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 June 30, 2006
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 000-20848
UNIVERSAL INSURANCE HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 65-0231984
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1110 W. Commercial Blvd.
Suite 100
Fort Lauderdale, Florida 33309
(Address of principal executive offices)
(954) 958-1200
(Issuer's telephone number)
2875 N.E. 191st Street
Suite 302
Miami, FL 33180
(former address)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the last practicable date: 37,957,103 shares of common
stock as of August 18, 2006.
Transitional Small Business Disclosure Format Yes No X
--- ---
UNIVERSAL INSURANCE HOLDINGS, INC.
----------------------------------
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Universal Insurance Holdings, Inc. and Subsidiaries
Fort Lauderdale, Florida
We have reviewed the accompanying condensed consolidated balance sheet of
Universal Insurance Holdings, Inc. and Subsidiaries as of June 30, 2006 and the
related condensed consolidated statements of income for the three and six-month
periods ended June 30, 2006 and 2005 and cash flows for six-month periods ended
June 30, 2006 and 2005. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Blackman Kallick Bartelstein, LLP
Chicago, Illinois
August 18, 2006
2
The following unaudited consolidated financial statements of Universal
Insurance Holdings, Inc. have been prepared in accordance with the instructions
to Form 10-QSB and, therefore, omit or condense certain footnotes and other
information normally included in financial statements prepared in conformity
with accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments (consisting primarily of normal
recurring accruals) necessary for a fair presentation of the financial
information for the interim periods reported have been made. Results of
operations for the three and six-months ended June 30, 2006 are not necessarily
indicative of the results for the year ending December 31, 2006.
3
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2006
(Unaudited)
ASSETS
Cash and cash equivalents $ 68,024,838
Reinsurance recoverables 126,311,358
Premiums and other receivables 22,415,709
Deferred acquisition cost 3,491,263
Real estate 3,202,918
Property and equipment, net 808,264
Deferred income tax 1,845,969
Other assets 210,333
----------------
Total assets $ 226,310,652
================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 35,008,322
Unearned premiums 105,572,557
Advanced premiums 3,449,783
Accounts payable 2,250,828
Reinsurance payable 53,632,960
Income taxes payable 2,385,577
Dividends payable 1,518,284
Other accrued expenses 8,038,276
Loans payable 1,100,849
----------------
Total liabilities $ 212,957,436
================
STOCKHOLDERS' EQUITY:
Cumulative convertible preferred stock, $.01 par value, 1,000,000 shares 1,387
authorized, 138,640 shares issued and outstanding, minimum liquidation
preference of $1,419,700
Common stock, $.01 par value, 50,000,000 shares authorized, 37,957,103
shares issued and 34,848,458 shares outstanding 341,728
Common stock in treasury, at cost - 208,645 shares (101,820)
Minority interest 35,421
Additional paid-in capital 16,315,656
Accumulated deficit (3,239,156)
----------------
Total stockholders' equity 13,353,216
----------------
Total liabilities and stockholders' equity $ 226,310,652
================
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 INCOME
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
PREMIUMS EARNED AND OTHER REVENUES:
Direct premiums written $ 114,003,676 $ 34,474,916 $ 77,159,159 $20,693,417
Ceded premiums written (77,945,774) (20,882,915) (45,963,214) (9,603,456)
---------- ----------- ----------- ------------
Net premiums written 36,057,902 13,592,001 31,195,945 11,089,961
Change in unearned premiums (25,079,437) (9,616,941) (24,503,066) (8,312,463)
----------- ---------- ----------- ------------
Premiums earned, net 10,978,465 3,975,060 6,692,879 2,777,498
Net investment income 969,183 326,570 585,216 120,155
Commission revenue 2,530,465 1,136,394 1,609,573 585,819
Transaction fees - 160,151 - 47,417
Other revenue 201,329 91,987 162,499 27,638
----------- ---------- ----------- ------------
Total premiums earned and other revenues 14,679,442 5,690,162 9,050,167 3,558,527
----------- ---------- ----------- ------------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 5,033,199 445,415 4,114,076 282,503
General and administrative expenses 2,982,796 4,225,875 3,062,980 3,258,169
----------- ---------- ----------- ------------
Total operating costs and expenses 8,015,995 4,671,290 7,177,056 3,540,672
----------- ---------- ----------- ------------
INCOME BEFORE FEDERAL INCOME TAXES 6,663,447 1,018,872 1,873,111 17,855
----------- ---------- ----------- ------------
Federal income taxes current 2,615,933 1,337,068 -
Federal income taxes deferred (1,238,670) - (1,437,547) -
----------- ---------- ----------- ------------
Federal income taxes, net 1,377,263 - (100,479) -
----------- ---------- ----------- ------------
NET INCOME $ 5,286,184 $ 1,018,872 $ 1,973,590 $ 17,855
============= ============== ============== ============
INCOME PER COMMON SHARE
Basic $ 0.15 $ 0.03 $ 0.06 $ 0.00
============= ============== ============== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 34,373,000 32,808,000 34,306,000 32,720,000
============= ============== ============== ============
INCOME PER COMMON SHARE
Diluted $ 0.14 $ 0.03 0.05 $ 0.00
============= ============== ============== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 36,863,000 33,456,000 37,300,000 33,406,000
============= ============== ============== ============
CASH DIVDEND DECLARED PER
COMMON SHARE $ 0.08 $ - $ 0.04 $ -
============= ============== ============== ============
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
5
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,286,184 $ 1,018,872
Adjustments to reconcile net income
to cash provided by (used in) operations:
Amortization and depreciation 185,062 66,126
Issuance of common stock as compensation 1,138,764 64,500
Net change in assets and liabilities relating to operating
activities:
Reinsurance recoverables (4,373,490) 37,578,035
Premiums and other receivables (16,941,815) (2,075,216)
Deferred taxes (1,238,670) -
Reinsurance payable 9,180,607 (8,146,502)
Deferred acquisition cost (3,491,263) -
Deferred ceding commission (1,043,544) -
Advanced premiums 2,441,954 1,412,556
Accounts payable 1,315,294 (2,489,515)
Taxes payable 2,385,577 579,222
Other accrued expenses 3,402,278 895,721
Unpaid losses and loss adjustment expenses (31,991,634) (44,518,594)
Unearned premiums 54,682,552 10,577,778
Other assets 735,913 (701,501)
------------ ------------
Net cash provided by (used in) operating activities 21,673,769 (5,738,518)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (51,826) (75,269)
Building improvements (115,027) -
Purchase of real estate - (1,367,031)
------------ ------------
Net cash used in investing activities (166,853) (1,442,300)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (24,976) (24,975)
Issuance of common stock 44,251 -
Common stock dividend paid (1,488,851) -
Repayments of loans payable (51,238) (367,182)
Proceeds from loans payable - 1,041,378
------------ ------------
Net cash (used in) provided by financing activities (1,520,814) 649,221
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 19,986,102 (6,531,597)
CASH AND CASH EQUIVALENTS, Beginning of period 48,038,736 22,443,579
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 68,024,838 $15,911,982
============ ============
Non-cash items
Declared dividends payable $1,518,284 $ -
============ ============
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
June 30, 2006
(Unaudited)
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, Sterling Premium Finance Company, which is wholly owned
by certain officers of the Company 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 June 30, 2006, the
related condensed consolidated statements of income for the six months ended
June 30, 2006 and 2005 and cash flows for the six months ended June 30, 2006 and
2005 are unaudited. There were no items comprising comprehensive income for the
six months ended June 30, 2006 and 2005. Accordingly, consolidated statements of
comprehensive income are not presented. 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, 2005 except for the adoption of new
accounting pronouncements as noted below. The interim financial statements
reflect all adjustments (consisting primarily of normal and recurring accruals
and adjustments) which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The Company's
operating results for any particular interim period may not be indicative of
results for the full year and thus should be read in conjunction with the
Company's annual statements.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
OFF-BALANCE SHEET ARRANGEMENTS. There were no off-balance sheet arrangements
during the first six months of 2006.
