Gryphon Holdings, Inc.

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Gryphon Holdings, Inc.

30 Wall Street
New York, New York 10005-2201
U.S.A.
(212) 825-1200
Fax: (212) 825-0200

Public Company
Incorporated: 1993
Employees: 130
Sales: $106.64 million (1996)
Stock Exchanges: NASDAQ
SICs: 6411 Insurance Agents, Brokers, and Service; 6351 Surety Insurance; 6331 Fire, Marine, and Casualty Insurance

Gryphon Holdings, Inc. is an insurance company which, through its two wholly owned subsidiaries, Calvert Insurance Co. and Associated International Insurance Co., provides specialized insurance in a variety of areas including earthquake coverage, architects’ and engineers’ liability, and more. Since becoming an independent entity, after being spun off from British based Willis Corroon in the mid-1990s, Gryphon has attracted investor interest and held its own in the somewhat precarious world of the insurance industry.

Beginnings

Gryphon Holdings has its roots in a series of companies which previously owned the two insurance carriers that it operates. Its two subsidiaries, Associated International and Calvert, were both purchased in the early 1980s by Stewart Wrightson Holdings. Wrightson, a large British insurance concern, was absorbed by Willis Faber Group in 1987, and three years later Willis Faber merged with Corroon & Black to form Willis Corroon Group. The British-based Willis Corroon, then the fourth largest insurance company in the world, decided to get out of the United States underwriting business due to a lack of profitability in 1993, when it spun off Gryphon Holdings, Inc. Gryphon’s initial public offering of stock was on the NASDAQ exchange in December of 1993. Willis retained a little over a third of the stock, which it sold off completely over the next two years. Gryphon appointed Stephen Crane, who had been in charge of several different Willis Group divisions since 1989, as President and CEO of the new firm.

Before Gryphon was spun off, its two subsidiary companies had operated independently, but within Gryphon they were to become better integrated to form a more efficient operation. Associated International Insurance Co. had been founded in 1972, with headquarters in Los Angeles. The company offered specialty lines of commercial property and casualty insurance, which included architects’ and engineers’ professional liability coverage, “difference in conditions” insurance (mainly against earthquake damage), and excess casualty and other types of specialty insurance. Associated’s typical customers were small to medium sized businesses. Associated was licensed in California, and operated as a “non-admitted” or “surplus lines” carrier in all other states except Massachusetts. Surplus line insurance consists of coverage not available from fully licensed (“admitted”) companies, and generally is subject to less government regulation, typically requiring only that the company offering it meet certain minimum financial standards, that it verify the insurance is not offered through a licensed carrier, and that the company obtain a surplus lines license. Offering insurance on a non-admitted basis can therefore be to a company’s advantage, as it subjects an insurer to reduced government scrutiny in the realm of the otherwise highly regulated insurance business.

Gryphon’s second subsidiary Calvert Insurance Company was founded in 1925 in Pennsylvania, as the Pennsylvania Indemnity Fire Exchange, Inc., a reinsurance company for automobile, fire, theft and transportation insurance carriers. “Reinsurance” is the business of selling coverage to smaller carriers against catastrophic losses they might sustain when they receive a large number of claims at the same time, as in the event of a single disaster. In 1940 the company’s name was changed to Calvert Fire Insurance Company, with “Fire” being dropped from the name in 1981. Corporate offices were relocated to Hoboken, New Jersey in 1991. As with Associated, the company had been wholly owned by Willis Corroon and its predecessors, and continued as a wholly owned subsidiary of Gryphon. Unlike Associated, Calvert was an admitted carrier throughout the United States and Canada. By the early 1990s the company was offering a combination of specialty property and casualty insurance coverage.

1994: Northridge Earthquake Hits Hard

Gryphon’s first year of independent operation was a somewhat turbulent one, primarily due to the Northridge, California earthquake which took place on January 17, 1994. Gryphon’s subsidiary, Associated International, was largely in the business of offering earthquake insurance in Southern California, and the company received many claims. The company’s own headquarters were in fact damaged, though they were naturally well insured. Associated received total claims of $73 million, but due to its own reinsurance coverage and its conservative underwriting policies, actual losses amounted to only about $4 million before taxes.

Associated faced a few difficult claims which arose out of the Northridge quake. Aside from major claims from Rocketdyne and Northridge Fashion Center, two businesses which were heavily damaged, the company had a dispute with the Encino Oaks Homeowners Association, representing a 509 unit condominium complex. The Homeowners’ group filed a claim for significantly more damages than Associated International’s engineers considered legitimate. Associated initially paid about $2.4 million on the claim, but the homeowners were requesting $2 million more than that, largely for repair of the stucco exteriors of the 10 condominium buildings, and some of the floors in the buildings. After a series of testy exchanges, and with Associated claiming that much of the alleged earthquake damage was actually due to structural defects in the original construction of the buildings, the claim was resolved. It took several years before the Northridge claims were completely settled. Gryphon’s other subsidiary, Calvert, weathered the first year of its parent’s independence more easily, with few exceptional claims.

