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, 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: 38,662,729 shares of common
stock as of November 14, 2007 (including 2.9 million shares held in trust).
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 September 30, 2007 and
the related condensed consolidated statements of operations for the nine-month
and three-month periods ended September 30, 2007 and 2006, and the condensed
consolidated statements of cash flows for each of the nine-month periods ended
September 30, 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
November 14, 2007
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2007
(Unaudited)
ASSETS
Cash and cash equivalents $ 284,763,534
Real estate, net 3,186,526
Prepaid reinsurance premiums 176,753,961
Reinsurance recoverables and other reinsurance receivable 116,051,656
Premiums and other receivables, net 25,859,211
Property and equipment, net 578,728
Deferred income taxes 12,583,944
Other assets 357
---------------
Total assets $ 619,777,917
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 53,356,520
Unearned premiums 263,404,817
Deferred ceding commission, net 1,506,066
Accounts payable 9,460,883
Reinsurance payable 146,376,934
Federal and state income taxes payable 26,770,230
Dividends payable 2,861,018
Other accrued expenses 16,602,305
Other liabilities 10,812,529
Loans payable 5,852
Long-term debt 25,000,000
---------------
Total liabilities 556,157,154
===============
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, 55,000,000 shares authorized,
39,057,103 shares issued and 35,762,729 shares
outstanding 390,572
Common stock in treasury, at cost - 394,374 shares (974,746)
Common stock held in trust, at cost - 2,900,000 shares (2,349,000)
Additional paid-in capital 22,837,565
Retained earnings 43,714,985
---------------
Total stockholders' equity 63,620,763
---------------
Total liabilities and stockholders' equity $ 619,777,917
===============
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,
------------- ------------- ------------- -------------
2007 2006 2007 2006
---- ---- ---- ----
PREMIUMS EARNED AND OTHER REVENUES:
Direct premiums written $ 381,318,190 $ 230,431,095 $ 118,754,920 $ 116,427,419
Ceded premiums written (271,847,589) (148,517,735) (86,699,581) (70,571,961)
-------------- --------------- -------------- ---------------
Net premiums written 109,470,601 81,913,360 32,055,339 45,855,458
Decrease (increase) in net unearned
premiums 9,492,236 (54,805,591) 4,264,123 (29,726,155)
-------------- --------------- -------------- ---------------
Premiums earned, net 118,962,837 27,107,769 36,319,462 16,129,303
Net investment income 8,241,833 2,047,374 2,766,754 1,078,191
Commission revenue 15,879,099 4,525,861 6,105,510 1,995,396
Other revenue 618,546 303,307 508,313 101,978
-------------- --------------- -------------- ---------------
Total premiums earned and other 143,702,315 33,984,311 45,700,039 19,304,868
revenues -------------- --------------- -------------- ---------------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 37,939,183 12,795,083 13,072,906 6,846,600
General and administrative expenses 34,227,989 8,735,407 12,923,516 6,667,895
-------------- --------------- -------------- ---------------
Total operating costs and 72,167,172 21,530,490 25,996,422 13,514,495
expenses -------------- --------------- -------------- ---------------
INCOME BEFORE INCOME TAXES 71,535,143 12,453,821 19,703,617 5,790,373
-------------- --------------- -------------- ---------------
Income taxes, current 31,708,367 7,479,177 8,602,743 4,863,244
Income taxes, deferred (3,912,189) (4,075,283) (2,709,828) (2,836,613)
-------------- --------------- -------------- ---------------
Income taxes, net 27,796,178 3,403,894 5,892,915 2,026,631
-------------- --------------- -------------- ---------------
NET INCOME $ 43,738,965 $ 9,049,927 $ 13,810,702 $ 3,763,742
============== =============== ============== ===============
INCOME PER COMMON SHARE:
Basic $ 1.23 $ 0.26 $ 0.39 $ 0.11
============== =============== ============== ===============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 35,528,000 34,409,000 35,763,000 34,891,000
============== =============== ============== ===============
INCOME PER COMMON SHARE:
Diluted $ 1.06 $ 0.24 $ 0.33 $ 0.10
============== =============== ============== ===============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 41,250,000 37,170,000 41,550,000 38,194,000
============== =============== ============== ===============
CASH DIVIDEND DECLARED PER
COMMON SHARE $ 0.15 $ 0.13 $ 0.08 $ 0.05
============== =============== ============== ===============
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 CASH FLOWS
(Unaudited)
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43,738,965 $ 9,061,431
Minority interest - (11,504)
----------------- ------------------
Net income 43,738,965 9,049,927
Adjustments to reconcile net income to cash provided by
operations:
Allowance for doubful accounts (40,921) -
Amortization and depreciation 253,979 268,859
Loss on disposal of assets 27,630 15,122
Issuance of common stock as compensation 1,871,453 1,102,014
Deferred taxes (3,912,188) (4,075,283)
Tax benefit on exercise of stock options (1,143,325) -
Net change in assets and liabilities relating to operating
activities:
Reinsurance recoverables and other reinsurance receivable (40,496,927) 8,329,620
Prepaid reinsurance premiums (42,550,787) (60,605,751)
Premiums and other receivables (1,523,637) (24,116,086)
Deferred acquisition costs, net 2,106,116 (1,017,567)
Other assets 17,368 132,972
Reinsurance payable 43,519,855 68,154,665
Deferred ceding commission, net 1,506,066 (1,043,544)
Other liabilities 6,283,429 3,681,337
Accounts payable 6,734,834 (585,072)
Taxes payable 13,215,182 7,006,677
Other accrued expenses 1,316,477 5,296,595
Unpaid losses and loss adjustment expenses 3,792,006 (27,725,779)
Unearned premiums 33,058,551 115,411,337
----------------- ------------------
Net cash provided by operating activities 67,774,126 99,280,043
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (155,375) (45,173)
Building improvements (19,513) (97,875)
----------------- ------------------
Net cash used in investing activities (174,888) (143,048)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (37,462) (37,462)
Issuance of common stock 835,500 45,249
Acquisition of treasury stock (872,926) -
Tax benefit on exercise of stock options 1,143,325 -
Common stock dividend paid (4,418,746) (3,007,135)
Repayments of loans payable (12,375,692) (461,296)
Minority interest - 15,504
----------------- ------------------
Net cash used in financing activities (15,726,001) (3,445,140)
----------------- ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 51,873,237 95,691,855
CASH AND CASH EQUIVALENTS, Beginning of period 232,890,297 48,038,736
----------------- ------------------
CASH AND CASH EQUIVALENTS, End of period $ 284,763,534 $ 143,730,591
Non-cash items ================= ==================
Declared dividends payable $ 2,861,018 $ 1,747,423
================= ==================
The accompanying notes to condensed consolidated financial statements are an integral part of these statements
5
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Universal Insurance Holdings, Inc. ("Company"), its wholly owned
property and casualty insurance subsidiary, Universal Property & Casualty
Insurance Company ("UPCIC"), and other wholly owned subsidiaries including Atlas
Florida Financial Corporation (parent of Atlas Premium Finance Company), Atlas
Premium Finance Company, and the Universal Insurance Holdings, Inc. Stock
Grantor Trust. All intercompany accounts and transactions have been eliminated
in consolidation.
