7 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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.)
2875 N.E. 191st Street
Suite 302
Miami, Florida 33180
(Address of principal executive offices)
(305) 792-4200
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date: 35,863,219 shares of common
stock as of May 15, 2005.
Transitional Small Business Disclosure Format Yes No X
--- ---
UNIVERSAL INSURANCE HOLDINGS, INC.
----------------------------------
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
------- --------------------
The following unaudited consolidated financial statements of Universal
Insurance Holdings, Inc. have been prepared in accordance with the instructions
to Form 10-QSB and, therefore, omit or condense certain footnotes and other
information normally included in financial statements prepared in conformity
with accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments (consisting primarily of normal
recurring accruals) necessary for a fair presentation of the financial
information for the interim periods reported have been made. Results of
operations for the three months ended March 31, 2005 are not necessarily
indicative of the results for the year ending December 31, 2005.
2
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
(Unaudited)
ASSETS
Cash and cash equivalents $ 4,651,388
Reinsurance recoverables 70,920,992
Premiums and other receivables (net of allowance for
doubtful accounts of $44,500) 2,898,640
Investments in real estate 2,322,996
Property and equipment, net 860,532
Other assets 105,780
----------------
Total assets $ 81,760,328
================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 25,479,436
Unearned premiums 27,373,693
Accounts payable 2,403,748
Reinsurance payable 19,330,834
Other accrued expenses 2,349,466
Loans payable 477,029
----------------
Total liabilities 77,414,206
================
STOCKHOLDERS' EQUITY:
Cumulative convertible preferred stock, $.01 par value,
1,000,000 shares authorized, 138,640 shares issued
and outstanding, minimum liquidation preference of
$1,419,700 1,387
Common stock, $.01 par value, 40,000,000 shares
authorized, 35,003,219 shares issued and 31,894,574
shares outstanding 271,437
Common stock in treasury, at cost - 208,645 shares (101,820)
Additional paid-in capital 15,136,462
Accumulated deficit (10,961,344)
----------------
Total stockholders' equity 4,346,122
----------------
Total liabilities and stockholders' equity $ 81,760,328
================
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
3
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended
March 31, March 31,
2005 2004
---- ----
PREMIUMS EARNED AND OTHER REVENUES:
Premiums earned, net $ 1,197,562 $ 730,228
Net investment income 206,415 15,555
Commission revenue 550,575 380,028
Transaction fees 112,734 684,453
Other revenue 64,349 262,104
----------------- ----------------
Total premiums earned and other revenues 2,131,635 2,072,368
----------------- ----------------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 162,912 195,997
General and administrative expenses 967,706 1,847,706
----------------- ----------------
Total operating costs and expenses 1,130,618 2,043,703
----------------- ----------------
NET INCOME $ 1,001,017 $ 28,665
================= ================
INCOME PER COMMON SHARE:
Basic $ 0.03 $ 0.00
================= ================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 31,778,000 27,213,000
================= ================
INCOME PER COMMON SHARE
Diluted $ 0.03 $ 0.00
================= ================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 32,388,000 27,881,000
================= ================
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
4
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Three Months Ended
March 31, March 31,
2005 2004
---- ----
NET INCOME $ 1,001,017 $ 28,665
OTHER COMPREHENSIVE INCOME:
Change in net unrealized gain on
available-for-sale securities - 29,492
----------- --------
COMPREHENSIVE INCOME $ 1,001,017 $ 58,157
=========== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
5
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,001,017 $ 28,665
Adjustments to reconcile net income
to cash used in operations:
Amortization and depreciation 49,473 77,417
Issuance of common stock as compensation 27,999 72,001
Net accretion of bond premiums and discounts - 96
Net change in assets and liabilities relating to operating activities:
Reinsurance recoverables 16,552,391 1,125,622
Premiums and other receivables (1,620,129) (168,989)
Reinsurance payables (3,742,096) (516,318)
Accounts payable (1,118,763) 481,734
Other accrued expenses 738,224 14,829
Unpaid losses and loss adjustment expenses (32,392,516) (1,018,510)
Unearned premiums 3,483,832 (609,143)
Other assets 110,709 (130,726)
-------------- -------------
Net cash used in operating activities (16,909,859) (643,322)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - 193,767
Purchase of real estate (642,995) -
-------------- -------------
Net cash (used in) provided by investing activities (642,995) 193,767
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (12,486) (12,489)
Repayments of loans payable (226,851) (112,530)
-------------- -------------
Net cash used in financing activities (239,337) (125,019)
-------------- -------------
NET DECREASE IN CASH AND CASH (17,792,191) (574,574)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, Beginning of period 22,443,579 8,011,278
-------------- -------------
CASH AND CASH EQUIVALENTS, End of period $ 4,651,388 $ 7,436,704
-------------- -------------
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
6
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements include the
accounts of Universal Insurance Holdings, Inc. ("Company"), its wholly owned
subsidiary, Universal Property & Casualty Insurance Company ("UPCIC") and other
wholly owned entities and the Universal Insurance Holdings, Inc. Stock Grantor
Trust. All intercompany accounts and transactions have been eliminated in
consolidation.
