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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-20848
UNIVERSAL INSURANCE HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 65-0231984
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2875 N.E. 191st Street
Suite 300
Miami, Florida 33180
(Address of principal executive offices)
(305) 792-4200
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date: 34,183,775 shares of common
stock as of May 1, 2004.
Transitional Small Business Disclosure Format Yes __ No X_
UNIVERSAL INSURANCE HOLDINGS, INC.
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
------- --------------------
The following unaudited consolidated financial statements of Universal
Insurance Holdings, Inc. have been prepared in accordance with the instructions
to Form 10-QSB and, therefore, omit or condense certain footnotes and other
information normally included in financial statements prepared in conformity
with accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
information for the interim periods reported have been made. Results of
operations for the three months ended March 31, 2004 are not necessarily
indicative of the results for the year ending December 31, 2004.
2
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 7,436,704
Debt securities held-to-maturity (fair-value of $101,975) 100,147
Equity securities available for sale (cost of $175,453) 179,288
Prepaid reinsurance premiums and reinsurance recoverables 23,711,917
Premiums and other receivables 667,312
Investments in real estate 196,021
Property, plant and equipment, net 1,132,842
Other assets 168,989
-----------------
$ 33,593,220
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 6,662,362
Unearned premiums 15,496,433
Accounts payable 1,658,388
Reinsurance payable 4,619,516
Other accrued expenses 836,847
Loans payable 728,739
-----------------
Total liabilities 30,002,285
-----------------
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,
32,183,775 shares issued and 29,075,130 shares outstanding 243,244
Common stock in treasury, at cost - 208,645 shares (101,820)
Additional paid-in capital 15,067,907
Accumulated deficit (11,623,618)
Accumulated other comprehensive income 3,835
-----------------
Total liabilities and stockholders' equity $ 33,593,220
=================
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,
2004 2003
---- ----
PREMIUMS EARNED AND OTHER REVENUES:
Premium income, net $ 730,228 $ 622,014
Net investment income 15,555 28,995
Commission revenue 380,028 374,651
Transaction fees 684,453 303,679
Other revenue 262,104 268,180
----------- ----------
Total revenues 2,072,368 1,575,484
----------- ----------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 195,997 443,837
General and administrative expensed 1,847,706 1,131,647
----------- -----------
Total operating costs and expenses 2,043,703 1,575,484
----------- -----------
NET INCOME $ 28,665 $ 22,035
=========== ===========
INCOME PER COMMON SHARE:
Basic $ 0.00 $ 0.00
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 27,213,000 21,468,000
=========== ===========
INCOME PER COMMON SHARES
Diluted $ 0.00 $ 0.00
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 27,881,000 22,036,000
=========== ===========
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, March 31,
2004 2003
---- ----
NET INCOME $ 28,665 $ 22,035
OTHER COMPREHENSIVE INCOME:
Change in net unrealized gain (loss) on
available-for-sale securities 29,492 (65,987)
----------- ----------
COMPREHENSIVE INCOME (LOSS) $ 58,157 $ (43,952)
=========== ===========
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Three
Months Ended Months Ended
March 31, March 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 28,665 $ 22,035
Adjustments to reconcile net income (loss)
to cash (used in) provided by operations:
Amortization and depreciation 77,417 61,028
Issuance of common stock as compensation 72,001 -
Net accretion of bond premiums and discounts 96 284
Net change in assets and liabilities relating to
operating activities:
Prepaid reinsurance premiums and reinsurance
recoverables 1,125,622 (515,910)
Premiums and other receivables (168,989) 608,693
Reinsurance payables (516,318) (80,967)
Accounts payable 481,734 (173,981)
Other accrued expenses 14,829 72,852
Unpaid losses and loss adjustment expenses (1,018,510) 1,335,800
Unearned premiums (609,143) (540,472)
Other assets (130,726) -
------------ ------------
Net cash (used in) provided by operating activities (643,322) 789,362
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures 193,767 -
Proceeds from maturities of debt securities
held to maturity - 72,122
Proceeds from disposal of fixed assets - 46,030
Sale of real estate - 70,311
------------ ------------
Net cash provided by investing activities 193,767 188,463
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (12,489) (12,487)
Repayments of loans payable (112,530) (234,231)
Proceeds from loans payable - 250,000
------------ ------------
Net cash (used in) provided by financing activities (125,019) 3,282
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH (574,574) 981,107
EQUIVALENTS
CASH AND CASH EQUIVALENTS, Beginning of period 8,011,278 4,587,920
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 7,436,704 $ 5,569,027
------------ ------------
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, 2004
(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, 2004,
the related condensed consolidated statements of operations and comprehensive
operations for the three months ended March 31, 2004 and 2003 and cash flows for
the three months ended March 31, 2004 and 2003 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, 2003. The
interim financial statements reflect all adjustments (consisting of only normal
and recurring accruals and adjustments) which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods presented.
