UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
COMMISSION FILE NUMBER 0-20848
UNIVERSAL INSURANCE HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 65-0231984
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2875 N.E. 191 STREET
SUITE 300
MIAMI, FLORIDA 33180
(Address of principal executive offices)
(305) 792-4200
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the last practicable date: 17,585,939 shares of common
stock as of November 1, 2001.
Transitional Small Business Disclosure Format Yes No X
--- ---
UNIVERSAL INSURANCE HOLDINGS, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited consolidated financial statements of Universal
Insurance Holdings, Inc. have been prepared in accordance with the instructions
to Form 10-QSB and, therefore, omit or condense certain footnotes and other
information normally included in financial statements prepared in conformity
with accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
information for the interim periods reported have been made. Results of
operations for the nine months ended September 30, 2001 are not necessarily
indicative of the results for the year ending December 31, 2001.
2
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2001
(Unaudited)
ASSETS
Fixed maturities held-to-maturity (fair value of $3,435,321) $3,288,241
Equity securities available for sale (cost of $497,443) 433,722
Cash and cash equivalents 8,478,002
Prepaid reinsurance premiums and reinsurance recoverable 12,892,852
Premiums and other receivables 845,731
Deferred policy acquisition costs 1,385,009
Property, plant and equipment, net 746,872
-------
Total assets $28,070,429
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $6,277,834
Unearned premiums 12,433,750
Accounts payable 3,212,141
Other accrued expenses 554,887
Accrued taxes, licenses and fees 103,049
Loan payable 215,283
-------
Total liabilities 22,796,944
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Cumulative convertible preferred stock, $.01 par value,
1,000,000 shares authorized, 138,640 shares issued and
outstanding, minimum liquidation preference of $1,419,700 1,387
Common stock, $.01 par value, 40,000,000 shares authorized,
14,894,584 shares issued and 14,685,939 shares outstanding 148,946
Common stock in treasury, at cost - 208,645 shares (101,819)
Additional paid-in capital 15,126,242
Accumulated deficit (9,837,550)
Accumulated other comprehensive loss (63,721)
Total stockholders' equity 5,273,485
Total liabilities and stockholders' equity $28,070,429
===========
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
3
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
PREMIUMS EARNED AND OTHER REVENUES
Premium income - net $5,964,573 $5,116,917 $1,846,493 $1,462,771
Net investment income 508,837 778,672 154,600 258,237
Commission revenue 1,406,370 1,035,819 554,379 391,022
Other income 2,637,300 - - -
---------- ----------- --------- ---------
Total revenues 10,517,080 6,931,408 2,555,472 2,112,030
---------- --------- --------- ---------
OPERATING COST AND EXPENSES:
Losses and loss adjustment expenses 5,772,229 2,836,265 2,551,981 1,235,453
General and administrative expenses 6,139,361 4,079,128 2,412,596 1,585,479
--------- --------- --------- ---------
Total operating cost and expenses 11,911,590 6,915,393 4,964,577 2,820,932
---------- --------- --------- ---------
NET INCOME (LOSS) $(1,394,510) $16,015 $(2,409,109) $ (708,902)
============ ========= ============ ============
INCOME (LOSS) PER COMMON SHARE:
Basic $ ( 0.09) $ 0.00 $ (0.16) $ (0.05)
============ ========== ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 14,698,000 14,780,000 14,686,000 14,752,000
============ ========== ============ ============
INCOME (LOSS) PER COMMON SHARE:
Diluted $ (0.09) $ 0.00 $ (0.16) $ (0.05)
============ ========== ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 14,698,000 15,751,000 14,686,000 14,752,000
============ ========== ============ ============
The accompanying notes to condensed consolidated financial statements are an
integral part of this statement.
