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, 2007
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 000-20848
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.)
1110 W. Commercial Blvd.
Suite 100
Fort Lauderdale, Florida 33309
(Address of principal executive offices)
(954) 958-1200
(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: 38,871,374 shares of common
stock as of May 14, 2007.
Transitional Small Business Disclosure Format Yes No X
-- --
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Universal Insurance Holdings, Inc. and Subsidiaries
Fort Lauderdale, Florida
We have reviewed the accompanying condensed consolidated balance sheet of
Universal Insurance Holdings, Inc. and Subsidiaries as of March 31, 2007 and the
related condensed consolidated statements of income and cash flows for each of
the three-month periods ended March 31, 2007 and 2006. These interim financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Blackman Kallick Bartelstein, LLP
Chicago, Illinois
May 14, 2007
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 primarily 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, 2007 are not necessarily
indicative of the results for the year ending December 31, 2007.
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2007
(Unaudited)
ASSETS
Cash and cash equivalents $ 272,344,012
Real estate, net 3,236,841
Reinsurance recoverables 263,647,056
Premiums and other receivables, net 20,009,914
Deferred policy acquisition costs, net 2,378,326
Property and equipment, net 564,064
Deferred income taxes 8,232,786
Other assets 16,749
--------------
Total assets $ 570,429,748
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 51,927,770
Unearned premiums 260,822,071
Accounts payable 2,337,892
Reinsurance payable 155,296,394
Federal and state income taxes payable 8,807,850
Dividends payable 4,579,352
Other accrued expenses 13,005,933
Other liabilities 8,076,078
Loans payable 7,516,931
Long-term debt 25,057,286
--------------
Total liabilities 537,427,557
--------------
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, 50,000,000
shares authorized, 38,307,103
shares issued and 35,198,458
shares outstanding 383,072
Common stock in treasury, at cost -
208,645 shares (101,820)
Common stock held in trust, at cost -
2,900,000 shares (2,349,000)
Additional paid-in capital 19,774,709
Retained earnings 15,293,843
--------------
Total stockholders' equity 33,002,191
--------------
Total liabilities and stockholders' equity $ 570,429,748
==============
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 OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
-------------- --------------
PREMIUMS EARNED AND OTHER REVENUES:
Direct premiums written $ 130,989,353 $ 36,844,517
Ceded premiums written (94,076,043) (31,982,560)
------------- ------------
Net premiums written 36,913,310 4,861,957
Decrease (Increase) in unearned
premiums 2,524,953 (576,371)
------------- ------------
Premiums earned, net 39,438,263 4,285,586
Net investment income 2,726,221 383,967
Commission revenue 2,352,856 920,892
Other revenue 51,702 38,830
------------- ------------
Total premiums earned and other revenues 44,569,042 5,629,275
------------- ------------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses, net 11,454,252 919,123
General and administrative expenses 10,926,557 (80,184)
------------- ------------
Total operating costs and expenses 22,380,809 838,939
------------- ------------
INCOME BEFORE INCOME TAXES 22,188,233 4,790,336
Income taxes, current 9,374,434 1,278,865
Income taxes, deferred 438,970 198,877
------------- ------------
Income Taxes, Net 9,813,404 1,477,742
------------- ------------
NET INCOME $ 12,374,829 $ 3,312,594
============= ============
INCOME PER COMMON SHARE:
Basic $ 0.35 $ 0.10
============= ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 34,999,000 33,470,000
============= ============
INCOME PER COMMON SHARE
Diluted $ 0.30 $ 0.09
============= ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 41,103,000 35,455,000
============= ============
CASH DIVIDEND DECLARED PER COMMON SHARE $ 0.07 $ 0.04
============= ============
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 Months Ended Three Months Ended
March 31, 2007 March 31, 2006
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,374,829 $ 3,312,594
Adjustments to reconcile net income to cash provided by operations:
Amortization and depreciation 83,532 105,745
Issuance of common stock as compensation 1,050,822 22,668
Net change in assets and liabilities relating to operating activities:
Reinsurance recoverables (53,889,153) 21,565,378
Premiums and other receivables 3,842,063 (1,193,374)
Allowance for doubful accounts 660,281 -
Deferred taxes 438,970 198,877
Deferred acquisition costs, net (272,210) -
Other assets 975 60,773
Reinsurance payable 52,439,315 (4,452,856)
Deferred ceding commission - 553,603
Other liabilities 3,546,978 1,511,793
Accounts payable (388,157) (287,517)
Taxes payable (6,477,978) 1,930,232
Other accrued expenses (1,963,337) 1,961,761
Unpaid losses and loss adjustment expenses 2,363,256 (35,174,664)
Unearned premiums 30,475,805 11,960,343
------------- -------------
Net cash provided by operating activities 44,285,991 2,075,356
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Building improvements (12,461) (54,546)
------------- -------------
Net cash used in investing activities (12,461) (54,546)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (12,488) (12,488)
Repayments of loans payable (4,807,327) (42,760)
------------- -------------
Net cash used in financing activities (4,819,815) (55,248)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 39,453,715 1,965,562
CASH AND CASH EQUIVALENTS, Beginning of period 232,890,297 48,038,736
------------- -------------
CASH AND CASH EQUIVALENTS, End of period $ 272,344,012 $ 50,004,298
============= =============
Non-cash items
Declared dividends payable $ 2,446,392 $ 1,364,506
============= =============
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, 2007
(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; Atlas Florida Financial Corporation, parent of Sterling
Premium Finance Company, Sterling Premium Finance Company, and the Universal
Insurance Holdings, Inc. Stock Grantor Trust. All intercompany accounts and
transactions have been eliminated in consolidation. The condensed consolidated
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America ("GAAP") that differ from
statutory accounting practices prescribed or permitted for insurance companies
by regulatory authorities.