The accompanying 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. In addition, the
accompanying financial statements have been prepared in accordance with the
instructions to Form 10-QSB and Regulation S-B. Accordingly, they omit or
condense certain footnotes and other information normally included in financial
statements prepared in conformity with GAAP and thus should be read in
conjunction with the audited consolidated financial statements and notes
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 2006.
The condensed consolidated balance sheet of the Company as of September 30,
2007, the related condensed consolidated statements of operations for the nine-
month and three-month periods ended September 30, 2007 and 2006 and condensed
consolidated statements of cash flows for the nine-month periods ended September
30, 2007 and 2006 are unaudited. There were no items comprising comprehensive
income for the nine months ended September 30, 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 a new accounting pronouncement as
noted below.
The preparation of financial statements in conformity with GAAP 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. The accompanying 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.
Results of operations for the nine months ended September 30, 2007 are not
necessarily indicative of the results for the year ending December 31, 2007.
6
SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING PRONOUNCEMENTS
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
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
September 30, 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 the Company's 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 the Company's estimates associated with those policies.
7
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 be required to 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 September 30, 2007, UPCIC had direct unearned premiums totaling
$263,404,817 and in-force premiums of approximately $526,000,000.
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. Deferred policy acquisition costs are reviewed to determine if
they are recoverable from unearned premiums, and if not, are charged to expense.
For the nine-month periods ended September 30, 2007 and September 30, 2006,
respectively, no amounts of deferred policy acquisition costs were charged to
expense as a result of the recoverability testing. As of September 30, 2007,
deferred ceding commissions exceeded deferred policy acquisition costs and were
recorded as a net liability in the amount of $1,506,066.
An allowance for doubtful accounts is established when it becomes evident that
collection is doubtful, typically after 90 days past due. As of September 30,
2007, UPCIC had recorded an allowance for doubtful accounts in the amount of
$568,057.
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.
Management continues to take action to strengthen UPCIC's financial condition.
On the Company's Homeowner's program ("HO"), premium rate increases averaging
10.1% and 13.2% statewide were approved by the Florida Office of Insurance
Regulation ("OIR") and implemented with effective dates in May 2006 and October
2006, respectively. On the Company's Dwelling Fire program ("DP"), premium rate
increases averaging 11.2% and 30.6% statewide were also approved by the OIR and
implemented with effective dates in May 2006 and September 2006, respectively.
Further, a rate decrease averaging 11.1% statewide (HO) and 3.2% statewide (DP)
reflecting anticipated reinsurance savings was approved by the OIR and
implemented in UPCIC's rates on June 1, 2007. Additionally, in September 2007,
8
the Company applied to the OIR for a rate decrease of 0.60% statewide (HO) and a
rate increase of 14.09% statewide (DP), with effective dates in UPCIC's rates in
January 2008 for new business and February 2008 for renewal business for both
the HO and DP programs. Both rate changes are subject to approval by the OIR.
UPCIC uses proprietary systems 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. In addition, UPCIC monitors
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.
Management believes these processes, and results attributable to them, will
continue to allow UPCIC to operate profitably. However, there can be no
assurance of the ultimate success of the Company's plans, or that the Company
will be able to maintain profitability.
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 UPCIC's risk of
exposure in the event of catastrophic losses, it also reduces UPCIC's potential
for greater profits should such catastrophic events fail to occur. The Company
submits the UPCIC reinsurance program for regulatory review to the OIR.
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 commencing
with the June 1, 2006 renewal which the Company had planned and factored into
its policy pricing. Effective June 1, 2006, UPCIC reduced the rate of cession on
its quota share reinsurance. Quota share reinsurance is used primarily to
increase UPCIC'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 UPCIC's quota share reinsurance from 80% to 50%, UPCIC has retained and
earned more premiums UPCIC writes, but has also retained more related losses.
UPCIC's increased exposure to potential losses could have a material adverse
effect on the business, financial condition and results of operations of UPCIC
and the Company. During 2006 and the nine months ended September 30, 2007, UPCIC
did not experience any catastrophic events.
9
Effective June 1, 2007, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with various reinsurers. Under the quota share
treaty, through May 31, 2008, UPCIC cedes 50% of its gross written premiums,
losses and LAE for policies with coverage for wind risk with a ceding commission
payable to UPCIC equal to 31% of ceded gross written premiums. In addition, the
quota share treaty has a limitation for any one occurrence of 40% of gross
premiums earned, not to exceed $100,000,000 (of which UPCIC's net liability in a
first event scenario is $45,000,000, in a second event scenario is $9,300,000
and in a third event scenario is $9,300,000) and a limitation from losses
arising out of events that are assigned a catastrophe serial number by the
Property Claims Services ("PCS") office of 112% of Gross Premiums Earned, not to
exceed $280,000,000. Effective June 1, 2007 through May 31, 2008, 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, 2007 through May 31, 2008, 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 excess of $200,000 for each
property loss. A $2,100,000 aggregate limit applies to the term of the
contract.
Effective June 1, 2007 through May 31, 2008, under an excess catastrophe
contract, UPCIC obtained catastrophe coverage of $576,000,000 in excess of
$100,000,000 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, 2007 through May 31, 2008, UPCIC purchased a
reinstatement premium protection contract which reimburses UPCIC for its cost to
reinstate the catastrophe coverage of the first $426,000,000 in excess of
$100,000,000. Effective June 1, 2007, UPCIC also obtained subsequent catastrophe
event excess of loss reinsurance to cover certain levels of UPCIC'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 90% of $1,065,387,373 in excess of
$208,693,813. Also at June 1, 2007, the FHCF made available, and UPCIC
obtained, $10,000,000 of additional catastrophe excess of loss coverage with one
free reinstatement of coverage to carriers qualified as Limited Apportionment
Companies or companies that participated in the Insurance Capital Build-Up
Incentive Program, such as UPCIC. This particular layer of coverage is
$10,000,000 in excess of $18,600,000. UPCIC also purchased Florida Hurricane
Catastrophe Fund Recovery Shortfall Reinsurance in the event FHCF cannot fulfill
its payment obligations for the 2007-2008 Hurricane Season.
The total cost of UPCIC's underlying catastrophe private reinsurance program
effective June 1, 2007 through May 31, 2008 is $113,178,000 of which UPCIC's
cost is 50%, or $56,589,000, and the quota share reinsurers' cost is the
remaining 50%. In addition, UPCIC purchases reinstatement premium protection as
described above which amounts to $14,213,402 of cost. The cost of subsequent
event catastrophe reinsurance is $11,184,125. The estimated premium UPCIC plans
to cede to the FHCF for the 2007 hurricane season is $42,853,590 of which
UPCIC's cost is 50%, or $21,426,795, and the quota share reinsurers' cost is the
remaining 50%. UPCIC is also participating in the additional coverage option for
Limited Apportionment Companies or companies that participated in the Insurance
Capital Build-Up Incentive Program offered by the FHCF, the premium for which is
$5,000,000 of which UPCIC's cost is 50%, or $2,500,000, and the quota share
10
reinsurers' cost is the remaining 50%. The total cost of UPCIC's Florida
Hurricane Catastrophe Fund Recovery Shortfall Reinsurance is $7,715,520, of
which UPCIC's cost is 50%, or $3,857,760.
