-----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, E7s2OSssOA8yxtPZfdOC2yBwbotz91uwMoCT35v1FpzaGLjVTxODcbKliY//2rI/ ly/LMmSXk8jNKeqmtVjy7w== 0000912558-97-000003.txt : 19970509 0000912558-97-000003.hdr.sgml : 19970509 ACCESSION NUMBER: 0000912558-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970508 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: 97598449 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 2 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, 1997 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, 1997 Common stock, par value $.01 6,688,340 Gryphon Holdings Inc. TABLE OF CONTENTS Part I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets at March 31, 1997 and December 31, 1996 3 Consolidated Statements of Income for the three months ended March 31, 1997 and 1996 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996 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 EXHIBIT 27 Financial Data Schedule 13 Gryphon Holdings Inc. and Subsidiaries Consolidated Balance Sheets March 31, December 31, 1997 1996 Assets (Dollars in thousands) Investments: Fixed maturities, available for sale, at fair value (amortized cost: 3/31/97 - $267,186; 12/31/96 - $274,515) $267,162 $280,164 Short-term investments, at cost, which approximates market 307 307 Total investments 267,469 280,471 Cash and cash equivalents 29,918 23,398 Accrued investment income 4,092 3,919 Premiums receivable 18,137 18,509 Reinsurance recoverable on paid losses 13,766 14,326 Reinsurance recoverable on unpaid losses 141,890 137,952 Prepaid reinsurance premiums 14,584 18,965 Deferred policy acquisition costs 13,222 12,415 Deferred income taxes 12,019 10,282 Other assets 6,921 6,747 Total assets $522,018 $526,984 Liabilities and Stockholders' Equity Policy liabilities: Unpaid losses and loss adjustment expenses $315,684 $309,259 Unearned premiums 65,631 68,683 Total policy liabilities 381,315 377,942 Reinsurance balances payable 14,636 16,207 Income taxes payable 337 55 Long-term debt 23,750 24,625 Other liabilities 8,021 13,019 Total liabilities 428,059 431,848 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 30,753 30,847 Foreign currency translation adjustment, net of tax (240) (219) Net unrealized investment gains (losses), net of tax (16) 3,672 Deferred compensation (267) (257) Retained earnings 88,442 86,271 Treasury stock, at cost; shares 1997:1,459,710; 1996: 1,487,075 (24,794) (25,259) Total stockholders' equity 93,959 95,136 Total liabilities and stockholders' equity $522,018 $526,984 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, 1997 1996 (Dollars and shares in thousands, except per-share data) Revenues Gross premiums written $35,651 $34,919 Net premiums written 24,423 21,213 Net premiums earned 23,101 21,951 Net investment income 4,170 4,159 Realized gains on investments 17 802 Other income 242 270 Total revenues 27,530 27,182 Expenses Losses and loss adjustment expenses 13,507 12,853 Underwriting, acquisition, and insurance expenses 10,862 9,234 Interest expense 421 437 Total expenses 24,790 22,524 Income before income taxes 2,740 4,658 Provision for income taxes (benefit): Current 318 1,493 Deferred 251 (340) Total income taxes 569 1,153 Net income $2,171 $3,505 Net income per-share $0.33 $0.53 Weighted average shares outstanding 6,663 6,648 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, 1997 1996 (Dollars in thousands) Operating activities Net income $2,171 $3,505 Adjustments to reconcile net income to net cash provided by operating activities: Increase in net policy liabilities 4,376 6,348 Decrease (increase) in premiums receivable 372 (956) Increase in deferred policy acquisition costs (807) (19) Deferred income tax provision 251 (340) (Increase) decrease in other assets and liabilities (4,801) 7,920 Amortization and depreciation 182 126 Amortization of bond discount, net 155 156 Realized gains on investments (17) (802) Decrease in reinsurance balances payable (1,571) (6,088) Increase in accrued investment income (173) (64) Net cash provided by operating activities 138 9,786 Investing activities Sales of fixed maturities 74,984 66,387 Purchases of fixed maturities (67,804) (74,331) Maturities or calls of fixed maturities 900 Capital expenditures (244) (86) Net cash used by investing activities 6,936 (7,130) Financing activities Principle payment on long-term debt (875) Issuance of common stock 371 Deferred compensation (29) Net cash provided by financing activities(533) Effect of exchange rate changes on cash (21) 7 Increase in cash and cash equivalents 6,520 2,663 Cash and cash equivalents at beginning of year 23,398 27,337 Cash and cash equivalents at end of year $29,918 $30,000 Supplemental disclosure of cash flow information Interest paid $421 $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, 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, 1997 1996 (Dollars in thousands) Fixed maturities $4,154 $4,125 Cash, cash equivalents and short-term investments 262 295 Total investment income 4,416 4,420 Less related expenses 246 261 Net investment income $4,170 $4,159 The gross realized gains and losses from sales of fixed maturity securities are as follows: For the three months ended March 31, 1997 1996 (Dollars in thousands) Gross realized gains $472 $1,184 Gross realized losses (455) (382) Net realized gain on sales $17 $802 At March 31, 1997 and December 31, 1996, 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, 1997 U.S. Treasury