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, 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)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date: 29,285,246 shares of common
stock as of November 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 nine months ended September 30, 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
SEPTEMBER 30, 2003
(Unaudited)
ASSETS
Cash and cash equivalents $ 1,938,069
Debt securities held-to-maturity (fair-value of $104,683) 100,338
Equity securities available for sale (cost of $175,453) 135,342
Prepaid reinsurance premiums and reinsurance recoverables 28,461,708
Premiums and other receivables 894,152
Investments in real estate 217,715
Property, plant and equipment, net 740,115
-------------
Total assets $32,487,439
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 7,280,964
Unearned premiums 15,715,204
Accounts payable 1,537,095
Reinsurance payable 2,907,381
Other accrued expenses 899,207
Loans payable 383,414
-------------
Total liabilities 28,723,265
-------------
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,
29,285,246 shares issued and 26,176,601 shares outstanding 203,841
Common stock in treasury, at cost - 208,645 shares (101,820)
Additional paid-in capital 15,003,976
Accumulated deficit (11,303,099)
Accumulated other comprehensive loss (40,111)
-------------
Total stockholders' equity 3,764,174
-------------
Total liabilities and stockholders' equity $ 32,487,439
=============
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)
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
PREMIUMS EARNED AND OTHER REVENUES:
Premium income, net $ 1,996,494 $ 4,500,436 $ 779,078 $ 998,974
Net investment income 55,279 327,233 13,827 147,961
Commission revenue 1,129,392 1,041,509 446,335 437,187
Other revenue 1,718,466 1,878,157 546,359 831,065
----------- ----------- ----------- -----------
Total revenues 4,899,631 7,747,335 1,785,599 2,415,187
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 766,459 3,898,206 96,130 697,745
General and administrative expenses 4,090,493 3,870,052 1,770,831 1,074,874
----------- ----------- ----------- -----------
Total operating costs and expenses 4,856,952 7,768,258 1,866,961 1,772,619
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 42,679 $ (20,923) $ (81,362) $ 642,568
=========== =========== =========== ===========
INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.00 $ (0.00) $ (0.00) $ 0.04
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 23,771,000 15,558,000 24,966,000 15,558,000
=========== =========== =========== ===========
INCOME (LOSS) PER COMMON SHARE
Diluted $ 0.00 $ (0.00) $ (0.00) $ 0.04
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 24,361,000 16,126,000 25,534,000 16,126,000
----------- ----------- ----------- -----------
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)
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
NET INCOME (LOSS) $ 42,679 $(20,923) $ (81,362) $ 642,568
OTHER COMPREHENSIVE INCOME:
Change in net unrealized gain (loss) on
available-for-sale securities 34,560 (40,802) 23,721 (63,636)
---------- --------- ---------- -----------
COMPREHENSIVE INCOME (LOSS) $ 77,239 $(61,725) $ (57,641) $ 578,932
========================================================
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)
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 42,679 $ (20,923)
Adjustments to reconcile net income
(loss)to cash (used in) provided
by operations:
Amortization and depreciation 205,144 168,773
Issuance of common stock as compensation 36,666 44,908
Net accretion of bond premiums and discounts 14,112 (23,768)
Net change in assets and liabilities relating
to operating activities:
Prepaid reinsurance premiums and reinsurance
recoverables (2,627,389) (7,625,360)
Premiums and other receivables 307,422 308,826
Reinsurance payables 1,860,568 (2,297,308)
Deferred policy acquisition costs - 529,942
Accounts payable 201,876 10,574
Other accrued expenses (74,241) 106,574
Accrued taxes, licenses and fees - (189,728)
Unpaid losses and loss adjustment expenses 56,209 (687,007)
Unearned premiums (2,709,825) 1,661,136
------------ ------------
Net cash used in operating activities (2,686,779) (8,013,361)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (64,369) (100,875)
Purchase of real estate - (310,827)
Proceeds from maturities of debt securities
held to maturity 235,133 2,494,811
Purchase of equity securities available for sale - (18,160)
Proceeds from sale of equity securities available
for sale 113,414 -
Sale of real estate 106,228 84,763
------------ ------------
Net cash provided by investing activities 390,406 2,149,712
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (37,460) -
Repayments of loans payable (566,018) -
Proceeds from loans payable 250,000 445,076
------------ -----------
Net cash (used in) provided by financing activities (353,478) 445,076
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,649,851) (5,418,573)
CASH AND CASH EQUIVALENTS, Beginning of period 4,587,920 10,481,699
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 1,938,069 $ 5,063,126
------------ ------------
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
September 30, 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 September 30,
2003, the related condensed consolidated statements of operations and
comprehensive operations and cash flows for the nine months ended September 30,
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 nine 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
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
7
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 became effective in the first
quarter of 2003. There has been no stock based compensation in 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. Management has reassessed the
critical accounting policies as disclosed in our 2002 Annual Report to
Stockholders on Form 10-KSB 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 unfavorable 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
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
2003 - 2004.