Effective June 1, 2007, the Company obtained $30,000,000 of coverage via a
catastrophe risk-linked transaction product in the event UPCIC's catastrophe
coverage and FHCF coverage are exhausted. The total cost of the Company's risk-
linked transaction product is $3,525,000.
UPCIC is responsible for losses related to catastrophic events with incurred
losses in excess of coverage provided by UPCIC's reinsurance program which could
have a material adverse effect on the UPCIC's and the Company's business,
financial condition and results of operations.
The reinsurance arrangements had the following effect on certain items in the
accompanying consolidated financial statements:
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
--------------------------------------------- --------------------------------------------
Premiums Premiums Loss and Loss Premiums Premiums Loss and Loss
Written Earned Adjustment Written Earned Adjustment
-------- ---------- Expenses --------- --------- Expenses
------------ -------------
Direct $381,318,190 $348,259,639 $73,524,183 $230,431,095 $115,019,758 $45,100,609
Ceded (271,847,589) (229,296,802) (35,585,000) (148,517,735) (87,911,989) (32,305,526)
------------- ------------- ------------ ------------- ------------ ------------
Net $109,470,601 $118,962,837 $37,939,183 $81,913,360 $27,107,769 $12,795,083
============ ============ =========== ============ ============ ===========
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
--------------------------------------------- --------------------------------------------
Premiums Premiums Loss and Loss Premiums Premiums Loss and Loss
Written Earned Adjustment Written Earned Adjustment
--------- --------- Expenses -------- -------- Expenses
-------------
Direct $118,754,920 $127,235,717 $24,824,144 $116,427,419 $55,698,634 $15,995,128
Ceded (86,699,581) (90,916,255) (11,751,238) (70,571,961) (39,569,331) (9,148,528)
------------- ------------- ------------ ------------- ------------ ------------
Net $32,055,339 $36,319,462 $13,072,906 $45,855,458 $16,129,303 $6,846,600
============ ============ =========== ============ ============ ===========
OTHER AMOUNTS:
September 30, 2007
-------------------
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses $48,260,230
Other reinsurance receivable 67,791,426
------------
Reinsurance recoverables and other reinsurance receivable $116,051,656
============
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, 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
11
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.
UPCIC may also be subject to assessments by Citizens Property Insurance
Corporation ("Citizens"), the state-run insurer of last resort, and the FHCF as
a result of operating deficiencies related to windstorm catastrophes. In
addition, the 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
are 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 June 12, 2006, the OIR ordered an emergency FHCF assessment of 1% of direct
premiums written for policies with effective dates beginning January 1, 2007,
which UPCIC is currently collecting from policyholders, as the assessment is to
policyholders, not UPCIC. This assessment was a result of catastrophe losses
Florida experienced in 2004 and 2005. The assessments collected from
policyholders are remitted to FHCF quarterly.
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 UPCIC'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
direct premiums 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.
During its meeting on October 11, 2007, the Board of Directors of FIGA again
determined the need for an assessment upon its member companies, which the OIR
approved on October 29, 2007. The Board decided on an assessment on member
companies of 2% of the Florida net direct premiums for the calendar year 2006.
UPCIC's participation in this assessment totaled $7,435,090. Pursuant to Florida
12
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 quarter
ended September 30, 2007 and will implement the recoupment in connection with
this assessment in 2008, making this, ultimately, a revenue-neutral event.
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
nine-month and three-month periods ended September 30, 2007 and September 30,
2006, respectively, follows:
Nine Months Ended
-----------------
September 30, September 30,
------------- -------------
2007 2006
---- ----
Number of shares used in calculating basic EPS 35,528,000 34,409,000
Effect of assumed conversion of common stock equivalents 5,722,000 2,761,000
---------- ----------
Number of shares used in calculating diluted EPS 41,250,000 37,170,000
Three Months Ended
------------------
September 30, September 30,
------------- -------------
2007 2006
---- ----
Number of shares used in calculating basic EPS 35,763,000 34,891,000
Effect of assumed conversion of common stock equivalents 5,787,000 3,303,000
---------- ----------
Number of shares used in calculating diluted EPS 41,550,000 38,194,000
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 Operations 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
13
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
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 nine months ended September 30, 2007 are $1,660,493 and
$996,296 lower, respectively, and for the three months ended September 30, 2007
are $980,582 and $588,350 lower, respectively, than if it had continued to
account for share-based compensation under APB 25. In addition, during the nine
months ended September 30, 2007, the Company issued common stock valued at
$925,000 as compensation. This expense is being recognized over a three-year
vesting period which commenced March 14, 2007.
At September 30, 2007, there were options outstanding to purchase 7,105,000
shares of common stock with an intrinsic value of $34,253,700, a weighted
average remaining contract term of 3.47 years and a weighted exercise price of
$2.32. Of the total options outstanding, options to purchase 3,780,000 shares of
common stock are currently exerciseable with an intrinsic value of $22,605,700,
a weighted average remaining contract term of 3.46 years, and a weighted average
exercise price of $1.16. Options to purchase 2,010,000 shares of common stock
were granted during the nine months ended September 30, 2007 at a weighted
average exercise price of $5.89. Options to purchase 750,000 shares of common
stock were exercised during the nine months ended September 30, 2007. On July
12, 2007, the Company granted options to purchase an aggregate of 1,575,000
shares of common stock to the Company's directors and executive officers. All of
the options granted on July 12, 2007 vest on July 12, 2008, have an exercise
price of $6.50 per share, and expire on July 12, 2012. The options granted to
Bradley I. Meier, the Company's President and Chief Executive Officer, and to
Sean P. Downes, the Company's Chief Operating Officer and Senior Vice President,
are only exercisable on such date or dates as the fair market value (as defined
in their respective option agreements) of the Company's common stock is and has
been at least one hundred fifty percent (150%) of the exercise price for the
previous twenty (20) consecutive trading days.
At September 30, 2007, there were warrants outstanding and currently exercisable
to purchase 850,000 shares of common stock with an intrinsic value of
$5,458,500, a weighted average remaining contract term of 2.74 years and a
weighted average exercise price of $0.72. There were no warrants exercised
during the nine months ended September 30, 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.
14
The fair value of options granted in 2007 was estimated assuming the following:
weighted average expected life of 2.45 years, dividend yield of 4.0 percent,
risk-free interest rate of 4.86 percent, and expected volatility of 70.0
percent. 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 value of options granted prior to adoption of SFAS 123(R) 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.