4
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
Nine Months Three Months
Ended Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
NET INCOME (LOSS) $ (1,394,510) $ 16,015 $(2,409,109) $ (708,902)
OTHER COMPREHENSIVE LOSS:
Change in net unrealized loss on
available-for-sale securities (3,849) (170,219) (43,426) (9,855)
------------ ----------- ------------ ----------
COMREHENSIVE LOSS $(1,398,359) $ (154,204) $(2,452,531) $ (718,757)
============= ============ ============= -----------
The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
5
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Nine Months Ended
September 30, September 30,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,394,510) $ 16,015
Adjustments to reconcile net income (loss)
to cash used in operations:
Amortization and depreciation 96,444 50,320
Gains on sales of equity securities available for sale - (182,708)
Deferred policy acquisition costs 413,658 37,415
Net accretion of bond premiums and discount (20,389) -
Warrants issued in lieu of payments - 19,000
Net change in assets and liabilities relating to operating
activities:
Prepaid reinsurance premiums and reinsurance
recoverable (205,707) (3,213,700)
Other receivables and deposits (392) 60,921
Accounts payable 498,320 770,480
Other accrued expenses (22,370) (611,184)
Accrued taxes, licenses and fees (117,625) (202,878)
Unpaid losses and loss adjustment expenses 2,809,710 405,937
Unearned premiums (3,739,908) (1,027,090)
Due from related parties and other (20,040) -
----------- ------------
Net cash used in operating activities (1,702,809) ( 3,877,472)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (202,194) (372,839)
Purchase of equity securities available for sale (127,546) (434,253)
Proceeds from sale of equity securities available for
sale - 551,601
Purchase of fixed maturities held to maturity (601,062) (1,147,085)
Proceeds from maturities of fixed maturities held to
maturity 759,153 403,786
----------- ------------
Net cash used in investing activities (179,299) (998,790)
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan payable 215,283 -
Cash dividends (202,921) (37,463)
Purchase of treasury stock (17,565) (34,509)
----------- ------------
Net cash used in financing activities (5,203) (71,972)
----------- ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (1,879,661) (4,948,234)
CASH AND CASH EQUIVALENTS, Beginning of period 10,357,663 16,272,982
----------- ------------
CASH AND CASH EQUIVALENTS, End of period $ 8,478,002 $11,324,748
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid $ 4,385 $ -
Income taxes paid - 40,000
The accompanying notes to condensed consolidated financial statements are an integral part of this statement.
6
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements include the
accounts of Universal Insurance Holdings, Inc. ("Company"), its wholly-owned
subsidiary, Universal Property & Casualty Insurance Company ("UPCIC"), and other
wholly-owned entities which are under common control through common ownership.
All intercompany accounts and transactions have been eliminated in
consolidation.
The condensed consolidated balance sheet of the Company as of September 30,
2001, the related consolidated statements of operations and comprehensive
operations for the nine months and three months ended September 30, 2001 and
2000, and cash flows for nine months ended September 30, 2001 and 2000 are
unaudited. The accounting policies followed for quarterly financial reporting
are the same as those disclosed in the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2000. The interim financial statements reflect all
adjustments (consisting of only normal and recurring accruals and adjustments)
which are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented. The Company's operating results for
any particular interim period may not be indicative of results for the full year
and thus should be read in conjunction with the Company's annual statements.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made in the 2000 financial statements to
conform them to and make them consistent with the presentation used in the 2001
financial statements.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities. Among other
provisions, SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It also requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
July 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, which changes the effective date of SFAS No. 133 for financial statements
for fiscal years beginning after June 15, 2000. The Company does not have
derivative instruments and thus, the adoption of SFAS No. 133 did not have a
material impact on the Company's financial position, results of operations or
cash flows.
7
In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principals ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting to state insurance departments was effective January 1, 2001. However,
statutory accounting principles will continue to be established by individual
state laws and permitted practices. The state of Florida required adoption of
the Codification for the preparation of statutory financial statements effective
January 1, 2001. The adoption of the Codification as modified by Florida did not
have a material adverse effect on the Company's statutory capital and surplus.
In July 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business
combinations entered into subsequent to June 30, 2001 to be accounted for using
the purchase method of accounting. SFAS No. 142 provides that goodwill and other
intangible assets with indefinite lives will not be amortized, but will be
tested for impairment on an annual basis. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. The new standards are not expected to
have a significant impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is
effective for the fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early adoption encouraged. The
provisions of SFAS No. 144 generally are to be applied prospectively. The
Company does not expect the adoption of SFAS No. 144 to have a material effect
on its financial statements or disclosures.
RISKS AND UNCERTAINTIES. The Company's business could be impacted by regulatory
and competitive restrictions on pricing for new and renewal business, the cost
of catastrophic reinsurance, adverse loss experience and federal and state
legislation or governmental regulations of insurance companies. Changes in these
areas could adversely impact the Company's operations in the future.