In addition to the actions described above, the Company terminated its outside
management agreement in January, 2002. The Company believes that this has
enhanced UPCIC's operating results through its ability to improve and better
control underwriting and loss adjusting activities, as well as reducing overall
management expenses.
8
Management believes the implementation of, and results attributable to, the
actions described above, along with the capital contribution to UPCIC of
$146,000 in 2003 and $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, and UPCIC has met the minimum statutory requirements for surplus
as regards policyholders as of September 30, 2003. However, there can be no
assurance of the ultimate success of these plans, 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 September 30,
2003, the Company had unearned premiums totaling $15,715,204.
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 September 30, 2003, deferred policy acquisition costs amounted
to $0 due to the effect of deferred reinsurance commissions.
An allowance for uncollectible premiums receivable is established when it
becomes evident collection is doubtful. No allowance is deemed necessary at
September 30, 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.
9
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 September
30, 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, 2003, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with various reinsurers. Under the quota share
treaty, UPCIC cedes 90% of its gross written premiums, losses and loss
adjustment expenses for policies with coverage for wind risk with a ceding
commission equal to 28% of ceded gross written premium. In addition, the quota
share treaty has a limitation for any one occurrence of $2,000,000. Effective
June 1, 2003, 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
$5,200,000 limit applies to the term of the contract.
Effective June 1, 2003, under an excess catastrophe contract, UPCIC obtained
catastrophe coverage of $26,000,000 in excess of $2,000,000 covering certain
loss occurrences including hurricanes. UPCIC also obtained coverage from the
10
Florida Hurricane Catastrophe Fund. The coverage is for approximately
$56,600,000.
The ceded reinsurance arrangements had the following effect on certain items in
the accompanying consolidated financial statements:
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Loss Loss
and Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $22,400,227 $25,110,052 $7,555,355 $23,241,044 $21,579,908 $12,609,868
Ceded (20,087,119) (23,113,558) (6,788,896) (21,943,312) (17,079,472) (8,711,662)
------------ ------------ ----------- ------------ ------------ -----------
Net $2,313,108 $1,996,494 $766,459 $1,297,732 $4,500,436 $3,898,206
============ ============ =========== ============ ============ ===========
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Loss Loss
and Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $7,019,765 $8,572,409 $1,415,771 $8,697,857 $7,591,620 $4,717,663
Ceded (6,060,133) (7,793,331) (1,319,641) (8,661,130) (6,592,646) (4,019,918)
----------- ----------- ----------- ----------- ----------- -----------
Net $959,632 $779,078 $96,130 $36,727 $998,974 $697,745
=========== =========== =========== =========== =========== ===========
Other Amounts:
September 30, 2003
------------------
Reinsurance recoverable on paid and unpaid losses
and loss adjustment expenses $ 10,460,482
Unearned premiums ceded 13,908,723
Other reinsurance receivable 4,092,503
----------
Prepaid reinsurance premiums and reinsurance recoverable $ 28,461,708
==========
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, 2003. UPCIC
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk arising from 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
11
various reinsurers located throughout the United States and internationally.
UPCIC believes only ceding risks to reinsurers whom it considers to be
financially sound combined with distribution of reinsurance contracts adequately
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 accrued 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. The remaining balance of the
loan was paid off during the second quarter of 2003. Loans payable at September
30, 2003 consists of various bank loans secured by the assets to which they are
subject 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. During the
second quarter of 2003, the parties settled the matter out of court and the
settlement was finalized. Accordingly, the Company has no further liability with
respect to the management fees claimed by Universal Management. The terms of the
settlement included a cash payment of $250,000 by the Company to Universal
Management. This amount was recorded as an expense and paid during the second
quarter.
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
nine months and three month periods ended September 30, 2003 and September 30,
2002, respectively, follows:
12
Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Basic EPS 23,771,000 15,558,000
Effect of assumed conversion of
common stock equivalents 590,000 568,000
----------- -----------
Diluted EPS 24,361,000 16,126,000
Options and warrants to purchase approximately 11,440,000 and 11,262,000
shares of common stock were outstanding during the nine months ended September
30, 2003 and September 30, 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.