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
nine months ended September 30, 2007 and 2006, the Company expensed claims
adjusting fees of $615,237 and $630,429, respectively, to Downes and Associates.
In September 2006, the Company initiated the process of acquiring all of the
outstanding common stock of Atlas Florida Financial Corporation, which owned 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 approximated Sterling's book value. The Company is in
the process of seeking approval of the acquisition from the OIR. Sterling has
been renamed Atlas Premium Finance Company.
NOTE 7 -- STOCK ISSUANCES
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 consideration for services
rendered pursuant to the terms of an employee agreement. The shares will vest
over a three year period. On May 1, 2007, the Company issued 22,143 shares of
restricted common stock at a price of $1.87 per share, on a "cashless" basis, to
James M. Lynch, CFO of the Company, pursuant to Mr. Lynch's exercise of stock
options. Also on May 1, 2007, the Company issued 387,234 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Norman M.
Meier, a director of the Company, pursuant to Mr. Meier's exercise of stock
options. Also on May 1, 2007, the Company issued 77,447 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Joel
Wilentz, a director of the Company, pursuant to Mr. Wilentz's exercise of stock
options. Also on May 1, 2007, the Company issued 77,447 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Reed
Slogoff, a director of the Company, pursuant to Mr. Slogoff's exercise of stock
options. Unless otherwise specified, such as in the case of the exercise of
stock options or warrants, the per share prices were determined using the
15
closing price of the Company's common stock as quoted on the OTC Bulletin Board
or the American Stock Exchange ("AMEX") and the shares were issued in private
transactions pursuant to Section 4(2) of the Securities Act of 1933, as amended.
NOTE 8 -- PROVISION FOR INCOME TAX EXPENSE
A provision for income tax expense of $27,796,178 was recorded for the nine
months ended September 30, 2007 as a result of current profitable operations. A
provision for income tax expense of $3,403,894 was recorded for the nine months
ended September 30, 2006 due to operating loss carry-forwards that existed at
that time.
NOTE 9 - SUBSEQUENT EVENTS
On October 4, 2007, the Company's Board of Directors declared a dividend of $.09
per share on its common stock. The dividend is payable on April 8, 2008 to
stockholders of record as of March 10, 2008.
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
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 and in
the section below entitled "Factors Affecting Operation Results and Market Price
of Stock," 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
16
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.
UPCIC is in the process of preparing Certificate of Authority (COA) applications
to write homeowners insurance policies in five additional states. Those states
are Texas, Hawaii, Georgia, South Carolina and North Carolina. UPCIC has
notified the Florida OIR that it intends to file COA applications in the
additional states. In addition, UPCIC is in the process of preparing an
application to become a National Flood Insurance Program (NFIP) servicing agent.
FINANCIAL CONDITION
Cash and cash equivalents at September 30, 2007 aggregated $284,763,534. 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.
The Company believes that premiums will be sufficient to meet the Company'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 September 30, 2007, the Company's investments were
comprised of $246,764,765 in cash and overnight repurchase agreements,
$37,998,769 in a money market account, and $3,186,526 in real estate consisting
of a building purchased by UPCIC that the Company is currently using as its home
office.
As of September 30, 2007, UPCIC was servicing approximately 365,000 homeowners'
and dwelling fire insurance policies and in-force premiums of approximately
$526,000,000.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2006
Net income increased 383.3% to $43,738,965 for the nine-month period ended
September 30, 2007 from $9,049,927 for the nine-month period ended September 30,
2006. On October 11, 2007, the Board of Directors of the Florida Insurance
Guaranty Association ("FIGA") determined the need for an assessment upon member
companies of 2.0% of the Florida net direct premiums for the calendar year 2006.
UPCIC's participation in this assessment totaled $7,435,090, which reduced net
income by $4,567,004. Excluding the FIGA assessment, the Company's net income
was $48,305,969 for the nine-month period, while earnings per diluted share were
$1.17 for the period versus $0.24 in the same period last year. The
reconciliation of Non-GAAP Measures to GAAP, as required by SEC Regulation G, is
set forth below in the section titled "Reconciliation of Non-GAAP Measures to
GAAP."
Gross premiums written increased 65.5% to $381,318,190 for the nine-month period
ended September 30, 2007 from $230,431,095 for the nine-month period ended
September 30, 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.
17
Net premiums earned increased 338.9% to $118,962,837 for the nine-month period
ended September 30, 2007 from $27,107,769 for the nine-month period ended
September 30, 2006. The increase is due to an increase in new business, premium
rate increases and changes in the reinsurance program as described in Note 3 -
Reinsurance.
Investment income increased 302.6% to $8,241,833 for the nine-month period ended
September 30, 2007 from $2,047,374 for the nine-month period ended September 30,
2006. The increase is primarily due to higher investment balances and a higher
interest rate environment during the nine-month period ended September 30, 2007.
Commission revenue increased 250.9% to $15,879,099 for nine-month period ended
September 30, 2007 from $4,525,861 for the nine-month period ended September 30,
2006. Commission revenue is comprised principally of the managing general
agent's policy fee income and service fee income on all new and renewal
insurance policies, reinsurance commission sharing agreements, and commissions
generated from agency operations. The increase is primarily attributable to an
increase in managing general agent's policy fee income and a greater amount of
reinsurance commission sharing.
Other revenue increased 103.9% to $618,546 for the nine-month period ended
September 30, 2007 from $303,307 for the nine-month period ended September 30,
2006. The increase is primarily due to fees earned on new payment plans offered
to policyholders.
Net losses and LAE incurred increased 196.5% to $37,939,183 for the nine-month
period ended September 30, 2007 from $12,795,083 for the nine-month period ended
September 30, 2006. Losses and LAE incurred increased as a result of increased
premium volume and changes in UPCIC's reinsurance program. The Company's net
loss ratio for the nine-month period ended September 30, 2007 was 31.9% compared
to 47.2% for the nine-month period ended September 30, 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 nine
months ended September 30, 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 294.3% to $34,227,989 for the
nine-month period ended September 30, 2007 from $8,735,407 for the nine-month
period ended September 30, 2006. The increase in general and administrative
expenses was due to several factors. Commission expense increased by
approximately $19,700,000 due to the increase in direct written premium. The
increase in commission expense was offset by an increase in ceding commissions
of approximately $24,200,000 due to an increase in ceded written premium and a
18
higher commission rate. Ceded written premium increased due to the increase in
direct written premium as well as changes in UPCIC's reinsurance program.
Compensation expense increased approximately $8,200,000 as the Company hired
additional staff and increased incentive compensation in order to retain
existing staff to support the substantial growth of the Company. Inspection
expense increased approximately $500,000 due to the increase in the number of
policies underwritten. Insurance expense increased approximately $3,400,000 due
to the purchase of a catastrophe risk-linked transaction product that protects
the Company from catastrophic losses. There was an increase in expenses of
approximately $3,100,000 for the change in deferred policy acquisition costs,
net of deferred ceding commissions, which relates to an increase in direct and
ceded unearned premiums as well as changes in UPCIC's reinsurance program.