During 1994, Gryphon began to implement a business plan intended to better integrate the two companies it owned. The plan included utilizing the two carriers’ different admitted/non-admitted status to maximum effect; efficiently allocating surplus funds of the subsidiaries by reinsuring between the two companies; retaining earnings within the subsidiaries to finance growth by paying dividends to the holding company only to cover its expenses; and revising the companies’ investment policies to allow investment in a wider range of securities in order to enhance after-tax returns and reduce risks. Gryphon also implemented an underwriting strategy which included focusing on specialized lines; using disciplined underwriting, which meant examining potential risks and profits carefully; focusing on service to customers; using sophisticated computer modeling techniques to predict probable maximum losses from earthquakes; and emphasizing the company’s relationships with its agents and brokers. Total revenues for 1994 were over $72 million, only slightly less than for the previous year, but net income was about $6.2 million, or about half that of 1993.

1995 was a better year for Gryphon. Although the Northridge earthquake claims were still not completely resolved, and Gryphon paid out another $3 million for claims dating to that event, there were no comparable calamities requiring large payments in 1995. Also during the year, the final shares of Gryphon stock owned by Willis Corroon were sold, giving Gryphon firmer control over its own destiny. Gryphon itself purchased 1.5 million of these shares, a significant portion of the Willis Corroon holdings. Gryphon also entered into a partnership with Frontier Pacific Insurance Company that made Frontier a companion carrier to Associated International in offering earthquake insurance. Gryphon would receive a fee as underwriting manager, and would have expanded presence in the California earthquake insurance market without incurring additional financial risk. The company’s performance rebounded for the year, reaching almost $103 million in revenues, with nearly $13 million in profits.

Gryphon Insurance Group Formed in 1996

Gryphon created a new operating company, the Gryphon Insurance Group, at the start of 1996. This new operating unit was created as a management and service company that was to conduct all the affairs of Calvert and Associated. Its creation was intended to allow Gryphon to begin to present itself as a single company in the marketplace.

Company Perspectives:

Gryphon Holdings, Inc., a publicly owned insurance holding company, operates through its main subsidiary, Gryphon Insurance Group, as a specialty property and casualty underwriting organization. Gryphon is an underwriting-focused company that is dedicated to consistently producing profits from underwriting operations through the exercise of rigorous risk selection and pricing discipline. Toward that end, the Company focuses on niches in which it can add value by developing specialized expertise and also enhances profitability by opportunistically identifying underserved or neglected markets. Gryphon is also committed to maintaining a competitive edge by providing general agents and wholesale brokers, its customers, with quality products and a high level of service. Gryphon is dedicated to producing a superior return for its shareholders over the longer term through its underwriting discipline and through a culture that encourages employees to think and act like owners.

The insurance business in the mid-1990s was quite competitive, and Gryphon was continually evaluating the market and making subtle changes to its product mix. The company offered a wide range of different types of specialized coverage, which would simply be discontinued if they failed to make money. Other coverage lines were added as the need for new, specialized types of insurance were discovered. In 1996, Gryphon offered six core groups of coverage. These included Property Difference in Conditions (primarily California earthquake insurance); Specialty Property; Casualty Excess; Professional Liability (mainly consisting of insurance against architects’ errors and omissions, as well as directors’ and officers’ liability, for non-profit entities); Commercial Auto; and Specialty Lines and Programs. The latter included such niche offerings as Plate Glass insurance and animal mortality coverage. The company had recently added Commercial Auto insurance, and expected it to develop into a successful area of business. Also new was a program of bicycle shop insurance, consisting of property and liability coverage for small to medium bicycle shop owners. A similar new line was liability insurance for health club owners and operators. At the same time that Gryphon was creating these new insurance products, other lines that had become unprofitable were being discontinued. The latter included Truck Leasing and Garage Liability insurance, both discontinued in 1995 but still on the books in “run-off,” as the policies that had been written were honored for the duration of the contract. Both of Gryphon’s subsidiaries, as well as Gryphon Insurance Group, were now rated “A” (Excellent) by insurance industry analyst A. E. Best Company.

Gryphon also made improvements beginning in 1996 to its computer systems. Following an analysis of the company’s extant hardware and software, and a projection of future needs by a team consisting of systems professionals and users, the company purchased new hardware and software systems to perform Gryphon’s premium, loss, and management reporting tasks. The new systems were expected to be able to greatly enhance management of insurance lines through their ability to provide more timely, better quality, and more customizable information. The ultimate goal was to save costs through greater control of, and access to, information.

Gryphon saw reduced earnings in 1996 as the insurance business remained competitive and certain lines of business continued to show limited returns. While the company’s gross revenues climbed slightly, earnings dropped in half, coming in at just over $6 million, even less than in 1994, the year of the Northridge earthquake. The company had been fine-tuning its approach since going public, and was experiencing growing pains, but CEO Crane publicly expressed his conviction that Gryphon would return to a position of strength, stating, “We spent a lot of time and money last year recovering from self-inflicted wounds. They were not serious enough to put us on the critical list, but they prompted us to conduct a thorough self-examination to confirm that we had dealt effectively with the causes of our problems and had made a substantial recovery. I am pleased to report that we are in sound financial and operational health, and strong enough to seize the opportunities before us. The only side-effect is the caution with which we are stepping through a very treacherous property and casualty market environment.”

Gryphon Holdings, though a relatively young company in the world of insurance, was reasonably profitable in its first few years as an independent company, and managed to weather the losses caused by a major natural disaster with only slight financial damage. Operating in an intensely competitive, highly regulated industry with a strategy that uses these conditions to the company’s advantage, Gryphon seems likely to continue to find its niche in years to come.