As presented in the accompanying condensed consolidated financial statements,
the Company incurred net losses of $2.4 million and $1.4 million for the three
months and nine months ended September 30, 2001, respectively.
Management attributes the net loss in the nine months ended September 30, 2001
to a higher than expected cost of catastrophic reinsurance and adverse loss
experience in the homeowners' insurance line of business. In order to improve
the Company's financial position and achieve profitable operations, management
has implemented a rate increase for new and renewal business, is restructuring
the homeowners' coverage offered, has restructured its catastrophic reinsurance
coverage to reduce the cost, and is working to reduce general and administrative
expenses. In addition, management is exploring sources of additional capital.
Management believes that the implementation of these plans will be successful
over the next twelve months. However, there can be no assurance that successful
implementation of these plans will be achieved or will be sufficient to ensure
UPCIC's future compliance with Florida insurance regulations, or that the
Company will be able to achieve profitability. Failure by UPCIC to maintain the
required level of statutory capital and surplus could result in the suspension
of UPCIC's authority to write new or renewal business, other regulatory actions
or ultimately, in the revocation of UPCIC's certificate of authority by the
Florida Department of Insurance.
8
NOTE 2 - INSURANCE OPERATIONS
UPCIC commenced its insurance activity in February 1998 by assuming policies
from the Florida Residential Property and Casualty Joint Underwriting
Association ("JUA"). UPCIC received the unearned premiums and began servicing
such policies. Since then, UPCIC has been renewing these policies as well as
soliciting business actively in the open market through independent agents.
Unearned premiums represent amounts that UPCIC would refund policyholders if
their policies were canceled. UPCIC determines unearned premiums by calculating
the pro-rata amount that would be due to the policyholder at a given point in
time based upon the premiums owed over the life of each policy. At September 30,
2001, the Company had unearned premiums totaling $12,433,750.
Universal Property and Casualty Management, Inc., an unaffiliated management
company, provides the Company with management and personnel for UPCIC's
underwriting, claims and financial requirements, together with support offices,
equipment and services. The fees for such services for the nine months ended
September 30, 2001 and 2000 totaled $913,508 and $764,468, respectively. The
fees for the three months ended September 30, 2001 and 2000 totaled $335,071 and
$408,941 respectively. UPCIC and Universal Property and Casualty Management,
Inc. have decided to terminate the management agreement effective as of January
15, 2002 at which time services previously provided by Universal Management to
UPCIC under the management agreement will be performed by UPCIC, Universal Risk
Advisors, Inc. and unaffiliated third parties.
The JUA's incentive program provided approximately $2,700,000 to an escrow
account to fund bonus payments to UPCIC. These funds will be progressively
released to UPCIC as certain conditions are met, including not canceling
policies acquired from the JUA for a three year period. As of September 30,
2001, the Company has substantially complied with the requirements related to
most of the potential bonus payments and $2,637,300 was released from escrow for
26,373 policies which had reached their three-year anniversary. The bonus
payments are not included in the Company's assets until they are eligible to be
released from escrow. Accordingly, $2,637,300 is reflected in other income for
the nine months ended September 30, 2001. For the three months ended September
30, 2001, no bonus payments are reflected in other income. No bonus payments
were reflected in income in the prior year periods. The remaining escrow account
balance is not included in the accompanying consolidated financial statements.
Premiums earned are included in earnings evenly over the terms of the policies.
UPCIC does not have policies that provide for retroactive premium adjustments.
Policy acquisition costs, consisting of commissions and other costs that vary
with and are directly related to the production of business, net of unearned
ceding commissions, are deferred and amortized over the terms of the policies,
but only to the extent that unearned premiums are sufficient to cover all
related costs and expenses. At September 30, 2001, deferred policy acquisition
costs amounted to $1,385,009.
An allowance for uncollectible premiums receivable is established when it
becomes evident collection is doubtful. No allowance is deemed necessary at
September 30, 2001.
9
Claims and claims adjustment expenses, less related reinsurance, are provided
for as claims are incurred. The provision for unpaid claims and claim adjustment
expenses includes: (1) the accumulation of individual case estimates for claims
and claims adjustment expenses reported prior to the close of the accounting
period; (2) estimates for unreported claims based on past experience modified
for current trends; and (3) estimates of expenses for investigating and
adjusting claims based on past experience.
