. Coffee 7,500 7,500 24,825 24,825
Robert P. Cuthbert 15,000 15,000 34,650 34,650
_____________________
(1) Based on $16.75 per share, which was the closing price of
the Common Stock on NASDAQ on December 31, 1997.
6
PERFORMANCE GRAPH
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Ownership of Common Stock by Management
The following table sets forth as of April 2, 1998
information concerning the ownership of Common Stock by each
Director, by each executive officer named in the Summary
Compensation Table and by all executive officers and Directors of
the Company as a group, together with their respective percentage
ownership of the outstanding Common Stock.
MANAGEMENT OWNERSHIP OF COMMON STOCK
Shares of Shares upon exercise Percent of
Name of Beneficial Owner Common Stock of Stock Options(1) Total(2) Class
Stephen A. Crane 82,664 56,250 138,914 2.1%
John F. Iannucci 46,338 (3) 0 46,338 (3) *
Robert M. Coffee 6,403 7,500 13,903 *
Robert P. Cuthbert 20,909 22,500 43,409 *
Robert M. Baylis 10,000 2,500 12,500 *
Franklin L. Damon 3,500 5,000 8,500 *
Robert R. Douglass 5,000 5,000 10,000 *
David H. Elliott 2,000 5,000 7,000 *
Hadley C. Ford 12,000 5,000 17,000 *
Richard W. Hanselman 3,000 5,000 8,000 *
Joe M. Rodgers 1,000 (4) 5,000 6,000 (4) *
George L. Yeager 1,000 5,000 6,000 *
All Directors and
Executive Officers as a
Group (12 persons) 193,814 123,750 317,564 4.7%
* less than 1%.
______________________
(1) Represents beneficial ownership of shares that may be
acquired by the exercise of stock options which are
currently exercisable or exercisable within sixty days.
(2) The amounts of Common Stock and stock options beneficially
owned are reported on the basis of regulations of the
Securities and Exchange Commission governing the
determination of beneficial ownership of securities.
(3) Includes 500 shares held by Mr. Iannucci's wife and
100 shares held by Mr. Iannucci as trustee for his grandson.
(4) These shares are held by JMR Investments, a Tennessee
general partnership of which Mr. Rodgers' wife is a general
partner and the majority owner.
Except as otherwise noted above, the Company believes the
beneficial holders listed above have sole voting and investment
power regarding the shares of Common Stock shown as being
beneficially owned by them.
7
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Severance Agreements
The Company has entered into severance agreements with each
of Messrs. Crane, Iannucci, and Cuthbert, under which each is
entitled to between 6 months and 12 months of salary continuation
payments, as determined by the Board, in the event that he is
terminated without "cause" or for disability, or resigns as a
result of constructive termination. Under the terms of these
agreements, as well as a similar severance agreement between the
Company and Mr. Coffee, in the event that a person acquires more
than 20% of the Company's outstanding voting securities, and
within 24 months thereafter the executive is terminated without
"cause" or for disability or the executive suffers a constructive
termination, as defined in such agreements, the executive is
entitled to a lump sum payment equal to 36 months of his then
current salary.
Indemnification Agreements
The Company's Certificate of Incorporation provides for the
indemnification of the Company's officers and Directors to the
fullest extent permitted by the Delaware General Corporation Law
(the "DGCL") in connection with services provided by such
individuals to or on behalf of the Company. As permitted by the
Certificate of Incorporation and the DGCL, the Company has
entered into indemnification agreements with each of its
executive officers and Directors that detail the procedures by
which such individuals will be entitled to indemnification in the
event they become involved in any proceeding in connection with
such services.
Acquisition of First Re
On February 9,1998, the Company entered into a stock
purchase agreement with Dearborn to buy all of the issued and
outstanding shares (the "Shares") of capital stock of certain
subsidiaries of Dearborn, including First Re. In connection with
the purchase of the Shares, the Company has agreed to elect, as
soon as practicable following the acquisition of the Shares, John
K. Castle, the Chairman of Castle Harlan, Inc., or such other
person nominated by Castle Harlan, Inc. and acceptable to the
Board of Directors (the "Castle Harlan Nominee"), as a Class I
Director of the Company to serve until the Annual Meeting of the
Shareholders in 2000, at which time the Board of Directors shall
recommend a Castle Harlan Nominee to the Shareholders of the
Company for election as a Class I Director. At each subsequent
Annual Meeting of Shareholders of the Company at which the term
of the Castle Harlan Nominee is to expire or a vacancy caused by
the cessation of service of the Castle Harlan Nominee is to be
filled, the Board of Directors shall recommend a replacement
Castle Harlan Nominee to Shareholders of the Company for election
as a Class I Director and shall use all reasonable efforts to
cause the election of such nominee to the Board of Directors.
The foregoing arrangement is subject to termination in various
circumstances outlined in an agreement between the Company,
Dearborn and Castle Harlan Partners II, L.P., a shareholder of
Dearborn. In a separate agreement with John A. Dore, the
President and Chief Executive Officer of First Re, the Company
has agreed to increase the number of Directors of the Company
following the acquisition of the Shares from ten to eleven and to
elect Mr. Dore to the Board of Directors of the Company.