-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ABNvz5PYy+eEK2R5bzoAhAhwNzR28LIjuepqM8FXy9dPm2PH5uhkfNp/ChGborTF Kn3nK+InYBHV94/DFYxwCQ== 0000912558-96-000004.txt : 19960510 0000912558-96-000004.hdr.sgml : 19960510 ACCESSION NUMBER: 0000912558-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960509 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRYPHON HOLDINGS INC CENTRAL INDEX KEY: 0000912558 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 133287060 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22820 FILM NUMBER: 96558685 BUSINESS ADDRESS: STREET 1: 30 WALL ST STREET 2: 6TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10005 BUSINESS PHONE: 2128251200 MAIL ADDRESS: STREET 1: 30 WALL ST STREET 2: 6TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10005 10-Q 1 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, 1996 Commission file number 0-5537 Gryphon Holdings Inc. (Exact name of registrant as specified in its charter) Delaware 13-3287060 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 Wall Street, New York, New York 10005-2201 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code:(212) 825-1200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at March 31, 1996 Common stock, par value $.01 6,648,050 Gryphon Holdings Inc. TABLE OF CONTENTS Part I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets at March 31, 1996 and December 31, 1995 3 Consolidated Statements of Income for the three months ended March 31, 1996 and 1995 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1996 and 1995 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 Signatures 12 Gryphon Holdings Inc. and Subsidiaries Consolidated Balance Sheets March 31, December 31, 1996 1995 Assets (Dollars in thousands) Investments: Fixed maturities, available for sale, at fair value (amortized cost: 3/31/96 - $256,014; 12/31/95 - $248,324) $260,188 $260,728 Short-term investments, at cost, which approximates market 537 537 Total investments 260,725 261,265 Cash and cash equivalents 30,000 27,337 Accrued investment income 4,144 4,080 Premiums receivable 18,431 17,475 Reinsurance recoverable on paid losses 20,676 24,489 Reinsurance recoverable on unpaid losses 142,745 152,975 Prepaid reinsurance premiums 18,110 20,434 Deferred policy acquisition costs 12,201 12,182 Deferred income taxes 9,802 6,582 Other assets 4,407 4,170 Total assets $521,241 $530,989 Liabilities and Stockholders' Equity Policy liabilities: Unpaid losses and loss adjustment expenses$301,927 $308,886 Unearned premiums 60,412 63,472 Total policy liabilities 362,339 372,358 Reinsurance balances payable 23,285 29,373 Income taxes payable 1,881 387 Long-term debt 25,500 25,500 Other liabilities 16,840 10,149 Total liabilities 429,845 437,767 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 30,850 30,850 Foreign currency translation adjustment, net of tax (202) (209) Net unrealized investment gains, net of tax 2,712 8,063 Deferred compensation (180) (193) Retained earnings 83,613 80,108 Treasury stock, at cost; 1,500,000 shares (25,478) (25,478) Total stockholders' equity 91,396 93,222 Total liabilities and stockholders' equity$521,241 $530,989 See accompanying notes to consolidated financial statements. These statements are subject to year-end audit. Gryphon Holdings Inc. and Subsidiaries Consolidated Statements of Income Three months ended March 31, 1996 1995 (Dollars and shares in thousands, except per-share data) Revenues Gross premiums written $34,919 $35,209 Net premiums written 21,213 17,872 Net premiums earned 21,951 17,697 Net investment income 4,159 3,666 Realized gains on investments 802 276 Other income 270 ______ Total revenues 27,182 21,639 Expenses Losses and loss adjustment expenses 12,853 10,343 Underwriting, acquisition, and insurance expenses 9,234 7,558 Interest expense 437 ______ Total expenses 22,524 17,901 Income before income taxes 4,658 3,738 Provision for income taxes (benefit): Current 1,493 892 Deferred (340) (156) Total income taxes 1,153 736 ______ ______ Net income $3,505 $3,002 Net income per-share data ______ ______ Net income $0.53 $0.37 Weighted average shares outstanding 6,648 8,148 See accompanying notes to consolidated financial statements. These statements are subject to year-end audit. Gryphon Holdings Inc. and Subsidiaries Consolidated Statements of Cash Flows Three months ended March 31, 1996 1995 (Dollars in thousands) Operating activities Net income $3,505 $3,002 Adjustments to reconcile net income to net cash provided by operating activities: Increase (decrease) in net policy liabilities 6,348 (994) (Increase) decrease in premiums receivable(956) 1,649 Increase in deferred policy acquisition costs (19) (208) Deferred income tax provision (340) (156) Decrease (increase) in other assets and liabilities7,920 (140) Amortization and depreciation 126 90 Amortization of bond