UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20848
UNIVERSAL INSURANCE HOLDINGS, INC.
(Name of small business issuer in its charter)
DELAWARE 65-0231984
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1110 WEST COMMERCIAL BOULEVARD, SUITE 100 33309
FORT LAUDERDALE, FLORIDA (Zip Code)
(Address of principal executive offices)
Company's telephone number, including area code: (954) 958-1200
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE OTC BULLETIN BOARD
REDEEMABLE COMMON STOCK PURCHASE OTC BULLETIN BOARD
WARRANTS (Name of exchange where registered)
(Title of each class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days:
YES X NO
--- ----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Indicate by checkmark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act) YES NO X
--- ---
State issuer's revenues for its most recent fiscal year: $19,661,817
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold as of December 31, 2005: $28,076,678.
State the number of shares of Common Stock of Universal Insurance Holdings,
Inc. outstanding as of March 1, 2006: 36,788,219
Transitional Small Business Disclosure Format: YES NO X
--- ---
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Universal Insurance Holdings, Inc. ("UIH" or the "Company") was originally
organized as Universal Heights, Inc. in 1990. The Company changed its name to
Universal Insurance Holdings, Inc. on January 12, 2001. In April 1997, the
Company organized a subsidiary, Universal Property & Casualty Insurance Company
("UPCIC"), as part of its strategy to take advantage of what management believed
to be profitable business and growth opportunities in the marketplace. UPCIC was
formed to participate in the transfer of homeowner insurance policies from the
Florida Residential Property and Casualty Joint Underwriting Association
("JUA"). The Company has since evolved into a vertically integrated insurance
holding company, which, through its various subsidiaries, covers substantially
all aspects of insurance underwriting, distribution and claims processing.
The Company was incorporated under the laws of the State of Delaware on
November 13, 1990 and its principal executive offices are located at 1110 West
Commercial Boulevard, Suite 100, Fort Lauderdale, Florida 33309, and its
telephone number is (954) 958-1200.
INSURANCE BUSINESS
On October 29, 1997, the Office of Insurance Regulation ("OIR") approved
UPCIC's application for a permit to organize as a domestic property and casualty
insurance company in the State of Florida. On December 4, 1997, UIH raised
approximately $6.7 million in a private placement of common stock with various
institutional and other accredited investors. The proceeds of the offering were
used to meet the minimum regulatory capitalization requirements ($5.0 million)
of the OIR to obtain an insurance company license and for general working
capital purposes. UPCIC received a license to engage in underwriting homeowners'
insurance in the State of Florida on December 31, 1997. In 1998, UPCIC began
operations through the assumption of homeowner insurance policies issued by the
JUA.
The JUA was established in 1992 as a temporary measure to provide insurance
coverage for individuals who could not obtain coverage from private carriers
because of the impact on the private insurance market of Hurricane Andrew in
1992. Rather than serving as a temporary source of emergency insurance coverage
as was originally intended, the JUA became a major provider of original and
renewal insurance coverage for Florida residents. In an attempt to reduce the
number of policies in the JUA, and thus the exposure of the program to
liability, the Florida legislature approved a number of initiatives to
depopulate the JUA. The Florida legislature subsequently approved, and the JUA
implemented, a Market Challenge/Takeout Bonus Program ("Takeout Program"), which
provided additional incentives to private insurance companies to acquire
policies from the JUA.
UPCIC's initial business and operations consisted of providing property and
casualty coverage through homeowners' insurance policies acquired from the JUA.
The insurance business acquired from the JUA provided a base for renewal
premiums. The majority of these policies renewed with UPCIC. In an effort to
further grow its insurance operations, in 1998 UPCIC also began to solicit
business actively in the open market through independent agents. Through renewal
of the JUA business combined with business solicited in the market through
independent agents, UPCIC is currently servicing approximately 89,000
homeowners' insurance policies covering homes and condominium units.
The Company's primary product is homeowners insurance. The Company's
criteria for selecting insurance policies includes but is not limited to the use
of specific policy forms, limitations on coverage amounts on buildings and
contents and required compliance with local building codes. Also, to improve
underwriting and manage risk, the Company utilizes standard industry modeling
techniques for hurricane and windstorm exposure. UPCIC's portfolio as of
December 31, 2005 includes approximately 85,000 policies with coverage for wind
risks and 4,000 policies without wind risks. The average premium for a policy
with wind coverage is approximately $1,019 and the average premium for a policy
without wind coverage is approximately $562. Approximately 24% of the policies
are located in Dade, Broward and Palm Beach counties.
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OPERATIONS
All underwriting, rating, policy issuance, reinsurance negotiations and
certain administration functions for UPCIC are performed by UPCIC, Universal
Risk Advisors, Inc., a wholly owned subsidiary of the Company, and unaffiliated
third parties.
Claims handling functions for UPCIC were initially administered by an
independent claims adjustment firm licensed in Florida. In 1999, the Company
formed Universal Adjusting Corporation, a wholly owned subsidiary, which
currently performs claims adjustment for UPCIC. This gives the Company greater
command over its loss control and expenditures.
The earnings of UPCIC from policy premiums are supplemented to an extent by
the generation of investment income from investment policies adopted by the
Board of Directors of UPCIC. UPCIC's principal investment goals are to maintain
safety and liquidity, enhance equity values and achieve an increased rate of
return consistent with regulatory requirements.
MANAGEMENT OPERATIONS
The Company has developed into a vertically integrated insurance holding
company performing various aspects of insurance underwriting, distribution and
claims. Universal Risk Advisors, Inc., the Company's wholly owned Managing
General Agent ("MGA"), was incorporated in Florida on July 2, 1998 and became
licensed by the OIR August 17, 1998 and contracted with UPCIC on September 28,
1998. Through the MGA, the Company has underwriting, reinsurance negotiation and
claims authority for UPCIC as well as third party insurance companies. The MGA
seeks to generate revenue through policy fee income and other administrative
fees from the marketing of UPCIC as well as third party insurance products
through the Company's distribution network. The Company markets and distributes
UPCIC's products and services in Florida through a network of approximately
1,570 active independent agents.
AGENCY OPERATIONS
Universal Florida Insurance Agency was incorporated in Florida on July 2,
1998 and Coastal Homeowners Insurance Specialists, Inc. was incorporated in
Florida on July 2, 2001, each as wholly owned subsidiaries of the Company to
solicit voluntary business. These entities are a part of the Company's agency
operations, which seek to generate income from commissions, premium financing
referral fees and the marketing of ancillary services.
DIRECT SALES OPERATIONS
The Company has formed subsidiaries that specialize in selling insurance
and generating insurance leads via the Internet. Tigerquote.com Insurance &
Financial Services Group, Inc. ("Tigerquote.com") and Tigerquote.com Insurance
Solutions, Inc. were incorporated in Delaware on June 6, 1999 and August 23,
1999, respectively. Tigerquote.com is an Internet insurance lead generating
network while Tigerquote.com Insurance Solutions, Inc. is a network of Internet
insurance agencies. These entities seek to generate income from the selling of
leads and commissions on policies written. 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 direct sales
operations and focus on its core operations.
OTHER OPERATIONS
Universal Inspection Corporation was incorporated in Florida on January 3,
2000 as a subsidiary of UIH. Universal Inspection Corporation performs property
inspections for homeowners' policies underwritten by UPCIC. 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.
3
FACTORS AFFECTING OPERATION RESULTS AND MARKET PRICE OF STOCK
The Company and its subsidiaries operate in a rapidly changing environment
that involves a number of uncertainties, some of which are beyond the Company's
control. This report contains in addition to historical information,
forward-looking statements that involve risks and uncertainties. The words
"expect," "estimate," "anticipate," "believe," "intend," "plan" and similar
expressions and variations thereof are intended to identify forward-looking
statements. The Company's actual results could differ materially from those set
forth in or implied by any forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
uncertainties discussed below as well as those discussed elsewhere in this
report.
NATURE OF THE COMPANY'S BUSINESS
Factors affecting the sectors of the insurance industry in which the
Company operates may subject the Company to significant fluctuations in
operating results. These factors include competition, catastrophe losses and
general economic conditions including interest rate changes, as well as
legislative initiatives, the regulatory environment, the frequency of
litigation, the size of judgments, severe weather conditions and the
availability and cost of reinsurance. Specifically the homeowners insurance
market, which comprises the bulk of the Company's current operations, is
influenced by many factors, including state and federal laws, market conditions
for homeowners insurance and residential plans. Additionally, an economic
downturn could result in fewer homeowner sales and less demand for new
homeowners seeking insurance.
Historically, the financial performance of the property and casualty
insurance industry has tended to fluctuate in cyclical patterns of soft markets
followed by hard markets. Although an individual insurance company's financial
performance is dependent on its own specific business characteristics, the
profitability of most property and casualty insurance companies tends to follow
this cyclical market pattern.
The Company believes that a substantial portion of its future growth will
depend on its ability, among other things, to successfully implement its
business strategy, including expanding the Company's product offering by
underwriting and marketing additional insurance products and programs through
its distribution network and further penetrating the Florida market by
establishing relationships with additional independent agents in order to expand
its distribution network. Any future growth is contingent on various factors,
including the availability of adequate capital, the Company's ability to hire
and train additional personnel, regulatory requirements and rating agency
considerations. There is no assurance that the Company will be successful in
expanding its business, that the existing infrastructure will be able to support
additional expansion or that any new business will be profitable. Moreover, as
the Company expands its insurance products and programs and the Company's mix of
business changes, there can be no assurance that the Company will be able to
improve its profit margins or other operating results. There can also be no
assurance that the Company will be able to obtain the required regulatory
approvals to offer additional insurance products. UPCIC also is required to
maintain minimum surplus to support its underwriting program. The surplus
requirement affects UPCIC's potential growth.
LIMITED INSURANCE COMPANY OPERATING HISTORY
UPCIC was incorporated in April 1997 and began operations in February 1998.
Accordingly, UPCIC did not generate significant revenue until 1998 when it had
completed the acquisition of, and received premiums for, policies from the JUA.
UPCIC's growth to date may not be an indication of future results of operations
in light of UPCIC's relatively short operating history and the competitive
nature of the insurance industry.
Because of UPCIC's limited operating history, there can be no assurance
that UPCIC will sustain profitability or significant revenues. There can be no
assurance that management's efforts will successfully address these risks or
that UPCIC and the Company will sustain profitability.
MANAGEMENT OF EXPOSURE TO CATASTROPHIC LOSSES
UPCIC is exposed to potentially numerous insured losses arising out of
single or multiple occurrences, such as natural catastrophes. As with all
property and casualty insurers, UPCIC expects to and will incur some losses
related to catastrophes and will price its policies accordingly. UPCIC's
exposure to catastrophic losses arises principally out of hurricanes and
windstorms. Through the use of standard industry modeling techniques that are
susceptible to change, UPCIC manages its exposure to such losses on an ongoing
basis from an underwriting perspective. In addition, UPCIC protects itself
against the risk of catastrophic loss by obtaining reinsurance coverage up to
approximately the "100 year Probable Maximum Loss" ("PML"). UPCIC's reinsurance
4
program consists of excess of loss, quota share and catastrophe reinsurance for
multiple hurricanes. However, UPCIC may not buy enough reinsurance to cover
multiple storms going forward or be able to timely obtain reinsurance. During
2004, Florida experienced four windstorm catastrophes (Hurricanes Charley,
Frances, Ivan and Jeanne) which resulted in losses. As a result of these storms,
the Company currently estimates it incurred $164,344,684 in losses prior to
reinsurance and $4,175,976 net of reinsurance. 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 $64,267,953 in losses prior to reinsurance and $4,050,000 net of
reinsurance.
RELIANCE ON THIRD PARTIES AND REINSURERS
UPCIC is dependent upon third parties to perform certain functions
including, but not limited to the purchase of reinsurance and risk management
analysis. UPCIC also relies on reinsurers to limit the amount of risk retained
under its policies and to increase its ability to write additional risks.
UPCIC's intention is to limit its exposure and therefore protect its capital,
even in the event of catastrophic occurrences, through reinsurance agreements
that currently transfer the risk of loss in excess of $1,350,000 up to
approximately the 100 year PML as of the beginning of hurricane season on June 1
of each year. This amount may change in the future.
REINSURANCE
The property and casualty reinsurance industry is subject to the same
market conditions as the direct property and casualty insurance market, and
there can be no assurance that reinsurance will be available to UPCIC to the
same extent and at the same cost as currently in place for UPCIC. In light of
the four windstorm catastrophes Florida experienced in 2004, and three windstorm
catastrophes Florida experienced in 2005, an increase in catastrophe reinsurance
costs for the current year renewal is possible and could adversely effect
UPCIC's results. Reinsurance does not legally discharge an insurer from its
primary liability for the full amount of the risks it insures, although it does
make the reinsurer liable to the primary insurer. Therefore, UPCIC is subject to
credit risk with respect to its reinsurers. Management evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk arising
from similar geographic regions, activities, or economic characteristics of the
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. A reinsurer's insolvency or inability to make payments under a
reinsurance treaty could have a material adverse effect on the financial
condition and profitability of UPCIC. In addition, 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 typical of a company of its size in the homeowners insurance
industry.
ADEQUACY OF LIABILITIES FOR LOSSES
The liabilities for losses and loss adjustment expenses periodically
established by UPCIC are estimates of amounts needed to pay reported and
unreported claims and related loss adjustment expenses. The estimates
necessarily will be based on certain assumptions related to the ultimate cost to
settle such claims. There is an inherent degree of uncertainty involved in the
establishment of liabilities for losses and loss adjustment expenses and there
may be substantial differences between actual losses and UPCIC's liabilities
estimates. In the case of UPCIC, this uncertainty is compounded by UPCIC's
limited historical claims experience. UPCIC relies on industry data, as well as
the expertise and experience of independent actuaries in an effort to establish
accurate estimates and adequate liabilities. Furthermore, factors such as storms
and weather conditions, inflation, claim settlement patterns, legislative
activity and litigation trends may have an impact on UPCIC's future loss
experience. Accordingly, there can be no assurance that UPCIC's liabilities will
be adequate to cover ultimate loss developments. UPCIC's profitability and
financial condition could be adversely affected to the extent that its
liabilities are inadequate.
UPCIC is directly liable for loss and loss adjustment expenses ("LAE")
payments under the terms of the insurance policies that it writes. In many
cases, several years may elapse between the occurrence of an insured loss and
the Company's payment of that loss. As required by insurance regulations and
accounting rules, the Company reflects its liability for the ultimate payment of
all incurred losses and LAE by establishing a liability for those unpaid losses
and LAE for both reported and unreported claims, which represent estimates of
future amounts needed to pay claims and related expenses.
5
When a claim involving a probable loss is reported, the Company establishes
a liability for the estimated amount of the Company's ultimate loss and LAE
payments. The estimate of the amount of the ultimate loss is based upon such
factors as the type of loss, jurisdiction of the occurrence, knowledge of the
circumstances surrounding the claim, severity of injury or damage, potential for
ultimate exposure, estimate of liability on the part of the insured, past
experience with similar claims and the applicable policy provisions.