The condensed consolidated balance sheet of the Company as of March 31, 2005,
the related condensed consolidated statements of operations and comprehensive
operations for the three months ended March 31, 2005 and 2004 and cash flows for
the three months ended March 31, 2005 and 2004 are unaudited. The accounting
policies followed for quarterly financial reporting are the same as those
disclosed in the Notes to Consolidated Financial Statements included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2004. The
interim financial statements reflect all adjustments (consisting primarily of
normal and recurring accruals and adjustments) which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods presented. The Company's operating results for any particular interim
period may not be indicative of results for the full year and thus should be
read in conjunction with the Company's annual statements.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
OFF-BALANCE SHEET ARRANGEMENTS. There were no off-balance sheet arrangements
during the first three months of 2005.
NEW ACCOUNTING PRONOUNCEMENTS. In December 2002, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE. This Statement, which is effective for years ending after December
15, 2002, amends Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and
provides alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, Statement No. 148 amends the disclosure requirements of Statement No.
123 regardless of the accounting method used to account for stock-based
compensation. The Company has chosen to continue to account for stock-based
compensation of employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. However, the enhanced disclosure
provisions as defined by SFAS No. 148 which became effective in the first
quarter of 2003 have been implemented. In December 2004, the FASB issued SFAS
7
No. 123 (revised 2004) ("SFAS No. 123R") SHARE-BASED PAYMENT, which replaces
SFAS. No. 123 and supersedes APB No. 25. As a result of SFAS No. 123R, the
Company will be required to recognize the cost of its stock options as an
expense in the consolidated statement of operations beginning in the first
quarter of 2006. The Company is currently assessing the impact that the adoption
of SFAS No. 123R will have on the consolidated results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. Management has reassessed the
critical accounting policies as disclosed in our 2004 Annual Report to
Stockholders on Form 10-KSB and determined that no changes, additions or
deletions are needed to the policies as disclosed. Also there were no
significant changes in our estimates associated with those policies.
RISKS AND UNCERTAINTIES. The Company's business could be affected by regulatory
and competitive restrictions on pricing for new and renewal business, the
availability and cost of catastrophic reinsurance, adverse loss experience and
federal and state legislation or governmental regulations of insurance
companies. Changes in these areas could adversely affect the Company's
operations in the future.
Management continues to take action to improve and strengthen UPCIC's financial
condition. Premium rate increases have been implemented. UPCIC changed the
geographic and coverage mix of the property insurance it writes, which is a key
determinant in the amount and pricing of reinsurance procured by UPCIC. The
Company achieved more favorable ceding commission terms on its quota share
reinsurance program effective June 1, 2004. UPCIC was also able to obtain a less
expensive catastrophic reinsurance program for 2004 - 2005.
In addition to the actions described above, effective May 1, 2004 the Company
brought in house the system it utilizes for policy issuance and administration.
The Company believes that this will enhance UPCIC's operating results through
its ability to improve and better control underwriting and loss adjusting
activities.
Management believes the implementation of, and results attributable to, the
actions described above will continue to strengthen UPCIC's surplus. However,
there can be no assurance of the ultimate success of these plans, or that the
Company will be able to achieve profitability.
