UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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)
Check whether the registrant filed all documents and reports required to
be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date: 19,617,411 shares of common
stock as of November 1, 2002.
Transitional Small Business Disclosure Format Yes __ No X
--
UNIVERSAL INSURANCE HOLDINGS, INC.
----------------------------------
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
-------- --------------------
The following unaudited consolidated financial statements of Universal
Insurance Holdings, Inc. have been prepared in accordance with the instructions
to Form 10-QSB and, therefore, omit or condense certain footnotes and other
information normally included in financial statements prepared in conformity
with accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
information for the interim periods reported have been made. Results of
operations for the nine months ended September 30, 2002 are not necessarily
indicative of the results for the year ending December 31, 2002.
2
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
(Unaudited)
ASSETS
Cash and cash equivalents $ 5,063,126
Debt securities held-to-maturity (fair-value of $550,225) 563,670
Equity securities available for sale (cost of $302,812) 222,174
Prepaid reinsurance premiums and reinsurance recoverables 20,738,639
Premiums and other receivables 900,093
Investments in real estate 442,622
Property, plant and equipment, net 893,963
-------------
Total assets $ 28,824,287
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 5,559,860
Unearned premiums 15,714,375
Reinsurance payable 1,030,594
Accounts payable 1,374,298
Other accrued expenses 614,260
Loans payable 889,160
------------
Total liabilities 25,182,547
------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Cumulative convertible preferred stock, $.01 par value, 1,000,000 shares
authorized, 138,640 shares issued and outstanding, minimum liquidation
preference of $1,419,700 $ 1,387
Common stock, $.01 par value, 40,000,000 shares authorized, 16,717,411
shares issued and 16,508,766 outstanding 167,175
Common stock in treasury, at cost - 208,645 shares (101,819)
Additional paid-in capital 15,003,976
Accumulated deficit (11,348,341)
Accumulated other comprehensive loss (80,638)
-------------
Total stockholders' equity 3,641,740
-------------
Total liabilities and stockholders' equity $ 28,824,287
=============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
PREMIUMS EARNED AND OTHER REVENUES:
Premium income, net $ 4,500,436 $ 5,964,573 $ 998,974 $ 1,846,493
Net investment income 327,233 508,837 147,961 154,600
Commission revenue 271,337 380,121 121,088 122,571
Other revenue 2,648,329 3,663,549 1,147,164 431,808
------------- ------------- ----------- -------------
Total revenues 7,747,335 10,517,080 2,415,187 2,555,472
------------- ------------- ----------- -------------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 3,898,206 5,772,229 697,745 2,551,981
General and administrative expenses 3,870,052 6,139,361 1,074,874 2,412,596
------------- ------------- ----------- -------------
Total operating costs and expenses 7,768,258 11,911,590 1,772,619 4,964,577
------------- ------------- ----------- -------------
NET INCOME (LOSS) $ (20,923) $ (1,394,510) $ 642,568 $ (2,409,105)
============= ============= =========== =============
INCOME (LOSS) PER COMMON SHARE:
Basic $ (0.00) $ (0.09) 0.04 $ (0.16)
============= ============= =========== =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 15,558,000 14,698,000 15,558,000 14,686,000
============= ============= =========== =============
INCOME (LOSS) PER COMMON SHARE
Diluted $ (0.00) $ (0.09) $ 0.04 $ (0.16)
============= ============= =========== =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 15,558,000 14,698,000 15,558,000 14,686,000
============= ============= =========== =============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
NET INCOME (LOSS) $ (20,923) $ (1,394,510) $ 642,568 $ (2,409,105)
OTHER COMPREHENSIVE INCOME:
Change in net unrealized gain (loss) on
available-for-sale securities (40,802) (3,849) (63,636) (43,426)
----------- -------------- ---------- -------------
COMPREHENSIVE INCOME (LOSS) $ (61,725) $ (1,398,359) $ 578,932 $ (2,452,531)
===============================================================
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 FLOW
(Unaudited)
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,923) $ (1,394,510)
Adjustments to reconcile net loss
to cash used in operations:
Amortization and depreciation 168,773 96,444
Net accretion of bond premiums and discounts (23,768) (20,389)
Net change in assets and liabilities relating to operating
activities:
Prepaid reinsurance premiums and reinsurance recoverables (7,625,360) (205,707)
Premiums and other receivables 308,826 (392)
Reinsurance payables (2,297,308) -
Deferred policy acquisition costs 529,942 413,658
Accounts payable 10,574 498,320
Other accrued expenses 106,574 (22,370)
Accrued taxes, licenses and fees (189,728) (117,625)
Unpaid losses and loss adjustment expenses (687,007) 2,809,710