All newly reported claims received are set up with an initial average
liability. That claim is then evaluated and the liability is adjusted upward or
downward according to the facts and damages of that particular claim.
In addition, management provides for a liability on an aggregate basis to
provide for losses incurred but not reported ("IBNR"). The Company utilizes
independent actuaries to help establish its liability for unpaid losses and LAE.
The Company does not discount the liability for unpaid losses and LAE for
financial statement purposes.
The estimates of the liability for unpaid losses and LAE are subject to the
effect of trends in claims severity and frequency and are continually reviewed.
As part of this process, the Company reviews historical data and considers
various factors, including known and anticipated legal developments, changes in
social attitudes, inflation and economic conditions. As experience develops and
other data become available, these estimates are revised, as required, resulting
in increases or decreases to the existing liability for unpaid losses and LAE.
Adjustments are reflected in results of operations in the period in which they
are made and the liabilities may deviate substantially from prior estimates.
Among the classes of insurance underwritten by the Company, the homeowner's
liability claims historically tend to have longer time lapses between the
occurrence of the event, the reporting of the claim to the Company and the final
settlement than do homeowners property claims. Liability claims often involve
third parties filing suit and the ensuing litigation. By comparison, property
damage claims tend to be reported in a relatively shorter period of time with
the vast majority of these claims resulting in an adjustment without litigation.
There can be no assurance that the Company's liability for unpaid losses
and LAE will be adequate to cover actual losses. If the Company's liability for
unpaid losses and LAE proves to be inadequate, the Company will be required to
increase the liability with a corresponding reduction in the Company's net
income in the period in which the deficiency is identified. Future loss
experience substantially in excess of established liability for unpaid losses
and LAE could have a material adverse effect on the Company's business, results
of operations and financial condition.
The following table sets forth a reconciliation of beginning and ending
liability for unpaid losses and LAE as shown in the Company's consolidated
financial statements for the periods indicated.
6
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
(Dollars in Thousands)
Balance at beginning of year $ 57,872 $ 7,681
Less reinsurance recoverable (56,292) (6,330)
-------- --------
Net balance at beginning of year 1,580 1,351
-------- --------
Incurred related to:
Current year 7,049 2,218
Prior years 2,549 56
-------- --------
Total incurred 9,598 2,274
-------- --------
Paid related to:
Current year 3,822 1,496
Prior years 1,215 549
-------- --------
Total paid 5,037 2,045
-------- --------
Net balance at end of year 6,141 1,580
Plus reinsurance recoverable 60,859 56,292
-------- --------
Balance at end of year $ 67,000 $ 57,872
======== ========
The Company's liabilities for unpaid losses and LAE, net of related reinsurance
recoverables, as of December 31, 2005 were increased in the current year by
$2,549,050 for claims that had occurred on or before the prior year balance
sheet date. This unfavorable loss emergence resulted principally from higher
than expected hurricane losses in 2004. The Company's liabilities for unpaid
losses and LAE, net of related reinsurance recoverables, as of December 31, 2004
were increased by $55,480 for claims that had occurred on or before the previous
year balance sheet date. This unfavorable loss emergence resulted principally
from settling homeowners losses established in the prior year for amounts that
were more than expected. There can be no assurance that the Company's unpaid
losses and LAE will not develop redundancies or deficiencies and possibly differ
materially from the Company's unpaid losses and LAE as of December 31, 2005. In
the future, if the unpaid losses and LAE develop redundancies or deficiencies,
such redundancy or deficiency would have a positive or adverse impact,
respectively, on future results of operations.
Based upon consultations with the Company's independent actuarial
consultants and their statement of opinion on losses and LAE, the Company
believes that the liability for unpaid losses and LAE is currently adequate to
cover all claims and related expenses which may arise from incidents reported
and IBNR.
The following table presents total unpaid loss and LAE, net, and the
corresponding total reinsurance recoverables shown in the Company's consolidated
financial statements for the periods indicated.
YEARS ENDED DECEMBER 31,
2005 2004
---- ----
(Dollars in Thousands)
Loss and LAE, net $ 2,130 $ 769
IBNR, net 4,011 811
----------- -----------
Total unpaid loss and LAE, net 6,141 1,580
Reinsurance recoverable $ 47,302 $ 27,137
IBNR recoverable 13,557 29,155
----------- -----------
Total reinsurance recoverable $ 60,859 $ 56,292
=========== ===========
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The following table presents the liability for unpaid losses and LAE for
the Company since inception. The top line of the table shows the estimated net
liabilities for unpaid losses and LAE at the balance sheet date for each of the
periods indicated. These figures represent the estimated amount of unpaid losses
and LAE for claims arising in all prior years that were unpaid at the balance
sheet date, including losses that had been incurred but not yet reported. The
portion of the table labeled "Cumulative paid as of" shows the net cumulative
payments for losses and LAE made in succeeding years for losses incurred prior
to the balance sheet date. The lower portion of the table shows the re-estimated
amount of the previously recorded liability based on experience as of the end of
each succeeding year.
YEARS ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in the Thousands)
Balance Sheet liability $6,141 $1,580 $1,351 $1,591 $2,893 $1,372 $1,532 $1,588
Cumulative paid as of:
One year later - 1,216 950 667 3,660 1,308 897 939
Two years later - - 1,153 992 3,667 1,635 1,081 904
Three years later - - - 1,115 3,899 1,693 1,115 1,010
Four years later - - - - 3,998 1,811 1,191 1,024
Five years later - - - - - 1,833 1,206 999
Six years later - - - - - - 1,212 1,006
Seven years later - - - - - - - 1,009
Re-estimated liability as of:
End of year $6,141 $1,580 $1,351 $1,591 $2,893 $1,372 $1,532 $1,588
One year later - 4,129 1,481 1,251 4,237 1,795 1,344 1,067
Two years later - - 1,295 1,372 3,976 1,942 1,268 1,089
Three years later - - - 1,231 4,160 1,925 1,286 1,071
Four years later - - - - 4,098 1,940 1,270 1,024
Five years later - - - - - 1,904 1,230 1,013
Six years later - - - - - - 1,280 1,020
Seven years later - - - - - - - 1,017
Cumulative redundancy (deficiency) - (2,549) 56 360 (1,205) (532) 252 571
The cumulative redundancy or deficiency represents the aggregate change in
the estimates over all prior years. A deficiency indicates that the latest
estimate of the liability for losses and LAE is higher than the liability that
was originally estimated and a redundancy indicates that such estimate is lower.
It should be emphasized that the table presents a run-off of balance sheet
liability for the periods indicated rather than accident or policy loss
development for those periods. Therefore, each amount in the table includes the
cumulative effects of changes in liability for all prior periods. Conditions and
trends that have affected liabilities in the past may not necessarily occur in
the future.
Underwriting results of insurance companies are frequently measured by
their combined ratios. However, investment income, federal income taxes and
other non-underwriting income or expense are not reflected in the combined
ratio. The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Underwriting
results are considered profitable when the combined ratio is under 100% and
unprofitable when the combined ratio is over 100%.
The following table sets forth loss ratios, expense ratios and combined
ratios for the periods indicated for the insurance business of Universal
Insurance Holdings, Inc. The ratios, net of reinsurance and inclusive of
unallocated loss adjustment expenses, are shown in the table below, and are
computed based upon Statutory Accounting Principles. The expense ratio includes
management fees and commissions paid to the Company in the amount of $5,536,002
in 2005 and $2,904,805 in 2004.
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YEARS ENDED DECEMBER 31,
2005 2004
---- ----
Loss Ratio 73% 89%
Expense Ratio 13 43
----------- -----------
Combined Ratio 86% 132%
=========== ===========
In order to reduce losses and thereby reduce the loss ratio and the
combined ratio, the Company has taken several steps. These include implementing
rate increases for new and renewal business, restructuring the homeowners'
coverage offered, restructuring the catastrophic reinsurance coverage to reduce
cost and working to reduce general and administrative expenses.
GOVERNMENT REGULATION
Florida insurance companies are subject to regulation and supervision by
the OIR. The OIR has broad regulatory, supervisory and administrative powers.
Such powers relate, among other things, to the granting and revocation of
licenses to transact business; the licensing of agents (through the Department
of Financial Services); the standards of solvency to be met and maintained; the
nature of and limitations on investments; approval of policy forms and rates;
periodic examination of the affairs of insurance companies; and the form and
content of required financial statements. Such regulation and supervision are
primarily for the benefit and protection of policyholders and not for the
benefit of investors.
In addition, the Florida legislature and the National Association of
Insurance Commissioners from time to time consider proposals that may affect,
among other things, regulatory assessments and reserve requirements. UPCIC
cannot predict the effect that any proposed or future legislation or regulatory
or administrative initiatives may have on the financial condition or operations
of UPCIC.
DEPENDENCE ON KEY INDIVIDUALS
UPCIC's operations depend in large part on the efforts of Bradley I. Meier,
who serves as President of UPCIC. Mr. Meier has also served as President, Chief
Executive Officer and Director of the Company since its inception in November
1990. In addition, UPCIC's operations have become materially dependent on the
efforts of Sean P. Downes, who serves as Chief Operating Officer of UPCIC. Mr.
Downes has also served as Chief Operating Officer, Senior Vice President and
Director of the Company since January 2005 and as a Director of UPCIC since May
2003. The loss of the services provided by Mr. Meier or Mr. Downes could have a
material adverse effect on UPCIC's financial condition and results of
operations.
COMPETITION
The insurance industry is highly competitive and many companies currently
write homeowners property and casualty insurance. Additionally, the Company and
its subsidiaries must compete with companies that have greater capital resources
and longer operating histories. Increased competition from other insurance
companies could adversely affect the Company's ability to do business
profitably. Although the Company's pricing is inevitably influenced to some
degree by that of its competitors, management of the Company believes that it is
generally not in the Company's best interest to compete solely on price,
choosing instead to compete on the basis of underwriting criteria, its
distribution network and high quality service to its agents and insureds.
EMPLOYEES
As of March 1, 2006, the Company had 81 full-time employees. None of the
Company's employees is represented by a labor union. The Company also utilized
the services of several temporary employees during the year to assist with the
increased workload related to the hurricanes Florida experienced. The Company
has an employment agreement with Bradley I. Meier, President and Chief Executive
Officer of the Company and Sean P. Downes, Senior Vice President and Chief
Operating Officer of the Company. See "Executive Compensation--Employment
Agreements."
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ITEM 2. DESCRIPTION OF PROPERTY
On July 31, 2004, the Company purchased a modern building located in Fort
Lauderdale, Florida that became its home office on July 1, 2005. The Company
believes that the new building is suitable for its intended use and adequate to
meet the Company's current needs. The building is 100% utilized by the Company.
There is no mortgage or lease arrangement. The building is adequately covered by
insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain lawsuits. In the opinion of management,
except as described below, none of these lawsuits (1) involve claims for damages
exceeding 10% of the current assets of the Company, (2) involve matters that are
not routine litigation incidental to the claims aspect of its business, (3)
involve bankruptcy, receivership or similar proceedings, (4) involve material
Federal, state, or local environmental laws, (5) potentially involve more than
$100,000 in sanctions and a governmental authority is a party, or (6) are
material proceedings to which any director, officer, affiliate of the Company,
beneficial owner of more than 5% of any class of voting securities of the
Company, or security holder is a party adverse to the Company or has a material
interest adverse to the Company.
On February 7, 2005, Marty Steinberg as a court appointed receiver for the
entities consisting of Lancer Management Group LLC, Lancer Management Group II
LLC, Lancer Offshore Inc., Omnifund Ltd., LSPV Inc., LSPV LLC, Alpha Omega Group
Inc. and G.H. Associates LLC (collectively the "Lancer Entities") filed suit
against Alfred Taubman, Anthony Cullen, British American Racing, Centrack
International, Inc., Kuwait & Middle East Financial Investment Co., Liberty
International Asset Management, Macroview Investments Limited, Opus Portfolio
Ltd., Reva Stocker, Roger Dodger, LLC, Signet Management Limited, Thornhill
Group Inc. Trust, World Class Boxing and the Company (collectively the
"Defendants") in the United States District Court for the Southern District of
Florida. The Company received the notice of suit by mail on September 8, 2005.
The suit alleged that the Lancer Entities fraudulently transferred funds to the
Defendants and that the transfers unduly enriched the Defendants. The receiver
asked the Company to pay $658,108. The Company had no record of the alleged
transfers and vigorously defended the suit. The lawsuit has since been dismissed
with prejudice by the receiver.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on December 7, 2005, at
which the Company's shareholders voted on the following items:
Proposal 1A: Election of two directors by holders of Series M Preferred Stock
Name For Withheld Abstain Broker Non-Vote
---- --- -------- ------- ---------------
Bradley I. Meier 88,690 0 0 0
Norman M. Meier 88,690 0 0 0
Proposal 1B: Election of three directors by holders of common stock, par value $.01 per share
("Common Stock"), Series A Preferred Stock and Series M Preferred Stock, voting
together as a class
Name For Withheld Abstain Broker Non-Vote
---- --- -------- ------- ---------------
Sean P. Downes 27,674,065 4,971,337 0 0
Reed J. Slogoff 30,574,065 2,071,337 0 0
Joel M. Wilentz 30,574,065 2,071,337 0 0
10
Proposal 2: Amendment of the Company's certificate of incorporation to increase the number of
authorized shares of Common Stock from 40,000,000 shares to 50,000,000 shares
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
30,279,070 2,314,567 85,765 0
Proposal 3: Ratification of appointment of Blackman Kallick Bartelstein LLP as the Company's
independent registered public accounting firm for the year ending December 31,
2005
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
30,412,785 2,281,567 0 0
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock is quoted on the OTC Bulletin Board under the
symbol UVIH. The following table sets forth prices of the Common Stock, as
reported by the OTC Bulletin Board. The following data reflects inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Year ended December 31, 2004 High Low
---------------------------- ---- ---
First Quarter $ 0.08 $ 0.045
Second Quarter 0.10 0.04
Third Quarter 0.06 0.04
Fourth Quarter 0.05 0.045
Year ended December 31, 2005 High Low
---------------------------- ---- ---
First Quarter $ 0.08 $ 0.04
Second Quarter 0.09 0.05
Third Quarter 0.07 0.04
Fourth Quarter 0.95 0.051
At March 1, 2006, transfer agent records indicate 45 shareholders of record
of the Company's Common Stock. There were approximately 425 beneficial owners of
its Common Stock. In addition, there were 3 shareholders of the Company's Series
A and Series M Preferred Stock ("Preferred Stock").
In October 1994, 49,950 shares of Series A Preferred Stock were issued in
repayment of $499,487 of related party debt and 88,690 shares of Series M
Preferred Stock were issued during fiscal year ended April 30, 1997, for
repayment of $88,690 of related party debt. Each share of Preferred Stock is
convertible into 2.5 shares of Common Stock and 5 shares of Common Stock,
respectively, into an aggregate of 568,326 common shares. Beginning May 1, 1998,
the Series A Preferred Stock paid a cumulative dividend of $.25 per quarter.
During 2004 and 2005, aggregate dividends on the Preferred Stock of $49,950 were
declared and paid.