The Company's operating results for any particular interim period may not be
indicative of results for the full year and thus should be read in conjunction
with the Company's annual statements.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
OFF -BALANCE SHEET ARRANGEMENTS. There were no off-balance sheet arrangements
during the first three months of 2004.
NEW ACCOUNTING PRONOUNCEMENTS. In December 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE. This Statement, which is effective for
years ending after December 15, 2002, amends Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, and provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation. In addition, Statement No. 148 amends the disclosure
requirements of Statement No. 123 regardless of the accounting method used to
account for stock-based compensation. The Company has chosen to continue to
account for stock-based compensation of employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations. However, the enhanced
disclosure provisions as defined by SFAS No. 148 which became effective in the
first quarter of 2003 have been implemented.
7
In February 2004, the FASB's Emerging Issues Task Force reached a consensus
regarding certain disclosure requirements in EITF Issue No. 03-1, THE MEANING OF
OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS
("EITF No. 03-1"). EITF No. 03-1 describes certain quantitative and qualitative
disclosures that are required for marketable equity securities covered by
Statement No. 115, including the aggregate amount of unrealized losses and the
aggregate related fair value of investments with unrealized losses, by
investment type, as well as the nature of the investment(s), cause of
impairment, number of positions held, severity and duration of the impairment.
The disclosures required by EITF No. 03-1 are effective for fiscal years ending
after December 15, 2003. The Emerging Issues Task Force is discussing further
the other issues addressed in EITF No. 03-1, including the meaning of
other-than-temporary impairment and its application to investments accounted for
under the cost method or the equity method, or as either available-for-sale or
held-to-maturity under Statement No. 115. The impact of such adoption is not
anticipated to have a material effect on the Company's consolidated financial
statements.
On December 31, 2003, the FASB issued a revised version of FIN 46 ("FIN 46R"),
which incorporates a number of modifications and changes made to the original
version. FIN 46R replaces the previously issued FIN 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, which requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or is entitled to receive
a majority of the entity's residual returns or both. FIN 46R does not have an
impact on the Company's consolidated financial condition or results of
operations. Further, FIN 46R requires the disclosure of certain information
related to variable interest entities in which the Company holds a significant
variable interest. The Company does not own any such interests.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. Management has reassessed the
critical accounting policies as disclosed in our 2003 Annual Report to
Stockholders on Form 10-KSB and determined that no changes, additions or
deletions are needed to the policies as disclosed. Also there were no
significant changes in our estimates associated with those policies.
RISKS AND UNCERTAINTIES. The Company's business could be affected by regulatory
and competitive restrictions on pricing for new and renewal business, the cost
of catastrophic reinsurance, adverse loss experience and federal and state
legislation or governmental regulations of insurance companies. Changes in these
areas could adversely affect the Company's operations in the future.
Management attributes recent operating losses and unfavorable loss ratios of
UPCIC primarily to higher than expected costs of catastrophic reinsurance and
adverse loss experience in the homeowners line of business. Management has taken
the following actions to improve and strengthen UPCIC's financial condition.
Premium rate increases of 7.5% and 7.8% were implemented in June 2003 and
January 2004, respectively. UPCIC changed the geographic and coverage mix of the
property insurance it writes, which is a key determinant in the amount and
pricing of reinsurance procured by UPCIC. The Company has achieved more
favorable ceding commission terms on its quota share reinsurance program. UPCIC
was also able to obtain a less expensive catastrophic reinsurance program for
2003 - 2004.
In addition to the actions described above, effective May 1, 2004 the Company
brought in house the system it utilizes for policy issuance and administration.
8
The Company believes that this will enhance UPCIC's operating results through
its ability to improve and better control underwriting and loss adjusting
activities, as well as reducing overall management expenses.