Due from related parties and other - (20,040)
Unearned premiums 1,661,136 (3,739,908)
-------------- ----------------
Net cash used in operating activities (8,058,269) (1,702,809)
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (100,875) (202,194)
Purchase of real estate (310,827) -
Sale of real estate 84,763 -
Purchase of equity securities available for sale (18,160) (127,546)
Proceeds from sale of equity securities available for sale - -
Purchase of debt securities held to maturity - (601,062)
Proceeds from maturities of debt securities held to
maturity 2,494,811 759,153
-------------- ----------------
Net cash provided by (used in) investing activities 2,149,712 (171,649)
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends - (202,921)
Loan payable 445,076 215,283
Purchase of treasury stock 44,908 (17,565)
-------------- ----------------
Net cash provided by (used in) financing activities 489,984 (5,203)
-------------- ----------------
NET DECREASE IN CASH AND CASH (5,418,573) (1,879,661)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, Beginning of period 10,481,699 10,357,663
-------------- ----------------
CASH AND CASH EQUIVALENTS, End of period $ 5,063,126 $ 8,478,002
============== ================
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
6
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements include the
accounts of Universal Insurance Holdings, Inc. ("Company"), its wholly-owned
subsidiary, Universal Property & Casualty Insurance Company ("UPCIC"), and other
wholly-owned entities. All intercompany accounts and transactions have been
eliminated in consolidation.
The condensed consolidated balance sheet of the Company as of September 30,
2002, the related condensed consolidated statements of operations and
comprehensive operations for the nine months and three months ended September
30, 2002 and 2001 and cash flows for the nine months ended September 30, 2002
and 2001 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, 2001. 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.
Certain reclassifications have been made in the 2001 financial statements to
conform them to and make them consistent with the presentation used in the 2002
financial statements.
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.
The Company has incurred losses in the past two years. In order to improve the
Company's financial position and achieve profitable operations, management has
implemented a rate increase for new and renewal business, is restructuring the
homeowners' coverage offered, has restructured its catastrophic reinsurance
coverage to reduce the cost, and is working to reduce general and administrative
expenses. In addition, management is exploring sources of additional capital,
7
including a sale of its insurance operations. Management believes that the
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 achieve
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. Specific to a recent homeowners' insurance rate increase implemented
by the Company on a use and file basis, effective February 28, 2002 for new
business and April 20, 2002 for renewal business, the Florida Department of
Insurance ("DOI") notified UPCIC in September 2002 of its intent to disapprove
the requested rate change. UPCIC's request to raise homeowners' insurance rates
was to go to arbitration with the DOI. The Company has recently been informally
notified by the DOI that the DOI no longer wants to go to arbitration on the
requested rate change and that the rate change applicable to the current year
will be granted. The financial statements of the Company do not include any
adjustment that might arise from denial of the requested rate change.
NOTE 2 - INSURANCE OPERATIONS
UPCIC commenced its insurance activity in February 1998 by assuming policies
from the Florida Residential Property and Casualty Joint Underwriting
Association ("JUA"). UPCIC received the unearned premiums and began servicing
such policies. Since then, UPCIC has been renewing these policies as well as
soliciting business actively in the open market through independent agents.
Unearned premiums represent amounts that UPCIC would refund policyholders if
their policies were canceled. UPCIC determines unearned premiums by calculating
the pro-rata amount that would be due to the policyholder at a given point in
time based upon the premiums owed over the life of each policy. At September 30,
2002, the Company had unearned premiums totaling $15,714,375.
Effective January 15, 2002, UPCIC and Universal Property and Casualty
Management, Inc., ("Universal Management") an unaffiliated managing agency,
terminated their prior management agreement so that services previously provided
by Universal Management are now provided by UPCIC, Universal Risk Advisors, Inc.
and unaffiliated third parties. Universal Risk Advisors, Inc. is an affiliated
managing general agency that provides the Company with management and personnel
for UPCIC's underwriting, together with support offices, equipment and services.
Premiums earned are included in earnings evenly over the terms of the policies.
UPCIC does not have policies that provide for retroactive premium adjustments.