NEW ACCOUNTING PRONOUNCEMENTS. SFAS No.123 (Revised 2004), Share-Based Payments,
issued in December 2004, is a revision of FASB Statement 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. The Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payments transactions. SFAS No. 123 (Revised
2004) requires a public entity to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award (with limited exceptions) with the cost recognized over the
period during which an employee is required to provide service in exchange for
the award. This statement is effective as of the beginning of the first interim
7
or annual reporting period of the company's first fiscal year that begins on or
after December 15, 2005 and the Company adopted the standard in the first
quarter of fiscal year 2006.
On March 29, 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. (SAB 107) regarding the Staff's interpretation of SFAS
123(R). This interpretation expresses the views of the Staff regarding the
interaction between SFAS 123(R) and certain SEC rules and regulations and
provides the Staff's views regarding the valuation of share-based payments
arrangements by public companies. In particular, this SAB provides guidance
related to share-based payments transactions with non-employees, the transition
from nonpublic to public entity status, valuation methods, the accounting for
certain redeemable financial instruments issued under shared-based payments
arrangements, the classification of compensation expense, non-GAAP financial
measures, first-time adoption of SFAS 123(R) in an interim period,
capitalization of compensation cost related to share-based payments
arrangements, the accounting for income tax effects of share-based payments
arrangements upon adoption of SFAS 123(R), the modification of employee share
options prior to adoption of SFAS 123(R) and disclosures in Management's
Discussion and Analysis subsequent to adoption of SFAS 123(R). The Company
adopted SAB 107 in connection with its adoption of SFAS 123(R).
In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections,
which establishes, unless impracticable, retrospective application as the
required method for reporting a change in accounting principle in absence of
explicit transition requirements specific to the newly adopted accounting
principle. The statement provides guidance for determining whether retrospective
application of a change in accounting principle is impracticable. The statement
also addresses the reporting of a correction of error by restating previously
issued financial statements. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 14,
2005. The Company adopted SFAS No. 154 in the first quarter of 2006. The impact
of such adoption did not have an effect on the Company's consolidated financial
statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. Management has reassessed the
critical accounting policies as disclosed in our 2005 Annual Report to
Stockholders on Form 10-KSB and determined that no changes, additions or
deletions are needed to the policies as disclosed. Also there were no
significant changes in our estimates associated with those policies.
RISKS AND UNCERTAINTIES. The Company's business could be affected by regulatory
and competitive restrictions on pricing for new and renewal business, the
availability and cost of catastrophic reinsurance, adverse loss experience and
federal and state legislation or governmental regulations of insurance
companies. Changes in these areas could adversely affect the Company's
operations in the future.
Management continues to take action to improve and strengthen UPCIC's
financial condition. Premium rate increases have been implemented. UPCIC changed
the geographic and coverage mix of the property insurance it writes, which is a
key determinant in the amount and pricing of reinsurance procured by UPCIC. In
light of the four windstorm catastrophes Florida experienced in 2004, and three
windstorm catastrophes Florida experienced in 2005, there was a significant
increase in catastrophe reinsurance cost for the June 1, 2006 renewal which the
8
Company had planned and factored into its original policy pricing. Effective May
1, 2004 the Company brought in house the system it utilizes for policy issuance
and administration. This has enhanced UPCIC's operating results through its
ability to improve and better control underwriting and loss adjusting
activities. Management believes the implementation of, and results attributable
to, the actions described above will continue to strengthen UPCIC's surplus.
However, there can be no assurance of the ultimate success of these plans, or
that the Company will be able to maintain profitability.
Effective June 1, 2006, the Company reduced the rate of cession on its
quota share reinsurance. Quota share reinsurance is used primarily to increase
the Company's underwriting capacity and to reduce exposure to losses. Quota
share reinsurance refers to a form of reinsurance under which the reinsurer
participates in a specified percentage of the premiums and losses on all
reinsured policies in a given class of business. As a result of this reduction
of the Company's quota share reinsurance from 80% to 50%, the Company will
retain and earn more premiums the Company writes, but will also retain more
related losses. The Company's increased exposure to potential losses could have
a material adverse effect on the Company's business, financial condition and
results of operations.
RESULTS OF OPERATIONS
INSURANCE OPERATIONS
UPCIC commenced its insurance activity in February 1998 by assuming policies
from the Florida Residential Property and Casualty Joint Underwriting
Association ("JUA"). UPCIC received the unearned premiums and began servicing
such policies. Since then, UPCIC has been renewing these policies as well as
soliciting business actively in the open market through independent agents.
Unearned premiums represent amounts that UPCIC would refund policyholders if
their policies were canceled. UPCIC determines unearned premiums by calculating
the pro-rata amount that would be due to the policyholder at a given point in
time based upon the premiums owed over the life of each policy. At June 30,
2006, the Company had unearned premiums totaling $105,572,557.
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 June 30, 2006, deferred policy acquisition cost amounted to
$3,491,263.
An allowance for uncollectible premiums receivable is established when it
becomes evident that collection is doubtful, typically after 90 days past due.
No allowance is deemed necessary at June 30, 2006.
9
Loss and loss adjustment expenses ("LAE"), less related reinsurance, are
provided for as claims are incurred. The provision for unpaid loss and LAE
includes: (1) the accumulation of individual case estimates for loss and LAE
reported prior to the close of the accounting period; (2) estimates for
unreported claims based on past experience modified for current trends; and (3)
estimates of expenses for investigating and adjusting claims based on past
experience. During 2005, Florida experienced three windstorm catastrophes
(Hurricanes Dennis, Katrina and Wilma) which resulted in losses. As a result of
these storms, the Company currently estimates that it incurred $77,181,196 in
losses prior to reinsurance and $4,121,253 net of reinsurance.