Liabilities for unpaid claims and claims adjustment expenses are based on
estimates of ultimate cost of settlement. Changes in claims estimates resulting
from the continuous review process and differences between estimates and
ultimate payments are reflected in expense for the period in which the revision
of these estimates first become known.
UPCIC estimates claims and claims expenses based on historical experience of
similar entities and payment and reporting patterns for the type of risk
involved. These estimates are continuously reviewed by UPCIC's affiliated
management professionals and any resulting adjustments are reflected in
operations for the period in which they are determined.
Inherent in the estimates of ultimate claims are expected trends in claims
severity, frequency and other factors that may vary as claims are settled. The
amount of uncertainty in the estimates for casualty coverage is significantly
affected by such factors as the amount of historical claims experience relative
to the development period, knowledge of the actual facts and circumstances, and
the amount of insurance risk retained.
NOTE 3 - REINSURANCE
UPCIC's in-force policyholder coverage for windstorm exposures as of September
30, 2001 was approximately $4.5 billion. In the normal course of business, UPCIC
seeks to reduce the loss that may arise from catastrophes or other events that
cause unfavorable underwriting results by reinsuring certain levels of risk in
various areas of exposure with other insurance enterprises or reinsurers.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the reinsurance policy. Reinsurance premiums, losses and loss adjustment
expenses are accounted for on bases consistent with those used in accounting for
the original policies issued and the terms of the reinsurance contracts.
Reinsurance ceding commissions received are deferred and amortized over the
effective period of the related insurance policies.
UPCIC limits the maximum net loss that can arise from large risks or risks in
concentrated areas of exposure by reinsuring (ceding) certain levels of risks
with other insurers or reinsurers, either on an automatic basis under general
reinsurance contracts known as "treaties" or by negotiation on substantial
individual risks. The reinsurance arrangements are intended to provide UPCIC
with the ability to maintain its exposure to loss within its capital resources.
Such reinsurance includes quota share, excess of loss and catastrophe forms of
reinsurance.
Effective June 1, 2001, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with Swiss Reinsurance America Corporation, rated A+
by A.M. Best. Under the quota share treaty, UPCIC cedes 50% of its gross written
premiums, losses and loss adjustment expenses with a provisional ceding
commission of 35%; the commission percentage will be adjusted based on the ceded
loss ratio. In addition, the quota share treaty has a limitation for any one
10
occurrence of $6,500,000. Under the excess per risk agreement, UPCIC obtained
coverage of $1,300,000 in excess of $500,000 ultimate net loss for each risk,
each loss, excluding losses arising from the peril of wind to the extent such
wind related losses are the result of a hurricane. A $2,600,000 limit applies to
any one-loss occurrence.
Effective June 1, 2001, under an excess catastrophe contract, UPCIC obtained
coverage of $47,500,000 in excess of $2,000,000. UPCIC also obtained coverage
from the Florida Hurricane Catastrophe Fund. The coverage is estimated to be
$38,000,000.
Effective July 1, 2001, UPCIC purchased industry loss warranty catastrophe
reinsurance which could supplement other coverage for 50% of losses of
$1,990,000 in excess of $10,000. The contract has a $10 billion industry loss
trigger. The premium for this coverage is $128,355.
Effective July 1, 2001, UPCIC entered into an arrangement which could supplement
other coverage. The contract has a $15 billion industry loss trigger and a
$1,000,000 payout. The premium for this coverage is $125,000.
Effective July 26, 2001, UPCIC purchased industry loss warranty catastrophe
reinsurance which could supplement other coverage for 50% of losses of
$1,990,000 in excess of $10,000. The contract has a $5 to $10 billion industry
loss trigger. The premium for this coverage is $99,500.