Applicable provisions of the Delaware General Corporation Law may affect
the ability of the Company to declare and pay dividends on its Common Stock. In
particular, pursuant to the Delaware General Corporation Law, a company may pay
dividends out of its surplus, as defined, or out of its net profits, for the
fiscal year in which the dividend is declared and/or the preceding year. Surplus
is defined in the Delaware General Corporation Law to be the excess of net
assets of the company over capital. Capital is defined to be the aggregate par
value of shares issued. Moreover, the ability of the Company to pay dividends,
if and when declared by its Board of Directors, may be restricted by regulatory
11
limits on the amount of dividends which UPCIC is permitted to pay the Company.
Section 628.371 of the Florida statutes sets forth limitations, based on net
income and statutory capital, on the amount of dividends that UPCIC may pay to
the Company without approval from the Department.
During 2004 and 2005, the Company did not pay a dividend to common
stockholders.
OTHER STOCK ISSUANCES
In May 2005, the Company issued 860,000 shares of Common Stock to Bradley
I. Meier, the Company's President and CEO, in conjunction with an amendment
approved by the Board of Directors to Mr. Meier's employment agreement whereby
Mr. Meier elected to receive shares of Common Stock in lieu of $21,500 in
accrued salary. The shares were issued at a discount to current market value,
which discount was intended to take into account the restricted and controlling
person status of the shares and to reflect the lack of liquidity of the shares.
Mr. Meier acquired the shares in a private transaction performed in accordance
with the terms of the amendment and pursuant to Section 4(2) of the Securities
Act of 1933, as amended. In January and May of 2005, Sean P. Downes, COO and
Senior Vice President of the Company, elected to receive an aggregate of
1,044,444 shares of Common Stock in lieu of $25,000 in salary and bonus. The
shares were issued at a discount to current market value, which discount was
intended to take into account the restricted and controlling person status of
the shares and to reflect the lack of liquidity of the shares. Mr. Downes
acquired the shares in private transactions pursuant to Section 4(2) of the
Securities Act of 1933, as amended. Also in 2005, pursuant to Section 4(2) of
the Securities Act of 1933, as amended, James M. Lynch, CFO of the Company, was
granted 50,000 shares of Common Stock, valued at $3,000, in recognition of
service to the Company. In addition, in February 2005, the Company issued
100,000 shares of restricted Common Stock to a private investor in connection
with a $100,000 loan made to the Company in September 2004.
EQUITY COMPENSATION PLANS
See Item 11, "Security Ownership of Certain Beneficial Owners and
Management - Equity Compensation Plan Information," for a discussion of shares
of Common Stock issued under the Company's equity compensation plans.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
A NUMBER OF STATEMENTS CONTAINED IN THIS REPORT ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN THE APPLICABLE STATEMENTS.
THESE RISKS AND UNCERTAINTIES INCLUDE BUT ARE NOT LIMITED TO THE COSTS AND THE
UNCERTAINTIES ASSOCIATED WITH THE RISK FACTORS SET FORTH IN ITEM 1 ABOVE.
INVESTORS ARE CAUTIONED THAT THESE FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES
OF FUTURE PERFORMANCE OR RESULTS.
OVERVIEW
UPCIC's application to become a Florida licensed property and casualty
insurance company was filed with the OIR on May 14, 1997 and approved on October
29, 1997. UPCIC's proposal to begin operations through the acquisition of
homeowner insurance policies issued by the JUA was approved by the JUA on May
21, 1997, subject to certain minimum capitalization and other requirements. One
of the requirements imposed by the OIR was to limit the number of policies UPCIC
could assume from the JUA to 30,000.
The OIR requires applicants to have a minimum capitalization of $5.0
million to be eligible to operate as an insurance company in the State of
Florida. Upon being issued an insurance license, companies must maintain
capitalization of at least $4 million. If an insurance company's capitalization
falls below $4 million, then the company will be deemed out of compliance with
OIR requirements, which could result in revocation of the participant's license
to operate as an insurance company in the State of Florida.
The Company has continued to implement its plan to become a financial
services company and, through its wholly-owned insurance subsidiaries, has
sought to position itself to take advantage of what management believes to be
profitable business and growth opportunities in the marketplace.
12
The Company entered into an agreement with the JUA whereby during 1998,
UPCIC assumed approximately 30,000 policies from the JUA. In addition, UPCIC
received bonus incentive funds from the JUA for assuming the policies. The bonus
funds were maintained in an escrow account for three years. These bonus payments
were not included in the Company's assets until receipt at the end of the
three-year period. UPCIC could not cancel the policies from the JUA for this
three-year period at which point UPCIC received the bonus funds. The Company
will not be receiving any additional bonus payments.
The Company expects that premiums from renewals and new business will be
sufficient to meet the Company's working capital requirements beyond the next
twelve months.
The policies obtained from the JUA provided the opportunity for UPCIC to
solicit future renewal premiums. The majority of the policies obtained from the
JUA renewed with UPCIC. 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 89,000
homeowners insurance policies. To improve underwriting and manage risk, the
Company utilizes standard industry modeling techniques for hurricane and
windstorm exposure. To diversify UPCIC's product lines, UPCIC underwrites inland
marine policies. Management may consider underwriting other types of policies in
the future. Any such program will require OIR approval. See Item 1, Competition
under "Factors Affecting Operation Results and Market Price of Stock" for a
discussion of the material conditions and uncertainties that may affect UPCIC's
ability to obtain additional policies.
CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. The Company's primary
areas of estimate are described below.
RECOGNITION OF PREMIUM REVENUES. Property and liability premiums are recognized
as revenue on a pro rata basis over the policy term. The portion of premiums
that will be earned in the future are deferred and reported as unearned
premiums. The Company believes that its revenue recognition policies conform to
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements.
INSURANCE LIABILITIES. Claims and claim adjustment expenses 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 claim adjustment expenses reported prior to the close of the accounting
period; (2) estimates for unreported claims based on industry data; and (3)
estimates of expenses for investigating and adjusting claims based on the
experience of the Company and the industry.
Inherent in the estimates of ultimate claims are expected trends in claim
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 claims experience relative to the
development period, knowledge of the actual facts and circumstances and the
amount of insurance risk retained. In the case of UPCIC, this uncertainty is
compounded by UPCIC's limited history of claims experience. In addition, UPCIC's
policyholders are currently concentrated in South Florida, which is periodically
subject to adverse weather conditions such as hurricanes and tropical storms.
The methods for making such estimates and for establishing the resulting
liability are continually reviewed, and any adjustments are reflected in
earnings currently.
DEFERRED POLICY ACQUISITION COSTS/DEFERRED CEDING COMMISSIONS. Commissions and
other costs of acquiring insurance that vary with and are primarily related to
the production of new and renewal business are deferred and amortized over the
terms of the policies or reinsurance treaties to which they are related.
Determination of costs other than commissions that vary with and are primarily
related to the production of new and renewal business requires estimates to
allocate certain operating expenses. When determining the maximum amount of
deferred policy acquisition costs, investment income to be earned over the
remaining policy period is estimated and taken into consideration. Estimates of
the costs of losses, catastrophic reinsurance and policy maintenance are also
required in the determination of the maximum amount of deferred policy
acquisition costs. Deferred reinsurance commissions have reduced net deferred
policy acquisition costs to $0 as of December 31, 2005; deferred ceding
commission is $1,043,544 as of December 31, 2005.
13
PROVISION FOR PREMIUM DEFICIENCY. It is the Company's policy to evaluate and
recognize losses on insurance contracts when estimated future claims and
maintenance costs under a group of existing contracts will exceed anticipated
future premiums and investment income. The determination of the provision for
premium deficiency requires estimation of the costs of losses, catastrophic
reinsurance and policy maintenance to be incurred and investment income to be
earned over the remaining policy period.
REINSURANCE. In the normal course of business, the Company seeks to reduce the
risk of 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. 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 typical of a company of its size in the homeowners
insurance industry. Amounts recoverable from reinsurers are estimated in a
manner consistent with the provisions of the reinsurance agreement and
consistent with the establishment of the liability of the Company. The Company's
reinsurance policies do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts
deemed uncollectible.
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no off-balance sheet arrangements during 2005.
RELATED PARTIES
All underwriting, rating, policy issuance, reinsurance negotiations and certain
administration functions for UPCIC are performed by UPCIC, Universal Risk
Advisors and unaffiliated third parties. Claims adjusting functions are
performed by Universal Adjusting Corporation, a wholly owned subsidiary of the
Company and unaffiliated third parties.
Dennis Downes and Associates, a multi-line insurance adjustment corporation
based in Deerfield Beach, Florida performs certain claims adjusting work for
UPCIC. Dennis Downes and Associates is owned by Dennis Downes, who is the father
of Sean P. Downes, COO and Senior Vice President of the Company. During 2005 and
2004, the Company expensed claims adjusting fees of $1,075,188 and $1,092,851,
respectively, to Dennis Downes and Associates. As of December 31, 2005, the
Company had accrued adjusting fees of $95,221 to Dennis Downes and Associates.
During 2005, Sean P. Downes filed a claim on his homeowner's policy issued by
UPCIC as a result of damage incurred during Hurricane Wilma. UPCIC handled the
claim in the ordinary course of its business and has made a loss payment to Mr.
Downes in the amount of $214,409.
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.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2005 AND YEAR ENDED DECEMBER 31,
2004.
The fiscal year ended December 31, 2005 marked a significant improvement in
the Company's operating results over recent past fiscal years. This improvement
was primarily attributable to volume and rate increases, restructuring the
homeowners' coverage offered, restructuring the Company's reinsurance coverage
and working to control general and administrative expenses.
Gross premiums written increased 115.7% to $88,701,123 for the year ended
December 31, 2005 from $41,120,962 for the year ended December 31, 2004. The
increase in gross premiums written is primarily attributable to an approximate
107.9% increase in new business as well as an overall 7.8% premium rate
increase. The increase in new business is partly attributable to the recent
Florida windstorm catastrophes which has provided an opportunity in the
otherwise competitive marketplace as certain companies are not accepting new
business, as well as marketing initiatives the Company has undertaken.
Net premiums written increased 282.5% to $21,606,878 for the year ended
December 31, 2005 from $5,648,548 for the year ended December 31, 2004. The
increase in net premiums written reflects the impact of reinsurance, since
14
$67,094,245 or 75.6% of premiums written were ceded to reinsurers for the year
ended December 31, 2005 as compared to $35,472,414 or 86.3% for the year ended
December 31, 2004. The increase in net premiums written is attributable to an
increase in new business, premium rate increases and changes to the Company's
reinsurance program. Under the Company's quota share reinsurance treaty, the
Company elected to cede 90% of gross written premiums, losses and loss
adjustment expenses during the first five months of 2004 for all policies except
for new and renewal without wind risk business with policy effective dates of
June 1, 2003 and after versus 80% of policies with coverage for wind risk during
the remaining seven months of 2004. The Company continued to cede 80% of
policies with coverage for wind risk during the first five months of 2005 versus
55% of policies with coverage for wind risk during the subsequent six months of
2005 and 80% of policies with coverage for wind risk during the remaining month
of 2005. The Company believes that the extent of its reinsurance is typical of a
company of its size in the homeowners' insurance industry.
Net premiums earned increased 283.6% to $15,825,982 for the year ended
December 31, 2005 from $4,125,757 for the year ended December 31, 2004. The
increase in net premiums earned is attributable to an increase in new business,
premium rate increases and changes in the reinsurance program noted above.
Commission revenue increased 67.2% to $2,525,168 for the year ended
December 31, 2005 from $1,510,345 for the year ended December 31, 2004.
Commission income is comprised mainly 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 due to increased policy fee income
attributable to an increase in new and renewal business.
Investment income consists of net investment income and net realized gains
(losses). Investment income increased 285.5% to $687,085 for the year ended
December 31, 2005 from $178,246 for the year ended December 31, 2004. The
increase is primarily due to higher investment balances and a higher interest
rate environment during 2005.
Transaction fees consist of revenue from the selling of insurance leads.
Transaction fee revenue decreased 82.1% to $298,310 for the year ended December
31, 2005 from $1,662,743 for the year ended December 31, 2004. The decrease is
primarily due to the Company's decision to stop generating new business from
Internet sales operations during the fourth quarter of 2005 and focus on core
operations.
Other revenue decreased 37.6% to $325,272 for the year ended December 31,
2005 from $521,682 for the year ended December 31, 2004. Other revenue is
comprised of fee revenue from direct sales and service revenue from other
operations. The decrease is primarily attributable to the fact that there was
less activity in the direct sales and service operations in 2005.
Losses and loss adjustment expenses ("LAE") incurred increased 322.1% to
$9,597,984 for the year ended December 31, 2005 from $2,274,035 for the year
ended December 31, 2004 as compared to net premiums earned which increased
283.6% to $15,825,982 for the year ended December 31, 2005 from $4,125,757 for
the year ended December 31, 2004. Losses and LAE, the Company's most significant
expense, 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. Losses and LAE increased due to an increase in insured exposures and
changes to the Company's reinsurance program discussed above. The Company's
direct loss ratio for the year ended December 31, 2005 was 148.4% compared to
464.1% for the year ended December 31, 2004. The Company's direct loss ratio
decreased principally due to the lower frequency and severity of claims in 2005.
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 $64,267,953 in losses prior
to reinsurance and $4,050,000 net of reinsurance. The losses from these storms
resulted in 104.2% of direct loss ratio. During 2004, Florida experienced 4
windstorms catastrophes (Hurricanes Charley, Frances, Ivan and Jeanne) which
resulted in losses. As a result of these storms, the Company currently estimates
it incurred $164,344,684 in losses prior to reinsurance and $4,175,976 net of
reinsurance. Except for catastrophe claims, the Company believes that the
severity and frequency of claims remained relatively stable for the periods
under comparison. The Company's net loss ratio for the year ended December 31,
2005 was 60.6% compared to 55.1% for the year ended December 31, 2004. The net
loss ratio increased due to the increase in net losses incurred in conjunction
with changes to the Company's reinsurance program discussed above as well as
higher than expected hurricane losses related to the 2004 catastrophes.
15
Catastrophes are an inherent risk of the property-liability insurance
business, particularly in the geographic area where the Company does business,
which may contribute to material year-to-year fluctuations in UPCIC'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 its catastrophe management
strategies will reduce the severity of future losses, UPCIC continues to be
exposed to similar or greater catastrophes.
The reserve for direct unpaid losses and LAE at December 31, 2005 is
$66,999,956. Based upon consultations with the Company's independent actuarial
consultants and their statement of opinion on losses and LAE, the Company
believes that the liability for unpaid losses and LAE is adequate to cover all
claims and related expenses which may arise from incidents reported. The range
of direct loss reserve estimates as determined by the Company's independent
actuarial consultants is a low of $55,978,393 and a high of $76,285,129. The key
assumption used to arrive at management's best estimate of loss reserves in
relation to the actuary's range and the specific factors that led to
management's best estimate is that the liability is based on management's
estimate of the ultimate cost of settling each loss and an amount for losses
incurred but not reported. However, if losses exceed direct loss reserve
estimates there could be a material adverse effect on the Company's financial
statements. Also, if there are regulatory initiatives, legislative enactments or
case law precedents which change the basis for policy coverage, in any of these
events, there could be an effect on direct loss reserve estimates having a
material adverse effect on the Company's financial statements.