The condensed consolidated balance sheet of the Company as of March 31, 2007,
the related condensed consolidated statements of operations for the three months
ended March 31, 2007 and 2006 and condensed consolidated statements of cash
flows for the three months ended March 31, 2007 and 2006 are unaudited. There
were no items comprising comprehensive income for the three months ended March
31, 2007 and 2006. Accordingly, consolidated statements of comprehensive income
are not presented. The significant 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, 2006 except for the adoption of new accounting
pronouncements as noted below. The interim financial statements reflect all
adjustments (consisting primarily of 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 2007.
NEW ACCOUNTING PRONOUNCEMENTS. SFAS No.123 (Revised 2004)("SFAS 123(R)"),
Share-Based Payments, issued in December 2004, is a revision of Financial
Accounting Standards Board ("FASB") Statement 123, Accounting for Stock-Based
7
Compensation and supersedes Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS 123(R) focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payments transactions. SFAS
123(R) requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions) with the cost recognized over
the period during which an employee is required to provide service in exchange
for the award. This statement is effective as of the beginning of the first
interim or annual reporting period of the company's first fiscal year that
begins on or after December 15, 2005 and the Company adopted the standard in the
first quarter of fiscal year 2006.
On March 29, 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No.107 ("SAB 107") regarding the Staff's interpretation of
SFAS 123(R). This interpretation expresses the views of the Staff regarding the
interaction between SFAS 123(R) and certain SEC rules and regulations and
provides the Staff's views regarding the valuation of share-based payments
arrangements by public companies. In particular, SAB 107 provides guidance
related to share-based payments transactions with non-employees, the transition
from nonpublic to public entity status, valuation methods, the accounting for
certain redeemable financial instruments issued under shared-based payments
arrangements, the classification of compensation expense, non-GAAP financial
measures, first-time adoption of SFAS 123(R) in an interim period,
capitalization of compensation cost related to share-based payments
arrangements, the accounting for income tax effects of share-based payments
arrangements upon adoption of SFAS 123(R), the modification of employee share
options prior to adoption of SFAS 123(R) and disclosures in Management's
Discussion and Analysis subsequent to adoption of SFAS 123(R). The Company
adopted SAB 107 in connection with its adoption of SFAS 123(R).
In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections,
which establishes, unless impracticable, retrospective application as the
required method for reporting a change in accounting principle in absence of
explicit transition requirements specific to the newly adopted accounting
principle. The statement provides guidance for determining whether retrospective
application of a change in accounting principle is impracticable. The statement
also addresses the reporting of a correction of error by restating previously
issued financial statements. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 14,
2005. The Company adopted SFAS No. 154 in the first quarter of 2006. The impact
of such adoption did not have an effect on the Company's consolidated financial
statements.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity's financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes." FIN 48 prescribes that a company should use a more-likely-than-not
recognition threshold based on the technical merits of the tax position taken.
Tax positions that meet the more-likely-than-not threshold should be measured in
8
order to determine the tax benefit to be recognized in the financial statements.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company analyzed its tax positions in accordance with this interpretation and
determined that it did not result in a reserve for uncertain tax positions as of
March 31, 2007. Therefore, no cumulative effect of a change in accounting
principle or adjustment to a liability for unrecognized tax benefits was
recognized as a result of adoption of FIN 48. As of January 1, 2007, the Company
had zero unrecognized tax benefits. Accordingly, the adoption of FIN 48 did not
have an effect on the results of operations or financial position of the
Company.
In September 2005, the FASB issued SFAS No. 157 which redefines fair value,
establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 applies where other
accounting pronouncements require or permit fair value measurements. SFAS No.
157 is effective for fiscal years beginning after November 15, 2007. The effects
of adoption will be determined by the types of instruments carried at fair value
in the Company's financial statements at the time of adoption as well as the
method utilized to determine their fair values prior to adoption. Based on the
Company's current use of fair value measurements, SFAS No. 157 is not expected
to have a material effect on the results of operations or financial position of
the Company.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159") which permits entities
to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS 159
will become effective for the Company on January 1, 2008. The Company is
currently evaluating the impact of adopting SFAS 159 on its financial position,
cash flows, and results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. Management has reassessed the
critical accounting policies as disclosed in our 2006 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
availability and 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 continues to take action and to strengthen UPCIC's financial
condition. Approved premium rate increases averaging 10.1% and 13.7% statewide
were implemented in May 2006 and October 2006, respectively, on the Company's
Homeowner's program (HO). Approved premium rate increases averaging 11.2% and
30.6% statewide were also implemented in May 2006 and September 2006,
respectively, on the Company's Dwelling Fire program (DP). Further, a rate
9
decrease averaging 11.2% statewide (HO) and 3.2% (DP) reflecting estimated
reinsurance savings which is to be implemented June 1, 2007 is subject to
approval by the OIR. 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. In light of the four windstorm
catastrophes Florida experienced in 2004, and three windstorm catastrophes
Florida experienced in 2005, there was a significant increase in the cost of
catastrophe reinsurance coverage for the June 1, 2006 renewal which the Company
had anticipated and factored into its policy pricing. Effective May 1, 2004 the
Company brought in house the system it utilizes for policy issuance and
administration. This has enhanced UPCIC's operating results through its ability
to improve and better control underwriting and loss adjusting activities.