Three Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Basic EPS 24,966,000 15,558,000
Effect of assumed conversion of
common stock equivalents 568,000 568,000
----------- -----------
Diluted EPS 25,534,000 16,126,000
Options and warrants to purchase approximately 11,462,000 and 11,262,000
shares of common stock were outstanding during the three months ended September
30, 2003 and September 30, 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 nine months ended September 30, 2003
and September 30, 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.
Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Net income (loss)
As reported $ 42,679 $ (20,923)
Pro forma $(407,510) $(471,112)
Basic and diluted earnings
(loss) per share
As reported $ 0.00 $(0.00)
Pro forma $(0.02) $(0.03)
Three Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Net income (loss)
As reported $ (81,362) $642,568
13
Pro forma $(183,460) $540,470
Basic and diluted earnings
(loss) per share
As reported $(0.00) $0.04
Pro forma $(0.01) $0.03
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.
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 Tigerquote.com Insurance Solutions, Inc.,
is a network of Internet insurance agencies. At September 30, 2003, agencies
14
have been established in 22 states and are active in 5 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 and landscaping 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 September 30, 2003 aggregated $1,938,069. 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, 2003, UPCIC's investments were comprised of $1,938,069 in cash and
repurchase agreements, $100,338 in fixed maturity securities and $135,342 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 1998 the Company
began to solicit business actively in the open market in an effort to further
grow its insurance operations. Through renewal of JUA business combined with
business solicited in the market through independent agents, UPCIC is currently
servicing approximately 44,000 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 models. 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, 2003 VERSUS NINE MONTHS
ENDED SEPTEMBER 30, 2002
Gross premiums written decreased 3.6% to $22,400,227 for the nine-month
period ended September 30, 2003 from $23,241,044 for the nine-month period ended
September 30, 2002. The decrease in gross premiums written is primarily
attributable to a decrease in new business mitigated by premium rate increases.
Net premiums earned decreased 55.6% to $1,996,494 for the nine-month
period ended September 30, 2003 from $4,500,436 for the nine-month period ended
September 30, 2002. The decrease is primarily due to the change in the
reinsurance program effective June 1, 2002 that increased premium ceded under
quota share reinsurance from 50% to 80%.
15
Investment income decreased 83.1% to $55,279 for the nine-month period
ended September 30, 2003 from $327,233 for the nine-month period ended September
30, 2002. The decrease is primarily due to lower investment balances and the
lower interest rate environment during the nine months ended September 30, 2003.
Other revenue decreased 8.5% to $1,718,466 for the nine-month period ended
September 30, 2003 from $1,878,157 for the nine-month period ended September 30,
2002. The decrease is primarily attributable to a decrease in revenue generated
by Tigerquote.com for leads sold over the Internet during the nine-months ended
September 30, 2003.
Commission income increased 8.4% to $1,129,392 for the nine-month period
ended September 30, 2003 from $1,041,509 for the nine-month period ended
September 30, 2002. Commission income is comprised principally of the managing
general agent's policy fee income on all new and renewal insurance policies and
commissions generated from agency operations. The increase is primarily
attributable to an increase in commissions generated from agency operations.
Losses and loss adjustment expenses ("LAE") incurred decreased 80.3% to
$766,459 for the nine-month period ended September 30, 2003 from $3,898,206 for
the nine-month period ended September 30, 2002. Losses and LAE incurred
decreased due to changes related to the Company's reinsurance program effective
June 1, 2002 that increased losses ceded under quota share reinsurance from 50%
to 80%. The Company's direct loss ratio for the nine-month period ended
September 30, 2003 was 30.1% compared to 58.4% for the nine-month period ended
September 30, 2002. Losses and LAE are influenced by loss severity and
frequency. They are also influenced by underwriting and adjusting philosophy.
The Company's direct loss ratio decreased principally due to the lower frequency
and severity of claims and also because of premium rate increases in the
nine-months ended September 30, 2003. Losses and LAE, the Company's most
significant expenses, represent actual payments made net of reinsurance and
changes in estimated net future payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses.
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 5.7% to $4,090,493 for the
nine-month period ended September 30, 2003 from $3,870,052 for the nine-month
period ended September 30, 2002. General and administrative expenses have
increased mainly due to lower ceding commissions on premiums ceded to
reinsurers.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS THREE
MONTHS ENDED SEPTEMBER 30, 2002
Gross premiums written decreased 19.3% to $7,019,765 for the three-month
period ended September 30, 2003 from $8,697,857 for the three-month period ended
September 30, 2002. The decrease in gross premiums written is primarily
16
attributable to a decrease in new business mitigated by premium rate increases
of 7% and 9% implemented in July 2001 and April 2002. The decrease in new
business was the result of non-renewal of certain policies for underwriting
reasons as well as a conscious effort to limit new business in order to control
reinsurance costs.