Liabilities for unpaid claims and claims adjustment expenses are based on
estimates of ultimate cost of settlement. Changes in claims estimates resulting
from the continuous review process and differences between estimates and
ultimate payments are reflected in expense for the period in which the revision
of these estimates first becomes known. UPCIC estimates claims and claims
expenses based on its historical experience and payment and reporting patterns
for the type of risk involved. These estimates are continuously reviewed by
UPCIC's management professionals and any resulting adjustments are reflected in
operations for the period in which they are determined.
Inherent in the estimates of ultimate claims are expected trends in claims
severity, frequency and other factors that may vary as claims are settled. The
amount of uncertainty in the estimates for casualty coverage is significantly
affected by such factors as the amount of historical claims experience relative
to the development period, knowledge of the actual facts and circumstances, and
the amount of insurance risk retained.
ONLINE COMMERCE OPERATIONS
The Company has formed subsidiaries that were to specialize in selling insurance
and generating insurance leads via the Internet. Tigerquote.com Insurance &
Financial Services Group, Inc. ("Tigerquote.com") and Tigerquote.com Insurance
Solutions, Inc. were incorporated in Delaware on June 6, 1999 and August 23,
1999, respectively. Tigerquote.com was an Internet insurance lead generating
network while Tigerquote.com Insurance Solutions, Inc. was a network of Internet
insurance agencies. These entities would have sought to generate income from the
selling of leads and commissions on policies written. To date, insurance
agencies have been established in 22 states. Separate legal entities have been
formed for each state and are governed by the respective states' departments of
insurance. None of the agencies are currently active as the Company changed its
focus to sell leads to other companies and independent agents. During the fourth
quarter of 2005, the Company decided to stop generating new business on its
online commerce operations and focus on its core operations.
CORPORATE AND OTHER OPERATIONS
Operating segments that are not individually reportable based on the current
operations in such segments, are included in Corporate and Other. The segment
currently includes the operations of Universal Insurance Holdings, Inc., Tiger
Home Services, Inc. and other entities. During 2001, the Company formed Tiger
Home Services, Inc., which furnished pool services to homeowners until the
operation was sold during the second quarter of 2005.
10
REINSURANCE
In the normal course of business, UPCIC seeks to reduce the loss that may arise
from catastrophes or other events that cause unfavorable underwriting results by
reinsuring certain levels of risk in various areas of exposure with other
insurance enterprises or reinsurers. Amounts recoverable from reinsurers are
estimated in a manner consistent with the reinsurance contracts. Reinsurance
premiums, losses and loss adjustment expenses are accounted for on bases
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts. Reinsurance ceding commissions received
are deferred and netted against policy acquisition costs and amortized over the
effective period of the related insurance policies.
UPCIC limits the maximum net loss that can arise from large risks or risks in
concentrated areas of exposure by reinsuring (ceding) certain levels of risks
with other insurers or reinsurers, either on an automatic basis under general
reinsurance contracts known as "treaties" or by negotiation on substantial
individual risks. The reinsurance arrangements are intended to provide UPCIC
with the ability to maintain its exposure to loss within its capital resources.
Such reinsurance includes quota share, excess of loss and catastrophe forms of
reinsurance. While ceding premiums to reinsurers reduces the Company's risk of
exposure in the event of catastrophic losses, it also reduces the Company's
potential for greater profits should such catastrophic events fail to occur. The
Company believes that the extent of its reinsurance is at least typical for a
company of its size in the Florida homeowner's insurance industry.
Effective June 1, 2006, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with various reinsurers. Under the quota share
treaty, through May 31, 2007, UPCIC cedes 50% of its gross written premiums,
losses and loss adjustment expenses for policies with coverage for wind risk
with a ceding commission equal to 28% of ceded gross written premiums. In
addition, the quota share treaty has a limitation for any one occurrence of
$25,000,000 and a limitation from losses arising out of events that are assigned
a catastrophe serial number by the Property Claims Services (PCS) office of
$55,000,000. Effective June 1, 2006 through May 31, 2007, UPCIC entered into a
multiple line excess per risk agreement with various reinsurers. Under the
multiple line excess per risk agreement, UPCIC obtained coverage of $1,300,000
in excess of $500,000 ultimate net loss for each risk and each property loss,
and $1,000,000 in excess of $300,000 for each casualty loss. A $5,200,000
aggregate limit applies to the term of the contract. Effective June 1, 2006
through May 31, 2007, UPCIC entered into a property per risk excess agreement
covering ex-wind only policies. Under the property per risk excess agreement,
UPCIC obtained coverage of $300,000 in excess of $200,000 for each property
loss. A $2,100,000 aggregate limit applies to the term of the contract.
Effective June 1, 2006 through May 31, 2007, under an excess catastrophe
contract, UPCIC obtained catastrophe coverage of $76,000,000 in excess of
$25,000,000 covering certain loss occurrences including hurricanes. The contract
contains a provision for one reinstatement in the event coverage is exhausted;
additional premium is calculated pro rata as to amount and 100% as to time.
Effective June 1, 2006 through May 31, 2007, UPCIC purchased a reinstatement
premium protection contract which reimburses the Company for its cost to
reinstate the catastrophe coverage of $76,000,000 in excess of $25,000,000.
Effective June 1, 2006, UPCIC also obtained subsequent catastrophe event excess
of loss reinsurance to cover certain levels of the Company's net retention
11
through three catastrophe events including hurricanes. UPCIC also obtained
coverage from the Florida Hurricane Catastrophe Fund (FHCF). The approximate
coverage is estimated to be for $223,110,000 in excess of $78,400,000. Also at
June 1, 2006, the Florida Hurricane Catastrophe Fund made available $10,000,000
of additional catastrophe excess of loss coverage with one free reinstatement of
coverage to carriers qualified as limited apportionment companies, such as
UPCIC. This particular layer of coverage is $10,000,000 in excess of $3,750,000.
The estimated total cost of the Company's underlying catastrophe private
reinsurance program at June 1, 2006 is $27,170,000 of which the Company's
estimated cost is 50% or $13,585,000 and the quota share reinsurers cost is the
remaining 50%. The contract has an adjustment mechanism which could result in a
higher reinsurance premium amount. In addition, the Company purchases
reinsurance premium protection as described above which amounts to $6,238,500.
This contract also has an adjustment mechanism which could result in a higher
reinsurance premium amount. The estimated cost of the subsequent catastrophe
event excess of loss reinsurance is $1,770,468. This contract also has an
adjustment mechanism which could result in a higher reinsurance premium amount.
The estimated premium the Company plans to cede to the Florida Hurricane
Catastrophe Fund for the 2006 hurricane season is $14,877,524, which includes
the 25% surcharge the FHCF is dictating for the 2006 hurricane season, of which
the Company's estimated cost is 50% or $7,438,762 and the quota share reinsurers
estimated cost is the remaining 50%. The Company is also participating in the
additional coverage option for Limited Apportionment Companies offered by the
FHCF, the premium for which is estimated to be $5,000,000 of which the Company's
estimated cost is 50% or $2,500,000 and the quota share reinsurers estimated
cost is the remaining 50%.