Policy acquisition costs, consisting of commissions and other costs that vary
with and are directly related to the production of business, net of ceding
commissions, are deferred and amortized over the terms of the policies, but only
to the extent that unearned premiums are sufficient to cover all related costs
-8-
and expenses. At September 30, 2002, deferred policy acquisition costs amounted
to $0.
An allowance for uncollectible premiums receivable is established when it
becomes evident collection is doubtful. No allowance is deemed necessary at
September 30, 2002.
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 become known. UPCIC estimates claims and claims
expenses based on historical experience of similar entities and payment and
reporting patterns for the type of risk involved. These estimates are
continuously reviewed by UPCIC's affiliated management professionals and any
resulting adjustments are reflected in operations for the period in which they
are determined.
Inherent in the estimates of ultimate claims are expected trends in claims
severity, frequency and other factors that may vary as claims are settled. The
amount of uncertainty in the estimates for casualty coverage is significantly
affected by such factors as the amount of historical claims experience relative
to the development period, knowledge of the actual facts and circumstances, and
the amount of insurance risk retained.
NOTE 3 - REINSURANCE
UPCIC's in-force policyholder coverage for windstorm exposures as of September
30, 2002 was approximately $4.5 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.
-9-
Effective June 1, 2002, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with various reinsurers, all rated A or better by
A.M. Best. Under the quota share treaty, UPCIC cedes 80% of its gross written
premiums, losses and loss adjustment expenses with a ceding commission equal to
26% of ceded gross written premium. In addition, the quota share treaty has a
limitation for any one occurrence of $2,000,000. Effective September 30, 2002,
UPCIC amended its quota share reinsurance treaty to cede an additional 10% of
its gross written premium. Effective June 1, 2002, 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, each
property loss, and $1,000,000 in excess of $300,000 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 $2,600,000 limit applies to any one-loss
occurrence.
Effective June 1, 2002, under an excess catastrophe contract, UPCIC obtained
catastrophe coverage of $30,000,000 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 estimated to be $55,000,000.
The ceded reinsurance arrangements had the following effect on certain items in
the accompanying consolidated financial statements:
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Loss Loss
and Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $23,241,044 $21,579,908 $12,609,868 $17,034,115 $20,774,023 $11,984,978
Ceded (21,943,312) (17,079,472) (8,711,662) (11,134,347) (14,809,450) (6,212,749)
------------ ------------ ------------ ------------ ------------ ------------
Net $1,297,732 $4,500,436 $3,898,206 $5,899,768 $5,964,573 $5,772,229
============ ============ ============ ============ ============ ============
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Loss Loss
and Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $8,697,857 $7,591,620 $4,717,663 $6,601,096 $6,936,327 $5,165,598
Ceded (8,661,130) (6,592,646) (4,019,918) (4,944,003) (5,089,834) (2,613,617)
----------- ----------- ----------- ----------- ----------- -----------
Net $36,727 $998,974 $697,745 $1,657,093 $1,846,493 $2,551,981
=========== =========== =========== =========== =========== ===========
Other Amounts:
September 30, 2002
------------------
Reinsurance recoverable on paid and unpaid losses
and loss adjustment expenses $ 6,259,869
Unearned premiums ceded 14,478,770
----------
-10-
Prepaid reinsurance premiums and reinsurance recoverable $ 20,738,639
==========
UPCIC's reinsurance contracts do not relieve UPCIC from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to UPCIC; consequently, allowances are established for amounts deemed
uncollectible. No allowance is deemed necessary at September 30, 2002. UPCIC
evaluates the similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies. UPCIC currently has reinsurance contracts with
various reinsurers located throughout the United States and internationally.
UPCIC believes that this distribution of reinsurance contracts adequately
minimizes UPCIC's risk from any potential operating difficulties of its
reinsurers.
NOTE 4 - LOAN PAYABLE
On May 29, 2002 Universal Insurance Holdings, Inc. entered into a Senior
Promissory Note with Renaissance Reinsurance LTD. for the principal sum of
$750,000 payable in 12 monthly installments of $62,500. Interest accrues on
the unpaid balance of the principal amount at a fixed annual rate of 9%.
Universal Risk Advisors, Inc. signed as guarantor of the note. The loan
amount was contributed to UPCIC as additional paid in capital.