As a result of the Company's review of its liability for losses and loss
adjustment expenses, which includes a re-evaluation of the adequacy of reserve
levels for prior year claims, the Company's liabilities for unpaid losses and
LAE, net of related reinsurance recoverables, as of December 31, 2005 were
increased in the current year by $2,549,050 for claims that had occurred on or
before the prior year balance sheet date. This unfavorable loss emergence
resulted principally from higher than expected hurricane losses in 2004. The
Company's liabilities for unpaid losses and LAE, net of related reinsurance
recoverables, as of December 31, 2004 were increased by $55,480 for claims that
had occurred on or before the previous year balance sheet date. This unfavorable
loss emergence resulted principally from settling homeowners' losses established
in the prior year for amounts that were more than expected. There can be no
assurance concerning future adjustments of reserves, positive or negative, for
claims through December 31, 2005.
General and administrative expenses decreased 33.0% to $4,012,391 for the
year ended December 31, 2005 from $5,984,871 for the year ended December 31,
2004. General and administrative expenses have decreased primarily due to higher
ceding commissions on premiums ceded to reinsurers as well as ceding commissions
recognized as a result of a change in the quota share ceding percentage from 55%
to 80% at December 1, 2005. The Company's ceding commission for the incremental
25% ceding percentage at December 1 is 35%. The ceding commission on the
previous 55% ceding percentage is 31%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash flow are premium revenues, commission
income and investment income.
For the year ended December 31, 2005, cash flows provided by operating
activities were $26,974,611. Cash flows from operating activities are expected
to be positive in both the short-term and reasonably foreseeable future. In
addition, the Company's investment portfolio is highly liquid as it consists
almost entirely of readily marketable securities. Cash flows from investing
activities are primarily comprised of purchases and sales of debt and equity
securities. Cash flows from financing activities primarily relate to Company
borrowings.
During 2003, the Company purchased software for $520,000. Management
believes the software will assist it in reducing overall management expenses
versus the previous outside vendor agreement. The final installment payment on
the software of $150,000 was paid in March 2005. In addition, the Company has
outstanding loans in the amount of $119,186 to finance several vehicles and a
boat, all acquired for business use and marketing of the Company's products and
in the amount of $1,032,901 for working capital needs. The amounts will become
due during the years 2006 through 2011.
In July 2004 the Company borrowed monies from a vendor and two private
investors in the amounts of $175,000, $150,000 and $100,000 for working capital.
The terms of the notes evidencing such loans require interest payments at a rate
of 10% through January 2005 with equal monthly payments of principal plus
interest thereafter until January 2006, the maturity date of the notes. The
notes were
16
paid off in January 2006. In connection with the loans, in July 2004, the
Company granted to the vendor and two private investors warrants to purchase
175,000, 150,000 and 100,000, shares of restricted Common Stock each at an
exercise price of $.05 per share. The warrants vested over the payment terms and
each expires in July 2009. These transactions were approved by the Company's
Board of Directors.
In September 2004, the Company borrowed $50,000 from each of Bradley I.
Meier, President and Chief Executive Officer of the Company, and Sean P. Downes,
Senior Vice President and Chief Operating Officer of the Company. The monies
were used to make an additional capital contribution to UPCIC to ensure that
UPCIC met regulatory surplus requirements and to allow for continued development
of UPCIC's business. The principal amount of these loans was repaid in October
2004. Also in September 2004, the Company borrowed $100,000 from a private
investor, which loan, plus interest of $10,000, was repaid in October 2004. The
funds were used to make an additional capital contribution to UPCIC to ensure
that UPCIC met regulatory surplus requirements and to allow for continued
development of UPCIC's business. In connection with this loan, the Company
granted in 2004 and subsequently issued in February 2005 100,000 shares of
restricted Common Stock to the private investor. These transactions were
approved by the Company's Board of Directors.
Also in September 2004, the Company's reinsurance intermediary advanced the
Company $250,000 which was used as an additional capital contribution to UPCIC.
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 five monthly installments of $200,000. 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.
The following table represents the Company's total contractual obligations
for which cash flows are fixed or determinable.
Total 2006 2007 2008 2009 2010 2010+
----- ---- ---- ---- ---- ---- -----
(Millions in Dollars)
Contractual obligations
Long-term debt $ 1,152 $ 767 $ 324 $ 16 $ 15 $ 17 $ 13
Operating leases 349 178 114 57 - - -
-------- ------ ------ ----- ----- ----- -----
Total contractual obligations $ 1,501 $ 945 $ 438 $ 73 $ 15 $ 17 $ 13
======== ====== ====== ===== ===== ===== =====
The balance of cash and cash equivalents as of December 31, 2005 was
$48,038,736. Most of this amount, including the $10,546,045 cash received from
reinsurers in advance of catastrophe claims, is available to pay claims in the
event of a catastrophic event pending reimbursement for any aggregate amount in
excess of $1,350,000 up to the 100 year PML which would be currently covered by
reinsurers. Catastrophic reinsurance is recoverable upon presentation to the
reinsurer of evidence of claim payment.
Accounting principles generally accepted in the United States of America
differ in some respects from reporting practices prescribed or permitted by the
Florida Office of Insurance Regulation. 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. The Company is also required to adhere to
prescribed premium-to-capital surplus ratios. The Company is in compliance with
these requirements.
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 to the Company 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.
17
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary assets of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of the general
levels of inflation. Interest rates do not necessarily move in the same
direction or with the same magnitude as the cost of paying losses and LAE.
Insurance premiums are established before the Company knows the amount of
loss and LAE and the extent to which inflation may affect such expenses.
Consequently, the Company attempts to anticipate the future impact of inflation
when establishing rate levels. While the Company attempts to charge adequate
rates, the Company may be limited in raising its premium levels for competitive
and regulatory reasons. Inflation also affects the market value of the Company's
investment portfolio and the investment rate of return. Any future economic
changes which result in prolonged and increasing levels of inflation could cause
increases in the dollar amount of incurred loss and LAE and thereby materially
adversely affect future liability requirements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are annexed to this report and are
referenced as pages F-1 to F-25.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. 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.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors and executive officers of the Company as of December 31, 2005
are as follows:
Name Age Position
---- --- --------
Bradley I. Meier 38 President, Chief Executive Officer and Director
Norman M. Meier 67 Director, Secretary
18
Name Age Position
---- --- --------
Reed J. Slogoff 37 Director
Joel M. Wilentz, M.D. 72 Director
James M. Lynch 51 Executive Vice President and Chief Financial Officer
Sean P. Downes 35 Senior Vice President, Chief Operating Officer and Director
BRADLEY I. MEIER has been President, Chief Executive Officer and a Director
of the Company since its inception in November 1990. He has served as President
of UPCIC, a wholly-owned subsidiary of the Company, since its formation in April
1997. In 1990, Mr. Meier graduated from the Wharton School of Business with a
B.S. in Economics.
NORMAN M. MEIER has been a Director of the Company since July 1992. From
December 1986 until November 1999, Mr. Meier was President, Chief Executive
Officer and a Director of Columbia Laboratories, Inc., a publicly-traded
corporation in the pharmaceuticals business. From 1971 to 1977, Mr. Meier was
Vice President of Sales and Marketing for Key Pharmaceuticals. From 1977 until
1986, Mr. Meier served as a consultant to Key Pharmaceuticals.
REED J. SLOGOFF has been a Director of the Company since March 1997. Mr.
Slogoff is currently a principal with Pearl Properties Commercial Management,
LLC, a commercial real estate investment and management firm based in
Philadelphia, Pennsylvania. Mr. Slogoff was formerly with Entercom
Communications Corp., a publicly traded radio broadcasting company and was
previously a member of the corporate and real estate group of the law firm of
Dilworth, Paxson, LLP. Mr. Slogoff received a B.A. with Honors from the
University of Pennsylvania in 1990, and a J.D. from the University of Miami
School of Law in 1993.
JOEL M. WILENTZ, M.D. has been a Director of the Company since March 1997.
Dr. Wilentz is one of the founding members of Dermatology Associates in Florida,
founded in 1970. He is a former member of the boards of the Neurological Injury
Compensation Associate for Florida and the Broward County Florida Medical
Association. He is a member of the board of directors of the American Arm of the
Israeli Emergency Medical Service for the southeastern United States, of which
he is also a past President. Dr. Wilentz is a past member of the Board of
Overseers of the Nova Southeastern University School of Pharmacy.
JAMES M. LYNCH CPA, CPCU has been Executive Vice President and Chief
Financial Officer of the Company since August 1998. Before joining the Company
in August 1998, Mr. Lynch was Chief Financial Officer of Florida Administrators,
Inc., an organization specializing in property and casualty insurance. Prior to
working at Florida Administrators, Inc., Mr. Lynch held the position of Senior
Vice President of Finance and Comptroller of Trust Group, Inc., which also
specialized in property and casualty insurance. Before his position at Trust
Group, Mr. Lynch was a Manager with the accounting and auditing firm of Coopers
& Lybrand, which later became PricewaterhouseCoopers LLC.
SEAN P. DOWNES has been Senior Vice President, Chief Operating Officer and
a Director of the Company since January 2005. He has served as Chief Operating
Officer and a Director of UPCIC since July 2003. Mr. Downes was Chief Operating
Officer of Universal Adjusting Corporation from July 1999 to July 2003. During
that time Mr. Downes created the Company's claims operation. Before joining the
Company in July 1999, Mr. Downes was Vice President of Dennis Downes and
Associates, a multi-line insurance adjustment corporation.
Norman M. Meier and Bradley I. Meier are father and son, respectively.
There are no other family relationships among the Company's executive officers
and directors. Eric Meier who is the brother of Bradley I. Meier, also works for
the Company.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Currently, the Company does
not have a procedure by which shareholders may recommend nominees to the
Company's Board of Directors. Officers are elected annually by the Board of
Directors and serve at the discretion of the Board.
The Company has entered into indemnification agreements with its executive
officers and directors pursuant to which the Company has agreed to indemnify
such individuals, to the fullest extent permitted by law, for claims made
against them in connection with their positions as officers, directors or agents
of the Company.
19
AUDIT COMMITTEE
The Company has a separately designated audit committee, whose members are
Bradley I. Meier and Reed J. Slogoff. The Company's Board of Directors has
determined that the Company does not have an audit committee financial expert
serving on its audit committee because the Company has not identified an
individual with the required expertise and experience.
CODE OF ETHICS
The Company had not adopted a code of ethics for senior executive and
financial officers because it has not expended the resources necessary for such
adoption.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
All required disclosures of Forms 3, 4 and 5 were timely filed by
directors, officers and 10% beneficial owners.
ITEM 10. EXECUTIVE COMPENSATION
The tables and descriptive information set forth below are intended to
comply with the Securities and Exchange Commission compensation disclosure
requirements applicable to, among other reports and filings, annual reports on
Form 10-KSB. This information is furnished with respect to the Company's
executive officers who earned in excess of $100,000 during the fiscal year ended
December 31, 2005.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
Name and Year Ended Restricted Long-Term Compensation
Principal Position December 31 Salary Bonus Stock Award Securities Underlying Options
------------------ ----------- ------ ----- ----------- -----------------------------
Bradley I. Meier 2005 $548,865 (1) $191,556 0 0
President & CEO 2004 419,052 (2) 0 0 1,000,000
2003 381,150 0 0 0
James M. Lynch 2005 $279,525 $3,846 50,000 0
Executive Vice 2004 172,375 15,000 0 0
President & CFO 2003 155,000 0 0 0
Sean P. Downes 2005 $401,923 (3) $181,167 0 0
Senior Vice President 2004 225,000 129,933 2,000,000 0
& Chief Operating 2003 109,167 0 0 0
Officer
(1) Includes $21,500 in salary received in the form of 860,000 shares of restricted Common Stock in lieu of cash
compensation at election of executive.
(2) Includes $72,000 in salary received in the form of 2,823,529 shares of restricted Common Stock in lieu of cash
compensation at election of executive.
(3) Includes $25,000 in salary and bonus received in the form of an aggregate of 1,044,444 shares of restricted Common Stock
in lieu of cash compensation at election of executive.
OPTION GRANTS IN LAST FISCAL YEAR
None.
20
AGGREGATED OPTION EXERCISES AND OPTION VALUES
FOR THE YEAR ENDED DECEMBER 31, 2005
None.
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
None.
EMPLOYMENT AGREEMENTS
As of August 11, 1999, the Company entered into a four-year employment
agreement with Bradley I. Meier, the Company's President and Chief Executive
Officer, amending and restating the previous employment agreement of May 1, 1997
between the Company and Mr. Meier. Under the terms of the employment agreement,
Mr. Meier will devote substantially all of his time to the Company and will be
paid a base salary of $250,000 per year which shall be increased by 5% each year
beginning with the first anniversary of the effective date. Additionally,
pursuant to the employment agreement, and during each year thereof, Mr. Meier
will be entitled to a bonus equal to 3% of pretax profits up to $5 million and
4% of pretax profits in excess of $5 million. On May 4, 2001, Addendum No. 3 to
the employment agreement was approved by the Board of Directors, whereby Mr.
Meier was entitled to receive an additional fifteen percent (15%) increase in
his base compensation in addition to the cumulative base compensation and
increase calculated at the beginning of 2001, retroactive to January 1, 2001 and
under Addendum No. 3, for each successive year of the term of the employment
agreement, the base compensation as adjusted by previous increase(s) will be
increased by ten (10%) percent. The employment agreement with Mr. Meier contains
non-competition and non-disclosure covenants. In addition, the agreement shall
be extended automatically for one year at each anniversary of the date of the
agreement up to the fourth year of the agreement, at the option of Mr. Meier.
Under the terms of Mr. Meier's employment agreement dated May 1, 1997, he was
granted ten-year stock options to purchase 1,500,000 shares of Common Stock at
$1.06 per share, of which 500,000 options vested immediately, 500,000 options
vested after one year and the remaining options vested after two years. On March
4, 2004, Mr. Meier was granted ten-year stock options to purchase 1,000,000
shares of Common Stock at $0.056 per share, which vested immediately. The
Company issued 860,000 and 2,823,529 shares of Common Stock during the
respective years ended December 31, 2005 and 2004 in conjunction with amendments
approved by the Board of Directors to the employment agreement between the
Company and Mr. Meier whereby Mr. Meier converted salary and accrued vacation
into shares of Common Stock. The shares were issued to Mr. Meier in private
transactions performed in accordance with the terms of the amendments and
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
As of January 1, 2005, the Company entered into a four-year employment
agreement with Sean P. Downes, the Company's Senior Vice President and Chief
Operating Officer. Under the terms of the employment agreement, Mr. Downes will
devote substantially all of his time to the Company and will be paid a base
salary of $350,000 per year which shall be increased by 20% each year beginning
with the first anniversary of the effective date. Additionally, pursuant to the
employment agreement, and during each year thereof, Mr. Downes will be entitled
to a bonus equal to 3% of pretax profits. The employment agreement with Mr.