Premium taxes increased nearly $2,200,000 as a result of the increase in direct
written premium. Expenses related to assessments increased approximately
$6,100,000 due to the 2007 FIGA assessment of approximately $7,400,000 and
recoupment of other assessments. Interest expense increased approximately
$1,200,000 due to outstanding debt balances on the Florida State Board of
Administration surplus note and Benfield Greig (Holdings), Inc. secured
promissory note described in the "Liquidity and Capital Resources" section
below. Other general and administrative expenses increased approximately
$5,300,000 primarily due to increases in premium volume.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2006
Net income increased 266.9% to $13,810,702 for the three-month period ended
September 30, 2007 from $3,763,742 for the three-month period ended September
30, 2006. On October 11, 2007, the Board of Directors of FIGA determined the
need for an assessment upon member companies of 2.0% of the Florida net direct
premiums for the calendar year 2006. UPCIC's participation in this assessment
totaled $7,435,090, which reduced net income by $4,567,004. Excluding the FIGA
assessment, the Company's net income was $18,377,706 for the three-month period,
while earnings per diluted share were $0.44 for the period versus $0.10 in the
same period last year. The reconciliation of Non-GAAP Measures to GAAP, as
required by SEC Regulation G, is set forth below in the section titled
"Reconciliation of Non-GAAP Measures to GAAP."
Gross premiums written increased 2.0% to $118,754,920 for the three-month period
ended September 30, 2007 from $116,427,419 for the three-month period ended
September 30, 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.
Net premiums earned increased 125.2% to $36,319,462 for the three-month period
ended September 30, 2007 from $16,129,303 for the three-month period ended
September 30, 2006. The increase is due to an increase in new business, premium
rate increases and changes in the reinsurance program as described in Note 3 -
Reinsurance.
Investment income increased 156.6% to $2,766,754 for the three-month period
ended September 30, 2007 from $1,078,191 for the three-month period ended
September 30, 2006. The increase is primarily due to higher investment balances
19
and a higher interest rate environment during the three-month period ended
September 30, 2007.
Commission revenue increased 206.0% to $6,105,510 for three-month period ended
September 30, 2007 from $1,995,396 for the three-month period ended September
30, 2006. Commission revenue is comprised principally of the managing general
agent's policy fee income and service fee income on all new and renewal
insurance policies, reinsurance commission sharing agreements, and commissions
generated from agency operations. The increase is primarily attributable to
greater reinsurance commission sharing and to an increase in managing general
agent's policy fee income.
Other revenue increased 398.5% to $508,313 for the three-month period ended
September 30, 2007 from $101,978 for the three-month period ended September 30,
2006. The increase is primarily due to fees earned on new payment plans offered
to policyholders.
Net losses and LAE incurred increased 90.9% to $13,072,906 for the three-month
period ended September 30, 2007 from $6,846,600 for the three-month period ended
September 30, 2006. Losses and LAE incurred increased as a result of increased
premium volume and changes in UPCIC's reinsurance program. The Company's net
loss ratio for the three-month period ended September 30, 2007 was 36.0%
compared to 42.4% for the three-month period ended September 30, 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 the three-month
periods ended September 30, 2007 and September 30, 2006, respectively, 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 93.8% to $12,923,516 for the
three-month period ended September 30, 2007 from $6,667,895 for the three-month
period ended September 30, 2006. The increase in general and administrative
expenses was due to several factors. Commission expense increased by
approximately $300,000 due to the increase in direct written premium.
Compensation expense increased nearly $2,700,000 as the Company hired additional
staff and increased incentive compensation in order to retain existing staff to
support the substantial growth of the Company. There was a decrease in expenses
of approximately $2,500,000 for the change in deferred policy acquisition costs,
net of deferred ceding commissions, which relates to an increase in direct and
ceded unearned premiums as well as changes in UPCIC's reinsurance program.
Expenses related to assessments increased approximately $7,900,000 primarily as
a result of the 2007 FIGA assessment.
20
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
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 nine-month period ended September 30, 2007, cash flows provided by
operating activities were $67,774,126. 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.
The Company believes that its current capital resources are sufficient to
support current operations and expected growth for at least twelve months.
COMPANY BORROWINGS
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 28, 2007,
these loans were 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 exercise price of $.05 per share, expiring in June
2010. These transactions were approved by the Company's Board of Directors.
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
$92.0 million. The $25.0 million is invested in a treasury money market
account.
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
21
note. As of September 30, 2007, the Company is in compliance with each of the
aforementioned loan covenants except for the Minimum Writing Ratio.
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. For the six-month period ended June 30, 2007, the Company's
net written premium to surplus ratio, as defined under the terms of the surplus
note agreement, was 1.83:1. For the nine-month period ended September 30, 2007,
the Company's net written premium to surplus ratio, as defined under the terms
of the surplus note agreement, was 1.55:1.
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 accrued at the rate of 12.75% per annum. The
outstanding principal was 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 of their
reinsurance placements for the contract year beginning on June 1, 2007. The
Company made all payments in a timely manner and paid the final installment on
July 18, 2007. Under the terms of the Secured Promissory Note, Benfield Greig
(Holdings), Inc. agreed to refund a portion of the interest paid on the note if
the Company fulfilled all its material obligations under the related broker
agreements. On July 27, 2007, the Company received a refund of interest from
Benfield Greig (Holdings), Inc. in the amount of $280,500 that reduced the
effective interest rate on the note to 8.25% per annum.
There can be no assurance that the above described transactions 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.
AVAILABLE CASH
The balance of cash and cash equivalents at September 30, 2007 is $284,763,534,
most of which is available to pay claims. 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
22
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 $92,031,742 at September
30, 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
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.
CASH DIVIDENDS
On March 15, 2007, the Company's Board of Directors declared a dividend of $.07
per share on its outstanding common stock which was paid on August 10, 2007 to
the shareholders of record of the Company at the close of business on July 20,
2007. During the second quarter, the Company paid a dividend of $.05 per share
of outstanding common stock that was accrued at December 31, 2006. The aggregate
amount of the dividend was $1,747,423. On July 12, 2007, the Company's Board of
Directors declared a dividend of $.08 per share on its common stock. The
aggregate amount of the dividend was $2,861,018 and was paid on October 22, 2007
to stockholders of record as of September 27, 2007. On October 4, 2007, the
Company's Board of Directors declared a dividend of $.09 per share on its common
stock. The dividend is payable on April 8, 2008 to stockholders of record as of
March 10, 2008.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the nine months ended
September 30, 2007.
RECONCILIATION OF NON-GAAP MEASURES TO GAAP
The following table shows the effect on net income and income per common share
for the nine-month and three-month periods ended September 30, 2007,
respectively, of the aforementioned 2007 FIGA assessment.
23
UNIVERSAL INSURANCE HOLDINGS, INC.