NOTE 5 - LEGAL PROCEEDINGS
Universal Management performed various services with respect to UPCIC insurance
policies and received fees for performing these services based upon policies
written pursuant to an agreement originally executed in 1997. The parties agreed
to terminate the agreement effective January 15, 2002. Universal Management
communicated to UPCIC that all management services would cease on the date of
termination rather than continuing through the life of the policies for which
fees were paid on a premiums written basis. As a result, UPCIC ceased remittance
of the management fees to Universal Management as of September 1, 2001. On
November 6, 2001, UPCIC filed a Complaint against Universal Management in the
United States District Court for The Southern District of Florida, Miami
Division, alleging breach of contract and demanding specific performance and
unspecified damages. On December 28, 2001, Universal Management filed a
counterclaim for breach of contract, alleging that it is entitled to fees for
policies written from September 2001 through the date of termination. As of
December 31, 2001, UPCIC has recorded a receivable from Universal Management
representing the management fees remitted on the basis of premiums earned
subsequent to the termination date, January 15, 2002, and provided an allowance
for doubtful accounts for the entire receivable balance of $80,000. The terms of
the settlement have not yet been finalized. Accordingly, the Company has not
accrued a liability with respect to the management fees claimed by Universal
Management.
NOTE 6 - LETTER OF INTENT
On May 28, 2002, the Company entered into a letter of intent to sell its
insurance operations to Holding Company of America, Inc. ("HCA") subject to an
exclusive ninety-day review period to conduct due diligence. The letter of
intent contemplates the sale of the following entities, constituting all of the
Company's insurance operations, each of which is a wholly-owned direct or
indirect subsidiary of the Company: Universal Insurance Holding Company of
Florida; Universal Property & Casualty Insurance Company; Universal Risk
-11-
Advisors, Inc.; Universal Adjusting Corporation; Universal Florida Insurance
Agency, Inc.; U.S. Insurance Solutions, Inc.; U.S.A Insurance Solutions, Inc.;
Universal Inspection Corporation. The purchase price is to be determined
pursuant to various formulas for valuing the insurance operations that take into
account capital and financial performance.
In addition, the letter of intent and a July 1, 2002 supplement provide for HCA
to contribute $2.5 million to the capital of Universal Property & Casualty
Insurance Company upon the execution of a promissory note by Universal Risk
Advisors, Inc. and the Company's guaranty. The note will be payable to HCA upon
the occurrence of certain events including the failure to (i) enter into a
purchase and sale agreement as contemplated by the letter of intent, (ii) obtain
the approval of the Florida Department of Insurance or (iii) close the
transaction, and will be payable in eight quarterly installments that bear
interest at the prime rate plus two percent. The amount has not yet been funded
as of November 15, 2002 and the Company is actively considering other offers to
acquire its insurance operations.
Item 2. Management's Discussion and Analysis or Plan of Operations
------ ----------------------------------------------------------
The following discussion and analysis by management of the Company's
consolidated financial condition and results of operations should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
Notes thereto.
FORWARD-LOOKING STATEMENTS
Certain statements made by the Company's management may be considered to
be "forward-looking statements" within the meaning of the Private Securities
Reform Litigation Act of 1995. Forward-looking statements are based on various
factors and assumptions that include known and unknown risks and uncertainties.
The words "believe," "expect," "anticipate," and "project," and similar
expressions, identify forward-looking statements, which speak only as of the
date the statement was made. Such statements may include, but not be limited to,
projections of revenues, income or loss, expenses, plans, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
results could differ materially from those described in forward-looking
statements as a result of the risks set forth in the following discussion, 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 U.S. Insurance Solutions, Inc.,
generate income from policy fees, commissions, premium financing referral fees
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,
-12-
Universal Inspection Corporation, which performs property inspections for
homeowners' policies underwritten by UPCIC.
The Company has formed two subsidiaries that specialize in selling
insurance via the Internet. Tigerquote.com Insurance & Financial Services Group,
Inc., and its wholly owned subsidiary Tigerquote.com Insurance Solutions, Inc.
are a network of Internet insurance agencies. At September 30, 2002, agencies
have been established in 22 states. Separate legal entities have been formed for
each state and are governed by the respective states' department of insurance.
The Company has also formed Tiger Home Services, Inc., which furnishes
pest control, pool services, landscaping, house cleaning and hurricane shutters
to homeowners. The Tiger Home Division had approximately $330,000 in revenue in
the first nine months of 2002. Management believes this will be a growing part
of the Company's overall business.
FINANCIAL CONDITION
Cash and cash equivalents at September 30, 2002 aggregated $5,063,126. The
source of liquidity for possible claims payments consists of net premiums, after
deductions for expenses.