Management believes the implementation of, and results attributable to, the
actions described above, along with capital contributions previously made to
UPCIC, removes the substantial doubt associated with UPCIC's ability to continue
as a going concern for a reasonable period of time, and UPCIC has met the
minimum statutory requirements for surplus as regards policyholders as of March
31, 2004. However, there can be no assurance of the ultimate success of these
plans, or that the Company will be able to achieve profitability.
NOTE 2 - INSURANCE OPERATIONS
UPCIC commenced its insurance activity in February 1998 by assuming policies
from the Florida Residential Property and Casualty Joint Underwriting
Association ("JUA"). UPCIC received the unearned premiums and began servicing
such policies. Since then, UPCIC has been renewing these policies as well as
soliciting business actively in the open market through independent agents.
Unearned premiums represent amounts that UPCIC would refund policyholders if
their policies were canceled. UPCIC determines unearned premiums by calculating
the pro-rata amount that would be due to the policyholder at a given point in
time based upon the premiums owed over the life of each policy. At March 31,
2004, the Company had unearned premiums totaling $15,496,433.
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, 2004, deferred policy acquisition costs amounted to
$0 due to the effect of deferred reinsurance commissions.
An allowance for uncollectible premiums receivable is established when it
becomes evident collection is doubtful. No allowance is deemed necessary at
March 31, 2004.
Claims and claims adjustment expenses, less related reinsurance, are provided
for as claims are incurred. The provision for unpaid claims and claim adjustment
expenses includes: (1) the accumulation of individual case estimates for claims
and claims adjustment expenses reported prior to the close of the accounting
period; (2) estimates for unreported claims based on past experience modified
for current trends; and (3) estimates of expenses for investigating and
adjusting claims based on past experience.
Liabilities for unpaid claims and claims adjustment expenses are based on
estimates of ultimate cost of settlement. Changes in claims estimates resulting
from the continuous review process and differences between estimates and
ultimate payments are reflected in expense for the period in which the revision
of these estimates first becomes known. UPCIC estimates claims and claims
expenses based on its historical experience and payment and reporting patterns
for the type of risk involved. These estimates are continuously reviewed by
9
UPCIC's management professionals and any resulting adjustments are reflected in
operations for the period in which they are determined.
Inherent in the estimates of ultimate claims are expected trends in claims
severity, frequency and other factors that may vary as claims are settled. The
amount of uncertainty in the estimates for casualty coverage is significantly
affected by such factors as the amount of historical claims experience relative
to the development period, knowledge of the actual facts and circumstances, and
the amount of insurance risk retained.
NOTE 3 - REINSURANCE
UPCIC's in-force policyholder coverage for windstorm exposures as of March 31,
2004 was approximately $4.4 billion. In the normal course of business, UPCIC
seeks to reduce the loss that may arise from catastrophes or other events that
cause unfavorable underwriting results by reinsuring certain levels of risk in
various areas of exposure with other insurance enterprises or reinsurers.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the reinsurance policy. Reinsurance premiums, losses and loss adjustment
expenses are accounted for on bases consistent with those used in accounting for
the original policies issued and the terms of the reinsurance contracts.
Reinsurance ceding commissions received are deferred and amortized over the
effective period of the related insurance policies.
UPCIC limits the maximum net loss that can arise from large risks or risks in
concentrated areas of exposure by reinsuring (ceding) certain levels of risks
with other insurers or reinsurers, either on an automatic basis under general
reinsurance contracts known as "treaties" or by negotiation on substantial
individual risks. The reinsurance arrangements are intended to provide UPCIC
with the ability to maintain its exposure to loss within its capital resources.
Such reinsurance includes quota share, excess of loss and catastrophe forms of
reinsurance.
Effective June 1, 2003, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with various reinsurers. Under the quota share
treaty, UPCIC cedes 90% of its gross written premiums, losses and loss
adjustment expenses for policies with coverage for wind risk with a ceding
commission equal to 28% of ceded gross written premium. In addition, the quota
share treaty has a limitation for any one occurrence of $2,000,000. Effective
June 1, 2003, UPCIC entered into an excess per risk agreement. Under the excess
per risk agreement, UPCIC obtained coverage of $1,300,000 in excess of $500,000
ultimate net loss for each risk and each property loss, and $1,000,000 in excess
of $300,000 for each casualty loss, excluding losses arising from the peril of
wind to the extent such wind related losses are the result of a hurricane. A
$5,200,000 limit applies to the term of the contract.