The ceded reinsurance arrangements had the following effect on certain items in
the accompanying consolidated financial statements:
Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
-------------------------------------------------- ---------------------------------------------------
Loss and
Loss Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $114,003,676 $59,321,123 $32,488,546 $34,474,916 $23,955,222 $12,763,557
Ceded (77,945,774) (48,342,658) (27,455,347) (20,882,915) (19,980,162) (12,318,143)
--------------- -------------- ------------- ------------- --------------- ---------------
Net $36,057,902 $10,978,465 $5,033,199 $13,592,001 $3,975,060 $445,415
=============== ============== ============= ============= =============== ===============
Three Months Ended Three Months Ended
June 30, 2006 June 30, 2005
-------------------------------------------------- ---------------------------------------------------
Loss and
Loss Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $77,159,159 $34,436,949 $25,799,436 $20,693,417 $13,700,426 $12,071,291
Ceded (45,963,214) (27,744,070) (21,685,360) (9,603,456) (10,922,928) (11,788,788)
--------------- -------------- ------------- ------------- --------------- ---------------
Net $31,195,945 $6,692,879 $4,114,076 $11,089,961 $2,777,498 $282,503
=============== ============== ============= ============= =============== ===============
12
OTHER AMOUNTS:
June 30, 2006
-------------
Reinsurance recoverable on paid and unpaid
losses and loss adjustment expenses $ 35,969,561
Unearned premiums ceded 71,249,881
Other reinsurance receivable 19,091,916
--------------
Reinsurance recoverable $ 126,311,358
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 June 30, 2006. UPCIC
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies. UPCIC currently has reinsurance contracts with
various reinsurers located throughout the United States and internationally.
UPCIC believes that ceding risks to reinsurers whom it considers to be
financially sound combined with the distribution of reinsurance contracts to an
array of reinsurers adequately minimizes UPCIC's risk from any potential
operating difficulties of its reinsurers. In addition, UPCIC does not have any
unauthorized reinsurers which have recoverable balances that are not secured by
a letter of credit or that have ceded balances payable that are greater than the
amount of the recoverable.
In light of the four windstorm catastrophes Florida experienced in 2004,
and three windstorm catastrophes Florida experienced in 2005, there was a
significant increase in catastrophe reinsurance cost for the June 1, 2006
renewal which the Company had planned and factored into its original policy
pricing.
Effective June 1, 2006, the Company reduced the rate of cession on its
quota share reinsurance. Quota share reinsurance is used primarily to increase
the Company's underwriting capacity and to reduce exposure to losses. Quota
share reinsurance refers to a form of reinsurance under which the reinsurer
participates in a specified percentage of the premiums and losses on all
reinsured policies in a given class of business. As a result of this reduction
of the Company's quota share reinsurance from 80% to 50%, the Company will
retain and earn more premiums the Company writes, but will also retain more
related losses. The Company's increased exposure to potential losses could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company may also be subject to assessments by Citizens Property
Insurance Corporation, the state-run insurer of last resort and the FHCF as a
result of operating deficiencies related to windstorm catastrophes. In addition,
the Company is subject to assessments by the Florida Insurance Guaranty
Association, as result of company insolvencies. Under current regulations,
insurers may recoup the amount of their assessments from policyholders, or in
some cases collect the amount of the assessments from policyholders as
surcharges for the benefit of the assessing entity.
13
On June 12, 2006 the OIR ordered an emergency FHCF assessment of 1% of
direct premiums written effective January 1, 2007 which the Company will collect
from policyholders, as the assessment is to policyholders, not the Company.
During its meeting on June 16, 2006 the Board of Directors of Florida
Insurance Guaranty Association ("FIGA") determined the need for an assessment
upon its member companies. The Board decided on an assessment on member
companies of 2% of the Florida net direct premiums for the calendar year 2005.
Based on the 2005 net direct premium of $11.2 billion this would generate
approximately $225 million. UPCIC's participation in this assessment totaled
$1,772,861. Pursuant to Florida statutes, insurers are permitted to recoup the
assessment by adding a surcharge to policies in an amount not to exceed the
amount paid by the insurer to FIGA. As a result, UPCIC is currently underwriting
the recoupment in connection with this assessment.
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 six
month periods ended June 30, 2006 and June 30, 2005, respectively, follows:
Six Months Ended
June 30, 2006 June 30, 2005
------------- -------------
Basic EPS 34,373,000 32,808,000
Effect of assumed conversion 2,490,000 648,000
of common stock equivalents ------------- -------------
Diluted EPS 36,863,000 33,456,000
Options and warrants totaling approximately 5,468,000 and 897,000 respectively,
were excluded from the calculation of diluted earnings per share as their effect
was anti-dilutive for the six months ended June 30, 2006. Options and warrants
totaling approximately 7,953,000 and 3,195,000 respectively, were excluded from
the calculation of diluted earnings per share as their effect was anti-dilutive
for the six months ended June 30, 2005. 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.
A reconciliation of shares used in calculating basic and diluted EPS for the
three month periods ended June 30, 2006 and June 30, 2005, respectively,
follows:
14
Three Months Ended
June 30, 2006 June 30, 2005
------------- -------------
Basic EPS 34,306,000 32,720,000
Effect of assumed conversion 2,994,000 686,000
of common stock equivalents ------------- -------------
Diluted EPS 37,300,000 33,406,000
Options and warrants totaling approximately 5,298,000 and 563,000 respectively,
were excluded from the calculation of diluted earnings per share as their effect
was anti-dilutive for the three months ended June 30, 2006. Options and warrants
totaling approximately 7,614,000 and 3,497,000 respectively, were excluded from
the calculation of diluted earnings per share as their effect was anti-dilutive
for the three months ended June 30, 2005. 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.
STOCK- BASED COMPENSATION PLANS AND WARRANTS
Effective January, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 (R), "Share-Based Payments," and began recognizing
compensation expense in its Consolidated Statements of Income for its stock
option grants based on the fair value of the awards. Prior to January 1, 2006,
the Company accounted for stock options grants under the recognition and
measurement of APB Opinion 25, "Accounting for Stock Issued to Employees," and
related Interpretations, as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation." No stock-based compensation expense was reflected in
the net income prior to adopting SFAS 123 (R) as all options were granted at an
exercise price equal to or greater than the market value of the underlying
common stock on the date of grant. SFAS 123 (R) was adopted using the modified
prospective transition method. Under this transition method, compensation cost
recognized in the periods after adoption includes (i) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2006,
based on the grant-date fair value estimated in accordance with the original
provision of SFAS 123, and (ii) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123 (R). Results from prior
periods have not been restated. As a result of adopting SFAS 123 (R), the
Company's income before income taxes and net income for the six months ended
June 30, 2006 are $12,471 and $9,428 lower, respectively, and for the three
months ended June 30, 2006 are $6,053 and $5,094 lower, respectively, than if it
had continued to account for share-based compensation under APB 25. In addition,
during the six months ended June 30, 2006, the Company issued common stock
valued at $1,138,764 as compensation.