REGULATION G: RECONCILIATION OF NON-GAAP MEASURES TO GAAP
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
2007 2006 2007 2006
---- ---- ---- ----
Income before income taxes per GAAP $ 71,535,143 $ 12,453,821 $ 19,703,617 $ 5,790,373
Plus: 2007 FIGA assessment (Non-GAAP) 7,435,090 - 7,435,090 -
-------------- -------------- ---------------- ------------
Income before income taxes and 2007
FIGA assessment (Non-GAAP) 78,970,233 12,453,821 27,138,707 5,790,373
Income taxes on income before income
taxes and 2007 FIGA assessment 30,664,264 3,403,894 8,761,001 2,026,631
(Non-GAAP) -------------- -------------- ---------------- ------------
Net income before 2007 FIGA
assessment, net of income
taxes (Non-GAAP) $ 48,305,969 $ 9,049,927 $ 18,377,706 $ 3,763,742
============== ============== ================ ============
Income per Common Share - Basic:
-------------------------------
Net income before 2007 FIGA
assessment, net of income
taxes (Non-GAAP) $ 1.36 $ 0.26 $ 0.52 $ 0.11
Less: 2007 FIGA assessment after tax
per share (Non-GAAP) $ 0.13 $ - $ 0.13 $ -
-------------- -------------- ---------------- ------------
Basic (GAAP) $ 1.23 $ 0.26 $ 0.39 $ 0.11
============== ============== ================ ============
Weighted Average Common Shares
Outstanding - Basic 35,528,000 34,409,000 35,763,000 34,891,000
Income per Common Share - Diluted:
---------------------------------
Net income before 2007 FIGA
assessment, net of income taxes
(Non-GAAP) $ 1.17 $ 0.24 $ 0.44 $ 0.10
Less: 2007 FIGA assessment after tax
per share (Non-GAAP) $ 0.11 $ - $ 0.11 $ -
-------------- -------------- ---------------- ------------
Diluted (GAAP) $ 1.06 $ 0.24 $ 0.33 $ 0.10
============== ============== ================ ============
Weighted Average Common Shares
Outstanding - Diluted 41,250,000 37,170,000 41,550,000 38,194,000
24
FACTORS AFFECTING OPERATION RESULTS AND MARKET PRICE OF STOCK
The Company and its subsidiaries operate in a rapidly changing environment that
involves a number of uncertainties, some of which are beyond the Company's
control. This report contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The words "expect,"
"estimate," "anticipate," "believe," "intend," "plan" and similar expressions
and variations thereof are intended to identify forward-looking statements. The
Company's actual results could differ materially from those set forth in or
implied by any forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those
uncertainties discussed below as well as those discussed elsewhere in this
report.
NATURE OF THE COMPANY'S BUSINESS
Factors affecting the sectors of the insurance industry in which the Company
operates may subject the Company to significant fluctuations in operating
results. These factors include competition, catastrophe losses and general
economic conditions including interest rate changes, as well as legislative
initiatives, the regulatory environment, the frequency of litigation, the size
of judgments, severe weather conditions, climate changes or cycles, the role of
federal or state government in the insurance market, judicial or other
authoritative interpretations of laws and policies, and the availability and
cost of reinsurance. Specifically, the homeowners' insurance market, which
comprises the bulk of the Company's current operations, is influenced by many
factors, including state and federal laws, market conditions for homeowners'
insurance and residential plans. Additionally, an economic downturn could result
in fewer home sales and less demand for new homeowners seeking insurance.
Historically, the financial performance of the property and casualty insurance
industry has tended to fluctuate in cyclical patterns of soft markets followed
by hard markets. Although an individual insurance company's financial
performance is dependent on its own specific business characteristics, the
profitability of most property and casualty insurance companies tends to follow
this cyclical market pattern.
The Company believes that a substantial portion of its future growth will depend
on its ability, among other things, to successfully implement its business
strategy, including expanding the Company's product offering by underwriting and
marketing additional insurance products and programs through its distribution
network, further penetrating the Florida market by establishing relationships
with additional independent agents in order to expand its distribution network
and to further disperse its geographic risk and expanding into other
geographical areas outside the state of Florida. Any future growth is contingent
on various factors, including the availability of adequate capital, the
Company's ability to hire and train additional personnel, regulatory
requirements, the competitive environment, and rating agency considerations.
There is no assurance that the Company will be successful in expanding its
business, that the existing infrastructure will be able to support additional
expansion or that any new business will be profitable. Moreover, as the Company
expands its insurance products and programs and the Company's mix of business
changes, there can be no assurance that the Company will be able to maintain or
improve its profit margins or other operating results. There can also be no
assurance that the Company will be able to obtain the required regulatory
25
approvals to offer additional insurance products. UPCIC also is required to
maintain minimum surplus to support its underwriting program. The surplus
requirement affects UPCIC's potential growth.
MANAGEMENT OF EXPOSURE TO CATASTROPHIC LOSSES
UPCIC is exposed to potentially numerous insured losses arising out of single or
multiple occurrences, such as natural catastrophes. As with all property and
casualty insurers, UPCIC expects to and will incur some losses related to
catastrophes and will price its policies accordingly. UPCIC's exposure to
catastrophic losses arises principally out of hurricanes and windstorms. Through
the use of standard industry modeling techniques that are susceptible to change,
UPCIC manages its exposure to such losses on an ongoing basis from an
underwriting perspective. UPCIC also protects itself against the risk of
catastrophic loss by obtaining reinsurance coverage as of the beginning of
hurricane season on June 1 of each year. For the 2007 hurricane season, UPCIC
purchased reinsurance coverage up to approximately the "150 year Probable
Maximum Loss" ("PML"). UPCIC's reinsurance program consists of excess of loss,
quota share and catastrophe reinsurance for multiple hurricanes. UPCIC's
catastrophe reinsurance program currently covers three events. However, UPCIC
may not buy enough reinsurance to cover multiple storms going forward or be able
to timely obtain reinsurance. In addition, UPCIC is responsible for losses
related to catastrophic events with incurred losses in excess of coverage
provided by UPCIC's reinsurance program such as losses beyond approximately the
150 year PML, which could have a material adverse effect on the business,
financial condition and results of operations of UPCIC and the Company.
RELIANCE ON THIRD PARTIES AND REINSURERS
UPCIC is dependent upon third parties to perform certain functions including,
but not limited to the purchase of reinsurance and risk management analysis.
UPCIC also relies on reinsurers to limit the amount of risk retained under its
policies and to increase its ability to write additional risks. UPCIC's
intention is to limit its exposure and therefore protect its capital, even in
the event of catastrophic occurrences, through reinsurance agreements. For the
2007 hurricane season, UPCIC's reinsurance agreements transfer the risk of loss
in excess of $45,000,000 for the first event and $9,300,000 for the second and
third events up to approximately the 150 year PML as of the beginning of
hurricane season on June 1. These amounts may change in the future.