NOTE 2 - 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 and began servicing
such policies. Since then, UPCIC has been renewing these policies as well as
soliciting business actively in the open market through independent agents.
Unearned premiums represent amounts that UPCIC would refund policyholders if
their policies were canceled. UPCIC determines unearned premiums by calculating
the pro-rata amount that would be due to the policyholder at a given point in
time based upon the premiums owed over the life of each policy. At March 31,
2005, the Company had unearned premiums totaling $27,373,693.
8
Premiums earned are included in earnings evenly over the terms of the policies.
UPCIC does not have policies that provide for retroactive premium adjustments.
Policy acquisition costs, consisting of commissions and other costs that vary
with and are directly related to the production of business, net of ceding
commissions, are deferred and amortized over the terms of the policies, but only
to the extent that unearned premiums are sufficient to cover all related costs
and expenses. At March 31, 2005, deferred policy acquisition costs amounted to
$0 due to the effect of deferred reinsurance commissions.
An allowance for uncollectible premiums receivable is established when it
becomes evident collection is doubtful, typically after 90 days past due. No
allowance is deemed necessary at March 31, 2005.
Loss and loss adjustment expenses ("LAE"), less related reinsurance, are
provided for as claims are incurred. The provision for unpaid loss and loss
adjustment expenses includes: (1) the accumulation of individual case estimates
for loss and LAE reported prior to the close of the accounting period; (2)
estimates for unreported claims based on past experience modified for current
trends; and (3) estimates of expenses for investigating and adjusting claims
based on past experience. The Company's direct loss ratio has decreased from the
prior year due to lower frequency and severity of claims. In addition, during
the third quarter of 2004, Florida experienced four windstorm catastrophes
(Hurricanes Charley, Frances, Ivan and Jeanne) which resulted in losses. As a
result of these storms, the Company estimated it incurred approximately
$148,500,000 in losses prior to reinsurance and $1,600,000 net of reinsurance
for the year ended December 31, 2004.
Liabilities for unpaid claims and claims adjustment expenses are based on
estimates of ultimate cost of settlement. Changes in claims estimates resulting
from the continuous review process and differences between estimates and
ultimate payments are reflected in expense for the period in which the revision
of these estimates first becomes known. UPCIC estimates claims and claims
expenses based on its historical experience and payment and reporting patterns
for the type of risk involved. These estimates are continuously reviewed by
UPCIC's management professionals and any resulting adjustments are reflected in
operations for the period in which they are determined.
Inherent in the estimates of ultimate claims are expected trends in claims
severity, frequency and other factors that may vary as claims are settled. The
amount of uncertainty in the estimates for casualty coverage is significantly
affected by such factors as the amount of historical claims experience relative
to the development period, knowledge of the actual facts and circumstances, and
the amount of insurance risk retained.
ONLINE COMMERCE OPERATIONS
The Company has formed subsidiaries that specialize, or will specialize, in
selling insurance and generating insurance leads via the Internet.
Tigerquote.com Insurance & Financial Services Group, Inc. ("Tigerquote.com") and
Tigerquote.com Insurance Solutions, Inc. were incorporated in Delaware on June
6, 1999 and August 23, 1999, respectively. Tigerquote.com is an Internet
insurance lead generating network while Tigerquote.com Insurance Solutions, Inc.
is a network of Internet insurance agencies. These entities seek to generate
income from the selling of leads and commissions on policies written.
9
CORPORATE AND OTHER OPERATIONS
Operating segments that are not individually reportable based on the current
operations in such segments, are included in Corporate and Other. The segment
currently includes the operations of Universal Insurance Holdings, Inc., Tiger
Home Services, Inc. and other entities. During 2001, the Company formed Tiger
Home Services, Inc., which furnishes pool services to homeowners. The services
are currently offered to commercial and residential customers in certain areas
in the state of Florida. During the third quarter of 2004, the Company sold the
landscaping division.
NOTE 3 - REINSURANCE
UPCIC's in-force policyholder coverage for windstorm exposures as of March 31,
2005 was approximately $7.2 billion. In the normal course of business, UPCIC
seeks to reduce the loss that may arise from catastrophes or other events that
cause unfavorable underwriting results by reinsuring certain levels of risk in
various areas of exposure with other insurance enterprises or reinsurers.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the reinsurance 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 amortized over the
effective period of the related insurance policies.