Downes contains non-competition and non-disclosure covenants. The employment
agreement for Mr. Downes also contains provisions regarding pay and benefits
upon certain termination and Change in Control events (as such term is defined
in the employment agreement) which are normally found in executive employment
agreements. If Mr. Downes is terminated for "cause" (as such term is defined in
the employment agreement), any accrued but not paid benefits shall no longer be
an obligation of the Company. If a Change of Control occurs, Mr. Downes is
entitled to salary and bonus for one year in a lump sum and all options or
warrants granted to Mr. Downes shall immediately vest and become exercisable. In
addition, there shall be no automatic extension of the term of the agreement, or
the agreement itself, unless extended in accordance with the term of the
agreement or by written instrument executed by the Company and approved by the
Board of Directors of the Company. Under the terms of Mr. Downes's employment
agreement, the Company may grant him options or warrants to purchase the
Company's Common Stock. During the year ended December 31, 2005, Mr. Downes
converted salary and accrued vacation into 1,044,444 shares of Common Stock. The
shares were issued to Mr. Downes in private transactions performed in accordance
with the terms of the amendments and pursuant to Section 4(2) of the Securities
Act of 1933, as amended.
21
DIRECTOR COMPENSATION
In 2005, each non-employee director received annual compensation of
$30,000, paid quarterly, for their service on the Board of Directors and
periodically receive stock options and reimbursement of reasonable expenses
incurred in attending Board meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain information with respect to all of the
Company's equity compensation plans in effect as of December 31, 2005:
EQUITY COMPENSATION PLAN INFORMATION
----------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average issuance under equity
issued upon exercise of exercise price of compensation plans
outstanding options, warrants outstanding options, (excluding securities
Plan Category and rights warrants and rights reflected in first column)
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 10,282,006 $0.86 N/A
approved by security holders
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security - - -
holders
----------------------------------------------------------------------------------------------------------------------
Total 10,282,006 $0.86 N/A
----------------------------------------------------------------------------------------------------------------------
Descriptions of the plans are contained in Note 12 to the Consolidated Financial
Statements.
SERIES M PREFERRED STOCK
As of March 1, 2006, directors and named executive officers, individually
and as a group, beneficially owned Series M Preferred Stock as follows:
Name and Address of Amount and Nature
Beneficial Owner(1) of Beneficial Ownership Percent of Class
-------------------- ----------------------- ----------------
Bradley I. Meier*(2) 48,890 48.0%
Norman M. Meier*(3) 53,000 52.0%
Officers and directors as a group
(2 persons)(4) 86,890 98.0%
* Director
(1) Unless otherwise indicated, the Company believes that each person has sole
voting and investment rights with respect to the shares of Series M
Preferred Stock of the Company specified opposite his name. Unless
otherwise indicated, the mailing address of each shareholder is c/o
Universal Insurance Holdings, Inc., 1110 W. Commercial Blvd., Suite 100,
Fort Lauderdale, FL 33309.
(2) Consists of (i) 33,890 shares of Series M Preferred Stock and (ii) 15,000
shares of Series M Preferred Stock beneficially owned by Belmer Partners, a
Florida General Partnership ("Belmer"), of which Mr. Meier is a general
partner. Excludes all shares of Series M Preferred Stock owned by Norman M.
Meier and Phylis R. Meier, Mr. Meier's father and mother, respectively, as
to which Mr. Meier disclaims beneficial ownership.
(3) Consists of (i) 38,000 shares of Series M Preferred Stock and (ii) 15,000
shares of Series M Preferred Stock beneficially owned by Belmer, of which
Mr. Meier is a general partner. Excludes all shares of Series M Preferred
22
Stock owned by Bradley I. Meier and Phylis R. Meier, Mr. Meier's son and
former spouse, respectively, as to which Mr. Meier disclaims beneficial
ownership.
(4) See footnotes (1)-(3) above.
SERIES A PREFERRED STOCK
As of March 1, 2006, directors and named executive officers, individually
and as a group, beneficially owned Series A Preferred Stock as follows:
Name and Address of Amount and Nature
Beneficial Owner(1) of Beneficial Ownership Percent of Class
------------------- ----------------------- ----------------
Norman M. Meier*(2) 9,975 20%
Officers and directors as a group
(1 person)(3)
* Director
(1) Unless otherwise indicated, the Company believes that each person has sole
voting and investment rights with respect to the shares of Series M
Preferred Stock of the Company specified opposite his name. Unless
otherwise indicated, the mailing address of each shareholder is c/o
Universal Insurance Holdings, Inc., 1110 W. Commercial Blvd., Suite 100,
Fort Lauderdale, FL 33309.
(2) Consists of 9,975 shares of Series A Preferred Stock beneficially owned by
Belmer, of which Mr. Meier is a general partner. Excludes all shares of
Series A Preferred Stock owned by Phylis R. Meier, Mr. Meier's former
spouse, as to which Mr. Meier disclaims beneficial ownership.
(3) See footnotes (1)-(2) above.
COMMON STOCK
As of March 1, 2006, directors and named executive officers, individually
and as a group, beneficially owned Common Stock as follows:
Name and Address of Amount and Nature of
Beneficial Owner(1) Beneficial Ownership(2) Percent of Class
------------------- ----------------------- ----------------
Bradley I. Meier(3) 21,405,278 58.2%
Sean P. Downes(4) 3,552,644 9.7%
Norman M. Meier(5) 2,370,945 6.4%
Reed J. Slogoff(6) 255,000 .7%
Joel M. Wilentz(7) 255,000 .7%
James M. Lynch(8) 225,000 .6%
Officers and directors as a group
(6 people)(9) 28,063,867 76.3%
(1) Unless otherwise indicated, the Company believes that each person has sole
voting and investment rights with respect to the shares of Common Stock of
the Company specified opposite his name. Unless otherwise indicated, the
mailing address of each shareholder is c/o Universal Insurance Holdings,
Inc., 1110 West Commercial Boulevard, Suite 100, Fort Lauderdale, Florida
33309.
(2) A person is deemed to be the beneficial owner of Common Stock that can be
acquired by such person within 60 days of the date hereof upon the exercise
of warrants or stock options or conversion of Series A Preferred Stock,
Series M Preferred Stock or convertible debt. Except as otherwise
specified, each beneficial owner's percentage ownership is determined by
assuming that warrants, stock options, Series A Preferred Stock, Series M
Preferred Stock and convertible debt that is held by such person (but not
those held by any other person) and that are exercisable or convertible
within 60 days from the date hereof, have been exercised or converted.
23
(3) Consists of (i) (a) 16,190,170 shares of Common Stock, (b) options to
purchase 90,000 shares of Common Stock at an exercise price of $1.13 per
share and options to purchase 500,000 shares of Common Stock at an exercise
price of $1.25 per share, (c) warrants to purchase 25,306 shares of Common
Stock at an exercise price of $3.00 per share and warrants to purchase
131,700 shares of Common Stock at an exercise price of $.75 per share, (d)
169,450 shares of Common Stock issuable upon conversion of Series M
Preferred Stock, (e) options to purchase 250,000 shares of Common Stock at
an exercise price of $1.06 per share which vested on November 2, 1997, (f)
options to purchase 500,000 shares of Common Stock at an exercise price of
$1.06 per share which vested on May 1, 1997 granted pursuant to Mr. Meier's
employment agreement, options to purchase 500,000 shares of Common Stock at
$1.06 per share which vested on May 1, 1998 granted pursuant to Mr. Meier's
employment agreement and options to purchase 500,000 shares of Common Stock
at an exercise price of $1.06 per share which vested on May 1, 1999 granted
pursuant to Mr. Meier's employment agreement, (g) options to purchase
250,000 shares of Common Stock at an exercise price of $1.63 per share, (h)
options to purchase 150,000 shares of Common Stock at an exercise price of
$1.10 per share which vested on December 23, 1999, (i) options to purchase
150,000 shares of Common Stock at an exercise price of $0.50 per share
which vested on December 21, 2001, (j) options to purchase 1,000,000 shares
of Common Stock at an exercise price of $0.056 per share which vested on
March 4, 2005 and (ii) an aggregate of 331,761 shares of Common Stock
(including shares of Common Stock issuable upon exercise of warrants and
conversion of Series A and Series M Preferred Stock) beneficially owned by
Belmer Partners, of which Mr. Meier is a general partner. Excludes options
to purchase 625,000 shares of Common Stock of Tigerquote.com at an exercise
price of $.50 per share. Also excludes all securities owned by Norman M.
Meier and Phyllis R. Meier, Mr. Meier's father and mother, respectively, as
to which Mr. Meier disclaims beneficial ownership. Includes 416,666 and
250,225 shares of Common Stock owned by Lynda Meier and Eric Meier,
respectively, who are the sister and brother, respectively, of Bradley I.
Meier, which shares are subject to proxies granting voting rights for such
shares to Bradley I. Meier.
(4) Consists of (i) 3,238,044 shares of Common Stock (ii) options to purchase
15,000 shares of Common Stock at an exercise price of $1.10 per share,
(iii) options to purchase 100,000 shares of Common Stock at an exercise
price of $0.50 per share and (iv) options to purchase 200,000 shares of
Common Stock at an exercise price of $0.04 per share.
(5) Consists of (i) (a) 479,246 shares of Common Stock, (b) options to purchase
250,000 shares of Common Stock at an exercise price of $1.25 per share, (c)
214,938 shares of Common Stock issuable upon conversion of Series A and
Series M Preferred Stock, (d) options to purchase 500,000 shares of Common
Stock at an exercise price of $1.06 per share which vested on November 2,
1997, (e) options to purchase 500,000 shares of Common Stock at an exercise
price of $1.63 per share, (f) options to purchase 75,000 shares of Common
Stock at an exercise price of $1.10 per share, (g) options to purchase
25,000 shares of Common Stock at an exercise price of $0.50 per share and
(ii) an aggregate of 331,761 shares of Common Stock (including shares of
Common Stock issuable upon exercise of warrants and conversion of Series A
and Series M Preferred Stock) beneficially owned by Belmer, of which Mr.
Meier is a general partner. Excludes options to purchase 100,000 shares of
Common Stock of Tigerquote.com at an exercise price of $.50 per share.
Excludes all securities owned by Bradley I. Meier or Phyllis Meier, Mr.
Meier's son and former spouse, respectively, as to which Mr. Meier
disclaims beneficial ownership.
(6) Consists of (i) 25,000 shares of Common Stock, (ii) options to purchase
100,000 shares of Common Stock at an exercise price of $1.06 per share,
(iii) options to purchase 100,000 shares of Common Stock at an exercise
price of $1.63 per share, of which 50,000 are held in a custodial account
for Mr. Slogoff's minor son, (iv) options to purchase 20,000 shares of
Common Stock at an exercise price of $1.10 per share and (v) options to
purchase 10,000 shares of Common Stock at an exercise price of $0.60 per
share. Excludes options to purchase 20,000 shares of Common Stock of
Tigerquote.com at an exercise price of $.50 per share.
(7) Consists of (i) 25,000 shares of Common Stock, (ii) options to purchase
100,000 shares of Common Stock at an exercise price of $1.06 per share,
(iii) options to purchase 100,000 shares of Common Stock at an exercise
price of $1.63 per share, (iv) options to purchase 20,000 shares of Common
Stock at an exercise price of $1.10 per share and (v) options to purchase
10,000 shares of Common Stock at an exercise price of $0.60 per share.
24
Excludes options to purchase 20,000 shares of Common Stock of
Tigerquote.com at an exercise price of $.50 per share.
(8) Consists of (i) 50,000 shares of Common Stock, (ii) options to purchase
50,000 shares of Common Stock at an exercise price of $1.87 per share,
(iii) options to purchase 25,000 shares of Common Stock at an exercise
price of $1.10 per share, (iv) options to purchase 15,000 shares of Common
Stock at exercise price of $0.70 per share and (v) options to purchase
100,000 shares of Common Stock at an exercise price of $0.50 per share.
Excludes options to purchase 20,000 shares of Common Stock of
Tigerquote.com at an exercise price of $.50 per share.
(9) See footnotes (1)-(8) above.
SERIES M PREFERRED STOCK
As of March 1, 2006, the following table sets forth information regarding
the number and percentage of Series M Preferred Stock held by all persons, other
than those persons listed immediately above, who are known by the Company to
beneficially own or exercise voting or dispositive control over 5% or more of
the Company's outstanding Series M Preferred Stock:
Amount and Nature of
Name and Address(1) Beneficial Ownership Percent of Class
---------------- -------------------- ----------------
Phyllis R. Meier(2) 16,800 18.9%
Universal Insurance Holdings, Inc.
1110 West Commercial Boulevard
Fort Lauderdale, Florida 33309
Belmer Partners(3) 15,000 16.9%
c/o Phyllis R. Meier
Managing General Partner
Universal Insurance Holdings, Inc.
1110 West Commercial Boulevard
Fort Lauderdale, Florida 33309
25
(1) Unless otherwise indicated, the Company believes that each person has sole
voting and investment rights with respect to the shares of Series M
Preferred Stock specified opposite her or its name.
(2) Consists of (i) 1,800 shares of Series M Preferred Stock and (ii) 15,000
shares of Series M Preferred Stock beneficially owned by Belmer, of which
Ms. Meier is the managing general partner. Excludes all securities owned by
Bradley I. Meier and Norman M. Meier, the son and former spouse,
respectively, as to which Ms. Meier disclaims beneficial ownership.
(3) Belmer Partners is a Florida general partnership in which Phylis R. Meier
is managing general partner and Bradley I. Meier and Norman M. Meier are
general partners.
SERIES A PREFERRED STOCK
As of March 1, 2006, the following table sets forth information regarding
the number and percentage of Series A Preferred Stock held by all persons, other
than those persons listed immediately above, who are known by the Company to
beneficially own or exercise voting or dispositive control over 5% or more of
the Company's outstanding Series A Preferred Stock:
Amount and Nature of
Name and Address(1) Beneficial Ownership Percent of Class
---------------- -------------------- ----------------
Phyllis R. Meier(2) 9,975 20.0%
Universal Insurance Holdings, Inc.
1110 West Commercial Boulevard
Fort Lauderdale, Florida 33309
Belmer Partners(3) 30,000 60.0%
c/o Phyllis R. Meier
Managing General Partner
Universal Insurance Holdings, Inc.
1110 West Commercial Boulevard
Fort Lauderdale, Florida 33309
(1) Unless otherwise indicated, the Company believes that each person has sole voting and
investment rights with respect to the shares of Series A Preferred Stock specified
opposite her or its name.
(2) Consists of 9,975 shares of Series A Preferred Stock beneficially owned. Excludes all
shares of Series A Preferred Stock owned by Norman M. Meier, Ms. Meier's former spouse,
as to which Ms. Meier disclaims beneficial ownership.
(3) Belmer Partners is a Florida general partnership in which Phylis R. Meier is managing
general partner and Bradley I. Meier and Norman M. Meier are general partners.