Effective June 1, 2003, under an excess catastrophe contract, UPCIC obtained
catastrophe coverage of $26,000,000 in excess of $2,000,000 covering certain
loss occurrences including hurricanes. UPCIC also obtained coverage from the
Florida Hurricane Catastrophe Fund. The coverage is for approximately
$56,600,000.
The ceded reinsurance arrangements had the following effect on certain items in
the accompanying consolidated financial statements:
10
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
------------------ ------------------
Loss Loss
and Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $6,965,205 $7,574,347 $1,213,779 $7,537,402 $8,077,875 $3,704,202
Ceded (6,323,515) (6,844,119) (1,017,782) (7,033,955) (7,455,861) (3,260,365)
----------- ----------- ----------- ----------- ----------- -----------
Net $641,690 $730,228 $195,997 $503,447 $622,014 $443,837
=========== =========== =========== =========== =========== ===========
Other Amounts:
March 31, 2004
--------------
Reinsurance recoverable on paid and unpaid losses
and loss adjustment expenses $ 7,496,561
Unearned premiums ceded 13,661,767
Other reinsurance receivable 2,553,589
----------
Prepaid reinsurance premiums and reinsurance recoverable $ 23,711,917
==========
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, 2004. 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.
11
NOTE 4 - EARNINGS PER SHARE
Earnings per share ("EPS") amounts are calculated in accordance with SFAS No.
128, EARNINGS PER SHARE. Basic EPS is based on the weighted average number of
shares outstanding for the period, excluding any dilutive common share
equivalents. Diluted EPS reflects the potential dilution that could occur if
securities to issue common stock were exercised.
A reconciliation of shares used in calculating basic and diluted EPS for the
three month periods ended March 31, 2004 and March 31, 2003, respectively,
follows:
Three Months Ended
March 31, 2004 March 31, 2003
-------------- --------------
Basic EPS 27,213,000 21,468,000
Effect of assumed conversion of
common stock equivalents 668,000 568,000
---------- ----------
Diluted EPS 27,881,000 22,036,000
Options and warrants to purchase approximately 9,226,000 and 11,462,000 shares
of common stock were outstanding during the three months ended March 31, 2004
and March 31, 2003, 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, 2004 and
March 31, 2003. Had compensation cost for stock options been recognized based on
the fair value at the grant dates for the options, consistent with the
provisions of SFAS No. 123, net income (loss) and earnings (loss) per share
would have been as indicated in the table below.
12
Three Months Ended
March 31, 2004 March 31, 2003
-------------- --------------
Net income (loss):
As reported $ 28,665 $ 22,035
Compensation expense (24,895) (97,863)
-------------- --------------
Pro forma 3,770 (75,828)
Net income (loss) per share:
Basic
As reported $0.00 $0.00
Compensation expense 0.00 0.00
-------------- --------------
Pro forma $0.00 $0.00
Diluted
As reported $0.00 0.00
Compensation expense 0.00 0.00
-------------- --------------
Pro forma $0.00 $0.00
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,
with the following weighted average assumptions used for grants during the three
months ended March 31, 2004: expected price volatility of $154%; risk-free
interest rate of 6.5%; no dividends; and expective lives of five years. There
were no option grants in 2003.
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 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 earning.
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"
13
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, 2004 follows:
Three months ended March 31,
2004 2003
---- ----
Total revenue
Insurance segment $2,080,023 $2,140,472
Online commerce segment 721,839 333,587
Corporate and other 106,996 80,170
----------- -----------
Total operating segments 2,908,858 2,554,229
Intercompany eliminations (836,490) (956,710)
----------- -----------
Total revenues $2,072,368 $1,597,519
=========== ===========
Earnings (loss) before income taxes
Insurance segment $232,514 $335,412
Online commerce segment 267,435 54,300
Corporate and other (471,284) (367,677)
----------- -----------
Total earnings before income taxes $28,665 $22,035
=========== ===========
Information regarding total assets as of March 31, 2004 and March 31, 2003:
Three months ended March 31,
2004 2003
---- ----
Total assets
Insurance segment $41,725,560 $37,911,385
Online commerce segment 1,609,289 979,733
Corporate and other 22,585,726 22,132,770
-------------- -------------
Total operating segments $65,920,575 $61,023,888
Intercompany eliminations (32,327,355) (28,030,714)
-------------- -------------
Total assets $33,593,220 $32,993,174
============= =============
Note - 7 SUBSEQUENT EVENTS
On April 30, 2004, the Company signed a binding contract to purchase a building
located in Fort Lauderdale, Florida that the Company intends to use as its home
office. The cost of the building is $1,625,000. The purchase is
14
contingent upon inspections and the Company obtaining financing. If finalized,
the Company would relocate its corporate headquarters to the building by the end
of 2004.