The ceded reinsurance arrangements had the following effect on certain items in
the accompanying consolidated financial statements:
11
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Loss Loss
and Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $17,034,115 $20,774,023 $11,984,978 $19,281,560 $20,308,651 $6,782,515
Assumed - - - (22,908) (22,908) 6,457
Ceded (11,134,347) (14,809,450) (6,212,749) (16,453,672) (15,168,826) (3,952,707)
------------ ------------ ----------- ------------ ----------- -----------
Net $5,899,768 $5,964,573 $5,772,229 $2,804,980 $5,116,917 $2,836,265
========== =========== ========== ========== ========== ==========
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Loss Loss
and Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $6,601,096 $6,936,327 $5,165,598 $7,472,992 $7,233,583 $2,853,082
Assumed - - - - - (31,349)
Ceded (4,944,003) (5,089,834) (2,613,617) (6,010,997) (5,770,812) (1,586,280)
----------- ------------ ----------- ----------- ----------- -----------
Net $1,657,093 $1,846,493 $2,551,981 $1,461,995 $1,462,771 $1,235,453
=========== ========== ========== ========== ========== ==========
Other Amounts:
September 30, 2001
------------------
Reinsurance recoverable on paid and unpaid losses
and loss adjustment expenses $ 3,359,204
Unearned premiums ceded 9,533,648
----------
Prepaid reinsurance premiums and reinsurance recoverable $ 12,892,852
==========
UPCIC's reinsurance contracts do not relieve UPCIC from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to UPCIC; consequently, allowances are established for amounts deemed
uncollectible. No allowance is deemed necessary at September 30, 2001. UPCIC
evaluates the similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies. UPCIC currently has reinsurance contracts with
various reinsurers located throughout the United States and internationally.
UPCIC believes that this distribution of reinsurance contracts adequately
minimizes UPCIC's risk from any potential operating difficulties of its
reinsurers.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis by management of the Company's
consolidated financial condition and results of operations should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.
12
FORWARD-LOOKING STATEMENTS
Certain statements made by the Company's management may be considered
to be "forward-looking statements" within the meaning of the Private Securities
Reform Litigation Act of 1995. Forward-looking statements are based on various
factors and assumptions that include known and unknown risks and uncertainties.
The words "believe," "expect," "anticipate," and "project," and similar
expressions, identify forward-looking statements, which speak only as of the
date the statement was made. Such statements may include, but not be limited to,
projections of revenues, income or loss, expenses, plans, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
results could differ materially from those described in forward-looking
statements as a result of the risks set forth in the following discussion, among
others.
OVERVIEW
The Company is a vertically integrated insurance holding company. The
Company, through its subsidiaries, is currently engaged in insurance
underwriting, distribution and claims. UPCIC generates revenue from the
collection and investment of premiums. The Company's agency operations which
include Universal Florida Insurance Agency and U.S. Insurance Solutions, Inc.
generate income from policy fees, commissions, premium financing referral fees
and the marketing of ancillary services. Universal Risk Advisors, Inc., the
Company's managing general agent, generates revenue through policy fee income
and other administrative fees from the marketing of UPCIC's and third party
insurance products through the Company's distribution network and UPCIC. Capital
Resources Group Ltd. was formed to participate in contingent capital products.
Universal Risk Life Advisors, Inc. was formed to be the Company's managing
general agent for life insurance products. In addition, the Company has formed
an independent claims adjusting company, Universal Adjusting Corporation, which
adjusts UPCIC claims in certain geographic areas and an inspection company,
Universal Inspection Corporation, which performs property inspections for
homeowners' policies underwritten by UPCIC.
The Company has formed two subsidiaries that specialize in selling
insurance via the Internet. Tigerquote.com Insurance & Financial Services Group,
Inc., and its wholly owned subsidiary Tigerquote.com Insurance Solutions, Inc.
are a network of Internet insurance agencies. At September 30, 2001, agencies
have been established in 22 states. Separate legal entities have been formed for
each state and are governed by the respective states' department of insurance.
The Company has also formed Tiger Home Services, Inc. which will
furnish pest control, pool services, landscaping and hurricane shutters to
homeowners.
FINANCIAL CONDITION
Cash and cash equivalents at September 30, 2001 aggregated $8,478,002.
The source of liquidity for possible claims payments consists of net premiums,
after deductions for expenses.
UPCIC believes that premiums will be sufficient to meet UPCIC's working
capital requirements for at least the next twelve months. Amounts considered to
be in excess of current working capital requirements have been invested. At
September 30, 2001 UPCIC's investments were comprised of $8,478,002 in cash and
13
repurchase agreements, $3,288,241 in fixed maturity securities and $433,722 in
equity securities.