Management believes the implementation of, and results attributable to, the
actions described above will continue to enhance UPCIC's surplus. However, there
can be no assurance of the ultimate success of these plans, or that the Company
will be able to maintain profitability.
On November 9, 2006 UPCIC entered into a $25.0 million surplus note with the
Florida State Board of Administration under Florida's Insurance Capital Build-Up
Incentive Program. Under the program, which was implemented by the Florida
legislature to encourage insurance companies to write additional residential
insurance coverage in Florida, the State Board of Administration matched UPCIC's
funds of $25.0 million that were earmarked for participation in the program.
Effective June 1, 2006, the Company reduced the rate of cession on its quota
share reinsurance. Quota share reinsurance refers to a form of reinsurance under
which the reinsurer participates in a specified percentage of the premiums and
losses on all reinsured policies in a given class of business. Quota share
reinsurance is used primarily to increase the Company's underwriting capacity
and to reduce exposure to losses. As a result of this reduction of the Company's
quota share reinsurance from 80% to 50%, the Company will retain and earn more
of the premiums the Company writes, but will also retain more of the related
losses. The Company's increased exposure to potential losses could have a
material adverse effect on the Company's business, financial condition and
results of operations.
NOTE 2 -- RESULTS OF OPERATIONS
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 of the assumed
policies and began servicing such policies. Since then, UPCIC has developed its
business by actively soliciting business 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 policyholders at a given point in
time based upon the premiums due for the full policy term. At March 31, 2007,
10
the Company had direct unearned premiums totaling $260,822,071.
Premiums earned are included in earnings on a pro-rata basis 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, 2007, deferred policy acquisition costs amounted to
$2,378,326.
An allowance for doubtful accounts is established when it becomes evident that
collection is doubtful, typically after 90 days past due. As of March 31, 2007,
the Company had recorded an allowance for doubtful accounts in the amount of
$1,229,047.
Loss and loss adjustment expenses ("LAE"), less related reinsurance, are
recorded as claims are incurred. The provision for unpaid loss and LAE includes:
(1) the accumulation of individual case estimates for loss and LAE reported, but
not paid prior to the close of the accounting period; (2) estimates for incurred
but unreported claims based on past experience modified for current trends; and
(3) estimates of expenses for investigating and adjusting claims based on past
experience. During 2006 and the first quarter of 2007, UPCIC did not experience
any catastrophic events.
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 property and 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.
The Company formed subsidiaries that specialize in selling insurance and
generating insurance leads via the Internet. Tigerquote.com Insurance &
Financial Services Group, Inc. ("Tigerquote.com") and Tigerquote.com Insurance
Solutions, Inc. were incorporated in Delaware on June 6, 1999 and August 23,
11
1999, respectively. Tigerquote.com was an Internet insurance lead generating
network while Tigerquote.com Insurance Solutions, Inc. was a network of Internet
insurance agencies. These entities sought to generate income from the selling of
leads and commissions on policies written. Insurance agencies were established
in 22 states. However, none of the agencies are currently active. During 2006,
the Company decided to discontinue its online commerce operations and focus on
its core operations
NOTE 3 -- REINSURANCE
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 contracts. 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 netted against policy acquisition costs 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. While ceding premiums to reinsurers reduces the Company's risk of
exposure in the event of catastrophic losses, it also reduces the Company's
potential for greater profits should such catastrophic events fail to occur. The
Company submits its reinsurance program for regulatory review to the Florida
Office of Insurance Regulation.
Effective June 1, 2006, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with various reinsurers. Under the quota share
treaty, through May 31, 2007, UPCIC cedes 50% of its gross written premiums,
losses and LAE for policies with coverage for wind risk with a ceding commission
equal to 28% of ceded gross written premiums. In addition, the quota share
treaty has a limitation for any one occurrence of $25,000,000 and a limitation
from losses arising out of events that are assigned a catastrophe serial number
by the Property Claims Services ("PCS") office of $55,000,000. Effective June 1,
2006 through May 31, 2007, UPCIC entered into a multiple line excess per risk
agreement with various reinsurers. Under the multiple line 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. A $5,200,000 aggregate limit applies to the
term of the contract. Effective June 1, 2006 through May 31, 2007, UPCIC entered
into a property per risk excess agreement covering ex-wind only policies. Under
the property per risk excess agreement, UPCIC obtained coverage of $300,000 in
12
excess of $200,000 for each property loss. A $2,100,000 aggregate limit applies
to the term of the contract.
Effective June 1, 2006 through May 31, 2007, under an excess catastrophe
contract, UPCIC obtained catastrophe coverage of $76,000,000 in excess of
$25,000,000 covering certain loss occurrences including hurricanes. The contract
contains a provision for one reinstatement in the event coverage is exhausted;
additional premium is calculated pro rata as to amount and 100% as to time.
Effective June 1, 2006 through May 31, 2007, UPCIC purchased a reinstatement
premium protection contract which reimburses the Company for its cost to
reinstate the catastrophe coverage of $76,000,000 in excess of $25,000,000.
Effective June 1, 2006, UPCIC also obtained subsequent catastrophe event excess
of loss reinsurance to cover certain levels of the Company's net retention
through three catastrophe events including hurricanes. UPCIC also obtained
coverage from the Florida Hurricane Catastrophe Fund ("FHCF"). The approximate
coverage is estimated to be for $217,480,000 in excess of $81,364,000. Also at
June 1, 2006, the FHCF made available, and the Company obtained, $10,000,000 of
additional catastrophe excess of loss coverage with one free reinstatement of
coverage to carriers qualified as Limited Apportionment Companies, such as
UPCIC. This particular layer of coverage is $10,000,000 in excess of $3,750,000.