At a meeting of the Company's Board of Director's on March 4, 2004, certain
employee and director compensation actions were approved. Patric Allan, CEO of
Tigerquote.com, was granted 100,000 shares of common stock, options to purchase
500,000 shares of common stock with an exercise price of $0.025 per share, and
additional options to purchase 500,000 shares of common stock with an exercise
price of $0.025 per share that are exercisable upon profit goals attained. All
stock and options are to be issued upon signing of a new employment agreement.
The agreement was finalized in April 2004. Accordingly, the related stock and
option activity will be reflected in the second quarter of 2004. Sean P. Downes,
COO of UPCIC, agreed to convert a $50,000 bonus into 2,000,000 shares of common
stock. The shares were issued in April 2004 and will be reflected in the second
quarter of 2004. In addition, outside directors were granted compensation of
$30,000 per year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis by management of the Company's
consolidated financial condition and results of operations should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
Notes thereto.
FORWARD-LOOKING STATEMENTS
Certain statements made by the Company's management may be considered to be
"forward-looking statements" within the meaning of the Private Securities Reform
Litigation Act of 1995. Forward-looking statements are based on various factors
and assumptions that include known and unknown risks and uncertainties. The
words "believe," "expect," "anticipate," and "project," and similar expressions,
identify forward-looking statements, which speak only as of the date the
statement was made. Such statements may include, but not be limited to,
projections of revenues, income or loss, expenses, plans, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
results could differ materially from those described in forward-looking
statements as a result of the risks set forth in the following discussion, among
others.
OVERVIEW
The Company is a vertically integrated insurance holding company. The
Company, through its subsidiaries, is currently engaged in insurance
underwriting, distribution and claims. UPCIC generates revenue from the
collection and investment of premiums. The Company's agency operations, which
include Universal Florida Insurance Agency and Coastal Homeowners Insurance
Specialists, Inc., generate income from commissions and the marketing of
ancillary services. Universal Risk Advisors, Inc., the Company's managing
general agent, generates revenue through policy fee income and other
administrative fees from the marketing of UPCIC's and third-party insurance
products through the Company's distribution network and UPCIC. Capital Resources
Group Ltd. was formed to participate in contingent capital products. Universal
Risk Life Advisors, Inc. was formed to be the Company's managing general agent
for life insurance products. In addition, the Company has formed an independent
claims adjusting company, Universal Adjusting Corporation, which adjusts UPCIC
claims in certain geographic areas, and an inspection company, Universal
15
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, 2004, agencies have
been established in 22 states, of which 5 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 and landscaping to homeowners. The services are currently offered to
commercial and residential customers in certain areas in the state of Florida.
FINANCIAL CONDITION
Cash and cash equivalents at March 31, 2004 aggregated $7,436,704. The
source of liquidity for possible claims payments consists of net premiums, after
deductions for expenses.
UPCIC believes that premiums will be sufficient to meet UPCIC's working
capital requirements for at least the next twelve months. Amounts considered to
be in excess of current working capital requirements have been invested. At
March 31, 2004, UPCIC's investments were comprised of $7,436,704 in cash and
repurchase agreements, $100,147 in fixed maturity securities and $179,288 in
equity securities.
Policies originally obtained from the Florida Residential Property and
Casualty Joint Underwriting Association ("JUA") provided the opportunity for
UPCIC to solicit future renewal premiums. Less than 50% of the policies obtained
from the JUA are currently renewed with the Company. UPCIC does not expect to
participate in takeouts of additional policies from the JUA. In 1998 the Company
began to solicit business actively in the open market in an effort to further
grow its insurance operations. Through renewal of JUA business combined with
business solicited in the market through independent agents, UPCIC is currently
servicing approximately 38,000 homeowners and dwelling fire insurance policies.