COMMON STOCK
As of March 1, 2006, the following table sets forth information regarding
the number and percentage of Common Stock held by all persons, other than those
persons listed immediately above, who are known by the Company to beneficially
own or exercise voting or dispositive control over 5% or more of the Company's
outstanding Common Stock:
26
Amount and Nature of
Name and Address(1) Beneficial Ownership(2) Percent of Class
---------------- -------------------- ----------------
Martin Steinberg, Esq., as the 6,518,004 17.7 %
receiver for Lancer Offshore Inc.(3)
c/o David E. Wells, Esq.
Hunton & Williams LLP
1111 Brickell Avenue, Suite 2500
Miami, FL 33131
(1) Unless otherwise indicated, the Company believes that each person has sole voting and
investment rights with respect to the shares of Common Stock of the Company specified
opposite its name.
(2) A person is deemed to be the beneficial owner of Common Stock that can be acquired by
such person within 60 days of the date hereof upon the exercise of warrants or stock
options or conversion of Series A and Series M Preferred Stock or convertible debt.
Except as otherwise specified, each beneficial owner's percentage ownership is
determined by assuming that warrants, stock options, Series A and Series M Preferred
Stock and convertible debt that are held by such a person (but not those held by any
other person) and that are exercisable within 60 days from the date hereof, have been
exercised or converted.
(3) Consists of 6,518,004 shares of Common Stock as indicated on Schedule 13D dated July 10,
2003 filed with the Securities and Exchange Commission on March 5, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dennis Downes and Associates, a multi-line insurance adjustment corporation
based in Deerfield Beach, Florida performs certain claims adjusting work for
UPCIC. Dennis Downes and Associates is owned by Dennis Downes, who is the father
of Sean P. Downes, COO and Senior Vice President of the Company. During 2005 and
2004, the Company expensed claims adjusting fees of $1,075,188 and $1,092,851,
respectively, to Dennis Downes and Associates. As of December 31, 2005, the
Company had accrued adjusting fees of $95,221 to Dennis Downes and Associates.
During 2005, Sean P. Downes filed a claim on his homeowner's policy issued by
UPCIC as a result of damage incurred during Hurricane Wilma. UPCIC handled the
claim in the ordinary course of its business and has made a loss payment to Mr.
Downes in the amount of $214,409.
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.
Transactions between the Company and its affiliates are on terms no less
favorable to the Company than can be obtained from third parties on an arms'
length basis. Transactions between the Company and any of its executive officers
or directors require the approval of a majority of disinterested directors.
ITEM 13. EXHIBITS
EXHIBITS
3.1 Registrant's Restated Amended and Restated Certificate of
Incorporation(1)
3.2 Registrant's Bylaws(1)
3.3 Certificate of Designation for Series A Convertible Preferred Stock
dated October 11, 1994(4)
3.4 Certificate of Designations, Preferences, and Rights of Series M
Convertible Preferred Stock dated August 13, 1997(2)
3.5 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated October 19, 1998(4)
27
3.6 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated December 18, 2000(4)
3.7 Certificate of Amendment of Certificate of Designations of the Series
A Convertible Preferred Stock dated October 29, 2001(4)
4.1 Form of Common Stock Certificate(1)
4.2 Form of Warrant Certificate(1)
4.3 Form of Warrant Agency Agreement(1)
4.4 Form of Underwriter Warrant(1)
4.5 Affiliate Warrant(1)
4.6 Form of Warrant to purchase 100,000 shares of Common Stock at an
exercise price of $2.00 per share issued to Steven Guarino dated as of
April 24, 1997. (Substantially similar in form to two additional
warrants to purchase 100,000 shares of Common Stock issued to Mr.
Guarino dated as of April 24, 1997, with exercise prices of $2.75 and
$3.50 per share, respectively)(2)
10.1 Registrant's 1992 Stock Option Plan(1)
10.2 Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers(1)
10.5 Management Agreements by and between Universal Property & Casualty
Insurance Company and Universal P&C Management, Inc. dated as of June
2, 1997(2)
10.6 Employment Agreement dated as of May 1, 1997 between Universal
Heights, Inc. and Bradley I. Meier(2)
11.1 Statement Regarding Computation of Per Share Income
16.1 Letter on change in certifying accountants from Millward & Co. CPA's
dated February 12, 1999, and as amended February 26, 1999(3)
16.2 Letter on change in certifying accountants from Deloitte & Touche LLP
dated October 7, 2002(5)
16.3 Letter on change in certifying accountants from Deloitte & Touche LLP
dated March 27, 2003(6)
21 List of Subsidiaries
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to Title 18, United States Code, Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 33-51546) declared effective on December 14,
1992
(2) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended April 30, 1997 filed with the Securities and
Exchange Commission on August 13, 1997, as amended
(3) Incorporated by reference to the Registrant's Current Report on Form
8-K and Current Report on Form 8-K/A, filed with the Securities and
Exchange Commission on February 12, 1999 and February 26, 1999,
respectively
28
(4) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2002 filed with the Securities
and Exchange Commission on April 9, 2003
(5) Incorporated by reference to the Registrant's Current Report on Form
8-K, filed with the Securities and Exchange Commission on October 7,
2002
(6) Incorporated by reference to the Registrant's Current Report on Form
8-K, filed with the Securities and Exchange Commission on April 2,
2003
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
Audit fees for the fiscal years ended December 31, 2005 and December 31, 2004
were $176,000 and $132,000, respectively.
AUDIT RELATED FEES
Audit related fees for the fiscal years ended December 31, 2005 and December 31,
2004 were $0.
TAX FEES
Tax fees for the fiscal years ended December 31, 2005 and December 31, 2004 were
$31,500 and $31,500, respectively.
ALL OTHER FEES
All other fees for products and services provided by the Company's principal
accountant for the fiscal years ended December 31, 2005 and December 31, 2004
were $0.
29
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
UNIVERSAL INSURANCE HOLDINGS, INC.
Dated: March 31, 2006 By: /s/ Bradley I. Meier
-------------------------------------
Bradley I. Meier, President and Chief
Executive Officer
By: /s/ James M. Lynch
-------------------------------------
James M. Lynch, Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Bradley I. Meier President, Chief Executive Officer March 31, 2006
-------------------- and Director
Bradley I. Meier
/s/ Sean P. Downes Senior Vice President, Chief March 31, 2006
------------------ Operating Officer and Director
Sean P. Downes
/s/ James M. Lynch Executive Vice President and Chief March 31, 2006
------------------ Financial Officer
James M. Lynch
/s/ Norman M. Meier Director March 31, 2006
-------------------
Norman M. Meier
/s/ Reed J. Slogoff Director March 31, 2006
-------------------
Reed J. Slogoff
/s/ Joel M. Wilentz Director March 31, 2006
-------------------
Joel M. Wilentz
30
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm......................F-2
Consolidated Balance Sheet - December 31, 2005...............................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004 ..................................................F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2005 and 2004.............................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004...................................................F-6
Notes to Consolidated Financial Statements............................F-7 - F-25
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Universal Insurance Holdings, Inc.
Fort Lauderdale, Florida
We have audited the accompanying consolidated balance sheet of UNIVERSAL
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES (the "Company") as of December 31,
2005, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of UNIVERSAL INSURANCE
HOLDINGS, INC. AND SUBSIDIARIES as of December 31, 2005, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Blackman Kallick Bartelstein LLP
Chicago, Illinois
March 30, 2006
F-2
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
Cash and cash equivalents $ 48,038,736
Real estate 3,141,059
Reinsurance recoverables 121,937,868
Premiums and other receivables 5,473,894
Property and equipment, net 888,332
Deferred income taxes 607,299
Other assets 946,246
--------------
Total Assets $ 181,033,434
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses 66,999,956
Unearned premiums 50,890,005
Deferred ceding commission 1,043,544
Accounts payable 1,943,363
Reinsurance payable 44,452,353
Other accrued expenses 4,635,998
Loans payable 1,152,087
--------------
Total Liabilities 171,117,306
--------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 14)
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, 50,000,000 shares authorized,
36,463,219 shares issued and 33,354,574 shares outstanding 286,037
Common stock in treasury, at cost - 208,645 shares (101,820)
Minority interest 35,000
Additional paid-in capital 15,184,331
Accumulated deficit (5,488,807)
--------------
Total stockholders' equity 9,916,128
--------------
Total liabilities and stockholders' equity $ 181,033,434
==============
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
PREMIUMS EARNED AND OTHER REVENUES:
Premium earned, net $ 15,825,982 $ 4,125,757
Net investment income 687,085 178,246
Commission revenue 2,525,168 1,510,345
Transaction fees 298,310 1,662,743
Other revenue 325,272 521,682
-------------- ------------
Total premiums earned and other revenues 19,661,817 7,998,773
-------------- ------------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 9,597,984 2,274,035
General and administrative expenses 4,012,391 5,984,871
-------------- ------------
Total operating costs and expenses 13,610,375 8,258,906
-------------- ------------
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES 6,051,442 (260,133)
-------------- ------------
Federal income taxes current 152,144 -
Federal income taxes deferred (607,299) -
-------------- ------------
Federal income taxes, net (455,155) -
-------------- ------------
NET INCOME (LOSS) $ 6,506,597 $ (260,133)
============== ============
INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.20 $ (0.01)
============== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 32,807,521 30,214,169
============== ============
INCOME (LOSS) PER COMMON SHARE
Diluted $ 0.19 $ (0.01)
============== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 33,945,639 30,214,169
============== ============
The accompanying notes are an integral part of the consolidated financial statements.
F-4
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
Accumulated
Preferred Common Treasury Other
Stock Stock Stock Additional Comp
Paid-in Minority Accumulated Income
Shares Amount Shares Amount Shares Amount Capital Interest Deficit (loss) Total
------ ------ ------ ------ ------ ------ ------- -------- ------- ------ -----
BALANCE,
January 1, 2004 138,640 $1,387 26,460,246 $215,008 208,645 $(101,820) $15,024,142 $ - $(11,639,794) $(25,657) $3,473,266
Net loss - - - - - - - - (260,133) - (260,133)
Net change in
unrealized gains
on available
for sale
securities - - - - - - - - - 25,657 25,657
-----------
Comprehensive
loss - - - - - - - - - - (234,476)
Preferred stock
dividend - - - - - - - - (49,948) - (49,948)
Issuance of
common stock - - 5,048,529 50,485 - - 90,265 - - - 140,750
------- ------ ---------- -------- ------- --------- ---------- ------ ----------- ------- -----------
BALANCE,
December 31,
2004 138,640 1,387 31,508,775 265,493 208,645 (101,820) 15,114,407 - (11,949,875) - 3,329,592
------- ------ ---------- -------- ------- --------- ---------- ------ ----------- ------- -----------
Net income (loss) - - - - - - - (4,421) 6,511,018 - 6,506,597
Net change in
unrealized gains
on available for
sale
securities - - - - - - - - - - -
-----------
Comprehensive
income - - - - - - - - - - 6,506,597
Minority
interest - - - - - - - 39,421 - - 39,421
Preferred
stock dividend - - - - - - - - (49,950) - (49,950)
Issuance of
common stock - - 2,054,444 20,544 - - 69,924 - - - 90,468
------- ------ ---------- -------- ------- --------- ---------- ------ ----------- ------- -----------
BALANCE,
December 31,
2005 138,640 $1,387 33,563,219 $286,037 208,645 $(101,820) $15,184,331 $35,000 $(5,488,807) $ - $ 9,916,128
======= ====== ========== ======== ======= ========= =========== ======= =========== ======= ===========
The accompanying notes are an integral part of the consolidated financial statements.
F-5
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income:
Net income 6,511,018 (260,133)
Minority interest (4,421) -
-------------- ---------------
Net income (loss) $ 6,506,597 $ (260,133)
Adjustments to reconcile net income (loss)
to cash provided by operations:
Amortization and depreciation 377,748 390,247
Loss on disposal of assets - (19,280)
Issuance of common stock 90,468 140,750
Net change in assets and liabilities relating to
operating activities:
Prepaid reinsurance premiums and reinsurance
recoverable (34,464,485) (62,635,844)
Premiums and other receivables (4,956,387) 19,078
Deferred taxes (607,299) -
Other assets 31,246 (793,831)
Reinsurance payable 21,379,423 17,937,096
Deferred ceding commission 1,043,544 -
Accounts payable (1,579,148) 2,345,857
Other accrued expenses 3,024,756 789,224
Unpaid losses and loss adjustment expenses 9,128,004 50,191,080
Unearned premiums 27,000,144 7,784,285
-------------- ---------------
Net cash provided by operating activities 26,974,611 15,888,529
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (302,907) (23,888)
Proceeds from sale of equity securities
available for sale - 194,976
Proceeds from maturities of debt securities
held to maturity - 100,000
Purchase of real estate - (1,680,001)
Building improvements (1,514,226) -
Sale of real estate - 140,022
-------------- ---------------
Net cash used in investing activities (1,817,133) (1,268,891)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (49,950) (49,948)
Payments on loans payable (591,730) (797,412)
Proceeds from loans payable 1,039,938 660,023
Minority interest 39,421 -
-------------- ---------------
Net cash provided by (used in) financing
activities 437,679 (187,337)
-------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 25,595,157 14,432,301
CASH AND CASH EQUIVALENTS, Beginning of year 22,443,579 8,011,278
-------------- ---------------
CASH AND CASH EQUIVALENTS, End of year $ 48,038,736 $ 22,443,579
============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
F-6
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
NATURE OF OPERATIONS
Universal Insurance Holdings, Inc. (the "Company") was originally incorporated
as Universal Heights, Inc. in Delaware in November 1990. The Company changed its
name to Universal Insurance Holdings, Inc. on January 12, 2001. The Company,
through its wholly owned subsidiary, Universal Insurance Holding Company of
Florida, formed Universal Property & Casualty Insurance Company ("UPCIC") in
1997.
INSURANCE OPERATIONS
UPCIC's application to become a Florida licensed property and casualty insurance
company was filed in May 1997 with the Florida Office of Insurance Regulation
("OIR") and was approved on October 29, 1997. In 1998, UPCIC began operations
through the acquisition of homeowner insurance policies issued by the Florida
Residential Property and Casualty Joint Underwriting Association ("JUA"). The
JUA was established in 1992 as a temporary measure to provide insurance coverage
for individuals who could not obtain coverage from private carriers because of
the impact on the private insurance market of Hurricane Andrew in 1992. Rather
than serving as a temporary source of emergency insurance coverage as was
originally intended, the JUA became a major provider of original and renewal
insurance coverage for Florida residents. In an attempt to reduce the number of
policies in the JUA, and thus the exposure of the program to liability, the
Florida legislature approved a number of initiatives to depopulate the JUA,
which resulted in policies being acquired by private insurers and provided
additional incentives to private insurance companies to acquire policies from
the JUA.
On December 4, 1997, the Company raised approximately $6,700,000 in a private
offering with various institutional and/or otherwise accredited investors
pursuant to which the Company issued, in the aggregate, 11,208,996 shares of its
common stock at a price of $.60 per share. The proceeds of this transaction were
used partially for working capital purposes and to meet the minimum regulatory
capitalization requirements ($5,000,000) required by the Florida Department of
Insurance to engage in this type of homeowners insurance company business.