REINSURANCE
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. Reinsurance does not legally discharge an insurer from its primary
liability for the full amount of the risks it insures, although it does make the
reinsurer liable to the primary insurer. Therefore, UPCIC is subject to credit
risk with respect to its reinsurers. Management 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. A reinsurer's insolvency or inability to make payments under a
reinsurance treaty could have a material adverse effect on the financial
condition and profitability of UPCIC and the Company. In addition, while ceding
26
premiums to reinsurers reduces UPCIC's risk of exposure in the event of
catastrophic losses, it also reduces the UPCIC's potential for greater profits
should such catastrophic events fail to occur. The Company believes that the
extent of UPCIC's reinsurance is typical of a company of its size in the
homeowners insurance industry.
ADEQUACY OF LIABILITIES FOR LOSSES
The liabilities for losses and loss adjustment expenses periodically established
by UPCIC are estimates of amounts needed to pay reported and unreported claims
and related loss adjustment expenses. The estimates necessarily will be based
on certain assumptions related to the ultimate cost to settle such claims. There
is an inherent degree of uncertainty involved in the establishment of
liabilities for losses and loss adjustment expenses and there may be substantial
differences between actual losses and UPCIC's liabilities estimates. UPCIC
relies on industry data, as well as the expertise and experience of independent
actuaries in an effort to establish accurate estimates and adequate liabilities.
Furthermore, factors such as storms and weather conditions, inflation, claim
settlement patterns, legislative activity and litigation trends may have an
impact on UPCIC's future loss experience. Accordingly, there can be no assurance
that UPCIC's liabilities will be adequate to cover ultimate loss developments.
The profitability and financial condition of UPCIC and the Company could be
adversely affected to the extent that its liabilities are inadequate.
UPCIC is directly liable for loss and loss adjustment expenses ("LAE") payments
under the terms of the insurance policies that it writes. In many cases, several
years may elapse between the occurrence of an insured loss and UPCIC's payment
of that loss. As required by insurance regulations and accounting rules, UPCIC
reflects its liability for the ultimate payment of all incurred losses and LAE
by establishing a liability for those unpaid losses and LAE for both reported
and unreported claims, which represent estimates of future amounts needed to pay
claims and related expenses.
When a claim involving a probable loss is reported, UPCIC establishes a
liability for the estimated amount of UPCIC's ultimate loss and LAE payments.
The estimate of the amount of the ultimate loss is based upon such factors as
the type of loss, jurisdiction of the occurrence, knowledge of the circumstances
surrounding the claim, severity of injury or damage, potential for ultimate
exposure, estimate of liability on the part of the insured, past experience with
similar claims and the applicable policy provisions.
All newly reported claims received are set up with an initial average liability.
That claim is then evaluated and the liability is adjusted upward or downward
according to the facts and damages of that particular claim.
In addition, management provides for a liability on an aggregate basis to
provide for losses incurred but not reported. UPCIC utilizes independent
actuaries to help establish its liability for unpaid losses and LAE. UPCIC does
not discount the liability for unpaid losses and LAE for financial statement
purposes.
27
The estimates of the liability for unpaid losses and LAE are subject to the
effect of trends in claims severity and frequency and are continually reviewed.
As part of this process, UPCIC reviews historical data and considers various
factors, including known and anticipated legal developments, changes in social
attitudes, inflation and economic conditions. As experience develops and other
data become available, these estimates are revised, as required, resulting in
increases or decreases to the existing liability for unpaid losses and LAE.
Adjustments are reflected in results of operations in the period in which they
are made and the liabilities may deviate substantially from prior estimates.
Among the classes of insurance underwritten by UPCIC, the homeowners' liability
claims historically tend to have longer time lapses between the occurrence of
the event, the reporting of the claim to UPCIC and the final settlement than do
homeowners' property claims. Liability claims often involve third parties filing
suit and the ensuing litigation. By comparison, property damage claims tend to
be reported in a relatively shorter period of time with the vast majority of
these claims resulting in an adjustment without litigation.
There can be no assurance that UPCIC's liability for unpaid losses and LAE will
be adequate to cover actual losses. If UPCIC's liability for unpaid losses and
LAE proves to be inadequate, UPCIC will be required to increase the liability
with a corresponding reduction in UPCIC's net income in the period in which the
deficiency is identified. Future loss experience substantially in excess of
established liability for unpaid losses and LAE could have a material adverse
effect on UPCIC's and the Company's business, results of operations and
financial condition.
GOVERNMENT REGULATION
Florida insurance companies are subject to regulation and supervision by the
Florida Office of Insurance Regulation ("OIR"). The OIR has broad regulatory,
supervisory and administrative powers. Such powers relate, among other things,
to the granting and revocation of licenses to transact business; the licensing
of agents (through the Department of Financial Services); the standards of
solvency to be met and maintained; the nature of, and limitations on,
investments; approval of policy forms and rates; review of reinsurance
contracts; periodic examination of the affairs of insurance companies; and the
form and content of required financial statements. Such regulation and
supervision are primarily for the benefit and protection of policyholders and
not for the benefit of investors.
In addition, the Florida legislature and the National Association of Insurance
Commissioners from time to time consider proposals that may affect, among other
things, regulatory assessments and reserve requirements. The Company cannot
predict the effect that any proposed or future legislation or regulatory or
administrative initiatives may have on the financial condition or operations of
UPCIC or the Company.
UPCIC will become subject to other states' laws and regulations as it seeks
authority to transact business in states other than Florida.
28
LEGISLATIVE INITIATIVES
The State of Florida operates Citizens Property Insurance Corporation
("Citizens") to provide insurance to Florida homeowners in high-risk areas and
others without private insurance options. As of September 30, 2007, there were
1,379,847 Citizens policies in force. In May 2007, the State of Florida passed
legislation that freezes property insurance rates for Citizens customers at
December 2006 levels through December 31, 2008 and permits insurance customers
to opt into Citizens when the price of a private policy is 15% more than the
Citizens rate, compared to the previous opt-in threshold of 25%. These
initiatives, together with any future initiatives that seek to further relax
eligibility requirements or reduce premium rates for Citizens customers, could
adversely affect the ability of UPCIC and the Company to do business profitably.
In addition, the Florida legislature in 2007 expanded the capacity of the
Florida Hurricane Catastrophe Fund ("FHCF"), with the intent of reducing the
cost of reinsurance otherwise purchased by residential property insurers. If the
expanded FHCF coverage expires or if the law providing for the expanded coverage
is otherwise modified, the cost of UPCIC's reinsurance program may increase,
which could affect UPCIC's profitability until such time as UPCIC can obtain
approval of appropriate rate changes. State and federal legislation relating to
insurance is affected by a number of political and economic factors that are
beyond the control of UPCIC and the Company, and the Florida legislature and the
National Association of Insurance Commissioners from time to time consider
proposals that may affect, among other things, regulatory assessments and
reserve requirements. The Company cannot predict the effect that any proposed or
future legislation or regulatory or administrative initiatives may have on the
financial condition or operations of UPCIC or the Company.