UPCIC limits the maximum net loss that can arise from large risks or risks in
concentrated areas of exposure by reinsuring (ceding) certain levels of risks
with other insurers or reinsurers, either on an automatic basis under general
reinsurance contracts known as "treaties" or by negotiation on substantial
individual risks. The reinsurance arrangements are intended to provide UPCIC
with the ability to maintain its exposure to loss within its capital resources.
Such reinsurance includes quota share, excess of loss and catastrophe forms of
reinsurance.
Effective June 1, 2004, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with various reinsurers. Under the quota share
treaty, UPCIC cedes 80% of its gross written premiums, losses and loss
adjustment expenses for policies with coverage for wind risk with a ceding
commission equal to 31% of ceded gross written premium. In addition, the quota
share treaty has a limitation for any one occurrence of $2,000,000. Effective
June 1, 2004, 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, 2004, 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 each property loss. A
$2,100,000 aggregate limit applies to the term of the contract.
Effective June 1, 2004, under an excess catastrophe contract, UPCIC obtained
catastrophe coverage of $22,200,000 in excess of $2,000,000 covering certain
loss occurrences including hurricanes. The contract contains one reinstatement.
10
Under separate excess catastrophe contracts, UPCIC obtained catastrophe coverage
of $22,200,000 in excess of $2,000,000 covering third and fourth events and
catastrophe coverage of $15,500,000 in excess of $2,000,000 covering fifth and
sixth events. UPCIC also obtained coverage from the Florida Hurricane
Catastrophe Fund. The coverage is for $59,468,708 in excess of $17,812,228.
The ceded reinsurance arrangements had the following effect on certain items in
the accompanying consolidated financial statements:
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Loss Loss
and Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $13,781,499 $10,254,796 $692,266 $6,965,205 $7,574,347 $1,213,779
Ceded (11,279,459) (9,057,234) (529,354) (6,323,515) (6,844,119) (1,017,782)
------------ ----------- --------- ----------- ----------- -----------
Net $2,502,040 $1,197,562 $162,912 $641,690 $730,228 $195,997
========== ========== ======== ======== ======== ========
Other Amounts:
March 31, 2005
--------------
Reinsurance recoverable on paid and unpaid losses
and loss adjustment expenses $ 36,316,650
Unearned premiums ceded 22,649,740
Other reinsurance receivable 11,954,602
-------------
Reinsurance recoverable $ 70,920,992
=============
UPCIC's reinsurance contracts do not relieve UPCIC from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to UPCIC; consequently, allowances are established for amounts deemed
uncollectible. No allowance is deemed necessary at March 31, 2005. UPCIC
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies. UPCIC currently has reinsurance contracts with
various reinsurers located throughout the United States and internationally.
UPCIC believes only ceding risks to reinsurers whom it considers to be
financially sound combined with distribution of reinsurance contracts adequately
minimizes UPCIC's risk from any potential operating difficulties of its
reinsurers. In addition, UPCIC does not have any unauthorized reinsurers which
have recoverable balances that are not secured by a letter of credit or that
have ceded balances payable that are greater than the amount of the recoverable.
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
11
equivalents. Diluted EPS reflects the potential dilution that could occur if
securities to issue common stock were exercised.
A reconciliation of shares used in calculating basic and diluted EPS for the
three month periods ended March 31, 2005 and March 31, 2004, respectively,
follows:
Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Basic EPS 31,778,000 27,213,000
Effect of assumed conversion of
common stock equivalents 610,000 668,000
---------- ----------
Diluted EPS 32,388,000 27,881,000
Options and warrants to purchase approximately 10,403,000 and 9,226,000 shares
of common stock were outstanding during the three months ended March 31, 2005
and March 31, 2004, respectively. Such options and warrants could potentially
dilute basic EPS in the future but were excluded from the computation of diluted
earnings per share due to being anti-dilutive.
