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 March 31, 2003
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. 191ST STREET
SUITE 300
MIAMI, FLORIDA 33180
(Address of principal executive offices)
(305) 792-4200
(Issuer's telephone number)
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the last practicable date: 25,576,914 shares of common
stock as of May 1, 2003.
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 three months ended March 31, 2003 are not necessarily
indicative of the results for the year ending December 31, 2003.
2
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
(Unaudited)
ASSETS
Cash and cash equivalents $ 5,569,027
Debt securities held-to-maturity (fair-value of $274,109) 262,763
Equity securities available for sale (cost of $303,281) 156,656
Prepaid reinsurance premiums and reinsurance recoverables 26,350,229
Premiums and other receivables 592,881
Investments in real estate 253,632
Property, plant and equipment, net 773,832
-----------------
Total assets $ 33,959,020
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 8,560,555
Unearned premiums 17,884,557
Accounts payable 1,161,238
Reinsurance payable 965,846
Other accrued expenses 1,046,300
Loans payable 715,201
-----------------
Total liabilities 30,333,697
-----------------
COMMITMENTS AND CONTINGENCIES (Note 5)
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,
21,676,914 shares issued and 21,468,269 shares outstanding 167,175
Common stock in treasury, at cost - 208,645 shares (101,820)
Additional paid-in capital 15,003,976
Accumulated deficit (11,298,770)
Accumulated other comprehensive loss (146,625)
----------------
Total stockholders' equity 3,625,323
----------------
Total liabilities and stockholders' equity $ 33,959,020
================
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Three
Months Ended Months Ended
March 31, March 31,
2003 2002
---- ----
PREMIUMS EARNED AND OTHER REVENUES:
Premium income, net $ 622,014 $ 1,884,321
Net investment income 28,995 96,566
Commission revenue 563,762 297,157
Other revenue 382,748 471,518
----------- -----------
Total revenues 1,597,519 2,749,562
----------- -----------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 443,837 1,336,803
General and administrative expenses 1,131,647 1,369,925
----------- -----------
Total operating costs and expenses 1,575,484 2,706,728
----------- -----------
NET INCOME $ 22,035 $ 42,834
=========== ===========
INCOME PER COMMON SHARE:
Basic $ 0.00 $ 0.00
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 21,468,000 14,686,000
=========== ===========
INCOME PER COMMON SHARE
Diluted $ 0.00 $ 0.00
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 22,036,000 15,254,264
=========== ===========
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended
March 31, March 31,
2003 2002
---- ----
NET INCOME $ 22,035 $ 42,834
OTHER COMPREHENSIVE INCOME:
Change in net unrealized gain (loss) on
available-for-sale securities (65,987) 24,344
--------- -------
COMPREHENSIVE INCOME $(43,952) $67,178
========= =======
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Three
Months Ended Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,035 $ 42,834
Adjustments to reconcile net income
to cash (used in) provided by operations:
Amortization and depreciation 61,028 52,956
Net accretion of bond premiums and discounts 284 (2,793)
Net change in assets and liabilities relating to operating
activities:
Prepaid reinsurance premiums and reinsurance recoverables (515,910) 1,886,025
Premiums and other receivables 608,693 177,397
Reinsurance payables (80,967) (3,327,902)
Deferred policy acquisition costs - (364,147)
Accounts payable (173,981) (787,309)
Other accrued expenses 72,852 (49,026)
Accrued taxes, licenses and fees - (69,376)
Unpaid losses and loss adjustment expenses 1,335,800 (1,458,827)
Unearned premiums (540,472) 996,700
------------ ------------
Net cash provided by (used in) operating activities 789,362 (2,903,468)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - (15,974)
Purchase of real estate - (110,812)
Proceeds from maturities of debt securities held to maturity 72,122 312,175
Proceeds from disposal of fixed assets 46,030 -
Sale of real estate 70,311 -
------------ ------------
Net cash provided by investing activities 188,463 185,389
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (12,487) -
Repayments of loans payable (234,231) (37,690)
Proceeds from loans payable 250,000 -
------------ ------------
Net cash provided by (used in) financing activities 3,282 (37,690)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH 981,107 (2,755,769)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, Beginning of period 4,587,920 10,481,699
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 5,569,027 $ 7,725,930
============ ============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
6
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(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. All intercompany accounts and transactions have been
eliminated in consolidation.