Policies originally obtained from the Florida Residential Property and
Casualty Joint Underwriting Association ("JUA") provided the opportunity for
UPCIC to solicit future renewal premiums. Approximately 50% of the policies
obtained from the JUA are currently renewed with the Company. UPCIC does not
expect to participate in takeouts of additional policies from the JUA. In an
effort to further grow its insurance operations, in 1998 the Company began to
solicit business actively in the open market. Through renewal of JUA business
combined with business solicited in the market through independent agents, UPCIC
is currently servicing approximately 40,000 homeowners and dwelling fire
insurance policies. In determining appropriate guidelines for such open market
policy sales, UPCIC employs standards similar to those used in its selection of
JUA policies. Also, to improve underwriting and manage risk, the Company uses
analytical tools and data currently developed in conjunction with the Company's
reinsurers and their utilization of catastrophe model utilizing Risk Management
Solutions. To diversify UPCIC's product lines, management may consider
underwriting personal umbrella liability policies in the future. Any such
program will require the approval of the Florida Department of Insurance.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2001 VERSUS NINE MONTHS
ENDED SEPTEMBER 30, 2000
Gross premiums written decreased 11.7% to $17,034,115 for the nine
month period ended September 30, 2001 from $19,281,560 for the nine month period
ended September 30, 2000. The decrease in gross premiums written is primarily
attributable to the Company's nonrenewal of certain policies in high exposure
areas in order to mitigate reinsurance costs.
Net premiums written (i.e. gross premiums written minus premiums ceded
to reinsurers) increased 183.0% to $5,899,768 for the nine month period ended
September 30, 2001 from $2,084,980 for the nine month period ended September 30,
2000. The increase in net premiums written reflects the impact of reinsurance,
since $11,134,347 or 65.4% of premiums written were ceded to reinsurers for the
nine month period ended September 30, 2001 as compared to $16,453,672 or 85.3%
for the nine month period ended September 30, 2000. The increase in net premiums
written was primarily a result of the Company's election under its quota share
reinsurance treaty to cede 50% of gross premiums written, losses and loss
adjustment expenses during each of the first three quarters of 2001, versus 50%
during the first quarter of 2000 and 65% in both the second and third quarters
of 2000.
Net premiums earned increased 16.6% to $5,964,573 for the nine month
period ended September 30, 2001 from $5,116,917 for the nine month period ended
September 30, 2000. The increase is primarily due to the Company's election
under its quota share reinsurance treaty to cede 50% of gross premiums written,
losses and loss adjustment expenses during each of the first three quarters of
2001, versus 50% during the first quarter of 2000 and 65% in both the second and
third quarters of 2000.
Investment income consists of net investment income and net realized
gains (losses). Investment income decreased 34.7% to $508,837 for the nine month
period ended September 30, 2001 from $778,672 for the nine month period ended
14
September 30, 2000. The decrease is primarily due to gains recognized on the
sale of equity securities in the nine months ended September 30, 2000.
Commission income increased 35.8% to $1,406,370 for the nine month
period ended September 30, 2001 from $1,035,819 for the nine month period ended
September 30, 2000. Commission income is comprised principally of the managing
general agent's policy fee income on all new and renewal insurance policies and
to a lesser extent commissions generated from agency operations.
Other income consists of JUA bonus payments of $2,637,300 released from
escrow during the nine months ended September 30, 2001.
Losses and loss adjustment expenses ("LAE") incurred increased 103.5%
to $5,772,229 for the nine month period ended September 30, 2001 from $2,836,265
for the nine month period ended September 30, 2000. The Company's direct loss
ratio for the nine month period ended September 30, 2001 was 57.7% compared to
33.4% for the nine month period ended September 30, 2000. The Company's gross
loss ratio increased principally due to the higher severity of claims in the
nine months ended September 30, 2001. The Company's net loss ratio, for the nine
month period ended September 30, 2001 was 96.8% compared to 55.4% for the nine
month period ended September 30, 2000. Losses and LAE, the Company's most
significant expenses, represent actual payments made and changes in estimated
future payments to be made to or on behalf of its policyholders, including
expenses required to settle claims and losses. Losses and LAE are influenced by
loss severity and frequency. Losses and LAE increased principally due to the
Company's election under its quota share reinsurance treaty to cede 50% of gross
premiums written, losses and loss adjustment expenses during each of the first
three quarters of 2001, versus 50% during the first quarter of 2000 and 65% in
both the second and third quarters of 2000, and to a lesser extent due to the
higher severity of claims in the nine months ended September 30, 2001.