NOTE 5 - STOCK BASED COMPENSATION
Pursuant to SFAS No. 123, the Company elected to account for stock-based
compensation plans under Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. Accordingly, no compensation expense was included
in the determination of net income for the three months ended March 31, 2005 and
March 31, 2004. Had compensation cost for stock options been recognized based on
the fair value at the grant dates for the options, consistent with the
provisions of SFAS No. 123, net income and earnings per share would have been as
indicated in the table below.
Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Net income:
As reported $ 1,001,017 $ 28,665
Compensation expense (13,520) (24,895)
------------ ---------
Pro forma 987,497 3,770
Net income per share:
Basic
As reported $0.03 $0.00
Compensation expense 0.00 0.00
------------ ---------
Pro forma $0.03 $0.00
Diluted
As reported $0.03 0.00
Compensation expense 0.00 0.00
------------ ---------
Pro forma $0.03 $0.00
12
For the purposes of estimating the compensation cost of the Company's option
grants in accordance with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model.
There were no option grants during the three months ended March 31, 2005.
NOTE 6 - SEGMENT INFORMATION
The Company and its subsidiaries operate principally in two business segments
consisting of insurance and online commerce. The insurance segment consists
primarily of underwriting through UPCIC, managing general agent operations
through Universal Risk Advisors, Inc., claims processing through Universal
Adjusting Corporation, property inspections through Universal Inspection
Corporation and marketing and distribution through Coastal Homeowners Insurance
Specialists, Inc. and Universal Florida Insurance Agency, Inc. The insurance
segment sells homeowner's insurance and includes substantially all aspects of
the insurance, distribution and claims process. The online commerce segment
consists of Internet insurance leads generation through Tigerquote.com and
commissions on policies placed by Tigerquote.com Insurance Solutions, Inc.
The accounting policies of the segments are the same as those described in the
summary of the significant accounting policies and practices. The Company
evaluates its business segments based on GAAP pretax operating earnings.
Corporate overhead expenses are allocated to business segments. Transactions
between reportable segments are accounted for at fair value.
Operating segments that are not individually reportable, based on the extent of
the current operations in such segments, are included in the "All Other"
category. The "All Other" category currently includes the operations of
Universal Insurance Holdings, Inc., Tiger Home Services, Inc. and other
entities.
Information regarding components of operations for the three months ended March
31, 2005 follows:
Three months ended March 31,
2005 2004
---- ----
Total revenue
Insurance segment $5,788,583 $2,080,023
Online commerce segment 113,419 721,839
Corporate and other 33,249 106,996
------------------ -------------------
Total operating segments 5,935,251 2,908,858
Intercompany eliminations (3,803,616) (836,490)
------------------ -------------------
Total revenues $2,131,635 $2,072,368
================== ===================
Earnings (loss) before income taxes
Insurance segment $1,481,161 $232,514
Online commerce segment (43,309) 267,435
Corporate and other (436,835) (471,284)
------------------ -------------------
Total earnings before income taxes $1,001,017 $28,665
================== ===================
13
Information regarding total assets as of March 31, 2005 and March 31, 2004:
March 31,2005 March 31,2004
------------- -------------
Total assets
Insurance segment $94,262,059 $41,725,560
Online commerce segment 1,849,964 1,609,289
Corporate and other 25,775,278 22,585,726
------------- ------------
Total operating segments $121,887,301 $65,920,575
Intercompany eliminations (40,126,973) (32,327,355)
------------- ------------
Total assets $81,760,328 $33,593,220
============= ============
NOTE 7 - RELATED PARTY TRANSACTIONS
Dennis Downes and Associates, a multi-line insurance adjustment corporation
based in Deerfield Beach, Florida performs certain claims adjusting work for
UPCIC. Dennis Downes and Associates is owned by Dennis Downes, who is the father
of Sean P. Downes, COO of UPCIC. During the three months ended March 31, 2005
and 2004, the Company paid claims adjusting fees of $85,140 and $43,592,
respectively, to Dennis Downes and Associates.
Item 2. Management's Discussion and Analysis or Plan of Operation
------ ---------------------------------------------------------
The following discussion and analysis by management of the Company's
consolidated financial condition and results of operations should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
Notes thereto.