In February 1998, the Company commenced its insurance business. Since then the
Company has developed into a vertically integrated insurance holding company
performing all aspects of insurance underwriting, distribution and claims.
Universal Risk Advisors, Inc. was incorporated in Florida on July 2, 1998, and
became licensed by the Florida Department of Insurance on August 17, 1998 and
contracted with UPCIC on September 28, 1998 as the Company's wholly owned
managing general agent ("MGA"). Through the MGA, the Company has underwriting
and claims authority for UPCIC as well as third-party insurance companies. The
MGA seeks to generate revenue through policy fee income and other administrative
fees from the marketing of UPCIC and third-party insurance products through the
Company's distribution network and UPCIC.
Universal Florida Insurance Agency was incorporated in Florida on July 2, 1998,
and Coastal Homeowners Insurance Specialists, Inc. was incorporated in Florida
on July 2, 2001, each as wholly owned subsidiaries of Universal Insurance
Holdings, Inc. to solicit voluntary business and to generate commission revenue.
These entities are a part of the Company's agency operations, which seek to
generate income from commissions, premium financing referral fees and the
marketing of ancillary services. In addition, Capital Resources Group, LTD. was
incorporated in the British Virgin Islands on June 2, 2000 as a subsidiary of
the Company to participate in contingent capital products. The Company has also
formed a claims adjusting company, Universal Adjusting Corporation, which was
incorporated in Delaware on August 9, 1999. Universal Adjusting Corporation
currently has claims authority for UPCIC.
ONLINE COMMERCE OPERATIONS
The Company has also formed subsidiaries that specialize in selling insurance
and generating insurance leads via the Internet. Tigerquote.com Insurance &
Financial Services Group, Inc. ("Tigerquote.com") and Tigerquote.com Insurance
Solutions, Inc. were incorporated in Delaware on June 6, 1999 and August 23,
1999, respectively. Tigerquote.com is an Internet insurance lead generating
network while Tigerquote.com Insurance Solutions, Inc. is a network of Internet
F-7
insurance agencies. As of December 31, 2005, insurance agencies have been
established in 22 states. None of these agencies are currently active as the
Company changed its focus to selling leads to other companies and independent
agents. During the fourth quarter of 2005, the Company decided to stop
generating new business for its online commerce operations and focus on its core
operations.
CORPORATE AND OTHER OPERATIONS
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.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Universal Insurance Holdings, Inc., its wholly owned subsidiary, Universal
Property & Casualty Insurance Co. 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 consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
("GAAP") that differ from statutory accounting practices prescribed or permitted
for insurance companies by regulatory authorities. The Company and its
subsidiaries operated principally in two business segments consisting of
insurance and online commerce during each period reported in the accompanying
consolidated financial statements, based upon management reporting.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company are summarized as
follows:
USE OF ESTIMATES. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. The
Company's primary areas of estimate are the recognition of premium revenues,
insurance liabilities, deferred policy acquisition costs and reinsurance. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts, after intercompany eliminations, of the Company and its subsidiaries
and, beginning in 2005, Sterling Premium Finance Company, which is consolidated
in accordance with FASB Interpretation No. 46(R), CONSOLIDATED OF VARIABLE
INTEREST ENTITIES ("FIN 46R"). FIN 46R requires the consolidation of certain
entities considered to be variable interest entities ("VIEs"). An entity is
considered to be a VIE when it has equity investors who lack the characteristics
of having a controlling financial interest, or its capital is insufficient to
permit it to finance its activities without additional subordinated financial
support. Consolidation of a VIE by an investor is required when it is determined
that the investor will absorb a majority of the VIE's expected losses if they
occur, received a majority of the entity's expected residual returns if they
occur, or both.
CASH AND CASH EQUIVALENTS. The Company includes all short-term, highly liquid
investments that are readily convertible to known amounts of cash and have an
original maturity of three months or less in cash equivalents.
SECURITIES HELD TO MATURITY. Debt securities which the Company has the intent
and ability to hold to maturity are reported at amortized cost, adjusted for
amortization of premiums or accretion of discounts and other-than-temporary
declines in fair value.
INVESTMENTS IN REAL ESTATE. Investments in real estate are reported at the lower
of cost or appraised value. Real estate represents a building purchased by UPCIC
that the Company uses as its home office. Depreciation is provided on the
straight-line basis over twenty-seven-and-one-half years. Real estate activity
also includes residential properties rented for the production of income until
they were sold during 2004. These properties were purchased in prior years in
connection with the settlement of certain claims. The properties were
depreciated on the straight-line basis over twenty-seven-and-one-half years
until the date of sale.
F-8
SECURITIES AVAILABLE FOR SALE. Equity securities are reported at fair value,
with unrealized gains and losses reported net of applicable deferred tax as a
separate component of stockholders' equity. Realized gains and losses are
determined on the specific identification method.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost. Depreciation
is provided on the straight-line basis over the estimated useful life of the
assets. Estimated useful life of all property and equipment ranges from three to
five years. Routine repairs and maintenance are expensed as incurred. Website
development costs are capitalized and amortized over their estimated useful
life.
RECOGNITION OF PREMIUM REVENUES. Property and liability premiums are recognized
as revenue on a pro rata basis over the policy term. The portion of premiums
that will be earned in the future are deferred and reported as unearned
premiums. The Company believes that its revenue recognition policies conform to
Staff Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS.
RECOGNITION OF COMMISSION REVENUE. Commission revenue, which is comprised of the
MGA's policy fee income on all new and renewal insurance policies and
commissions generated from agency operations is recognized as income upon policy
inception. The Company believes that its revenue recognition policies conform to
Staff Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS.
RECOGNITION OF TRANSACTION FEE REVENUE. Transaction fee revenue, which is
comprised of revenue from the selling of insurance leads is recognized as income
upon sale of the lead. Effective November 2004, for most customers payment was
required in advance of distribution of the leads. The Company believes that its
revenue recognition policies conform to Staff Accounting Bulletin 101, REVENUE
RECOGNITION IN FINANCIAL STATEMENTS.
DEFERRED POLICY ACQUISITION COSTS. Commissions and other costs of acquiring
insurance that vary with and are primarily related to the production of new and
renewal business, net of reinsurance commissions, are deferred and amortized
over the terms of the policies or reinsurance treaties to which they are
related. Investment income is taken into consideration when calculating the
maximum amount of deferred acquisition cost.
INSURANCE LIABILITIES. Unpaid losses and loss adjustment expenses ("LAE") are
provided for as claims are incurred. The provision for unpaid losses and loss
adjustment expenses includes: (1) the accumulation of individual case estimates
for claims and claim adjustment expenses reported prior to the close of the
accounting period; (2) estimates for unreported claims based on industry data;
and (3) estimates of expenses for investigating and adjusting claims based on
the experience of the Company and the industry.
Inherent in the estimates of ultimate claims are expected trends in claim
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 claims experience relative to the
development period, knowledge of the actual facts and circumstances and the
amount of insurance risk retained. In the case of UPCIC, this uncertainty is
compounded by UPCIC's limited history of claims experience. In addition, UPCIC's
policyholders are currently concentrated in South Florida, which is periodically
subject to adverse weather conditions, such as hurricanes and tropical storms.
The methods for making such estimates and for establishing the resulting
liability are continually reviewed, and any adjustments are reflected in current
earnings.
PROVISION FOR PREMIUM DEFICIENCY. It is the Company's policy to evaluate and
recognize losses on insurance contracts when estimated future claims and
maintenance costs under a group of existing contracts will exceed anticipated
future premiums. No accrual for premium deficiency was considered necessary as
of December 31, 2005.
REINSURANCE. In the normal course of business, the Company seeks to reduce the
risk of 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
provisions of the reinsurance agreement and consistent with the establishment of
the liability of the Company.
INCOME TAXES. Income tax provisions are based on the asset and liability method.
Deferred federal income taxes have been provided for temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the consolidated financial statements, net of valuation allowance.
F-9
INCOME (LOSS) PER SHARE OF COMMON STOCK. Basic earnings per share is computed by
dividing the Company's net income (loss) less cumulative Preferred Stock
dividends by the weighted-average number of shares of Common Stock outstanding
during the period. Diluted earnings per share is computed by dividing the
Company's net income (loss) minus Preferred Stock dividends by the weighted
average number of shares of Common Stock outstanding during the period and the
impact of all dilutive potential common shares, primarily Preferred Stock,
options and warrants. The dilutive impact of stock options and warrants is
determined by applying the treasury stock method and the dilutive impact of the
Preferred Stock is determined by applying the "if converted" method.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting
Standards ("SFAS") No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, requires disclosure of the estimated fair value of all financial
instruments, including both assets and liabilities unless specifically exempted.
The Company uses the following methods and assumptions in estimating the fair
value of financial instruments.
Cash and cash equivalents: the carrying amount reported in the
consolidated balance sheet for cash and cash equivalents approximates
fair value due to the short-term nature of those items.
Premiums and other receivables, reinsurance recoverables and accounts
payable: the carrying amounts reported in the consolidated balance
sheet for premiums and other receivables, reinsurance recoverables and
accounts payable approximate their fair value due to their short-term
nature.
Equity securities available-for-sale and debt securities
held-to-maturity: fair values for equity and debt securities are based
on quoted market prices.
Notes payable are principally equal to the unpaid balance of the
respective notes.
CONCENTRATIONS OF CREDIT RISK. Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of cash,
investments, premiums receivable and reinsurance recoverables. Concentrations of
credit risk with respect to premiums receivable are limited due to the large
number of individuals comprising the Company's customer base. However, the
majority of the Company's revenues are currently derived from products and
services offered to customers in Florida, which could be adversely affected by
economic downturns, an increase in competition or other environmental changes.
In order to reduce credit risk for amounts due from reinsurers, the Company
seeks to do business with financially sound reinsurance companies and regularly
evaluates the financial strength of all reinsurers used.
STOCK OPTIONS. The Company grants options for a fixed number of shares to
employees and outside directors with an exercise price equal to the fair value
of the shares as of the grant date. The Company has elected to apply Accounting
Principles Board ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations in accounting for its stock options granted to employees
and directors, and SFAS No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION, for its
stock options granted to non-employees. Under APB No. 25, because the exercise
price of the Company's employee and director stock options equals the market
price of underlying stock on the date of the grant, no compensation expense is
recognized. The Company expenses the fair value (determined as of the grant
date) of options and warrants granted to non-employees in accordance with SFAS
No. 123. The Company has adopted the disclosure only provisions of SFAS No. 123.
(See Note 12).
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
Net income (loss):
As reported $ 6,506,597 $ (260,133)
Compensation expense (fair value) (32,775) (97,233)
------------ -----------
Pro forma $ 6,473,822 $ (357,366)
Net income (loss) per share:
Basic
As reported $ 0.20 $ (0.01)
Compensation expense 0.00 0.00
------------ -----------
Pro forma $ 0.20 $ (0.01)
Diluted
As reported $ 0.19 $ (0.01)
Compensation expense 0.00 0.00
------------ -----------
Pro forma $ 0.19 $ (0.01)
STATUTORY ACCOUNTING. UPCIC prepares its statutory financial statements in
conformity with accounting practices prescribed or permitted by the Office of
Insurance Regulation of the State of Florida. Effective January 1, 2001, the
Office of Insurance Regulation of the State of Florida required that insurance
companies domiciled in the State of Florida prepare their statutory financial
statements in accordance with the National Association of Insurance
Commissioners' ("NAIC") Accounting Practices and Procedures Manual (the
"Manual"), as modified by the Office of Insurance Regulation of the state of
Florida. Accordingly, the admitted assets, liabilities and capital and surplus
of UPCIC as of December 31, 2005, and the results of its operations and its cash
flow, for the year then ended have been determined in accordance with statutory
accounting principles. These principles are designed primarily to demonstrate
the ability to meet obligations to policyholders and claimants and,
consequently, differ in some respects from accounting principles generally
accepted in the United States of America (GAAPUSA). Accordingly, this report
contains certain non GAAPUSA financial disclosures.
NEW ACCOUNTING PRONOUNCEMENTS. In December 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE. This statement, which is effective for
F-10
years ending after December 15, 2002, amends Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, and provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation. In addition, Statement No. 148 amends the disclosure
requirements of Statement No. 123 regardless of the accounting method used to
account for stock-based compensation. The Company has chosen to continue to
account for stock-based compensation of employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES and related interpretations. However, the enhanced
disclosure provisions as defined by SFAS No. 148 which became effective in the
first quarter of 2005 have been implemented. In December 2005, the FASB issued
SFAS No. 123 (revised 2005) ("SFAS No. 123R") SHARE-BASED PAYMENT, which
replaces SFAS. No. 123 and supersedes APB No. 25. As a result of SFAS No. 123R,
the Company will be required to recognize the cost of its stock options as an
expense in the consolidated statement of operations beginning in the first
quarter of 2006. The Company has determined that the impact that the adoption of
SFAS No. 123R will have on the consolidated results of operations is immaterial.
RECLASSIFICATIONS. Certain prior year amounts in the consolidated financial
statements have been reclassified to conform with the current year presentation.
NOTE 3 - INSURANCE OPERATIONS
UPCIC commenced its insurance activity in February 1998 by assuming policies
from the JUA. UPCIC received the unearned premiums and began servicing the
policies. Subsequently, UPCIC renewed a large number of these policies while
commencing solicitation of business in the voluntary market through independent
agents. Unearned premiums represent amounts that UPCIC would refund
policyholders if their policies were canceled. Accordingly, 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. As of December 31, 2005, the Company has direct unearned
premiums of $50,890,005.
NOTE 4 - REINSURANCE
UPCIC's in-force policyholder coverage for windstorm exposures as of December
31, 2005 was approximately $14.6 billion. In the normal course of business,
UPCIC also seeks to reduce the risk of 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.
QUOTA SHARE
Effective June 1, 2005, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with various reinsurers. Under the quota share
treaty, through May 31, 2005, UPCIC cedes 55% of its gross written premiums,
losses and loss adjustment expenses for policies with coverage for wind risk
with a ceding commission equal to 31% of ceded gross written premiums. Effective
December 1, 2005, UPCIC entered into a second quota share reinsurance treaty
with one of the reinsurers on the earlier treaty. Under the second quota share
treaty, UPCIC cedes an additional 25% of its gross written premiums, losses and
loss adjustment expenses for policies with coverage for wind risk with a ceding
commission equal to 35% of ceded gross written premiums through May 31, 2006.
For the year ended December 31, 2004, UPCIC ceded 90% of gross written premiums,
losses and loss adjustment expenses during the first five months of 2004 for all
policies except for new and renewal without wind risk business with policy
effective dates of June 1, 2003 and after with a ceding commission equal to 28%
of ceded gross premiums written versus 80% of policies with coverage for wind
risk during the remaining seven months of 2004 and the first five months of
2005. In addition, the quota share treaties effective June 1, 2005 and December
1, 2005 have a limitation for any one occurrence of $3,000,000. During the prior
F-11
contract year, the limitation for any one occurrence was $2,000,000.