discount, net 156 79 Realized gains on investments (802) (276) (Decrease) increase in reinsurance balances payable(6,088) 2,402 (Increase) decrease in accrued investment income (64) 65 Net cash provided by operating activities 9,786 5,513 Investing activities Sales of fixed maturities 66,387 79,490 Purchases of fixed maturities (74,331) (89,943) Maturities or calls of fixed maturities 900 197 Capital expenditures (86) (129) Net cash used by investing activities (7,130) (10,385) Financing activities Effect of exchange rate changes on cash 7 7 Increase (decrease) in cash and cash equivalents 2,663 (4,865) Cash and cash equivalents at beginning of year 27,337 28,908 Cash and cash equivalents at end of year$30,000 $24,043 Supplemental disclosure of cash flow information Income taxes paid $300 Interest paid $437 See accompanying notes to consolidated financial statements. These statements are subject to year-end audit. 1. Basis of Presentation Gryphon Holdings Inc. (the "Company") operates through its main subsidiary, Gryphon Insurance Group Inc., as a specialty property and casualty underwriting organization. The Company's wholly owned insurance company subsidiaries are Associated International Insurance Company and Calvert Insurance Company. The accompanying financial statements include, for all periods presented, the accounts and operations of Gryphon Holdings Inc. and its subsidiaries. 2. Principles of Consolidation The accompanying consolidated financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP"), which as to the two wholly owned insurance company subsidiaries differ from the statutory accounting practices prescribed or permitted by regulatory authorities, and include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 3. Investments Fair values are based on quoted market prices, when available, or estimates based on market prices for similar securities, when quotes are not available. Short-term investments are carried at cost, which approximates their fair value. Realized gains and losses from the sales or liquidation of investments are determined on the basis of the specific identification method and are included in net income. Investment income is recognized when earned. The amortization of premium and accretion of discount for fixed maturity securities are computed utilizing the interest method. The major components of net investment income are summarized as follows: For the three months ended March 31, 1996 1995 (Dollars in thousands) Fixed maturities $4,125 $3,472 Cash, cash equivalents and short-term investments 295 536 Total investment income 4,420 4,008 Less related expenses 261 342 Net investment income $4,159 $3,666 The gross and net realized gains and losses from sales of fixed income securities are as follows: For the three months ended March 31, 1996 1995 (Dollars in thousands) Gross realized gains $1,184 $750 Gross realized losses (382) (474) Net realized gain on sales $802 $276 At March 31, 1996 and December 31, 1995, the amortized cost and estimated fair values of investments in fixed maturities, by categories of securities, and short-term investments were as follows: Gross Gross Estimated AmortizedUnrealizedUnrealizedFair Cost Gains Losses Value (Dollars in thousands) March 31, 1996 U.S. Treasury securities and obligations of U.S. government corporations and agencies$45,308$1,062 $(457) $45,913 Debt securities issued by foreign governments5,794 89 (86) 5,797 Tax-exempt obligations of states and political subdivisions 135,806 4,013 (648) 139,171 Mortgage-backed securities 35,912 385 (307) 35,990 Corporate securities 33,194 531 (408) 33,317 256,014 6,080 (1,906) 260,188 Short-term investments 537 537 $256,551 $6,080 $(1,906) $260,725 Gross Gross Estimated AmortizedUnrealizedUnrealizedFair 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 governments4,078 158 4,236 Tax-exempt obligations of states and political subdivisions 124,073 6,702 (40) 130,735 Mortgage-backed securities 36,616 976 37,592 Corporate securities 35,265 1,571 (56) 36,780 248,324 12,508 (104) 260,728 Short-term investments 537 537 $248,861 $12,508 $(104) $261,265 4. Long-Term Debt In September 1995, the Company purchased 1.5 million shares of its Common Stock beneficially owned by Willis Corroon Group plc ("Willis Corroon") for a purchase price of $25.5 million, including related expenses. The Company financed its purchase with commercial lending institutions through an unsecured term loan. This loan matures in varying amounts through 2002 with interest payable at least quarterly. The term loan interest rate is equivalent to either the 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, 1996, the weighted average interest rate was 6.85%, and the fair value of the loan approximated the carrying value. Principal payments due on the term loan are as follows: Principal Amount Year ending December 31, (Dollars in thousands) 1996 $ 875 1997 3,500 1998 3,625 1999 4,125 2000 4,625 Thereafter 8,750 Total $25,500 In October of 1995, the Company entered into an interest rate swap agreement with a commercial lending institution in order to reduce the impact of interest rate fluctuations on the Company's term loan. The interest rate swap was effected with respect to the first $15.5 million of scheduled principal amortizations of the $25.5 million loan. The impact of the swap was to create an effective fixed rate of 6.97% on the $15.5 million principal amount. As of March 31, 1996, the fair value of the interest rate swap approximated the carrying value. 