FORWARD-LOOKING STATEMENTS
Certain statements made by the Company's management may be considered to be
"forward-looking statements" within the meaning of the Private Securities Reform
Litigation Act of 1995. Forward-looking statements are based on various factors
and assumptions that include known and unknown risks and uncertainties. The
words "believe," "expect," "anticipate," and "project," and similar expressions,
identify forward-looking statements, which speak only as of the date the
statement was made. Such statements may include, but not be limited to,
projections of revenues, income or loss, expenses, plans, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
results could differ materially from those described in forward-looking
statements as a result of the risks set forth in the following discussion, among
others.
14
OVERVIEW
The Company is a vertically integrated insurance holding company. The
Company, through its subsidiaries, is currently engaged in insurance
underwriting, distribution and claims. UPCIC generates revenue from the
collection and investment of premiums. The Company's agency operations, which
include Universal Florida Insurance Agency and Coastal Homeowners Insurance
Specialists, Inc., generate income from commissions. Universal Risk Advisors,
Inc., the Company's managing general agent, generates revenue through policy fee
income and other administrative fees from the marketing of UPCIC's and
third-party insurance products through the Company's distribution network and
UPCIC. Universal Risk Life Advisors, Inc. was formed to be the Company's
managing general agent for life insurance products. In addition, the Company has
formed an independent claims adjusting company, Universal Adjusting Corporation,
which adjusts UPCIC claims in certain geographic areas, and an inspection
company, Universal Inspection Corporation, which performs property inspections
for homeowners' policies underwritten by UPCIC.
The Company has formed subsidiaries that specialize, or will specialize, in
selling insurance and generating insurance leads via the Internet.
Tigerquote.com Insurance & Financial Services Group, Inc. is an Internet
insurance lead generating network, and Tigerquote.com Insurance Solutions, Inc.,
is a network of Internet insurance agencies. At March 31, 2005, agencies have
been established in 21 states, none of which are currently active. Separate
legal entities have been formed for each state and are governed by the
respective states' departments of insurance.
The Company has also formed Tiger Home Services, Inc., which furnishes pool
services to homeowners. The services are currently offered to residential
customers in certain areas in the state of Florida. During the third quarter of
2004, the Company sold the landscaping division.
FINANCIAL CONDITION
Cash and cash equivalents at March 31, 2005 aggregated $4,651,388. The
source of liquidity for possible claims payments consists of net premiums after
deductions for expenses, reinsurance recoverables and short-term loans.
UPCIC believes that premiums will be sufficient to meet UPCIC's working
capital requirements for at least the next twelve months. The Company's policy
is to invest amounts considered to be in excess of current working capital
requirements. At March 31, 2005, UPCIC's investments were comprised of
$4,651,388 in cash and repurchase agreements and $2,332,996 in real estate
consisting of a building purchased by UPCIC that the Company plans to use as its
home office when construction is completed in June 2005.
Policies originally obtained from the Florida Residential Property and
Casualty Joint Underwriting Association ("JUA") provided the opportunity for
UPCIC to solicit future renewal premiums. Less than 20% of the policies obtained
from the JUA are currently renewed with the Company. UPCIC does not expect to
participate in takeouts of additional policies from the JUA. In 1998 the Company
began to solicit business actively in the open market in an effort to further
15
grow its insurance operations. Through renewal of JUA business combined with
business solicited in the market through independent agents, UPCIC is currently
servicing approximately 57,000 homeowners and dwelling fire insurance policies.
The Company, as noted above, diversified its operations by establishing
online commerce and other ancillary operations. However, the Company is
currently contemplating the sale of the online commerce division in order to
further focus on the core property and casualty insurance business.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2005 VERSUS THREE MONTHS
ENDED MARCH 31, 2004
Gross premiums written increased 97.9% to $13,781,499 for the three-month
period ended March 31, 2005 from $6,965,205 for the three-month period ended
March 31, 2004. The increase in gross premiums written is primarily attributable
to an approximate 90.1% increase in new business as well as an overall 7.8 %
premium rate increase. The increase in new business is partially attributable to
the recent windstorm catastrophes providing an opportunity in the otherwise
competitive marketplace as certain companies are not accepting new business.