UPCIC believes that premiums will be sufficient to meet UPCIC's working
capital requirements for at least the next twelve months. Amounts considered to
be in excess of current working capital requirements have been invested. At
September 30, 2002 UPCIC's investments were comprised of $5,063,126 in cash and
repurchase agreements, $563,670 in fixed maturity securities and $222,174 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 an effort to
further grow its insurance operations, in 1998 the Company began to solicit
business actively in the open market. Through renewal of JUA business combined
with business solicited in the market through independent agents, UPCIC is
currently servicing approximately 44,000 homeowners and dwelling fire insurance
policies. In determining appropriate guidelines for such open market policy
sales, UPCIC employs standards similar to those used in its selection of JUA
policies. Also, to improve underwriting and manage risk, the Company uses
analytical tools and data currently developed in conjunction with the Company's
reinsurers and their utilization of catastrophe model utilizing Risk Management
Solutions (RMS). 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.
-13-
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2002 VERSUS NINE
MONTHS ENDED SEPTEMBER 30, 2001
Gross premiums written increased 36.4% to $23,241,044 for the nine month
period ended September 30, 2002 from $17,034,115 for the nine month period ended
September 30, 2001. The increase in gross premiums written is primarily
attributable to an increase in new business as well as premium rate increases.
Net premiums earned decreased 24.5% to $4,500,436 for the nine month
period ended September 30, 2002 from $5,964,573 for the nine month period ended
September 30, 2001. The decrease is primarily due to non-renewal of certain
policies in high exposure areas in late 2001 and to the change in the
reinsurance program effective June 1, 2002.
Investment income decreased 35.7% to $327,233 for the nine month period
ended September 30, 2002 from $508,837 for the nine month period ended September
30, 2001. The decrease is primarily due to the lower interest rate environment
and lower investment balances during the nine months ended September 30, 2002.
Other revenue decreased 27.7% to $2,648,329 for the nine month period
ended September 30, 2002 from $3,663,549 for the nine month period ended
September 30, 2001. The decrease is primarily attributable to the JUA bonus
received of $2,637,300 in the first nine months of 2001.
Commission income decreased 28.6% to $271,337 for the nine month period
ended September 30, 2002 from $380,121 for the nine month period ended September
30, 2001. Commission income is comprised principally of the managing general
agent's policy fee income on all new and renewal insurance policies and to a
lesser extent commissions generated from agency operations. The decrease is
primarily attributable to a change in the agent compensation arrangement that
took effect in August 2002, mitigated by an increase in new business.
Losses and loss adjustment expenses ("LAE") incurred decreased 32.5% to
$3,898,206 for the nine month period ended September 30, 2002 from $5,772,229
for the nine month period ended September 30, 2001. The Company's direct loss
ratio for the nine month period ended September 30, 2002 was 58.4% compared to
57.7% for the nine month period ended September 30, 2001. The Company's direct
loss ratio was comparable for the two periods. Losses and LAE, the Company's
most significant expenses, represent actual payments made and changes in
estimated future payments to be made to or on behalf of its policyholders,
including expenses required to settle claims and losses. Losses and LAE are
influenced by loss severity and frequency.
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.
-14-
General and administrative expenses decreased 37.0% to $3,870,052 for the
nine month period ended September 30, 2002 from $6,139,361 for the nine month
period ended September 30, 2001. General and administrative expenses have
decreased mainly due to higher ceding commissions on premiums ceded to
reinsurers as well as ceding commission recognized as a result of the change in
the quota share ceding percentage from 50% to 80% on June 1, 2002.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2002 VERSUS THREE
MONTHS ENDED SEPTEMBER 30, 2001
Gross premiums written increased 31.8% to $8,697,857 for the three month
period ended September 30, 2002 from $6,601,096 for the three month period ended
September 30, 2001. The increase in gross premiums written is primarily
attributable to an increase in new business as well as premium rate increases.
Net premiums earned decreased 45.9% to $998,974 for the three month period
ended September 30, 2002 from $1,846,493 for the three month period ended
September 30, 2001. The decrease is primarily due to non-renewal of certain
policies in high exposure areas in late 2001 and to a lesser extent the change
in the reinsurance program effective June 1, 2002.
Investment income decreased 4.3% to $147,961 for the three month period
ended September 30, 2002 from $154,600 for the three month period ended
September 30, 2001. The decrease is primarily due to the lower interest rate
environment and lower investment balances during the three months ended
September 30, 2002.