Catastrophes are an inherent risk of the property-liability insurance
business which may contribute to material year-to-year fluctuations in UPCIC's
and the Company's results of operations and financial position. The level of
catastrophe loss experienced in any year cannot be predicted and could be
material to the results of operations and financial position. While management
believes UPCIC's and the Company's catastrophe management strategies will reduce
the severity of future losses, UPCIC and the Company continue to be exposed to
catastrophic losses.
General and administrative expenses increased 50.5% to $6,139,361 for
the nine month period ended September 30, 2001 from $4,079,128 for the nine
month period ended September 30, 2000. General and administrative expenses have
increased due to further development of the Company's insurance operations
offset by a reduction of approximately $400,000 of general and administrative
expenses from the nine months ended September 30, 2000 developing the Company's
insurance Internet initiative versus approximately $900,000 to the nine months
ended September 30, 2001.
15
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2001 VERSUS THREE
MONTHS ENDED SEPTEMBER 30, 2000
Gross premiums written decreased 11.7% to $6,601,096 for the three
month period ended September 30, 2001 from $7,472,922 for the three month period
ended September 30, 2000. The decrease in gross premiums written is primarily
attributable to the Company's nonrenewal of certain policies in high exposure
areas in order to mitigate reinsurance costs.
Net premiums earned increased 26.2% to $1,846,493 for the three month
period ended September 30, 2001 from $1,462,771 for the three month period ended
September 30, 2000. The increase is primarily due to the Company's election
under its quota share reinsurance treaty to cede 50% of gross premiums written,
losses and loss adjustment expenses during each of the first three quarters of
2001, versus 50% during the first quarter of 2000 and 65% in both the second and
third quarters of 2000.
Investment income consists of net investment income and net realized
gains (losses). Investment income decreased 40.1% to $154,600 for the three
month period ended September 30, 2001 from $258,237 for the three month period
ended September 30, 2000. The decrease is primarily due to gains recognized on
the sale of equity securities in the three months ended September 30, 2000.
Commission income increased 41.8% to $554,379 for the three month
period ended September 30, 2001 from $391,022 for the three month period ended
September 30, 2000. Commission income is comprised principally of the managing
general agent's policy fee income on all new and renewal insurance policies and
to a lesser extent commissions generated from agency operations.
Losses and loss adjustment expenses ("LAE") incurred increased 106.6%
to $2,551,981 for the three month period ended September 30, 2001 from
$1,235,453 for the three month period ended September 30, 2000. The Company's
direct loss ratio for the three month period ended September 30, 2001 was 74.5%
compared to 39.4% for the three month period ended September 30, 2000. The
Company's gross loss ratio increased principally due to the higher severity of
claims in the three months ended September 30, 2001. The Company's net loss
ratio, for the three month period ended September 30, 2001 was 138.2% compared
to 85.7% for the three month period ended September 30, 2000. Losses and LAE,
the Company's most significant expenses, represent actual payments made and
changes in estimated future payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses. Losses
and LAE are influenced by loss severity and frequency. Losses and LAE increased
principally due to the Company's election under its quota share reinsurance
treaty to cede 50% of gross premiums written, losses and loss adjustment
expenses during each of the first three quarters of 2001, versus 50% during the
first quarter of 2000 and 65% in both the second and third quarters of 2000, and
to a lesser extent due to the higher severity of claims in the three months
ended September 30, 2001.
Catastrophes are an inherent risk of the property-liability insurance
business which may contribute to material year-to-year fluctuations in UPCIC's
and the Company's results of operations and financial position. The level of
catastrophe loss experienced in any year cannot be predicted and could be
material to the results of operations and financial position. While management
believes UPCIC's and the Company's catastrophe management strategies will reduce
16
the severity of future losses, UPCIC and the Company continue to be exposed to
catastrophic losses.
General and administrative expenses increased 52.2% to $2,412,596 for
the three month period ended September 30, 2001 from $1,585,479 for the three
month period ended September 30, 2000. General and administrative expenses have
increased due to further development of the Company's insurance operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are premium revenues and
investment income.