The condensed consolidated balance sheet of the Company as of March 31, 2003,
the related condensed consolidated statements of operations and comprehensive
operations for the three months ended March 31, 2003 and 2002 and cash flows for
the three months ended March 31, 2003 and 2002 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, 2002. 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.
OFF -BALANCE SHEET ARRANGEMENTS. There were no off-balance sheet arrangements
during the first three months of 2003.
NEW ACCOUNTING PRONOUNCEMENTS. In July 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, which establish accounting and reporting
standards for business combinations. SFAS No. 141 requires all business
combinations entered into subsequent to June 30, 2001 to be accounted for using
7
the purchase method of accounting. SFAS No. 142 provides that goodwill and other
intangible assets with indefinite lives be tested for impairment on an annual
basis rather than amortized. The Company adopted the provisions of these
statements in the first quarter of 2002 which did not have a material effect on
the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, which is effective for fiscal years beginning
after December 15, 2001. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for
the disposal of a segment of a business (as previously defined in that opinion).
This statement also amends Accounting Research Bulletin No. 51, CONSOLIDATED
FINANCIAL STATEMENTS, to eliminate the exception to consolidation for
subsidiaries for which control is likely to be temporary. The Company adopted
SFAS No. 144 in the first quarter of 2002 which did not have a material effect
on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE. This Statement, which is effective for
years ending after December 15, 2002, amends Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, and provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation. In addition, Statement No. 148 amends the disclosure
requirements of Statement No. 123 regardless of the accounting method used to
account for stock-based compensation. The Company has chosen to continue to
account for stock-based compensation of employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations. However, the enhanced
disclosure provisions as defined by SFAS No. 148 are effective for the quarter
ended March 31, 2003. There was no stock based compensation during the quarter.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. Management has reassessed the
critical accounting policies as disclosed in our 2002 Annual Report to
Stockholders on Form 10-K and determined that no changes, additions, or
deletions are needed to the policies as disclosed. Also there were no
significant changes in our estimates associated with those policies.
RISKS AND UNCERTAINTIES. The Company's business could be affected 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 affect the Company's operations in the future.
Management attributes recent operating losses and increasing loss ratios of
UPCIC primarily to higher than expected costs of catastrophic reinsurance and
adverse loss experience in the homeowners line of business. Management has taken
the following actions to improve and strengthen UPCIC's financial condition.
Premium rate increases of approximately 7% and 9% were implemented in July, 2001
and April, 2002, respectively. UPCIC changed the geographic and coverage mix of
8
the property insurance it writes, which is a key determinant in the amount and
pricing of reinsurance procured by UPCIC. The Company has achieved more
favorable ceding commission terms on its quota share reinsurance program. UPCIC
was also able to obtain a less expensive catastrophic reinsurance program for
2002 - 2003.
In addition to the actions described above, the Company terminated its outside
management agreement in January, 2002. The Company believes that this will
enhance UPCIC's operating results through its ability to improve and better
control underwriting and loss adjusting activities, as well as reducing overall
management expenses.
Management believes the implementation of, and results attributable to, the
actions described above, along with the capital contribution to UPCIC of
$1,768,000 in 2002, removes the substantial doubt associated with UPCIC's
ability to continue as a going concern for a reasonable period of time, as UPCIC
has met the minimum statutory requirements for surplus as regards policyholders
as of March 31, 2003. However, there can be no assurance of the ultimate success
of these plans, or that the Company will be able to renew its reinsurance
program under as favorable terms, or that the Company will be able to achieve
profitability.
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 March 31,
2003, the Company had unearned premiums totaling $17,884,557.
Effective January 15, 2002, UPCIC and Universal Property and Casualty
Management, Inc. ("Universal Management"), an unaffiliated managing agency,
terminated their prior management agreement so that services previously provided
by Universal Management are now provided by UPCIC, Universal Risk Advisors, Inc.
and unaffiliated third parties. Universal Risk Advisors, Inc. is an affiliated
managing general agency that provides the Company with management and personnel
for UPCIC's underwriting, together with support offices, equipment and services.
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 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 March 31, 2003, deferred policy acquisition costs amounted to
$0 due to the effect of deferred reinsurance commissions.
9
An allowance for uncollectible premiums receivable is established when it
becomes evident collection is doubtful. No allowance is deemed necessary at
March 31, 2003.