Net premiums earned increased 64.0% to $1,197,562 for the three-month
period ended March 31, 2005 from $730,228 for the three-month period ended March
31, 2004. The increase is due to an increase in new business, premium rate
increases and changes in the reinsurance program effective June 1, 2004.
Investment income increased 1,227.0% to $206,415 for the three-month period
ended March 31, 2005 from $15,555 for the three-month period ended March 31,
2004. The increase is primarily due to higher investment balances that resulted
from advances from reinsurers and a higher interest rate environment during the
three months ended March 31, 2005.
Transaction fee revenue decreased 83.5% to $112,734 for the three-month
period ended March 31, 2005 from $684,453 for the three-month period ended March
31, 2004. The decrease is primarily due to decreased sales of on-line insurance
leads to insurance agents.
Other revenue decreased 82.2% to $64,349 for the three-month period ended
March 31, 2005 from $362,104 for the three-month period ended March 31, 2004.
The decrease is primarily attributable to less activity in the direct sales and
service operations during the three months ended March 31, 2005.
Commission income increased 44.9% to $550,575 for the three-month period
ended March 31, 2005 from $380,028 for the three-month period ended March 31,
2004. Commission income is comprised principally of the managing general agent's
policy fee income on all new and renewal insurance policies and commissions
generated from agency operations. The increase is primarily attributable to an
increase in commissions generated from agency operations on new policies.
Net losses and loss adjustment expense ("LAE") incurred decreased 16.9% to
$162,912 for the three-month period ended March 31, 2005 from $195,997 for the
three-month period ended March 31, 2004. Losses and LAE incurred decreased due
16
to lower frequency and severity of claims in 2005. The Company's direct loss
ratio for the three-month period ended March 31, 2005 was 6.8% compared to 16.0%
for the three-month period ended March 31, 2004. Losses and LAE are influenced
by loss severity and frequency. The Company's direct loss ratio decreased
principally due to the lower frequency and severity of claims in the three
months ended March 31, 2005. 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 third
quarter of 2004, Florida experienced four windstorm catastrophes (Hurricanes
Charley, Frances, Ivan and Jeanne) which resulted in losses. As a result of
these storms, the Company estimated for the year ended December 31, 2004 it
incurred approximately $148,500,000 in losses prior to reinsurance and
$1,600,000 net of reinsurance. UPCIC currently reports only 235 open claims out
of nearly 10,000 reported from the four hurricanes. The level of catastrophe
loss experienced in any year cannot be predicted and could be material to the
results of operations and financial position. While management believes UPCIC's
and the Company's catastrophe management strategies will reduce the severity of
future losses, UPCIC and the Company continue to be exposed to catastrophic
losses.
General and administrative expenses decreased 47.6% to $967,706 for the
three-month period ended March 31, 2005 from $1,847,706 for the three-month
period ended March 31, 2004. General and administrative expenses decreased
primarily due to higher ceding commissions on premiums ceded to reinsurers. This
is primarily a result of an increase in the dollar amount of ceded premiums
written to quota share reinsurers related to the increase in direct premiums
written.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash flow are premium revenues,
commissions, policy fees, investment income and reinsurance recoverables and
short-term loans.
For the three-month period ended March 31, 2005, cash flows used by
operating activities were $16,909,859. Cash flows were negative in the
three-month period ended March 31, 2005 primarily due to cash received in the
fourth quarter of 2004 from reinsurers in advance of catastrophe claim payments
to policyholders resulting from Hurricanes Charley, Frances, Ivan and Jeanne
that hit Florida in the third quarter of 2004 which were settled in three-month
period ended March 31, 2005. 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
almost entirely of cash and readily marketable securities.
In July 2004, the Company borrowed monies from three private investors in
the amounts of $175,000, $150,000 and $100,000 for working capital. The terms of
the notes evidencing such loans require interest payments at a rate of 10%
through January 2005 with equal monthly payments of principal plus interest
thereafter until January 2006, the maturity date of the notes. In conjunction
with the loans, the Company plans to issue to the private investors warrants to
purchase 175,000, 150,000 and 100,000 shares of restricted Common Stock each at
an exercise price of $.05 per share, and each expiring in July 2009. These
transactions were approved by the Company's Board of Directors.