The total cost of the Company's underlying catastrophe private reinsurance
program effective June 1, 2006 through May 31, 2007 is $46,172,701 of which the
Company's cost is 50%, or $23,086,350, and the quota share reinsurers cost is
the remaining 50%. In addition, the Company purchases reinsurance premium
protection as described above which amounts to $10,613,780. The cost of the
subsequent catastrophe event excess of loss reinsurance is $2,986,372. The
premium the Company ceded to the FHCF for the 2006 hurricane season is
$15,432,459, which includes a 25% surcharge required by the FHCF for the 2006
hurricane season, of which the Company's cost is 50%, or $7,716,230, and the
quota share reinsurers' cost is the remaining 50%. The Company is also
participating in the additional coverage option for Limited Apportionment
Companies offered by the FHCF, the premium for which is $5,000,000 of which the
Company's cost is 50%, or $2,500,000, and the quota share reinsurers' cost is
the remaining 50%.
The reinsurance arrangements had the following effect on certain items in the
accompanying consolidated financial statements:
Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
---------------------------------------------------------- ------------------------------------------------------
Loss and Loss Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $ 130,989,353 $ 100,513,548 $ 22,452,279 $ 36,844,517 $ 24,884,174 $ 6,689,110
Ceded (94,076,043) (61,075,285) (10,998,027) (31,982,560) (20,598,588) (5,769,987)
------------- ------------- ------------- ------------- ------------- -------------
Net $ 36,913,310 $ 39,438,263 $ 11,454,252 $ 4,861,957 $ 4,285,586 $ 919,123
============= ============= ============= ============= ============= =============
13
Other Amounts:
March 31, 2007
--------------
Reinsurance recoverable on paid and unpaid
losses and loss adjustment expenses 45,762,003
Prepaid reinsurance premiums 167,203,932
Other reinsurance receivable 50,681,121
----------
Reinsurance recoverable $263,647,056
============
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, 2007. 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
various reinsurers located throughout the United States and internationally.
UPCIC believes that ceding risks to reinsurers whom it considers to be
financially sound combined with the distribution of reinsurance contracts to an
array of reinsurers adequately minimizes UPCIC's risk from any potential
operating difficulties of its reinsurers.
In light of the four windstorm catastrophes Florida experienced in 2004, and
three windstorm catastrophes Florida experienced in 2005, there was a
significant increase in catastrophe reinsurance cost for the June 1, 2006
renewal which the Company had planned and factored into its policy pricing.
Effective June 1, 2006, the Company reduced the rate of cession on its quota
share reinsurance. Quota share reinsurance is used primarily to increase the
Company's underwriting capacity and to reduce exposure to losses. Quota share
reinsurance refers to a form of reinsurance under which the reinsurer
participates in a specified percentage of the premiums and losses on all
reinsured policies in a given class of business. As a result of this reduction
of the Company's quota share reinsurance from 80% to 50%, the Company will
retain and earn more premiums the Company writes, but will also retain more
related losses. The Company's increased exposure to potential losses could have
a material adverse effect on the Company's business, financial condition and
results of operations.
As of May 14, 2007, the Company is in the process of arranging its reinsurance
program and negotiating with reinsurers for the contract period effective June
1, 2007 through May 31, 2008 such that UPCIC has the ability to maintain its
exposure to loss within its capital resources and reduce the loss that may arise
from catastrophes or other events that cause unfavorable underwriting results.
However, the specific terms and costs of the reinsurance program have not yet
been agreed upon.
The Company may also be subject to assessments by Citizens Property Insurance
Corporation, the state-run insurer of last resort and the FHCF as a result of
operating deficiencies related to windstorm catastrophes. In addition, the
14
Company is subject to assessments by the Florida Insurance Guaranty Association
("FIGA"). FIGA services pending claims by or against Florida policyholders of
member insurance companies which become insolvent and ordered liquidated. FIGA's
membership is composed of all Florida licensed direct writers of property or
casualty insurance. Under current regulations, insurers may recoup the amount of
their assessments from policyholders, or in some cases collect the amount of the
assessments from policyholders as surcharges for the benefit of the assessing
entity.
On August 17, 2005 the Board of Governors of Citizens Property Insurance
Corporation ("Citizens") authorized the levying of a regular assessment on
assessable insurers to recoup the 2004 Plan Year Deficit incurred in the High
Risk Account. The assessment is based upon the Company's share of direct written
premium for the subject lines of business in the State of Florida for the
calendar year preceding the plan year in which the deficit occurred. UPCIC's
participation in this assessment totaled $203,300. Pursuant to Florida statutes,
insurers are permitted to recoup the assessment by adding a surcharge to
policies in an amount not to exceed the amount paid by the insurer to Citizens.
UPCIC completed the recoupment of this assessment in 2006.
On June 12, 2006, the Florida Office of Insurance Regulation ("OIR") ordered an
emergency FHCF assessment of 1% of direct premiums written for policies with
effective dates beginning January 1, 2007, which the Company will collect from
policyholders, as the assessment is to policyholders, not the Company. This
assessment was a result of catastrophe losses Florida experienced in 2004 and
2005.