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 becomes known. UPCIC estimates claims and claims
expenses based on its historical experience and payment and reporting patterns
for the type of risk involved. These estimates are continuously reviewed by
UPCIC's 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 March 31,
2003 was approximately $4.8 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, 2002, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with various reinsurers. Under the quota share
treaty, UPCIC originally ceded 80% of its gross written premiums, losses and
loss adjustment expenses with a ceding commission equal to 26% of ceded gross
10
written premium. In addition, the quota share treaty has a limitation for any
one occurrence of $2,000,000. Effective September 30, 2002, UPCIC amended its
quota share reinsurance treaty to cede an additional 10% of its gross written
premium. Effective June 1, 2002, UPCIC entered into an excess per risk
agreement. Under the excess per risk agreement, UPCIC obtained coverage of
$1,300,000 in excess of $500,000 ultimate net loss for each risk and each
property loss, and $1,000,000 in excess of $300,000 for each casualty 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, 2002, under an excess catastrophe contract, UPCIC obtained
catastrophe coverage of $30,000,000 in excess of $2,000,000 covering certain
loss occurrences including hurricanes. UPCIC also obtained coverage from the
Florida Hurricane Catastrophe Fund. The coverage is for approximately
$55,000,000.
The ceded reinsurance arrangements had the following effect on certain items in
the accompanying consolidated financial statements:
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Loss Loss
and Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
Direct $7,537,402 $8,077,875 $3,704,202 $7,912,989 $6,916,289 $2,900,417
Ceded (7,033,955) (7,455,861) (3,260,365) (3,956,495) (5,031,968) (1,563,614)
----------- ------------ ----------- ----------- ----------- -----------
Net $503,447 $622,014 $443,837 $3,956,494 $1,884,321 $1,336,803
========= ======== ======== ========== ========== ==========
Other Amounts:
March 31, 2003
--------------
Reinsurance recoverable on paid and unpaid losses
and loss adjustment expenses $ 8,871,126
Unearned premiums ceded 16,513,257
----------
Prepaid reinsurance premiums and reinsurance recoverable $ 25,384,383
==========
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 March 31, 2003. 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
11
minimizes UPCIC's risk from any potential operating difficulties of its
reinsurers.
NOTE 4 - LOAN PAYABLE
On May 29, 2002, Universal Insurance Holdings, Inc. entered into a Senior
Promissory Note with Renaissance Reinsurance LTD. for the principal sum of
$750,000 payable in 12 monthly installments of $62,500. Interest accrues on the
unpaid balance of the principal amount at a fixed annual rate of 9%. Universal
Risk Advisors, Inc. signed as guarantor of the note. The loan amount was
contributed to UPCIC as additional paid in capital. Loans payable also consists
of various bank loans secured by the respective asset for which they are subject
to and amounts loaned by vendors.
NOTE 5 - LEGAL PROCEEDINGS
Universal Management performed various services with respect to UPCIC insurance
policies and received fees for performing these services based upon policies
written pursuant to an agreement originally executed in 1997. The parties agreed
to terminate the agreement effective January 15, 2002. Universal Management
communicated to UPCIC that all management services would cease on the date of
termination rather than continuing through the life of the policies for which
fees were paid on a premiums written basis. As a result, UPCIC ceased remittance
of the management fees to Universal Management as of September 1, 2001. On
November 6, 2001, UPCIC filed a Complaint against Universal Management in the
United States District Court for The Southern District of Florida, Miami
Division, alleging breach of contract and demanding specific performance and
unspecified damages. On December 28, 2001, Universal Management filed a
counterclaim for breach of contract, alleging that it is entitled to fees for
policies written from September 2001 through the date of termination. As of
December 31, 2001, UPCIC has recorded a receivable from Universal Management
representing the management fees remitted on the basis of premiums earned
subsequent to the termination date, January 15, 2002, and provided an allowance
for doubtful accounts for the entire receivable balance of $80,000. The parties
are trying to settle the matter out of court. The terms of the settlement have
not yet been finalized. Accordingly, the Company has not accrued a liability
with respect to the management fees claimed by Universal Management.
NOTE 6 - EARNINGS PER SHARE
Earnings per share ("EPS") amounts are calculated in accordance with SFAS No.
128, EARNINGS PER SHARE. Basic EPS is based on the weighted average number of
shares outstanding for the period, excluding any dilutive common share
equivalents. Diluted EPS reflects the potential dilution that could occur if
securities to issue common stock were exercised.