Other revenue increased 165.7% to $1,147,164 for the three month period
ended September 30, 2002 from $431,808 for the three month period ended
September 30, 2001. The increase is primarily attributable to revenue generated
by Tigerquote.com for leads sold over the internet during the three months ended
September 30, 2002.
Commission income decreased 1.2% to $121,088 for the three month period
ended September 30, 2002 from $122,571 for the three month period ended
September 30, 2001. Commission income is comprised principally of the managing
general agent's policy fee income on all new and renewal insurance policies and
to a lesser extent commissions generated from agency operations. The decrease is
primarily attributable to a change in the agent compensation arrangement that
took effect in August 2002, mitigated by an increase in new business.
Losses and loss adjustment expenses ("LAE") incurred decreased 72.7% to
$697,745 for the three month period ended September 30, 2002 from $2,551,981 for
the three month period ended September 30, 2001. The Company's direct loss ratio
for the three month period ended September 30, 2002 was 62.1% compared to 74.5%
for the three month period ended September 30, 2001. The Company's direct loss
ratio decreased principally due to the lower frequency and severity of claims in
the three months ended September 30, 2002. Losses and LAE, the Company's most
significant expenses, represent actual payments made and changes in estimated
future payments to be made to or on behalf of its policyholders, including
expenses required to settle claims and losses. Losses and LAE are influenced by
loss severity and frequency.
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
-15-
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 55.4% to $1,074,874 for the
three month period ended September 30, 2002 from $2,412,596 for the three month
period ended September 30, 2001. General and administrative expenses have
decreased mainly due to higher ceding commissions on premiums ceded to
reinsurers as well as ceding commission recognized as a result of the change in
the quota share ceding percentage from 50% to 80% on June 1, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash flow are premium revenues and
investment income.
For the nine month period ended September 30, 2002, cash flows used by
operating activities were $8,058,269. Cash flows from operating activities are
negative, primarily due to payments made to reinsurers, including the transfer
of the unearned premium related to the new quota share reinsurance agreement in
the second quarter of 2002. The Company's investment portfolio is highly liquid
as it consists almost entirely of readily marketable securities. Cash flows from
investing activities are primarily comprised of proceeds from maturities of debt
securities held to maturity. Cash flows from financing activities primarily
relate to Company borrowings. The Company is party to a senior Promissory Note
with a reinsurer for $750,000 payable in 12 monthly installments through July
2003. The funds were used to make an additional capital contribution to UPCIC.
Payments have been made in a timely manner.
The Company has incurred losses in the past two years. In order to
improve the Company's financial position and achieve profitable operations,
management has implemented a rate increase for new and renewal business, is
restructuring the homeowners' coverage offered, has restructured its
catastrophic reinsurance coverage to reduce the cost, and is working to reduce
general and administrative expenses.
In addition, management is exploring sources of additional capital,
including the sale of its insurance operations. On May 28, 2002, the Company
entered into a letter of intent to sell its insurance operations to Holding
Company of America, Inc. ("HCA") subject to an exclusive ninety-day review
period to conduct due diligence. The letter of intent contemplates the sale of
the following entities, constituting all of the Company's insurance operations,
each of which is a wholly-owned direct or indirect subsidiary of the Company:
Universal Insurance Holding Company of Florida; Universal Property & Casualty
Insurance Company; Universal Risk Advisors, Inc.; Universal Adjusting
Corporation; Universal Florida Insurance Agency, Inc.; U.S. Insurance Solutions,
Inc.; U.S.A Insurance Solutions, Inc.; Universal Inspection Corporation. The
purchase price is to be determined pursuant to various formulas for valuing the
insurance operations that take into account capital and financial performance.
In addition, the letter of intent and a July 1, 2002 supplement provide
for HCA to contribute $2.5 million to the capital of Universal Property &
Casualty Insurance Company upon the execution of a promissory note by Universal
Risk Advisors, Inc. and the Company's guaranty. The note will be payable to HCA
upon the occurrence of certain events including the failure to (i) enter into a
-16-
purchase and sale agreement as contemplated by the letter of intent, (ii) obtain
the approval of the Florida Department of Insurance or (iii) close the
transaction, and will be payable in eight quarterly installments that bear
interest at the prime rate plus two percent. The amount has not yet been funded
as of November 15, 2002 and the Company is actively considering other offers to
acquire its insurance operations.