During its meeting on June 16, 2006, the Board of Directors of FIGA determined
the need for an assessment upon its member companies. FIGA decided on an
assessment on member companies of 2% of the Florida net direct premiums for the
calendar year 2005. Based on the 2005 net direct premium of $11.2 billion, this
would generate approximately $225 million. UPCIC's participation in this
assessment totaled $1,772,861. Pursuant to Florida statutes, insurers are
permitted to recoup the assessment by adding a surcharge to policies in an
amount not to exceed the amount paid by the insurer to FIGA. UPCIC recouped this
assessment in 2006.
On September 14, 2006 the Board of Governors of Citizens authorized the levying
of a regular assessment on assessable insurers to recoup the 2005 Plan Year
Deficit incurred in the High Risk Account. The assessment is based upon the
Company's share of direct written premium for the subject lines of business in
the State of Florida for the calendar year preceding the plan year in which the
deficit occurred. UPCIC's participation in this assessment totaled $263,650.
Pursuant to Florida statutes, insurers are permitted to recoup the assessment by
adding a surcharge to policies in an amount not to exceed the amount paid by the
insurer to Citizens. As a result, UPCIC recorded this assessment as an expense
during the year ended December 31, 2006 and is implementing the recoupment in
connection with this assessment in 2007.
During its meeting on December 14, 2006 the Board of Directors of FIGA
determined the need for an emergency assessment upon its member companies. The
Board decided on an emergency assessment on member companies of 2% of the
Florida net direct premiums for the calendar year 2005. Based on the 2005 net
15
direct premium of $11.2 billion, this would generate approximately $225 million.
UPCIC's participation in this assessment totaled $1,772,861. Pursuant to Florida
statutes, insurers are permitted to recoup the assessment by adding a surcharge
to policies in an amount not to exceed the amount paid by the insurer to FIGA.
As a result, UPCIC recorded this assessment as an expense during the year ended
December 31, 2006 and is implementing the recoupment in connection with this
assessment in 2007.
NOTE 4 -- 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-month periods ended March 31, 2007 and March 31, 2006, respectively,
follows:
Three Months Ended
March 31, 2007 March 31, 2006
----------------- --------------
Basic EPS 34,999,000 33,470,000
Effect of assumed conversion of
common stock equivalents 6,104,000 1,985,000
----------------- --------------
Diluted EPS 41,103,000 35,455,000
NOTE 5 -- STOCK-BASED COMPENSATION PLANS AND WARRANTS
Effective January, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 (R), "Share-Based Payments," and began recognizing
compensation expense in its Consolidated Statements of Income for its stock
option grants based on the fair value of the awards. Prior to January 1, 2006
the Company elected to apply Accounting Principles Board ("APB") No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for its stock options granted to employees and directors, and SFAS
No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION, for its stock options granted
to non-employees. Under APB No. 25, because the exercise price of the Company's
employee and director stock options equal the market price of underlying stock
on the date of the grant, no compensation expense was recognized. The Company
expensed the fair value (determined as of the grant date) of options and
warrants granted to non-employees in accordance with SFAS No. 123. SFAS 123 (R)
was adopted using the modified prospective transition method. Under this
transition method, compensation cost recognized in the periods after adoption
includes (i) compensation cost for all share-based payments granted prior to,
but not yet vested as of January 1, 2006 based on the grant-date fair value
estimated in accordance with the original provision of SFAS 123, and (ii)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
16
provisions of SFAS 123 (R). Results from prior periods have not been restated.
As a result of adopting SFAS 123 (R), the Company's income before income taxes
and net income for the first quarter of 2007 are $657,822 and $394,693 lower,
respectively, than if it had continued to account for share-based compensation
under APB 25. In addition, during the three months ended March 31, 2007, the
Company issued common stock valued at $925,000 as compensation. This expense is
being recognized over a three-year vesting period.
The following table illustrates the effects on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS 123 to
options granted under the Company's stock option plans for all periods
presented. For purposes of this pro forma disclosure, the value of the options
is estimated using a Black-Scholes-Merton option pricing model and amortized to
expense over the options' vesting periods.
Three Months Ended
March 31, 2007 March 31, 2006
---------------- --------------
Net income reported $ 12,374,829 $ 3,312,594
Add:
Total stock-based compensation expense
included in reported net income,
net of related tax effects 394,693 4,439
Deduct:
Total stock-based compensation expense
determined under fair value based
method, net of related tax effects (394,693) (4,439)
------------ -----------
SFAS No. 123(R) pro forma net income $ 12,374,829 $ 3,312,594
============ ===========
Pro forma earnings per share
Basic $ 0.35 $ 0.10
============ ===========
Fully diluted $ 0.30 $ 0.09
============ ===========
Earnings per share, as reported
Basic $ 0.35 $ 0.10
============ ===========
Fully diluted $ 0.30 $ 0.09
============ ===========
At March 31, 2007, there were options outstanding to purchase 6,880,000 shares
of common stock with an intrinsic value of $16,807,100, a weighted average
remaining contract term of 3.27 years and a weighted exercise price of $1.09. Of
these, options to purchase 5,130,000 shares of common stock are currently
17
exerciseable with an intrinsic value of $12,502,000, a weighted average
remaining contract term of 3.38 years, and a weighted exercise price of $1.10.
Options to purchase 435,000 shares of common stock were granted during the
quarter ended March 31, 2007 at a weighted average exercise price of $3.70.
There were no options exercised during the quarter ended March 31, 2007.