securities and obligations of U.S. government corporations and agencies $61,845 $89 $(861) $61,073 Debt securities issued by foreign governments 9,575 93 (174) 9,494 Tax-exempt obligations of states and political subdivisions 121,276 2,822 (401) 123,697 Mortgage-backed securities 25,410 113 (950) 24,573 Corporate securities 49,080 61 (816) 48,325 267,186 3,178 (3,202) 267,162 Short-term investments 307 307 $267,493 $3,178 $(3,202) $267,469 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 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, 1997, the weighted average interest rate was 6.84%, 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) 1997 $2,625 1998 3,625 1999 4,125 2000 4,625 2001 5,000 Thereafter 3,750 Total $23,750 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, 1997, 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, 1997 and 1996. 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 1996 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 1997 Compared with the First Quarter of 1996 Gross Premiums Written. Gross premiums written were $35.7 million for the first quarter of 1997, compared with $34.9 million for the first quarter of 1996. In 1997, the Company's gross premiums written experienced increases in the following lines of business: a $1.0 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; a $0.8 million increase in Architects' & Engineers' liability due to expanded marketing and enhanced coverages offered; and a $0.7 million increase in Difference in Conditions (DIC) premiums, which were affected by increased competition with respect to certain types of DIC risks. Such increases were partially offset by a $1.1 million decrease in other property due to increased competition; a $0.4 million decrease in commercial automobile due to the non-renewal of a truck leasing program, mitigated in part by new business written; and a $0.2 million decrease in Specialty Lines. Net Premiums. Net premiums written increased 15.1% to $24.4 million for the first quarter of 1997 from $21.2 million for the first quarter of 1996, primarily as a result of a new reinsurance program, effective in the fourth quarter of 1996, which reduced reinsurance costs, mainly by increasing net retentions to $500,000 per risk in most lines of business. Net premiums earned increased by 5.2% to $23.1 million for the first quarter of 1997 from $22.0 million for the first quarter of 1996, as a result of most of the factors described above. Net Investment Income. Net investment income was $4.2 million for the first quarter of 1997 compared with $4.2 million for the first quarter of 1996. In 1997, net investment income was affected by additional funds available for investment, but also by lower average interest rates compared with the first quarter of 1996. Net Realized Gains on Investments. In the first quarter of 1997, the Company realized a net gain of seventeen thousand dollars, compared with a net gain of $0.8 million in the first quarter of 1996. 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's other income was $0.2 million, compared with $0.3 million for the first quarter of 1996. The Company receives 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 5.1% to $13.5 million for the first quarter of 1997 from $12.9 million for the first quarter of 1996, primarily due to increased earned premium exposures. Losses and loss adjustment expenses were 58.5% of net premiums earned in the first quarter of 1997, compared with 58.6% in the first quarter of 1996. Underwriting, Acquisition, and Insurance Expenses. Underwriting, acquisition, and insurance expenses increased by 17.6% to $10.9 million for the first quarter of 1997 from $9.2 million for the first quarter of 1996, largely due to increased acquisition costs, primarily net commission expenses and premium taxes. Interest Expense. For the first quarter of 1997 interest expense was $0.4 million compared with $0.4 million for the first quarter of 1996. Interest expense resulted from a term loan used to purchase 1.5 million shares of the Company's common stock in 1995. Income Taxes. Income taxes were $.6 million for the first quarter of 1997, compared with income taxes of $1.2 for the first quarter of 1996. Net Income. Net income was $2.2 million for the first quarter of 1997, compared with $3.5 million for the first quarter of 1996. 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 $0.1 million for the first three months of 1997, compared with $9.8 million for the first three months of 1996. At March 31, 1997, the Company maintained cash and cash equivalents of $29.9 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 March 31, 1997 were held by its subsidiaries. Reinsurance recoverables on unpaid losses were $141.9 million at March 31, 1997 and $138.0 million at December 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 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 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. 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 1997. 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 13 b) No reports on Form 8-K were filed during the first three months of 1997. 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 8, 1997 Stephen A. Crane Stephen A. Crane President & Chief Executive Officer Date: May 8, 1997 Robert P. Cuthbert Robert P. Cuthbert Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) EX-27 2
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