In determining appropriate guidelines for such open market policy sales, UPCIC
employs standards similar to those used in its selection of JUA policies. Also,
to improve underwriting and manage risk, the Company uses analytical tools and
data currently developed in conjunction with the Company's reinsurers and their
utilization of catastrophe models. To diversify UPCIC's product lines,
management may consider underwriting personal umbrella liability policies in the
future. Any such program will require the approval of the Florida Department of
Insurance.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2004 VERSUS THREE MONTHS
ENDED MARCH 31, 2003
Gross premiums written decreased 7.6% to $6,965,205 for the three-month
period ended March 31, 2004 from $7,537,402 for three-month period ended March
31, 2003. The decrease in gross premiums written is primarily attributable to a
decrease in new business mitigated by premium rate increases. The decrease in
16
new business was the result of non-renewal of certain policies for underwriting
reasons as well as an effort to limit new business in order to control
reinsurance costs.
Net premiums earned increased 17.4% to $730,228 for the three-month period
ended March 31, 2004 from $622,014 for the three-month period ended March 31,
2003. The increase is primarily due to changes in the reinsurance program
effective June 1, 2003.
Investment income decreased 46.3% to $15,555 for the three-month period
ended March 31, 2004 from $28,995 the three-month period ended March 31, 2003.
The decrease is primarily due to the lower interest rate environment during the
three months ended March 31, 2004.
Transaction fee revenue increased 125.4% to $684,453 for the three-month
period ended March 31, 2004 from $303,679 for the three-month period ended March
31, 2003. The increase is primarily due to increased sales of insurance leads to
insurance agents.
Other revenue decreased 2.3% to $262,104 for the three-month period ended
March 31, 2004 from $268,180 for the three-month period ended March 31, 2003.
The decrease is primarily attributable to slightly less activity in the direct
sales and service operations during the three months ended March 31, 2004.
Commission income increased 1.4% to $380,028 for the three-month period
ended March 31, 2004 from $374,651 for the three-month period ended March 31,
2003. Commission income is comprised principally of the managing general agent's
policy fee income on all new and renewal insurance policies and commissions
generated from agency operations. The increase is primarily attributable to an
increase in commissions generated from agency operations.
Losses and loss adjustment expense ("LAE") incurred decreased 55.8% to
$195,997 for the three-month period ended March 31, 2004 from $443,837 for the
three-month period ended March 31, 2003. Losses and LAE incurred decreased due
to lower frequency and severity of claims in 2004 and because of changes related
to the Company's reinsurance program. The Company's direct loss ratio for the
three-month period ended March 31, 2004 was 16.0% compared to 45.9% for the
three-month period ended March 31, 2003. Losses and LAE are influenced by loss
severity and frequency. They are also influenced by underwriting and adjusting
philosophy. The Company's direct loss ratio decreased principally due to the
lower frequency and severity of claims and also because of premium rate
increases in the three months ended March 31, 2004. Losses and LAE, the
Company's most significant expenses, represent actual payments made net of
reinsurance and changes in estimated future net payments to be made to or on
behalf of its policyholders, including expenses required to settle claims and
losses.
Catastrophes are an inherent risk of the property-liability insurance
business which may contribute to material year-to-year fluctuations in UPCIC's
and the Company's results of operations and financial position. The level of
catastrophe loss experienced in any year cannot be predicted and could be
material to the results of operations and financial position. While management
believes UPCIC's and the Company's catastrophe management strategies will reduce
the severity of future losses, UPCIC and the Company continue to be exposed to
catastrophic losses.
General and administrative expenses increased 63.3% to $1,847,706 for the
three-month period ended March 31, 2004 from $1,131,647 for the three-month
17
period ended March 31, 2003. General and administrative expenses have increased
mainly due to lower ceding commissions on premiums ceded to reinsurers.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash flow are premium revenues,
commissions, policy fees and investment income.
For the three-month period ended March 31, 2004, cash flows used by
operating activities were $643,322. Cash flows from operating activities are
negative primarily due to payments made to reinsurers, increased recoverables on
paid losses and a decrease in the unearned premium reserve. 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 readily marketable
securities.
The Company has incurred losses in prior years. In order to improve the
Company's financial position and achieve profitable operations, management
implemented rate increases for new and renewal business, has restructured the
homeowners' coverage offered, has restructured its catastrophic reinsurance
coverage to reduce the cost, and has worked to control general and
administrative expenses. In addition, management is exploring sources of
additional capital, including the sale of its insurance operations.
Management believes that the continued implementation of these plans will
be successful over the next twelve months. However, there can be no assurance
that successful implementation of these plans will be achieved or will be
sufficient to ensure UPCIC's future compliance with Florida insurance
regulations, or that the Company will be able to maintain profitability. Failure
by UPCIC to maintain the required level of statutory capital and surplus could
result in the suspension of UPCIC's authority to write new or renewal business,
other regulatory actions or ultimately, in the revocation of UPCIC's certificate
of authority by the Florida Department of Insurance.