17
In order to improve the Company's financial position and achieve profitable
operations, management has implemented rate increases for new and renewal
business, has restructured the homeowners' coverage offered, has restructured
its catastrophic reinsurance coverage to reduce cost, and has worked to control
future general and administrative expenses. In addition, management is exploring
sources of additional capital.
Management believes that the continued implementation of these plans will
be successful over the next twelve months. However, there can be no assurance
that successful implementation of these plans will be achieved or will be
sufficient to ensure UPCIC's future compliance with Florida insurance
regulations, or that the Company will be able to maintain profitability. Failure
by UPCIC to maintain the required level of statutory capital and surplus could
result in the suspension of UPCIC's authority to write new or renewal business,
other regulatory actions or ultimately, in the revocation of UPCIC's certificate
of authority by the Florida Office of Insurance Regulation ("OIR").
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. In light of
the four windstorm catastrophes Florida experienced in 2004, an increase in
catastrophe reinsurance costs for the current year renewal is possible and could
adversely effect UPCIC's results.
The Company believes that its current capital resources together with
management's plan as described above will be sufficient to support current
operations and expected growth for at least 12 months.
The balance of cash and cash equivalents at March 31, 2005 is $4,651,388.
Most of this amount is available to pay claims in the event of catastrophic
events pending reimbursement for any aggregate amount in excess of $400,000 per
event up to approximately the 100 year probable maximum loss which would be
covered by reinsurers. Catastrophic reinsurance is recoverable upon presentation
to the reinsurer of evidence of claim payment.
Generally accepted accounting principles differ in some respects from
reporting practices prescribed or permitted by the OIR. To retain its
certificate of authority, the Florida insurance laws and regulations require
that UPCIC maintain capital and surplus equal to the statutory minimum capital
and surplus requirement defined in the Florida Insurance Code. UPCIC's statutory
capital and surplus exceeded the minimum capital and surplus requirements of
$4,000,000 as of March 31, 2005. 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, 2004 was $(4,787,758).
The Company is required to comply with the National Association of
Insurance Commissioner's ("NAIC") Risk-Based Capital ("RBC") requirements. RBC
requirements prescribe a method of measuring the amount of capital appropriate
for an insurance company to support its overall business operations in light of
its size and risk profile. NAIC's RBC requirements are used by regulators to
determine appropriate regulatory actions relating to insurers who show signs of
18
weak or deteriorating condition. As of December 31, 2004, based on calculations
using the appropriate NAIC RBC formula, the Company's reported total adjusted
capital was in excess of the requirements.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the first three months
of 2005.
Item 3. Controls and Procedures
------ -----------------------
The Company carried out an evaluation under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the
period covered by this report. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that disclosure
controls and procedures were effective as of the end of the period covered by
this report to ensure that information required to be disclosed by the Company
in its reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms. There was
no change in the Company's internal controls over financial reporting that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
------ -----------------
The Company did not have any reportable legal proceedings during the three
months ending March 31, 2005. 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
------ -----------------------------------------------------------
In January 2005, the Company issued 444,444 shares of Common Stock to Sean
P. Downes, COO of UPCIC, pursuant to Mr. Downes election to receive such shares
in lieu of $10,000 in salary. The shares were issued to Mr. Downes in a private
transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Also in January 2005, pursuant to Section 4(2) of the Securities Act of 1933, as
amended, the Company issued to James M. Lynch, CFO of the Company, 50,000 shares
of Common Stock in recognition of service to the Company.
19
Item 3. Defaults upon Senior Securities
------ --------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
None.
Item 5. Other Information
------ -----------------
None.
Item 6. Exhibits
------ --------
Exhibit No. Exhibit
----------- -------
11.1 Statement Regarding Computation of Per Share Income
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Title 18, United States
Code, Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSAL INSURANCE HOLDINGS, INC.
Date: May 16, 2005 /s/ Bradley I. Meier
-----------------------------------------
Bradley I. Meier, Chief Executive Officer
/s/ James M. Lynch
-----------------------------------------
James M. Lynch, Chief Financial Officer
21