A reconciliation of shares used in calculating basic and diluted EPS for the
three months ended March 31, 2003 and March 31, 2002, respectively, follows:
Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Basic EPS 21,468,000 14,686,000
Effect of assumed conversion of
12
common stock equivalents 568,000 568,000
------- -------
Diluted EPS 22,036,000 15,254,000
Options and warrants to purchase approximately 11,462,000 and 11,262,000
shares of common stock were outstanding during the three months ended March 31,
2003 and March 31, 2002, respectively. Such options and warrants could
potentially dilute basic EPS in the future but were excluded from the
computation of diluted earnings per share due to being anti-dilutive.
Pursuant to SFAS No. 123, the Company elected to account for stock-based
compensation plans under Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. Accordingly, no compensation expense was included
in the determination of net income for the three months ended March 31, 2003 and
March 31, 2002. Had compensation cost for stock options been recognized based on
the fair value at the grant dates for the options, consistent with the
provisions of SFAS No. 123, net income (loss) and earnings (loss) per share
would have been as indicated in the table below.
Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Net income (loss)
As reported $22,035 $42,834
Pro forma $(75,828) $(54,836)
Basic and diluted earnings
(loss) per share
As reported $0.00 $0.00
Pro forma $0.00 $0.00
Item 2. Management's Discussion and Analysis or Plan of Operation
------ ---------------------------------------------------------
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 Condensed Consolidated Financial Statements and
Notes thereto.
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.
13
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 Coastal Homeowners Insurance
Specialists, Inc., generate income from commissions 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 subsidiaries that specialize, or will specialize,
in selling insurance and generating insurance leads via the Internet.
Tigerquote.com Insurance & Financial Services Group, Inc. is an Internet
insurance lead generating network, and its wholly-owned subsidiary
Tigerquote.com Insurance Solutions, Inc., is a network of Internet insurance
agencies. At March 31, 2003, agencies have been established in 22 states.
Separate legal entities have been formed for each state and are governed by the
respective states' departments of insurance.
The Company has also formed Tiger Home Services, Inc., which furnishes
pest control, pool services, landscaping, house cleaning and hurricane shutters
to homeowners. The services are currently offered to commercial and residential
customers in certain areas in the state of Florida.
FINANCIAL CONDITION
Cash and cash equivalents at March 31, 2003 aggregated $5,569,027. 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
March 31, 2003, UPCIC's investments were comprised of $5,569,027 in cash and
repurchase agreements, $262,763 in fixed maturity securities and $156,656 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. Less than 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 46,000 homeowners and dwelling fire insurance
14
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 (RMS). 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 - THREE MONTHS ENDED MARCH 31, 2003 VERSUS THREE MONTHS
ENDED MARCH 31, 2002
Gross premiums written decreased 4.7% to $7,537,402 for the three month
period ended March 31, 2003 from $7,912,989 for the three month period ended
March 31, 2002. The decrease in gross premiums written is primarily attributable
to non-renewal of certain policies in high exposure areas in the first quarter
of 2003 and was partially mitigated by premium rate increases.
Net premiums earned decreased 67.0% to $622,014 for the three month period
ended March 31, 2003 from $1,884,321 for the three month period ended March 31,
2002. The decrease is primarily due to the change in the reinsurance program
effective June 1, 2002.
Investment income decreased 70.0% to $28,995 for the three month period
ended March 31, 2003 from $96,556 for the three month period ended March 31,
2002. The decrease is primarily due to the lower interest rate environment and
lower investment balances during the three months ended March 31, 2003.
Other revenue decreased 18.8% to $382,748 for the three month period ended
March 31, 2003 from $471,518 for the three month period ended March 31, 2002.
The decrease is primarily attributable to a decrease in revenue generated by
Tigerquote.com for leads sold over the Internet during the three months ended
March 31, 2003.
Commission income increased 89.7% to $563,762 for the three month period
ended March 31, 2003 from $297,157 for the three month period ended March 31,
2002. 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. The increase is primarily
attributable to an increase in commissions from agency operations.
Losses and loss adjustment expenses ("LAE") incurred decreased 66.8% to
$443,837 for the three month period ended March 31, 2003 from $1,336,803 for the
three month period ended March 31, 2002. Losses and LAE incurred decreased due
to changes related to the Company's reinsurance program. The Company's direct
loss ratio for the three month period ended March 31, 2003 was 45.9% compared to
41.9% for the three month period ended March 31, 2002. The Company's direct loss
ratio increased principally due to the higher frequency and severity of claims
in the three months ended March 31, 2003. 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.