The following table illustrates the effects on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS 123 to
options granted under the Company's stock option plans for all periods
presented. For purposes of this pro forma disclosure, the value of the options
is estimated using a Black-Scholes-Merton option pricing model and amortized to
expense over the options' vesting periods.
15
For the Six Months Ended
June 30, 2006 June 30, 2005
------------- -------------
Net income reported $ 5,286,184 $ 1,018,872
Add:
Total stock-based compensation expense included in reported
net income, net of related tax effects 9,428 -
Deduct:
Total stock-based compensation expense determined under
fair value based method, net of related tax effects (9,428) (19,938)
----------------- -------------------
SFAS No 123 R pro forma net income $ 5,286,184 $ 998,934
================= ===================
Pro forma earnings per share
Basic $0.15 $0.03
================= ===================
Fully diluted $0.14 $0.03
================= ===================
Earnings per share, as reported
Basic $0.15 $0.03
================= ===================
Fully diluted $0.14 $0.03
================= ===================
For the Three Months Ended
June 30, 2006 June 30, 2005
------------- -------------
Net income reported $ 1,973,590 $ 17,855
Add:
Total stock-based compensation expense included in reported
net income, net of related tax effects 5,049 -
Deduct:
Total stock-based compensation expense determined under
fair value based method, net of related tax effects (5,049) (6,418)
----------------- -------------------
SFAS No 123 R pro forma net income $ 1,973,590 $ 11,437
================= ===================
Pro forma earnings per share
Basic $0.06 $0.00
================== ===================
Fully diluted $0.05 $0.00
================== ===================
Earnings per share, as reported
Basic $0.06 $0.00
================== ===================
Fully diluted $0.05 $0.00
================== ===================
16
At June 30, 2006, there were 7,205,000 options outstanding and currently
exercisable with a weighted average remaining contract term of 2.30 years and a
weighted exercise price of $0.95. There were 220,000 options exercised during
the six months ended June 30, 2006.
At June 30, 2006, there were 1,081,700 warrants outstanding and currently
exercisable with a weighted average remaining contract term of 1.70 years and a
weighted exercise price of $0.59. There were 525,000 warrants exercised during
the six months ended June 30, 2006.
The Company estimated the fair value of all stock options awards as of the grant
date by applying the Black-Scholes-Merton option pricing model. The use of this
valuation model involves assumptions that are judgmental and highly sensitive in
the determination of compensation expense and include the expected life of the
option, stock price volatility, risk-free interest rate, dividend yield,
exercise price, and forfeiture rate. Under SFAS 123 (R), forfeitures are
estimated at the time of valuation and reduce expense ratably over the vesting
period. The forfeiture rate is adjusted periodically based on the extent to
which actual forfeitures differ, or are expected to differ, from the previous
estimate. Under SFAS 123 and APB 25, the Company elected to account for
forfeitures when awards were actually forfeited and reflect the forfeitures as a
cumulative adjustment to the pro forma expense.
In accordance with SFAS 123 (R), fair values of options granted prior to
adoption and determined for purposes of disclosure under SFAS 123 have not been
changed. The fair values of options granted prior to adoption of SFAS 123 (R),
of which a portion is unvested, was estimated assuming the following: weighted
average expected life of five years, dividend yield of 0.0 percent, risk-free
interest rate of 6.5 percent, and expected volatility of 154.5 percent for
grants in 2004 and 126.3 in 2002. No options were granted in the first six
months of 2006.
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 generated through Tigerquote.com and
commissions on policies placed by Tigerquote.com Insurance Solutions, Inc.
The accounting policies of the segments are the same as those described in the
summary of the significant accounting policies and practices. The Company
evaluates its business segments based on GAAP pretax operating earnings.
Corporate overhead expenses are allocated to business segments. Transactions
between reportable segments are accounted for at fair value.
17
Operating segments that are not individually reportable, based on the extent of
the current operations in such segments, are included in the "All Other"
category. The "All Other" category currently includes the operations of
Universal Insurance Holdings, Inc., and other entities.
Information regarding components of operations for the three months and six
months ended June 30, 2006 and 2005 follows:
Six months ended June 30,
2006 2005
---- ----
Total revenue
Insurance segment $14,660,353 $5,486,771
Online commerce segment 370 161,014
Corporate and other 69,263 42,377
------------ -----------
Total operating segments 14,729,986 5,690,162
Intercompany eliminations (50,544) -
------------ -----------
Total revenues $14,679,442 $5,690,162
============ ===========
Earnings (loss) before income taxes
Insurance segment $ 7,607,293 $1,851,554
Online commerce segment (55,457) (94,361)
Corporate and other (888,389) (738,321)
------------ -----------
Total earnings before income taxes $ 6,663,447 $1,018,872
============ ===========
Three months ended June 30,
2006 2005
---- ----
Total revenue
Insurance segment $9,055,583 $3,501,811
Online commerce segment (20,405) 47,595
Corporate and other 40,261 9,121
----------- -----------
Total operating segments 9,075,439 3,558,527
Intercompany eliminations (25,272) -
----------- -----------
Total revenues $9,050,167 $3,558,527
=========== ===========
Earnings (loss) before income taxes
Insurance segment $2,207,270 $850,537
Online commerce segment (25,318) (94,361)
Corporate and other (308,841) (738,321)
----------- -----------
Total earnings before income taxes $1,873,111 $17,855
=========== ===========
Information regarding total assets as of June 30, 2006:
18
June 30, 2006
-------------
Total assets
Insurance segment $222,376,443
Online commerce segment 70,675
Corporate and other 6,485,889
-------------
Total operating segments $228,933,007
Intercompany eliminations (2,622,355)
------------
Total assets $226,310,652
============
RELATED PARTY TRANSACTIONS
Dennis Downes and Associates, a multi-line insurance adjustment corporation
based in Deerfield Beach, Florida performs certain claims adjusting work for
UPCIC. Dennis Downes and Associates is owned by Dennis Downes, who is the father
of Sean P. Downes, Chief Operating Officer, Senior Vice President and a Director
of the Company. During the six months ended June 30, 2006 and 2005, the Company
expensed claims adjusting fees of $496,000 and $375,343 respectively, to Dennis
Downes and Associates.
In July 2004, the Company borrowed monies from a private investor in the amount
of $175,000 for working capital. In August 2005, this individual's son, Michael
P. Moran, became UPCIC's Vice President of Claims. The loan was paid off in
January 2006.