Management believes that the 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 achieve 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. Specific to a recent
homeowners' insurance rate increase implemented by the Company on a use and file
basis, effective February 28, 2002 for new business and April 20, 2002 for
renewal business the Florida Department of Insurance ("DOI") notified UPCIC in
September 2002 of its intent to disapprove the requested rate change. UPCIC's
request to raise homeowners' insurance rates was to go to arbitration with the
DOI. The Company has recently been informally notified by the DOI that the DOI
no longer wants to go to arbitration on the requested rate change and that the
rate change applicable to the current year will be granted. The financial
statements of the Company do not include any adjustment that might arise from
denial of the requested rate change.
The Company believes that its current capital resources together with
management's plan as described above will be sufficient to support current
operations and expected growth for at least 12 months.
The balance of cash and cash equivalents at September 30, 2002 is
$5,063,126. Most of this amount, along with readily marketable equity securities
aggregating $222,174 would be available to pay claims in the event of a
catastrophic event pending reimbursement for any aggregate amount in excess of
$400,000 up to 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 surplus equal to the statutory minimum capital and
surplus requirement defined in the Florida Insurance Code. UPCIC's statutory
capital and surplus exceeded the minimum capital and surplus requirements of
$4,000,000 as of September 30, 2002. UPCIC is also required to adhere to
prescribed premium-to-capital surplus ratios. UPCIC is in compliance with these
requirements and expects to remain in compliance, if management's plans are
successful.
-17-
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 capital surplus as of the preceding year end.
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, 2001, based on calculations
using the appropriate NAIC RBC formula, the Company's total reported adjusted
capital was in excess of three of the four ratios which would require any form
of regulatory action. However, UPCIC'S surplus as reported was below the company
action level, triggering a Company Action Level event in accordance with Florida
Insurance Statutes. Accordingly, UPCIC was required to file a Risk Based Capital
Plan containing items specified in Florida statutes. The Risk Based Capital Plan
has been approved by the DOI contingent upon certain items specified by the DOI,
including DOI approval of any rate changes contemplated by the plan and
determination by the DOI that a reinsurance agreement that is a part of the plan
is acceptable. See Note 1 for status of DOI approval of a recently requested
rate change.
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 nine
months ending September 30, 2002. Certain claims and complaints have been filed
or are pending against the Company with respect to various matters. In the
opinion of management none of these lawsuits, except for the lawsuit with
Universal Property and Casualty Management Company described in Note 5 to the
condensed consolidated Financial Statements included herewith, are material and
they are adequately provided for or covered by insurance or, if not so covered,
are without any or have little merit or involve such amounts that if disposed of
unfavorably would not have a material adverse effect on the Company.
Item 2. Changes in Securities
------ ---------------------
-18-
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 625,000 shares of common stock. The shares were
issued to Mr. Meier in a private transaction on September 9, 2002. This
transaction was performed in accordance with the terms of the amendment and
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
------ -------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
None.
Item 5. Other Information
------ -----------------
None.
Item 6. Exhibits and Reports On Form 8-K
------ --------------------------------
(a) Exhibits
Exhibit No. Exhibit
----------- -------
11.1 Statement Regarding Computation of Per Share Income
(b) Reports on Form 8-K
None.
-19-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSAL INSURANCE HOLDINGS, INC.
Date: November 19, 2002 /s/ Bradley I. Meier
------------------------------
Bradley I. Meier, Chief Executive Officer
/s/ James M. Lynch
------------------------------
James M. Lynch, Chief Financial Officer
-20-
CERTIFICATION
I, Bradley I. Meier, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Universal
Insurance Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
-21-
Date: November 19, 2002 /s/ Bradley I. Meier
------------------------------------------
Bradley I. Meier, Chief Executive Officer
-22-
CERTIFICATION
I, James M. Lynch, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Universal
Insurance Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
-23-
Date: November 19, 2002 /s/ James M. Lynch
------------------------------------------
James M. Lynch, Chief Financial Officer
-24-
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Universal Insurance Holdings,
Inc. ("Company") on Form 10-QSB for the period ended September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof ("Report"), each
of the undersigned, in the capacities and on the dates indicated below, hereby
certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of the
Company.
November 19, 2002 /s/ Bradley I. Meier
------------------------------------------
Bradley I. Meier, Chief Executive Officer
/s/ James M. Lynch
------------------------------------------
James M. Lynch, Chief Financial Officer
26