DEPENDENCE ON KEY INDIVIDUALS
UPCIC's operations depend in large part on the efforts of Bradley I. Meier, who
serves as President of UPCIC. Mr. Meier has also served as President, Chief
Executive Officer and Director of the Company since its inception in November
1990. In addition, UPCIC's operations have become materially dependent on the
efforts of Sean P. Downes, who serves as Chief Operating Officer of UPCIC. Mr.
Downes has also served as Chief Operating Officer, Senior Vice President and
Director of the Company since January 2005 and as a Director of UPCIC since May
2003. The loss of the services provided by Mr. Meier or Mr. Downes could have a
material adverse effect on UPCIC's and the Company's financial condition and
results of operations.
COMPETITION
The insurance industry is highly competitive and many companies currently write
homeowners' property and casualty insurance. Additionally, the Company and its
subsidiaries must compete with companies that have greater capital resources and
longer operating histories. Increased competition from other private insurance
companies as well as Citizens could adversely affect the Company's ability to do
business profitably. Although the Company's pricing is inevitably influenced to
some degree by that of its competitors, management of the Company believes that
it is generally not in the Company's best interest to compete solely on price,
choosing instead to compete on the basis of underwriting criteria, its
distribution network and high quality service to its agents and insureds.
29
FINANCIAL STABILITY RATING
Financial stability ratings are an important factor in establishing the
competitive position of insurance companies and may impact an insurance
company's sales. Demotech, Inc. maintains a letter scale financial stability
rating system ranging from A" (A double prime) to L (licensed by state
regulatory authorities). In October 2007, Demotech, Inc. assigned UPCIC a
financial stability rating of A, which is the fourth highest of six rating
levels. According to Demotech, Inc., A ratings are assigned to insurers that
have "... exceptional ability to maintain liquidity of invested assets, quality
reinsurance, acceptable financial leverage and realistic pricing while
simultaneously establishing loss and loss adjustment expense reserves at
reasonable levels." With a financial stability rating of A, the Company expects
that UPCIC's property insurance policies will be acceptable to the secondary
mortgage marketplace and mortgage lenders. The rating of UPCIC is subject to at
least annual review by, and may be revised downward or revoked at the sole
discretion of, Demotech, Inc.
UPCIC's failure to maintain a commercially acceptable financial stability rating
could have a material adverse effect on the Company's ability to retain and
attract policyholders and agents. Many of the Company's competitors have ratings
higher than that of UPCIC. A downgrade in the financial stability rating of
UPCIC could have an adverse impact on its ability to effectively compete with
other insurers with higher ratings. Additionally, a withdrawal of the rating
could cause UPCIC's insurance policies to no longer be acceptable to the
secondary marketplace and mortgage lenders, which could cause a material adverse
effect of the Company's results of operations and financial position.
Demotech, Inc. bases its ratings on factors that concern policyholders and not
upon factors concerning investor protection. Such ratings are subject to change
and are not recommendations to buy, sell or hold securities.
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.
30
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company did not have any reportable legal proceedings during the nine months
ended September 30, 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 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 consideration for services
rendered pursuant to the terms of an employee agreement. The shares will vest
over a three year period. On May 1, 2007, the Company issued 22,143 shares of
restricted common stock at a price of $1.87 per share, on a "cashless" basis, to
James M. Lynch, CFO of the Company, pursuant to Mr. Lynch's exercise of stock
options. Also on May 1, 2007, the Company issued 387,234 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Norman M.
Meier, a director of the Company, pursuant to Mr. Meier's exercise of stock
options. Also on May 1, 2007, the Company issued 77,447 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Joel
Wilentz, a director of the Company, pursuant to Mr. Wilentz's exercise of stock
options. Also on May 1, 2007, the Company issued 77,447 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Reed
Slogoff, a director of the Company, pursuant to Mr. Slogoff's exercise of stock
options. Unless otherwise specified, such as in the case of the exercise of
stock options or warrants, the per share prices were determined using the
closing price of the Company's common stock as quoted on the OTC Bulletin Board
or the AMEX and the shares were issued in private transactions 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
The Company held its annual meeting of stockholders on May 18, 2007 in Fort
Lauderdale, Florida. The following proposals were adopted at the meeting.
Proposal Election of two directors by holders of Series M Preferred Stock.
1A:
Name For Withheld Abstain Broker Non-Vote
---- --- -------- ------- ---------------
Bradley I. Meier 88,690 0 0 0
Norman M. Meier 88,690 0 0 0
31
Proposal Election of four directors by holders of Common Stock, Series A
1B: Preferred Stock. and Series M Preferred Stock, voting together
as a class.
Name For Withheld Abstain Broker Non-Vote
---- --- -------- ------- ---------------
Sean P. Downes 28,846,123 132,600 0 0
Reed J. Slogoff 28,953,153 25,600 0 0
Joel M. Wilentz 28,953,153 25,600 0 0
Ozzie A. Schindler 28,953,153 25,600 0 0
Proposal 2: Amendment of the Company's certificate of incorporation to
increase the number of authorized shares of Common Stock from
50,000,000 shares to 55,000,000 shares.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
28,789,894 187,453 1,406 0
Proposal 3: Approval of the formulas used to calculate performance bonuses in
each of the amended employment agreements of the Chief Executive
Officer and the Chief Operating Officer of the Company.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
23,008,722 1,632,640 14,306 0
Proposal 4: Ratification of appointment of Blackman Kallick Bartelstein LLP
as the Company's independent registered public accounting firm for
the year ending December 31, 2007.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
28,954,803 23,850 100 0
32
ITEM 5. Other Information
None.
ITEM 6. Exhibits
Exhibit No. Exhibit
----------- -------
3.1 Registrant's Restated Amended and Restated Certificate of
Incorporation (1)
3.2 Certificate of Designation for Series A Convertible Preferred Stock
dated October 11, 1994 (2)
3.3 Certificate of Designations, Preferences, and Rights of Series M
Convertible Preferred Stock dated August 13, 1997 (3)
3.4 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated October 19, 1998 (2)
3.5 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated December 18, 2000 (2)
3.6 Certificate of Amendment of Certificate of Designations of the
Series A Convertible Preferred Stock dated October 29, 2001 (2)
3.7 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated December 7, 2005 (4)
3.8 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated May 18, 2007 (4)
3.9 Amended and Restated Bylaws (5)
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
33
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
(1) Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (File No. 33-51546) declared effective on
December 14, 1992
(2) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2002
(3) Incorporated by reference to the Registrant's Annual Report on Form
10- KSB/A for the year ended April 30, 1997
(4) Incorporated by reference to the Registrant's Quarterly Report on
Form 10- QSB for period ended June 30, 2007
(5) Incorporated by reference to the Registrant's Current Report on
Form 8-K dated January 8, 2007
34
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, 2007 /s/ Bradley I. Meier
----------------------------------------
Bradley I. Meier, President and Chief
Executive Officer
/s/ James M. Lynch
-----------------------------------------
James M. Lynch, Chief Financial Officer
35