STOCK ISSUANCES
In February 2006 pursuant to section 4(2) of the Securities Acts of 1933, as
amended, the Company issued 325,000 shares of restricted Common Stock at a price
of $.05 per share to a private investor pursuant to the exercise of warrants to
purchase restricted Common Stock. In April 2006 pursuant to section 4(2) of the
Securities Acts of 1933, as amended, the Company issued 200,000 shares of Common
Stock at a price of $.05 per share to a vendor pursuant to the exercise of
warrants to purchase restricted Common Stock. Also in April 2006, the Company
issued 200,000 shares of restricted Common Stock at a price of $.04 per share to
Sean P. Downes, COO of the Company, pursuant to Mr. Downes' exercise of stock
options and 123,077 shares of restricted Common Stock at a price of $.93 per
share pursuant to Mr. Downes' election to receive such shares in lieu of accrued
vacation. The shares were issued to Mr. Downes in a private transaction pursuant
to Section 4(2) of the Securities Act of 1933, as amended. Also in April 2006
pursuant to section 4(2) of the Securities Acts of 1933, as amended, the Company
issued 10,000 shares of restricted Common Stock at a price of $.50 per share to
Reed J. Slogoff, a Director of the Company, pursuant to the exercise of options
to purchase restricted Common Stock. In May 2006, the Company issued 400,000
shares of restricted Common Stock to one employee at $1.23 per share and 25,000
to a second employee at $1.30 per share in conjunction with employment
agreements. Also in May 2006 pursuant to section 4(2) of the Securities Acts of
1933, as amended, the Company issued 10,000 shares of restricted Common Stock at
a price of $.50 per share to an employee of the Company pursuant to the exercise
of options to purchase the restricted Common Stock. In June 2006 pursuant to
19
section 4(2) of the Securities Acts of 1933, as amended, the Company issued
25,000 shares of restricted Common Stock at a price of $1.52 per share to each
of the outside directors of the Company, (Norman M. Meier, Reed Slogoff, and
Joel Wilentz) and 200,000 shares of restricted Common Stock at a price of $1.52
per share to Sean P. Downes, COO of the Company as a bonus. Also in June 2006
pursuant to section 4(2) of the Securities Acts of 1933, as amended, the Company
issued James M. Lynch, CFO of the Company, 25,807 shares of Common Stock at a
price of $1.65 per share as a bonus. Unless otherwise specified, such as in the
case of the exercise of stock options or warrants, the per share prices were
determined using the closing price of the Company's Common Stock as quoted on
the OTC Bulletin Board.
PROVISION FOR INCOME TAX EXPENSE
A provision for income tax expense of $1,377,263 is recorded for the six months
ended June 30, 2006 as a result of utilization of operating loss carry-forwards
and current profitable operations. No provision had been recorded for the six
months ended June 30, 2005 due to the substantial operating loss carry-forwards
and corresponding valuation allowance that existed at that time.
SUBSEQUENT EVENT
On August 11, 2006, the Company declared a dividend of $.05 per share on the
outstanding Common Stock of the Company to be paid on November 8, 2006 to the
shareholders of record of the Company at the close of business on October 25,
2006.
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
20
collection and investment of premiums. The Company's agency operations, which
include Universal Florida Insurance Agency and Coastal Homeowners Insurance
Specialists, Inc., generate income from commissions. Universal Risk Advisors,
Inc., the Company's managing general agent, generates revenue through policy fee
income and other administrative fees from the marketing of UPCIC's and
third-party insurance products through the Company's distribution network and
UPCIC. Universal Risk Life Advisors, Inc. was formed to be the Company's
managing general agent for life insurance products. In addition, the Company has
formed an independent claims adjusting company, Universal Adjusting Corporation,
which adjusts UPCIC claims, and an inspection company, Universal Inspection
Corporation, which performs property inspections for homeowners' policies
underwritten by UPCIC.
The Company has formed subsidiaries that were to specialize in selling
insurance and generating insurance leads via the Internet. Tigerquote.com
Insurance & Financial Services Group, Inc. was to be an Internet insurance lead
generating network, and Tigerquote.com Insurance Solutions, Inc., was to be a
network of Internet insurance agencies. At June 30, 2006, agencies have been
established in 22 states. Separate legal entities have been formed for each
state and are governed by the respective states' departments of insurance. None
of the agencies are currently active as the Company changed its focus to sell
leads to other companies and independent agents. During the fourth quarter of
2005, the Company decided to stop generating new business on its direct sales
operation and focus on its core operations.
The Company also formed Tiger Home Services, Inc., which furnished pool
services to homeowners until the operation was sold during the second quarter of
2005.
FINANCIAL CONDITION
Cash and cash equivalents at June 30, 2006 aggregated $68,024,838. The
source of liquidity for possible claims payments consists of net premiums after
deductions for expenses, reinsurance recoverables and short-term loans.
UPCIC believes that premiums will be sufficient to meet UPCIC's working
capital requirements for at least the next twelve months. The Company's policy
is to invest amounts considered to be in excess of current working capital
requirements. At June 30, 2006, the Company's investments were comprised of
$68,024,838 in cash and overnight repurchase agreements and $3,202,918 in real
estate consisting of a building purchased by UPCIC that the Company is currently
using as its home office.
Policies originally obtained from the Florida Residential Property and
Casualty Joint Underwriting Association ("JUA") provided the opportunity for
UPCIC to solicit future renewal premiums. Less than 15% of the policies 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 150,000 homeowners and dwelling fire insurance policies.
21
The Company, as noted above, diversified its operations by establishing
online commerce and other ancillary operations. However, the Company is
currently contemplating the sale of the online commerce division in order to
further focus on the core property and casualty insurance business.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2006 VERSUS SIX MONTHS ENDED
JUNE 30, 2005
Gross premiums written increased 230.1% to $114,003,676 for the six-month
period ended June 30, 2006 from $34,474,916 for the six-month period ended June
30, 2005. The increase in gross premiums written is primarily attributable to an
approximate 222.3% increase in new business as well as an overall 7.8% premium
rate increase. The increase in new business is partially attributable to the
recent windstorm catastrophes providing an opportunity in the otherwise
competitive marketplace as certain companies are not accepting new business.
Net premiums earned increased 176.2% to $10,978,465 for the six-month
period ended June 30, 2006 from $3,975,060 for the six-month period ended June
30, 2005. The increase is due to an increase in new business, premium rate
increases and changes in the reinsurance program.
Investment income increased 196.8% to $969,183 for the six-month period
ended June 30, 2006 from $326,570 for the six-month period ended June 30, 2005.
The increase is primarily due to higher investment balances and a higher
interest rate environment during the six-months ended June 30, 2006.
Transaction fee revenue decreased 100.0% to $0 for the six-month period
ended June 30, 2006 from $160,151 for the six-month period ended June 30, 2005.
The decrease is primarily due to the discontinuance of sales of on-line
insurance leads to insurance agents during the six-month period ended June 30,
2006.