15
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 decreased 17.4% to $1,131,647 for the
three month period ended March 31, 2003 from $1,369,925 for the three month
period ended March 31, 2002. General and administrative expenses have decreased
mainly due to higher ceding commissions on premiums ceded to reinsurers.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash flow are premium revenues and
investment income.
For the three month period ended March 31, 2003, cash flows provided by
operating activities were $789,362. 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 proceeds from
maturities of debt securities held to maturity and sale of real estate. Cash
flows from financing activities primarily relate to Company borrowings. The
Company is party to a senior Promissory Note with a reinsurer for $750,000
payable in 12 monthly installments through July 2003. The funds were used to
make an additional capital contribution to UPCIC. Payments have been made in a
timely manner. In January 2003, loans in the amount of $250,000 were made to the
Company by two vendors. The proceeds from the loans are being used for working
capital.
The Company has incurred losses in the past two years. In order to improve
the Company's financial position and achieve profitable operations, management
has implemented rate increases for new and renewal business, has restructured
the homeowners' coverage offered, has restructured its catastrophic reinsurance
coverage to reduce the cost, and has worked to reduce general and administrative
expenses. In addition, management is exploring sources of additional capital,
including the sale of its insurance operations.
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.
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.
16
The balance of cash and cash equivalents at March 31, 2003 is $5,569,027.
Most of this amount, along with readily marketable securities aggregating
$419,419, would be available to pay claims in the event of a catastrophic event
pending reimbursement for any aggregate amount in excess of $200,000 up to
approximately 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.
Generally accepted accounting principles differ in some respects from
reporting practices prescribed or permitted by the DOI. 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 defined in the Florida Insurance Code. UPCIC's statutory
capital and surplus exceeded the minimum capital and surplus requirements of
$4,000,000 as of March 31, 2003. UPCIC is also required to adhere to prescribed
premium-to-capital surplus ratios. UPCIC is in compliance with these
requirements and 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.
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
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, 2002, based on calculations
using the appropriate NAIC RBC formula, the Company's total reported adjusted
capital was in excess of the requirements.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the first three months
of 2003.
Item 3. Controls and Procedures
------ -----------------------
Based on the evaluation by the Chief Executive Officer and Chief Financial
Officer of the Company as of a date within 90 days of the filing date of this
quarterly report, the Company's disclosure controls and procedures are
adequately designed to ensure that the information required to be included in
this report has been recorded, processed, summarized and reported on a timely
basis. There have not been any significant changes in the Company's internal
controls or in any other factors that could significantly affect these controls
and there have been no corrective actions taken with regard to significant
deficiencies and material weaknesses subsequent to the date of such officers'
evaluation.
17
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
------- -----------------
The Company did not have any reportable legal proceedings during the three
months ending March 31, 2003. Certain claims and complaints have been filed or
are pending against the Company with respect to various matters. In the opinion
of management none of these lawsuits, except for the lawsuit with Universal
Property and Casualty Management Company described in Note 5 to the condensed
consolidated Financial Statements included herewith, are material, and they 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.
Item 2. Changes in Securities
------- ---------------------
None.
Item 3. Defaults upon Senior Securities
------- -------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
None.
Item 5. Other Information
------- -----------------
Effective May 1, 2003, Irwin L. Kellner resigned from the Company's Board
of Directors. The Company plans on timely filling this vacancy when a qualified
candidate becomes available. The resignation was not because of a disagreement
with the Company on any matter relating to the Company's operations, policies or
practices.
Item 6. Exhibits and Reports on Form 8-K
------ --------------------------------
(a) Exhibits
Exhibit No. Exhibit
----------- -------
99.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Title 18, United States
Code, Section 1350, as Adopted Pursuant to Section
906 of the Sabanes-Oxley Act of 2002
11.1 Statement Regarding Computation of Per Share Income
(b) Reports on Form 8-K
None.
18
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: May 14, 2003 /s/ Bradley I. Meier
---------------------------------------------
Bradley I. Meier, Chief Executive Officer
/s/ James M. Lynch
---------------------------------------------
James M. Lynch, Chief Financial Officer
19
CERTIFICATION
I, Bradley I. Meier, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Universal Insurance
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
20
Date: May 14, 2003 /s/ Bradley I. Meier
-------------------------------------------
Bradley I. Meier, Chief Executive Officer
21
CERTIFICATION
I, James M. Lynch, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Universal Insurance
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
22
Date: May 14, 2003 /s/ James M. Lynch
----------------------------------------
James M. Lynch, Chief Financial Officer
23