At March 31, 2007, there were warrants outstanding and currently exercisable to
purchase 850,000 shares of common stock with an intrinsic value of $2,831,500, a
weighted average remaining contract term of 3.24 years and a weighted exercise
price of $0.72. There were no warrants exercised during the quarter ended March
31, 2007.
The Company estimated the fair value of all stock options awards as of the grant
date by applying the Black-Scholes-Merton option pricing model. The use of this
valuation model involves assumptions that are judgmental and highly sensitive in
the determination of compensation expense and include the expected life of the
option, stock price volatility, risk-free interest rate, dividend yield,
exercise price, and forfeiture rate. Under SFAS 123(R), forfeitures are
estimated at the time of valuation and reduce expense ratably over the vesting
period. The forfeiture rate is adjusted periodically based on the extent to
which actual forfeitures differ, or are expected to differ, from the previous
estimate. Under SFAS 123 and APB 25, the Company elected to account for
forfeitures when awards were actually forfeited and reflect the forfeitures as a
cumulative adjustment to the pro forma expense.
In accordance with SFAS 123(R), fair values of options granted prior to adoption
and determined for purposes of disclosure under SFAS 123 have not been changed.
The fair values of options granted prior to adoption of SFAS 123(R), of which a
portion is unvested, was estimated assuming the following: weighted average
expected life of five years, dividend yield of 0.0 percent, risk-free interest
rate of 6.5 percent, and expected volatility of 154.5 percent and 126.3 percent
for grants issued in 2004 and 2002, respectively. The fair value of options
granted in 2007 was estimated assuming the following: weighted average expected
life of 2.5 years, dividend yield of 4.0 percent, risk-free interest rate of
4.75 percent, and expected volatility of 65.17 percent.
NOTE 6 -- RELATED PARTY TRANSACTIONS
All underwriting, rating, policy issuance, reinsurance negotiations and
administration functions for UPCIC are performed by UPCIC, Universal Risk
Advisors, Inc., a wholly owned subsidiary of the Company, and unaffiliated third
parties. Claims adjusting functions are performed by Universal Adjusting
Corporation, a wholly owned subsidiary of the Company, and affiliated and
unaffiliated third parties.
Downes and Associates, a multi-line insurance adjustment corporation based in
Deerfield Beach, Florida performs certain claims adjusting work for UPCIC.
Downes and Associates is owned by Dennis Downes, who is the father of Sean P.
Downes, Chief Operating Officer and Senior Vice President of UPCIC. During the
three months ended March 31, 2007 and 2006, the Company expensed claims
adjusting fees of $390,000 and $375,779, respectively, to Downes and Associates.
18
In July 2004, the Company borrowed monies from a private investor in the amount
of $175,000 for working capital. In August 2005, this individual's son, Michael
P. Moran, became UPCIC's Vice President of Claims. The loan was paid off in
January 2006.
In September 2006, the Company initiated the process of acquiring all of the
outstanding common stock of Atlas Florida Financial Corporation, which owns all
of the outstanding common stock of Sterling Premium Finance Company, Inc.
("Sterling"), from the Company's Chief Executive Officer and Chief Operating
Officer for $50,000, which approximates Sterling's book value. The Company plans
to request approval of the acquisition from the Florida Office of Insurance
Regulation during the second quarter of 2007.
On March 14, 2007, the Company issued 250,000 shares of restricted common stock
at a price of $3.70 per share to an employee in conjunction with an employee
agreement. The shares will vest over a three year period. The per share price
was determined using the closing price of the Company's common stock as quoted
on the OTC Bulletin Board and the shares were issued in a private transaction
pursuant Section 4(2) of the Securities Act of 1933, as amended.
NOTE 7 -- PROVISION FOR INCOME TAX EXPENSE
A provision for income tax expense of $9,813,404 is recorded for the three
months ended March 31, 2007 as a result of current profitable operations. A
provision for income tax expense of $1,477,742 was recorded for the three months
ended March 31, 2006 due to operating loss carry-forwards that existed at that
time.
NOTE 8 -- SUBSEQUENT EVENTS
On April 24, 2007, the Company was advised by the American Stock Exchange
("Amex") that its application for listing of its common stock had been approved.
Shares of the Company's common stock began trading on the Amex on April 30,
2007, under the ticker symbol UVE.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis by management of the Company's
consolidated financial condition and results of operations should be read in
conjunction with the Company's 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
19
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. 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. 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, and an inspection company, Universal Inspection Corporation, which
performs property inspections for homeowners' policies underwritten by UPCIC.
The Company formed subsidiaries that specialize in selling insurance and
generating insurance leads via the Internet. Tigerquote.com Insurance &
Financial Services Group, Inc. ("Tigerquote.com") and Tigerquote.com Insurance
Solutions, Inc. were incorporated in Delaware on June 6, 1999 and August 23,
1999, respectively. Tigerquote.com was an Internet insurance lead generating
network while Tigerquote.com Insurance Solutions, Inc. was a network of Internet
insurance agencies. These entities sought to generate income from the selling of
leads and commissions on policies written. Insurance agencies were established
in 22 states. However, none of the agencies are currently active. During 2006,
the Company decided to discontinue its online commerce operations and focus on
its core operations.
The Company also formed Tiger Home Services, Inc., which furnished pool
maintenance services to homeowners until the operation was sold during the
second quarter of 2005.
20
FINANCIAL CONDITION
Cash and cash equivalents at March 31, 2007 aggregated $272,344,012. The source
of liquidity for possible claims payments consists of the collection of net
premiums after deductions for expenses, reinsurance recoverables and short-term
loans.