For the nine month period ended September 30, 2001, cash flows used by
operating activities were $1,702,809. Cash flows from operating activities are
negative, primarily due to the increase in loss ratio and reinsurance costs, as
well as a decrease in gross premiums written. The Company's investment portfolio
is highly liquid as it consists almost entirely of readily marketable
securities. Cash flows from investing activities are primarily comprised of
purchases and sales of debt and equity securities. Cash flows from financing
activities is comprised of payment of cash dividends on common and preferred
stock and purchases of treasury stock.
The Company believes that its current capital resources together with
management's plan as described above will be sufficient to support current
operations and expected growth for at least 12 months.
The balance of cash and cash equivalents at September 30, 2001 is
$8,478,002. Most of this amount, along with readily marketable debt and equity
securities aggregating $3,721,963 would be available to pay claims in the event
of a catastrophic event pending reimbursement for any aggregate amount in excess
of $1 million up to the 100 year probable maximum loss which would be covered by
reinsurers. Catastrophic reinsurance is recoverable upon presentation to the
reinsurer of evidence of claim payment.
To retain its certificate of authority, the Florida insurance laws and
regulations require that UPCIC maintain capital surplus equal to the statutory
minimum capital and surplus requirement of $4,000,000 defined in the Florida
Insurance Code. UPCIC is also required to adhere to prescribed
premium-to-capital surplus ratios. UPCIC is in compliance with these
requirements and it expects to remain in compliance, if management's plans are
successful.
The maximum amount of dividends which can be paid by Florida insurance
companies without prior approval of the Florida Commissioner is subject to
restrictions relating to statutory surplus. The maximum dividend that may be
paid by UPCIC without prior approval is limited to the lesser of statutory net
income from operations of the preceding calendar year or 10.0% of statutory
unassigned capital surplus as of the preceding year end. Pursuant to a consent
order between UPCIC and the Florida Department of Insurance ("DOI"), during
UPCIC's first four years of operations, any dividend by UPCIC would require DOI
approval.
The Company is required to comply with the National Association of
Insurance Commissioner's ("NAIC") Risk-Based Capital ("RBC") requirements. RBC
requirements prescribe a method of measuring the amount of capital appropriate
for an insurance company to support its overall business operations in light of
17
its size and risk profile. NAIC's RBC requirements are used by regulators to
determine appropriate regulatory actions relating to insurers who show signs of
weak or deteriorating condition. As of December 31, 2000, based on calculations
using the appropriate NAIC RBC formula, the Company's total adjusted capital is
in excess of the amount which would require any form of regulatory action.
Generally accepted accounting principles differs in some respects from reporting
practices prescribed or permitted by the DOI. UPCIC's statutory capital and
surplus was $4,781,539 as of September 30, 2001. Statutory net income (loss) was
$(273,773) for the nine month period ended September 30, 2001 and $129,192 for
the nine month period ended September 30, 2000.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company did not have any reportable legal proceedings during the
nine months ending September 30, 2001. Certain claims and complaints have been
filed or are pending against the Company with respect to various matters. In the
opinion of management all such matters are adequately provided for or covered by
insurance or, if not so covered, are without any or have little merit or involve
such amounts that if disposed of unfavorably would not have a material adverse
effect on the Company. On November 6, 2001 UPCIC filed a Complaint against
Universal Property and Casualty Management Company in the United States District
Court for the Southern District of Florida, Miami Division, alleging breach of
contract related to the services the management company performs for the
company. The Complaint seeks specific performance of the contract at issue and
damages of an unspecified amount.
ITEM 2. CHANGES IN SECURITIES
On October 29, 2001, the Company filed a Certificate of Amendment to
its Certificate of Incorporation with the Secretary of the State of Delaware to
amend the voting rights of its Series A Preferred Stock from ten votes per share
to one vote per share in consideration of the issuance of warrants to the Series
A Preferred Stock shareholders to purchase 100,000 shares of Common Stock at an
exercise price of $1.00 per share, distributed in proportion to such
shareholders' beneficial ownership of the Series A Preferred Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Exhibit
11.1 Statement Regarding Computation of Per Share Income
(b) Reports on form 8-K
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSAL INSURANCE HOLDINGS, INC.
Date: November 14, 2001 /s/ Bradley I. Meier
-----------------------------------
Bradley I. Meier, President
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