Other revenue increased 118.9% to $201,329 for the six-month period ended
June 30, 2006 from $91,987 for the six-month period ended June 30, 2005. The
increase is primarily attributable to an increase in miscellaneous revenues
during the six-month period ended June 30, 2006.
Commission income increased 122.7% to $2,530,465 for six-month period ended
June 30, 2006 from $1,136,394 for the six-month period ended June 30, 2005.
Commission income is comprised principally of the managing general agent's
policy fee income on all new and renewal insurance policies and commissions
generated from agency operations. The increase is primarily attributable to an
increase in commissions generated from agency operations on new policies.
Net losses and loss adjustment expense ("LAE") incurred increased 1,030.02%
to $5,033,199 for the six-month period ended June 30, 2006 from $445,415 for the
six-month period ended June 30, 2005. Losses and LAE incurred increased as a
result of increased premium volume, changes in the Company's reinsurance program
and additional losses related to 2004 catastrophes. The Company's net loss ratio
for the six-month period ended June 30, 2006 was 45.8% compared to 11.2% for the
six-month period ended June 30, 2005. Losses and LAE are influenced by loss
severity and frequency. The Company's net loss ratio increased principally due
22
to additional net losses of $2,220,000 related to 2004 catastrophes recognized
in the six-month period ended June 30, 2006. Losses and LAE, the Company's most
significant expenses, represent actual payments made net of reinsurance and
changes in estimated future net payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses.
Catastrophes are an inherent risk of the property-liability insurance
business which may contribute to material year-to-year fluctuations in UPCIC's
and the Company's results of operations and financial position. During 2005,
Florida experienced three windstorm catastrophes (Hurricanes Dennis, Katrina and
Wilma) which resulted in losses. As a result of these storms, the Company
currently estimates it incurred $77,181,196 in losses prior to reinsurance and
$4,121,253 net of reinsurance. The level of catastrophe loss experienced in any
year cannot be predicted and could be material to the results of operations and
financial position. While management believes UPCIC's and the Company's
catastrophe management strategies will reduce the severity of future losses,
UPCIC and the Company continue to be exposed to catastrophic losses.
General and administrative expenses decreased 29.4% to $2,982,796 for the
six-month period ended June 30, 2006 from $4,225,875 for the six-month period
ended June 30, 2005. General and administrative expenses decreased primarily due
to an increase in ceding commissions associated with an increase in the dollar
amount of ceded premiums written to quota share reinsurers related to an
increase in direct premiums written.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2006 VERSUS THREE MONTHS
ENDED JUNE 30, 2005
Gross premiums written increased 272.9% to $77,159,159 for the three-month
period ended June 30, 2006 from $20,693,417 for the three-month period ended
June 30, 2005. The increase in gross premiums written is primarily attributable
to an approximate 265.1% increase in new business as well as an overall 7.8%
premium rate increase. The increase in new business is partially attributable to
the recent windstorm catastrophes providing an opportunity in the otherwise
competitive marketplace as certain companies are not accepting new business.
Net premiums earned increased 141.0% to $6,692,879 for the three-month
period ended June 30, 2006 from $2,777,498 for the three-month period ended June
30, 2005. The increase is due to an increase in new business, premium rate
increases and changes in the reinsurance program effective June 1, 2005.
Investment income increased 387.1% to $585,216 for the three-month period
ended June 30, 2006 from $120,155 for the three-month period ended June 30,
2005. The increase is primarily due to higher investment balances and a higher
interest rate environment during the three-months ended June 30, 2006.
Transaction fee revenue decreased to $0 for the three-month period ended
June 30, 2006 from $47,417 for the three-month period ended June 30, 2005. The
decrease is primarily due to the decreased sales of on-line insurance leads to
insurance agents.
23
Other revenue increased 488.0% to $162,499 for the three-month period ended
June 30, 2006 from $27,638 for the three-month period ended June 30, 2005. The
increase is primarily attributable to an increase in miscellaneous revenues
during the three-month period ended June 30, 2006.
Commission income increased 174.8% to $1,609,573 for the three-month period
ended June 30, 2006 from $585,819 for the three-month period ended June 30,
2005. Commission income is comprised principally of the managing general agent's
policy fee income on all new and renewal insurance policies and commissions
generated from agency operations. The increase is primarily attributable to an
increase in commissions generated from agency operations on new policies.
Net losses and loss adjustment expense ("LAE") incurred increased 1,356.3%
to $4,114,076 for the three-month period ended June 30, 2006 from $282,503 for
the three-month period ended June 30, 2005. Losses and LAE incurred increased
due to increased exposure due to increased premium volume, changes in the
Company's reinsurance program and additional losses related to 2004
catastrophes. The Company's net loss ratio for the three-month period ended June
30, 2006 was 61.4% compared to 10.2% for the three-month period ended June 30,
2005. Losses and LAE are influenced by loss severity and frequency. The
Company's net loss ratio increased principally due to additional net losses of
$2,220,000 related to 2004 catastrophes recognized in the three-month period
ended June 30, 2006. Losses and LAE, the Company's most significant expenses,
represent actual payments made net of reinsurance and changes in estimated
future net payments to be made to or on behalf of its policyholders, including
expenses required to settle claims and losses.
Catastrophes are an inherent risk of the property-liability insurance
business which may contribute to material year-to-year fluctuations in UPCIC's
and the Company's results of operations and financial position. During 2005,
Florida experienced three windstorm catastrophes (Hurricanes Dennis, Katrina and
Wilma) which resulted in losses. As a result of these storms, the Company
currently estimates it incurred $77,181,196 in losses prior to reinsurance and
$4,121,253 net of reinsurance. The level of catastrophe loss experienced in any
year cannot be predicted and could be material to the results of operations and
financial position. While management believes UPCIC's and the Company's
catastrophe management strategies will reduce the severity of future losses,
UPCIC and the Company continue to be exposed to catastrophic losses.
General and administrative expenses decreased 6.0% to $3,062,980 for the
three-month period ended June 30, 2006 from $3,258,169 for the three-month
period ended June 30, 2005. General and administrative expenses decreased
primarily due to an increase in the dollar amount of ceded premiums written to
quota share reinsurers related to an increase in direct premiums written.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash flow are premium revenues,
commissions, policy fees, investment income and reinsurance recoverables and
short-term loans.
24
For the six-month period ended June 30, 2006, cash flows provided by
operating activities were $21,673,769. Cash flows from operating activities are
expected to be positive in both the short-term and reasonably foreseeable
future. In addition, the Company's investment portfolio is highly liquid as it
consists almost entirely of cash and readily marketable securities.
In June 2005, the Company borrowed monies from two private investors and
issued two promissory notes for the aggregate principal sum of $1,000,000
payable in 10 monthly installments of $100,000. Payment on one note commences on
June 30, 2006 and commences on the other note on November 30, 2006. The loan
amount subsequently was contributed to UPCIC as additional paid-in-capital. In
conjunction with the notes, the Company granted a warrant to one of the
investors to purchase 200,000 shares of restricted Common Stock at an exercise
price of $.05 per share, expiring in June 2010. These transactions were approved
by the Company's Board of Directors.