The Company believes that its current capital resources together with
management's plan as described above will be sufficient to support current
operations and expected growth for at least 12 months.
The balance of cash and cash equivalents at March 31, 2004 is $7,436,704.
Most of this amount, along with readily marketable securities aggregating
$279,435, would be available to pay claims in the event of a catastrophic event
pending reimbursement for any aggregate amount in excess of $200,000 up to
approximately the 100 year probable maximum loss which would be covered by
reinsurers. Catastrophic reinsurance is recoverable upon presentation to the
reinsurer of evidence of claim payment.
Generally accepted accounting principles differ in some respects from
reporting practices prescribed or permitted by the DOI. To retain its
certificate of authority, the Florida insurance laws and regulations require
that UPCIC maintain capital 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, 2004. UPCIC is also required to adhere to prescribed
18
premium-to-capital surplus ratios. UPCIC is in compliance with these
requirements and expects to remain in compliance, if management's plans are
successful.
The maximum amount of dividends which can be paid by Florida insurance
companies without prior approval of the Florida Commissioner is subject to
restrictions relating to statutory surplus. The maximum dividend that may be
paid by UPCIC without prior approval is limited to the lesser of statutory net
income from operations of the preceding calendar year or 10.0% of statutory
unassigned surplus as of the preceding year end. Statutory unassigned surplus
(deficit) at December 31, 2003 was $(2,623,215).
The Company is required to comply with the National Association of
Insurance Commissioner's ("NAIC") Risk-Based Capital ("RBC") requirements. RBC
requirements prescribe a method of measuring the amount of capital appropriate
for an insurance company to support its overall business operations in light of
its size and risk profile. NAIC's RBC requirements are used by regulators to
determine appropriate regulatory actions relating to insurers who show signs of
weak or deteriorating condition. As of December 31, 2003, 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 2004.
ITEM 3. CONTROLS AND PROCEDURES.
Based on the evaluation by the Chief Executive Officer and Chief Financial
Officer of the Company as of a date within 90 days of the filing date of this
quarterly report, the Company's disclosure controls and procedures are
adequately designed to ensure that the information required to be included in
this report has been recorded, processed, summarized and reported on a timely
basis. There have not been any significant changes in the Company's internal
controls or in any other factors that could significantly affect these controls
and there have been no corrective actions taken with regard to significant
deficiencies and material weaknesses subsequent to the date of such officers'
evaluation.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
------- -----------------
The Company did not have any reportable legal proceedings during the
three-months ending March 31, 2004. 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.
19
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities
--------------------------------------------------------------------------------
Under an amendment to the employment agreement between the Company and
Bradley I. Meier dated June 27, 2002, and approved by the Board of Directors,
Mr. Meier elected to convert salary into shares of common stock. 2,853,529
shares of common stock were issued to Mr. Meier in a private transaction on
March 1, 2004. The transaction was performed in accordance with the terms of the
amendment and pursuant to Section 4(2) of the Securities Act of 1933, as
amended. On March 4, 2004, Mr. Meier was granted 1,000,000 ten year options to
purchase common stock at $0.056 per share.
Item 3. Defaults upon Senior Securities
------- -------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
None.
Item 5. Other Information
------- -----------------
Effective December 31, 2003, the terms of the employment agreement of
Bradley I. Meier, President and Chief Executive Officer of the Company, were
amended to extend the term of the employment agreement to December 31, 2008 and
to provide for an increase in base salary and for severance payment upon
termination of the agreement by the Company. For additional terms of the amended
employment agreement, refer to Exhibit 99.1 to this Form 10-QSB. This
description of the amendment is qualified in all respects by such reference.
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
(a) Exhibits
EXHIBIT NO. EXHIBIT
11.1 Statement Regarding Computation of Per Share Income
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Title 18, United States
Code, Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
20
99.1 Addendum No. 6 to Employment Agreement of Bradley I.
Meier, effective as of December 31, 2003
(b) Reports on Form 8-K
None.
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSAL INSURANCE HOLDINGS, INC.
Date: May 14, 2004 /s/ Bradley I. Meier
-----------------------------------------
Bradley I. Meier, Chief Executive Officer
/s/ James M. Lynch
-----------------------------------------
James M. Lynch, Chief Financial Officer
26