UPCIC believes that premiums will be sufficient to meet UPCIC's working capital
requirements for at least the next twelve months. The Company's policy is to
invest amounts considered to be in excess of current working capital
requirements. At March 31, 2007, the Company's investments were comprised of
$245,143,755 in cash and overnight repurchase agreements, $27,200,257 in a money
market account, and $3,236,841 in real estate consisting of a building purchased
by UPCIC that the Company is currently using as its home office.
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 15% of the policies originally
obtained from the JUA are currently in force 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. UPCIC is currently servicing
approximately 310,000 homeowners' and dwelling fire insurance policies.
The Company, as noted above, diversified its operations by establishing online
commerce and other ancillary operations. However, the Company discontinued the
online commerce division in order to further focus on the core property and
casualty insurance business.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2006
Gross premiums written increased 255.5% to $130,989,353 for the three-month
period ended March 31, 2007 from $36,844,517 for the three-month period ended
March 31, 2006. The increase in gross premiums written is primarily attributable
to an increase in new business as well as premium rate increases. The increase
in new business is attributable to improving relationships with existing agents,
an increase in new agents due to increased marketing efforts to agents, a new
web-based policy administration platform and the disruption in the marketplace
as a result of the windstorm catastrophes in 2004 and 2005.
21
Net premiums earned increased 820.3% to $39,438,263 for the three-month period
ended March 31, 2007 from $4,285,586 for the three-month period ended March 31,
2006. The increase is due to an increase in new business, premium rate increases
and changes in the reinsurance program.
Investment income increased 610.0% to $2,726,221 for the three-month period
ended March 31, 2007 from $383,967 for the three-month period ended March 31,
2006. The increase is primarily due to higher investment balances and a higher
interest rate environment during the three-month period ended March 31, 2007.
Commission revenue increased 155.5% to $2,352,856 for three-month period ended
March 31, 2007 from $920,892 for the three-month period ended March 31, 2006.
Commission revenue 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 managing general agent's policy fee income.
Other revenue increased 33.1% to $51,702 for the three-month period ended March
31, 2007 from $38,830 for the three-month period ended March 31, 2006. The
increase is primarily attributable to an increase in miscellaneous revenues
during the three-month period ended March 31, 2007.
Net losses and LAE incurred increased 1,146.2% to $11,454,252 for the
three-month period ended March 31, 2007 from $919,123 for the three-month period
ended March 31, 2006. Losses and LAE incurred increased as a result of increased
premium volume and changes in the Company's reinsurance program. The Company's
net loss ratio for the three-month period ended March 31, 2007 was 29.0%
compared to 21.4% for the three-month period ended March 31, 2006. Losses and
LAE are influenced by loss severity and frequency. 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. During 2006 and the
first quarter of 2007, UPCIC did not experience any catastrophic events. 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 to $10,926,557 for the three-month
period ended March 31, 2007 from $(80,184) for the three-month period ended
March 31, 2006. The increase in general and administrative expenses were due to
22
were due to several factors. Commission expense increased by approximately
$11,600,000 due to the increase in direct written premium. The increase in
commission expense was partially offset by an increase in ceding commissions of
approximately $8,800,000 due to an increase in ceded written premium. Ceded
written premium increased due to the increase in direct written premium as well
as changes in the Company's reinsurance program. Compensation expense increased
nearly $3,700,000 as the Company hired additional staff and increased incentive
compensation in order to retain existing staff to support the substantial growth
of the Company. Premium taxes increased nearly $1,200,000 as a result of the
increase in direct written premium. As the Company's balance of premiums
receivable increased as a result of the increase in production, the Company
recorded an additional allowance for doubtful accounts in the approximate amount
of $679,000. Interest expense increased nearly $627,000 due to outstanding debt
balances on the Florida State Board of Administration surplus note and Benfield
Greig (Holdings), Inc. secured promissory note described the "Liquidity and
Capital Resources" section below.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash flow are the receipt of premiums,
commissions, policy fees, investment income, reinsurance recoverables and
short-term loans.
For the three-month period ended March 31, 2007, cash flows provided by
operating activities were $44,285,991. Cash flows from operating activities are
expected to be positive in both the short-term and reasonably foreseeable
future. In addition, the Company's investment portfolio is highly liquid as it
consists entirely of cash, overnight repurchase agreements and a money market
account.
In June 2005, the Company borrowed monies from two private investors and issued
two promissory notes for the aggregate principal sum of $1,000,000 payable in 10
monthly installments of $100,000. Payment on one note commenced in July 31, 2006
and commenced on the other note on November 30, 2006. As of March 31, 2007,
these loans had been fully paid. The loan proceeds were subsequently contributed
to UPCIC as additional paid-in-capital. In conjunction with the notes, the
Company granted a warrant to one of the investors to purchase 200,000 shares of
restricted common stock at an exercised price of $.05 per share, expiring in
June 2010. These transactions were approved by the Company's Board of Directors.
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 cost, and has worked to control
general and administrative expenses. However, there can be no assurance of the
23
ultimate success of these plans, or that the Company will be able to maintain
profitability.
On November 9, 2006 UPCIC entered into a $25.0 million surplus note with the
Florida State Board of Administration under Florida's Insurance Capital Build-Up
Incentive Program. Under the program, which was implemented by the Florida
legislature to encourage insurance companies to write additional residential
insurance coverage in Florida, the State Board of Administration matched UPCIC's
funds of $25.0 million that were earmarked for participation in the program. The
surplus note brings the current capital and surplus of UPCIC to approximately
$71 million.