5. Earnings Per Share Earnings per common share are based on the average number of shares outstanding during each period; the exercise of outstanding stock options would have no significant dilutive effect on earnings per share. 6. Unaudited Consolidated Financial Statements In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the results of operations and financial position of the Company for the periods ended March 31, 1996 and 1995. The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes to financial statements as contained in the Company's 1995 Annual Report on Form 10-K. The results of operations for the period presented are not necessarily indicative of the results to be expected for the entire year. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General The Company is a holding company that, through its subsidiaries, underwrites specialty property and casualty insurance in sectors of the insurance industry that are generally considered difficult to insure. Many of the coverages written by the Company can be categorized as excess and surplus lines, which generally means that the risks are nonstandard or that the policies in respect of the risks are written with unusual limits or at deviated rates. The property and casualty insurance industry is highly cyclical. The excess and surplus lines sectors of the property and casualty insurance industry are often subject to greater cyclicality and volatility than the industry in general. During soft markets, large standard lines insurers often utilize excess capacity to assume risks in excess and surplus and specialty lines. During hard markets, such insurers tend to abandon the excess and surplus and specialty lines to the carriers that concentrate in these sectors. Thus, capacity in these lines will fluctuate substantially, often with fluctuations in revenues or profits, or both. Results of Operations First Quarter of 1996 Compared with the First Quarter of 1995 Gross Premiums Written. Gross premiums written were $34.9 million for the first quarter of 1996, compared with $35.2 million for the first quarter of 1995. The decrease in gross premiums written was primarily attributable to a $2.0 million decrease in Difference in Conditions ("DIC") premiums resulting from timing differences and processing delays in the booking of premiums, the sharing of premiums with a companion carrier, and, to a lesser extent, an increase in competition with respect to certain types of DIC risks. Other Property decreased by $0.3 million due to the processing delays mentioned above, as well as increased competition, mitigated in part by new business from plate glass and fire policies. Such decreases were partially offset by a $0.8 million increase in premiums from Specialty Lines, due to new business, and a $0.7 million increase in Casualty premiums, resulting from new program business marketed by the Company. Architects' & Engineers' Liability premiums increased by $0.6 million due to enhanced coverages offered, although the underlying market conditions remain soft. Net Premiums. Net premiums written increased 18.7% to $21.2 million for the first quarter of 1996 from $17.9 million for the first quarter of 1995, primarily as a result of reduced reinsurance costs for Casualty and Specialty Lines, increased retention levels in the Commercial Automobile and Other Property business and a change in the mix of business written. Net premiums earned increased by 24.0% to $22.0 million for the first quarter of 1996 from $17.7 million for the first quarter of 1995, as a result of most of the factors described above. Net Investment Income. Net investment income increased 13.4% to $4.2 million for the first quarter of 1996 from $3.7 million for the first quarter of 1995. The increase is primarily due to additional funds available for investment in 1996. Net Realized Gains on Investments. In the first quarter of 1996, the Company realized a net gain of $0.8 million, principally from the sale of taxable securities. The Company is shifting its portfolio in 1996 towards a lower percentage of taxable securities to optimize the mix of taxable and tax-exempt investments. Other Income. For the quarter ended March 31, 1996, the Company recorded $0.3 million of underwriting management fees for DIC business underwritten on behalf of a companion carrier. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased by 24.3% to $12.9 million for the first quarter of 1996 from $10.3 million for the first quarter of 1995, primarily due to earned premium exposures. Losses and loss adjustment expenses were 58.6% of net premiums earned in the first quarter of 1996, compared with 58.4% in the first quarter of 1995. Underwriting, Acquisition, and Insurance Expenses. Underwriting, acquisition, and insurance expenses increased by 22.2% to $9.2 million for the first quarter of 1996 from $7.6 million for the first quarter of 1995, primarily due to increased acquisition costs and additions to staff related to new business. Interest Expense. For the quarter ended March 31, 1996, the Company recorded $0.4 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 $1.2 million for the first quarter of 1996, compared with income taxes of $0.7 for the first quarter of 1995. Net Income. Net income was $3.5 million for the first quarter of 1996, compared with $3.0 million for the first quarter 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 $9.8 million for the first three months of 1996, compared with $5.5 million for the first three months of 1995. At March 31, 1996, the Company maintained cash and cash equivalents of $30.0 million to meet current payment obligations. In addition, the Company's investment portfolio could be substantially liquidated without any material financial impact. Substantially all of the cash and investments of the Company at March 31, 1996 were held by its subsidiaries. Reinsurance recoverables on unpaid losses decreased from $153.0 million at December 31, 1995 to $142.7 million at March 31, 1996. Because of the high limits on the Company's issued policies relative to net retentions, reinsurance recoverable on unpaid losses can fluctuate significantly depending upon the emergence and severity of reported and unreported losses. In September 1995, the Company purchased 1.5 million shares of its common stock from Willis Corroon for a total purchase price of $25.5 million, including related expenses. The Company financed its purchase of such shares through the proceeds of borrowing from commercial lending institutions. As a result of the interest on this indebtedness, the Company's corporate overhead expense will increase by approximately $1.8 million in 1996. As a holding company, the Company depends principally on dividends from its insurance company subsidiaries to pay corporate overhead expenses, including principal and interest on its borrowings. These subsidiaries are subject to state insurance laws that restrict their ability to pay dividends. Under the insurance code of Pennsylvania, dividends from Calvert are limited to the greater of 10% of surplus as regards policyholders as of the preceding year end or the net income for the previous year, without prior approval from the Pennsylvania Department of Insurance. Under the insurance code of California, dividends from Associated are limited to the greater of 10% of policyholders' statutory surplus as of the preceding year end or the Company's statutory net income from operations for the previous year, without prior approval from the California Department of Insurance. The National Association of Insurance Commissioners (NAIC) adopted a risk-based capital system for assessing the adequacy of statutory capital and surplus for all property and casualty insurers. Based on computations made by the Company in conformity with such guidelines, Associated and Calvert have exceeded the required levels of capital. There can be no assurance that capital requirements applicable to the Company's business will not increase in the future. The Company has no present plans to make any significant capital expenditures in the foreseeable future. The Company has no off-balance-sheet obligations that are not disclosed in its financial statements. The Company believes that retained earnings will be sufficient to satisfy its long- term capital requirements to fund growth. Effects of Inflation There was no significant impact on the Company's operations as a result of inflation during the first quarter of 1996. However, there can be no assurance that inflation will not have a material impact on the Company's operations in the future. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits. - None b) The following report on Form 8-K was filed during the first three months of 1996. 1. Form 8-K dated March 12, 1996, reporting a change in the Registrant's By-Laws. 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 9, 1996 Stephen A. Crane Stephen A. Crane President & Chief Executive Officer Date: May 9, 1996 Robert P. Cuthbert Robert P. Cuthbert Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----