In order to improve the Company's financial position and achieve profitable
operations, management has implemented rate increases for new and renewal
business, has restructured the homeowners' coverage offered, has restructured
its catastrophic reinsurance coverage to reduce cost, and has worked to control
future general and administrative expenses.
Management believes that the continued implementation of these plans will
be successful over the next twelve months. However, there can be no assurance
that successful implementation of these plans will be achieved or will be
sufficient to ensure UPCIC's future compliance with Florida insurance
regulations, or that the Company will be able to maintain profitability. Failure
by UPCIC to maintain the required level of statutory capital and surplus could
result in the suspension of UPCIC's authority to write new or renewal business,
other regulatory actions or ultimately, in the revocation of UPCIC's certificate
of authority by the Florida Office of Insurance Regulation ("OIR").
The Company believes that its current capital resources together with
management's plan as described above will be sufficient to support current
operations and expected growth for at least twelve months.
On June 7, 2006 the Company declared a dividend of $.04 per share on the
outstanding Common Stock of the Company to be paid on July 10, 2006 to the
shareholders of record of the Company at the close of business on June 28, 2006.
The dividend payable amount of $1,518,284 is accrued in the June 30, 2006
balance sheet. During the quarter the Company also paid a $0.04 dividend that
was accrued at the end of first quarter. The amount of the dividend was
$1,488,851.
The property and casualty reinsurance industry is subject to the same
market conditions as the direct property and casualty insurance market, and
there can be no assurance that reinsurance will be available to UPCIC to the
same extent and at the same cost as currently in place for UPCIC. Future
increases in catastrophe reinsurance costs are possible and could adversely
affect UPCIC's results.
The balance of cash and cash equivalents at June 30, 2006 is $68,024,838.
Most of this amount is available to pay claims in the event of catastrophic
25
events pending reimbursement by reinsurers. Catastrophic reinsurance is
recoverable upon presentation to the reinsurer of evidence of claim payment.
Generally accepted accounting principles differ in some respects from
reporting practices prescribed or permitted by the OIR. To retain its
certificate of authority, the Florida insurance laws and regulations require
that UPCIC maintain capital and surplus equal to the statutory minimum capital
and surplus requirement defined in the Florida Insurance Code. UPCIC's statutory
capital and surplus exceeded the minimum capital and surplus requirements of
$4,000,000 as of June 30, 2006. UPCIC is also required to adhere to prescribed
premium-to-capital surplus ratios.
The maximum amount of dividends which can be paid by Florida insurance
companies without prior approval of the OIR Commissioner is subject to
restrictions relating to statutory surplus. The maximum dividend that may be
paid by UPCIC without prior approval is limited to the lesser of statutory net
income from operations of the preceding calendar year or 10.0% of statutory
unassigned surplus as of the preceding year end. Statutory unassigned surplus
(deficit) at December 31, 2005 was $(1,995,376).
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, 2005, 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 six months of
2006.
Item 3. Controls and Procedures
The Company carried out an evaluation under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the
period covered by this report. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that disclosure
controls and procedures were effective as of the end of the period covered by
this report to ensure that information required to be disclosed by the Company
in its reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms. There was
no change in the Company's internal controls over financial reporting that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company did not have any reportable legal proceedings during the six
months ending June 30, 2006. Certain claims and complaints have been filed or
are pending against the Company with respect to various matters. In the opinion
of management, none of these lawsuits is material, and they are adequately
provided for or covered by insurance or, if not so covered, are without any or
have little merit or involve such amounts that if disposed of unfavorably would
not have a material adverse effect on the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In February 2006 pursuant to section 4(2) of the Securities Acts of 1933,
as amended, the Company issued 325,000 shares of restricted Common Stock at a
price of $.05 per share to a private investor pursuant to the exercise of
warrants to purchase restricted Common Stock. In April 2006 pursuant to section
4(2) of the Securities Acts of 1933, as amended, the Company issued 200,000
shares of Common Stock at a price of $.05 per share to a vendor pursuant to the
exercise of warrants to purchase restricted Common Stock. Also in April 2006,
the Company issued 200,000 shares of restricted Common Stock at a price of $.04
per share to Sean P. Downes, COO of the Company, pursuant to Mr. Downes'
exercise of stock options and 123,077 shares of restricted Common Stock at a
price of $.93 per share pursuant to Mr. Downes' election to receive such shares
in lieu of accrued vacation. The shares were issued to Mr. Downes in a private
transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Also in April 2006 pursuant to section 4(2) of the Securities Acts of 1933, as
amended, the Company issued 10,000 shares of restricted Common Stock at a price
of $.50 per share to Reed J. Slogoff, a Director of the Company, pursuant to the
exercise of options to purchase restricted Common Stock. In May 2006, the
Company issued 400,000 shares of restricted Common Stock to one employee at
$1.23 per share and 25,000 to a second employee at $1.30 per share in
conjunction with employment agreements. Also in May 2006 pursuant to section
4(2) of the Securities Acts of 1933, as amended, the Company issued 10,000
shares of restricted Common Stock at a price of $.50 per share to an employee of
the Company pursuant to the exercise of options to purchase the restricted
Common Stock. In June 2006 pursuant to section 4(2) of the Securities Acts of
1933, as amended, the Company issued 25,000 shares of restricted Common Stock at
a price of $1.52 per share to each of the outside directors of the Company,
(Norman M. Meier, Reed Slogoff, and Joel Wilentz) and 200,000 shares of
restricted Common Stock at a price of $1.52 per share to Sean P. Downes, COO of
the Company as a bonus. Also in June 2006 pursuant to section 4(2) of the
Securities Acts of 1933, as amended, the Company issued James M. Lynch, CFO of
the Company, 25,807 shares of Common Stock at a price of $1.65 per share as a
bonus. Unless otherwise specified, such as in the case of the exercise of stock
options or warrants, the per share prices were determined using the closing
price of the Company's Common Stock as quoted on the OTC Bulletin Board.
Item 3. Defaults upon Senior Securities
-------------------------------
None.
27
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Effective May 1, 2006, the terms of the employment agreements of Bradley I.
Meier, President and Chief Executive Officer of the Company and Sean P. Downes,
COO of the Company were amended to provide for an increase in base salary of
$150,000 per annum.
Item 6. Exhibits
Exhibit No. Exhibit
----------- -------
11.1 Statement Regarding Computation of Per Share Income
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Title 18, United States
Code, Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
28
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: August 18, 2006 /s/ Bradley I. Meier
---------------------------------------
Bradley I. Meier, President and Chief
Executive Officer
/s/ James M. Lynch
---------------------------------------
James M. Lynch, Chief Financial Officer
29