The surplus note has a twenty-year term and accrues interest at a rate
equivalent to the 10-year U.S. Treasury Bond Rate, adjusted quarterly based on
the 10-year Constant Maturity Treasury rate. For the first three years of the
term of the surplus note, UPCIC is required to pay interest only, although
principal payments can be made during this period. Any payment of principal or
interest by UPCIC on the surplus note must be approved by the Commissioner of
Florida's OIR.
An event of default will occur under the surplus note if UPCIC: (i) defaults in
the payment of the surplus note; (ii) fails to meet at least a 2:1 ratio of net
premium to surplus ("Minimum Writing Ratio") requirement by June 1, 2007; (iii)
fails to submit quarterly filings to the OIR; (iv) fails to maintain at least
$50 million of surplus during the term of the surplus note, except for certain
situations; (v) misuses proceeds of the surplus note; (vi) makes any
misrepresentations in the application for the program; or (vii) pays any
dividend when principal or interest payments are past due under the surplus
note. As of March 31, 2007, the Company is in compliance with each of the
aforementioned loan covenants.
If UPCIC fails to increase its writing ratio for two consecutive quarters prior
to June 1, 2007, fails to obtain the 2:1 Minimum Writing Ratio by June 1, 2007,
or drops below the 2:1 Minimum Writing Ratio once it is obtained for two
consecutive quarters, the interest rate on the surplus note will increase during
such deficiency by 25 basis points if the resulting writing ratio is between
1.5:1 and 2:1 and the interest rate will increase by 450 basis points if the
writing ratio is below 1.5:1. If the writing ratio remains below 1.5:1 for three
consecutive quarters after June 1, 2007, UPCIC must repay a portion of the
surplus note so that the Minimum Writing Ratio will be obtained for the
following quarter. The Company expects to maintain the 2:1 Minimum Writing Ratio
throughout the term of the surplus note.
To meet its matching obligation under the Insurance Capital Build-Up Incentive
Program, on November 3, 2006, the Company entered into a Secured Promissory Note
with Benfield Greig (Holdings), Inc. in the aggregate principal amount of $12
million. Interest on the note will accrue at the market rate of 12.75% per
annum. The outstanding principal is due in six monthly installments of $1.5
million and a final seventh monthly installment of the remaining balance plus
all accrued interest under the terms of the note starting on January 31, 2007
and ending on July 31, 2007. In connection with the loan, the Company and its
subsidiaries appointed Benfield Inc. as their reinsurance intermediary for all
24
of their reinsurance placements for the contract year beginning on June 1, 2007.
As of March 31, 2007, all amounts due on the note have been paid.
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 OIR.
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 twelve months.
On March 15, 2007, the Company declared a dividend of $.07 per share on its
outstanding common stock to be paid on August 10, 2007 to the shareholders of
record of the Company at the close of business on July 20, 2007. The dividend
payable amount is $2,446,392.
The property and casualty reinsurance industry is subject to the same market
conditions as the direct property and casualty insurance market, and there can
be no assurance that reinsurance will be available to UPCIC to the same extent
and at the same cost as currently in place for UPCIC. Future increases in
catastrophe reinsurance costs are possible and could adversely affect UPCIC's
results.
The balance of cash and cash equivalents at March 31, 2007 is $272,344,012. Most
of this amount is available to pay claims in the event of catastrophic events. A
portion of those paid losses would be recoverable through the Company's
catastrophic reinsurance upon presentation to the reinsurer of evidence of claim
payment.
Accounting principles generally accepted in the United States of America differ
in some respects from reporting practices prescribed or permitted by the OIR. 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 as the
greater of 10% of the insurer's total liabilities or $4,000,000. UPCIC's
statutory capital and surplus was $71,019,536 at March 31, 2007 and exceeded the
minimum capital and surplus requirements. UPCIC is also required to adhere to
prescribed premium-to-capital surplus ratios.
The maximum amount of dividends which can be paid by Florida insurance companies
without prior approval of the OIR 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
25
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, 2006 was $(1,088,159).
The Company is required to comply with the National Association of Insurance
Commissioners' ("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, 2006, 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 three months of
2007.
ITEM 3. CONTROLS AND PROCEDURES
The Company carried out an evaluation under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the
period covered by this report. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that disclosure
controls and procedures were effective as of the end of the period covered by
this report to ensure that information required to be disclosed by the Company
in its reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms. There was
no change in the Company's internal controls over financial reporting that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company did not have any reportable legal proceedings during the three
months ending March 31, 2007. 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 is material, and they are adequately
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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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 14, 2007, the Company issued 250,000 shares of restricted common stock
at a price of $3.70 per share to an employee in conjunction with an employee
agreement. The shares will vest over a three year period. The per share price
was determined using the closing price of the Company's common stock as quoted
on the OTC Bulletin Board and the shares were issued in a private transaction
pursuant 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
Effective January 1, 2007, the terms of the employment agreements of Bradley I.
Meier, President and Chief Executive Officer of the Company, and Sean P. Downes,
Chief Operating Officer of the Company, were amended to provide for an increase
in base salary of $161,175 and $114,000 per annum, respectively.
ITEM 6. 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 the Sarbanes-Oxley Act of 2002
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSAL INSURANCE HOLDINGS, INC.
Date: May 14, 2007 /s/ Bradley I. Meier
-------------------------------------------------------
Bradley I. Meier, President and Chief Executive Officer
/s/ James M. Lynch
-------------------------------------------------------
James M. Lynch, Chief Financial Officer
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