Net premiums earned decreased 22.0% to $779,078 for the three-month period
ended September 30, 2003 from $998,974 for the three-month period ended
September 30, 2002. The decrease is primarily due to the change in the
reinsurance program effective June 1, 2002 that increased premium ceded under
quota share reinsurance from 50% to 80%.
Investment income decreased 90.7% to $13,827 for the three-month period
ended September 30, 2003 from $147,961 for the three-month period ended
September 30, 2002. The decrease is primarily due to the lower investment
balances and lower interest rate environment during the three months ended
September 30, 2003.
Other revenue decreased 34.3% to $546,359 for the three-month period ended
September 30, 2003 from $831,065 for the three-month period ended September 30,
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
September 30, 2003.
Commission income increased 2.1% to $446,335 for the three-month period
ended September 30, 2003 from $437,187 for the three-month period ended
September 30, 2002. Commission income is comprised principally of the managing
general agent's policy fee income on all new and renewal insurance policies and
to commissions generated from agency operations. The increase is primarily
attributable to an increase in commissions generated from agency operations.
Losses and loss adjustment expenses incurred decreased 86.2% to $96,130
for the three-month period ended September 30, 2003 from $697,745 for the
three-month period ended September 30, 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 September 30, 2003 was 16.5%
compared to 62.1% for the three-month period ended September 30, 2002. Losses
and LAE are influenced by loss severity and frequency. They are also influenced
by underwriting and adjusting philosophy. The Company's direct loss ratio
decreased principally due to the lower frequency and severity of claims and also
because of premium rate increases in the three months ended September 30, 2003.
Losses and LAE, the Company's most significant expenses, represent actual
payments made net of reinsurance and changes in estimated future net payments to
be made to or on behalf of its policyholders, including expenses required to
settle claims and losses.
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.
17
General and administrative expenses increased 64.7% to $1,770,831 for the
three-month period ended September 30, 2003 from $1,074,874 for the three-month
period ended September 30, 2002. General and administrative expenses have
increased mainly due to lower ceding commissions on premiums ceded to
reinsurers.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash flow are premium revenues,
commissions, policy fees and investment income.
For the nine-month period ended September 30, 2003, cash flows used by
operating activities were $2,686,779. Cash flows from operating activities are
negative primarily due to payments made to reinsurers, increased recoverables on
paid losses and a decrease in the unearned premium reserve. 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 was party to a senior Promissory Note with a
reinsurer for $750,000 payable in 12 monthly installments, and the Company paid
the balance of the loan in the second quarter of 2003. The funds were used to
make an additional capital contribution to UPCIC. In January 2003, loans in the
aggregate amount of $250,000 were made to the Company by two vendors. The loans
have a term of one year and pay interest at a rate of 10%. The proceeds from the
loans are being used for working capital.
The Company has incurred losses in prior years. In order to improve the
Company's financial position and achieve profitable operations, management
implemented rate increases in 2000 and 2001 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 control general and
administrative expenses. In addition, management is exploring sources of
additional capital, including the sale of its insurance operations.
Management believes that the continued 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 maintain 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.
The balance of cash and cash equivalents at September 30, 2003 is
$1,938,069. Most of this amount, along with readily marketable securities
aggregating $235,680, 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
18
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 and 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 September 30, 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 surplus as of the preceding year end. Statutory unassigned surplus
(deficit) at December 31, 2002 was $(2,326,372).
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 reported total adjusted
capital was in excess of the requirements.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the first nine 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.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
------ -----------------
19
The Company did not have any reportable legal proceedings during the
nine-months ending September 30, 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 which was settled during the
second quarter as 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
------ ---------------------
Under an amendment to the employment agreement between the Company and
Bradley I. Meier dated June 27, 2002, and approved by the Board of Directors,
Mr. Meier elected to convert salary into shares of common stock. The shares were
issued to Mr. Meier in a private transaction on August 27, 2003 for 1,041,666
shares. The transaction was performed in accordance with the terms of the
amendment and pursuant to section 4(2) of the Securities Act of 1933, as
amended.
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
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 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
20
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
21
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, 2003 /s/ Bradley I. Meier
-----------------------------------------
Bradley I. Meier, Chief Executive Officer
/s/ James M. Lynch
-----------------------------------------
James M. Lynch, Chief Financial Officer
22