EXCESS PER RISK
Effective June 1, 2005 and 2004, UPCIC entered into a multiple line excess per
risk agreement with various reinsurers. Under the multiple line excess per risk
agreement, UPCIC obtained coverage of $1,300,000 in excess of $500,000 ultimate
net loss for each risk and each property loss, and $1,000,000 in excess of
$300,000 for each casualty loss. A $5,200,000 aggregate limit applies to the
term of the contract. Effective June 1, 2005 and 2004, UPCIC entered into a
property per risk excess agreement covering ex-wind only policies. Under the
property per risk excess agreement, UPCIC obtained coverage of $300,000 in
excess of $200,000 for each property loss. A $2,100,000 aggregate limit applies
to the term of the contract.
EXCESS CATASTROPHE
The excess catastrophe reinsurance agreement provides four layers of excess
catastrophe coverage of $22,200,000 in excess of $2,000,000 as of June 1, 2004
as follows:
First Layer Second Layer Third Layer Fourth Layer
----------- ------------ ----------- ------------
Coverage $3,000,000 in $5,000,000 in $7,500,000 in $6,700,000 in
excess of excess of excess of excess of
$2,000,000 $5,000,000 each $10,000,000 each $17,500,000 each
each loss loss occurrence loss occurrence loss occurrence
occurrence
Deposit premium $1,020,000 $1,337,500 $1,425,000 $770,500
Minimum premium $816,000 $1,070,000 $1,140,000 $616,400
Premium rate -% of 0.0213% 0.028% 0.0307% 0.016%
total insurance value
The catastrophe contract contained one reinstatement. Effective June 1, 2004,
under separate excess catastrophe contracts, UPCIC obtained catastrophe coverage
of $22,200,000 in excess of $2,000,000 covering third and fourth events and
catastrophe coverage of $15,500,000 in excess of $2,000,000 covering fifth and
six events as follows:
Third and Fourth Event
First Layer Second Layer Third Layer Fourth Layer
----------- ------------ ----------- ------------
Coverage $3,000,000 in $5,000,000 in $7,500,000 in $6,700,000 in
excess of excess of excess of excess of
$2,000,000 $5,000,000 each $10,000,000 each $17,500,000 each
each loss loss occurrence loss occurrence loss occurrence
occurrence
Minimum premium $255,000 $325,000 $356,250 $300,000
Maximum premium $1,050,000 $1,375,000 $1,500,000 $1,500,000
Fifth and Sixth Event
First Layer Second Layer Third Layer
----------- ------------ -----------
Coverage $3,000,000 in $5,000,000 in excess $7,500,000 in excess
excess of of $5,000,000 each of $10,000,000 each
$2,000,000 each loss occurrence loss occurrence
loss occurrence
Minimum premium $300,000 $375,000 $375,000
Maximum premium $825,000 $1,000,000 $1,200,000
F-12
Effective June 1, 2005, UPCIC revised and enhanced its excess catastrophe
reinsurance program. The excess catastrophe reinsurance agreement provides four
layers of excess catastrophe coverage of $46,000,000 in excess of $3,000,000 as
of December 31, 2005 as follows:
First Layer Second Layer Third Layer Fourth Layer
----------- ------------ ----------- ------------
Coverage $13,000,000 in $9,500,000 in $10,000,000 in $13,500,000 in
excess of excess of excess of excess of
$3,000,000 $16,000,000 $25,500,000 each $35,500,000 each
each loss each loss loss occurrence loss occurrence
occurrence occurrence
Deposit premium $4,290,000 $2,090,000 $1,400,000 $1,012,500
Minimum premium $3,432,000 $1,672,000 $1,120,000 $810,000
Premium rate -% of 0.050% 0.024% 0.016% 0.012%
total insurance value
Loss occurrence is defined as all individual losses directly occasioned by any
one disaster, accident or loss or series of disasters, accidents or losses
arising out of one event, which occurs within the area of one state of the
United States or province of Canada and states or provinces contiguous thereto
and to one another.
Effective June 1, 2004, UPCIC entered a reimbursement agreement with the Florida
Hurricane Catastrophe Fund (the "Fund"), which is administered by the Florida
State Board of Administration. Under the reimbursement agreement, the Fund would
reimburse the Company, with respect to each loss occurrence during the contract
year (June 1, 2004 to May 31, 2005) for 90% of the ultimate loss paid by the
Company in excess of the Company's retention plus 5% of the reimbursed losses to
cover loss adjustment expenses. A covered event means any one storm declared to
be a hurricane by the National Hurricane Center for losses incurred in Florida,
both while it is a hurricane and through subsequent downgrades. The Fund
provided UPCIC with coverage of $59,469,000 in excess of $17,812,000. The
premium for this coverage was $2,453,238. Effective June 1, 2005, UPCIC entered
a subsequent reimbursement agreement with the Fund under the same terms through
May 31, 2006. The Fund has provided UPCIC with coverage of $85,333,000 in excess
of $26,827,000 as of December 31, 2005. The premium for this coverage was
$4,266,662. If needed to meet reimbursement obligations to reinsurers, the Fund
would assess homeowners' insurers and certain other types of insurers writing
business in the state of Florida. Florida law allows insurers to make rate
filings to pass these assessments to policyholders.
For the 2004 hurricane season, Universal Insurance Holdings, Inc. purchased
financial protection with a limit of $5.5 million against any diminution in
value of its subsidiary insurance operations attributable to catastrophe losses
exceeding specified reinsurance limits. Universal Insurance Holdings, Inc.
assigned its right to proceeds under this contract to UPCIC. For the 2005
hurricane season, the Company purchased the same financial protection, the
proceeds of which are also being used as a guarantee for promissory notes issued
to two private investors for the aggregate principal sum of $1,000,000.
Amounts recoverable from reinsurers are estimated in accordance with the
reinsurance contract. Reinsurance premiums, losses and loss adjustment expenses
("LAE") are accounted for on bases consistent with those used in accounting for
the original policies issued and the terms of the reinsurance contracts.
The preceding reinsurance arrangements had the following effect on certain items
in the accompanying consolidated financial statements:
F-13
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
Loss and Loss Loss and Loss
Premiums Premiums Adjustment Premiums Premiums Adjustment
Written Earned Expenses Written Earned Expenses
------- ------ -------- ------- ------ --------
Direct $ 88,701,123 $ 61,700,978 $91,540,103 $41,120,962 $ 33,219,781 $154,169,550
Ceded (67,094,245) (45,874,996) (81,942,119) (35,472,414) (29,094,024) (151,895,515)
------------- ------------- ------------ ------------ ------------ -------------
Net $ 21,606,878 $ 15,825,982 $ 9,597,984 $ 5,648,548 $ 4,125,757 $ 2,274,035
============= ============= ============ ============ ============ =============
Other amounts:
December 31, 2005
-----------------
Reinsurance recoverable on unpaid losses
and loss adjustment expenses $60,859,231
Reinsurance recoverable on paid losses 5,721,455
Other reinsurance receivables 13,710,422
Unearned premiums ceded 41,646,760
----------
Prepaid reinsurance premiums and reinsurance
recoverable $121,937,868
------------
Reinsurance premium and funds held payable $44,452,353
============
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. UPCIC evaluates the similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. Two reinsurers have unsecured
balances greater than 10% of the total amount of prepaid reinsurance premiums
and reinsurance recoverables as of December 31, 2005. The balances for these
reinsurers are $25,386,154 which is with the Florida Hurricane Catastrophe Fund,
and $31,146,891 with a domestic reinsurer rated by A.M. Best A+ (superior). As
of December 31, 2005, UPCIC has reinsurance contracts with various reinsurers,
all rated A- or better by A. M. Best at the time of placement, 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 5 - INVESTMENTS
Major categories of net investment income are summarized as follows:
December 31, 2005 December 31, 2004
----------------- -----------------
Debt securities held-to-maturity $ - $ 3,957
Common stocks - 45,180
Cash and cash equivalents 930,387 274,184
Real estate - (87,982)
---------- ----------
930,387 235,339
Investment expenses 243,302 57,093
---------- ----------
$ 687,085 $ 178,246
========== ==========
Proceeds from the sale of equity securities during 2005 and 2004 were $0 and
$194,976 respectively. Gross gains on the sale of securities during 2005 and
2004 were $0 and $45,180, respectively. Gross losses on the sale of securities
during 2005 and 2004 were $0 and $0, respectively.
F-14
The aggregate amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value as of December 31, 2005 for available-for-sale and
held-to-maturity securities by major security type are as follows:
Cost or Gross Gross Fair
Amortized Cost Unrealized Gains Unrealized Losses Value
-------------- ---------------- ----------------- -----
Available-for-sale securities:
Cash and cash equivalents $ 48,038,736 $ - $ - $48,038,736
Equity securities - - - -
------------ ------------ ------------- -------------
Total $ 48,038,736 $ - $ - $48,038,736
============ ============ ============= =============
As of December 31, 2005, the Company had no held-to-maturity securities with
maturities due after one year.
As of December 31, 2005, short-term investments with a carrying value of
$1,500,000 were on deposit with regulatory authorities.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2005 consisted of the following:
Computers $ 114,680
Furniture 254,136
Automobiles and equipment 518,220
Software 1,061,287
------------
Total cost 1,948,323
Less: Accumulated depreciation
and amortization (1,059,991)
------------
Net carrying value $ 888,332
============
Land $ 270,000
Building 1,410,000
Capital Improvements 1,514,227
------------
Total Cost 3,194,227
Less: Accumulated depreciation (53,168)
------------
Net carrying value $ 3,141,059
============
Depreciation of real estate was $53,168 in 2005. Depreciation and amortization
of property and equipment was $377,748 and 390,247 during 2005 and 2004,
respectively.
NOTE 7 - LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
As described in Note 2, UPCIC establishes liabilities for unpaid losses and loss
adjustment expenses on reported and unreported claims of insured losses. These
liability estimates are based on known facts and interpretation of factors such
as claim payment patterns, loss payments, pending levels of unpaid claims,
product mix and industry experience. The establishment of appropriate
liabilities, including liabilities for catastrophes, is an inherently uncertain
process. This uncertainty is compounded by UPCIC's limited history of claims
experience. UPCIC regularly updates its estimates as new facts become known and
further events occur which may impact the resolution of unsettled claims.
The level of catastrophe loss experienced in any year cannot be predicted and
could be material to results of operations and financial position. UPCIC's
policyholders are concentrated in South Florida, which is periodically subject
to adverse weather conditions, such as hurricanes and tropical storms. During
2005, Florida experienced three windstorms catastrophes (Hurricanes Dennis,
Katrina and Wilma) which resulted in losses. During 2004, Florida experienced
four windstorm catastrophes (Hurricanes Charley, Frances, Ivan, and Jeanne)
which resulted in losses. UPCIC's in-force policyholder coverage for windstorm
exposures as of December 31, 2005 was approximately $14.6 billion. UPCIC
continuously evaluates alternative business strategies to more effectively
F-15
manage its exposure to catastrophe losses, including the maintenance of
catastrophic reinsurance coverage as discussed in Note 4.
Management believes that the liabilities for claims and claims expense as
of December 31, 2005 is appropriately established in the aggregate and adequate
to cover the ultimate cost of reported and unreported claims arising from losses
which had occurred by that date. However, if losses exceeded direct loss reserve
estimates there could be a material adverse effect on the Company's financial
statements. Also, if there are regulatory initiatives, legislative enactments or
case law precedents which change the basis for policy coverage, in any of these
events, there could be an effect on direct loss reserve estimates having a
material adverse effect on the Company's financial statements.
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
Balance at beginning of year $57,871,952 $ 7,680,872
Less reinsurance recoverable (56,292,041) (6,329,872)
------------ ------------
Net balance at beginning of year 1,579,911 1,351,000
------------ ------------
Incurred related to:
Current year 7,048,934 2,218,555
Prior years 2,549,050 55,480
------------ ------------
Total incurred 9,597,984 2,274,035
------------ ------------
Paid related to:
Current year 3,821,743 1,496,024
Prior years 1,215,427 549,100
------------ ------------
Total paid 5,037,170 2,045,124
------------ ------------
Net balance at end of year 6,140,725 1,579,911
Plus reinsurance recoverable 60,859,231 56,292,041
------------ ------------
Balance at end of year $66,999,956 $57,871,952
============ ============
The Company's liabilities for unpaid losses and LAE, net of related reinsurance
recoverables, as of December 31, 2005 were increased in the current year by
$2,549,050 for claims that had occurred on or before the prior year balance
sheet date. This unfavorable loss emergence resulted principally from higher
than expected hurricane losses in 2004. The Company's liabilities for unpaid
losses and LAE, net of related reinsurance recoverables, as of December 31, 2004
were increased by $55,480 for claims that had occurred on or before the previous
year balance sheet date. This unfavorable loss emergence resulted principally
from settling homeowners losses established in the prior year for amounts that
were more than expected. There can be no assurance that the Company's unpaid
losses and LAE will not develop redundancies or deficiencies and possibly differ
materially from the Company's unpaid losses and LAE as of December 31, 2005. In
the future, if the unpaid losses and LAE develop redundancies or deficiencies,
such redundancy or deficiency would have a positive or adverse impact,
respectively, on future results of operations.
NOTE 8 - LOANS PAYABLE
During 2003, the Company purchased software for $520,000. Management believes
the software will assist it in reducing overall management expenses versus the
previous outside vendor agreement. The final installment payment on the software
of $150,000 was paid in March 2005.
F-16
Loans payable as of December 31, 2005 also consists of the following bank loans
secured by the respective assets: a boat loan for $80,697 principal due in May
2011, with interest paid monthly at 8.8%, and several vehicle loans totaling
$38,489 principal due from January 2005 to March 2008, with interest paid
monthly ranging from 5.6% to 10%. Other loans with vendors and private investors
amounted to $1,032,901 as of December 31, 2005. Loans with vendors and private
investors are primarily short-term loans utilized for working capital. As noted
in Note 4, two promissory notes from two private investors with an aggregate
principal sum of $1,000,000 are guaranteed under a financial protection
contract. In addition, the Company granted certain vendors and private investors
warrants in connection with the short-term loans (see Note 12).
Loan repayments are due as follows as of December 31, 2005:
2006 $ 766,885
2007 324,108
2008 16,465
2009 15,017
2010 16,747
Thereafter 12,865
------------
$ 1,152,087
============
NOTE 9 - REGULATORY REQUIREMENTS AND RESTRICTIONS
UPCIC is subject to comprehensive regulation by the OIR. The Florida Insurance
Code (the "Code") requires that UPCIC maintain minimum statutory surplus of
$4,000,000. UPCIC is also required to adhere to prescribed premium-to-surplus
ratios under the Code and to maintain approved securities on deposit with the
state of Florida.
UPCIC's statutory surplus as of December 31, 2005 is $11,111,458 and its
statutory net income (loss) for the years ended December 31, 2005 and 2004 was
$2,257,622 and $(1,802,644), respectively.
NOTE 10 - RELATED PARTY TRANSACTIONS
All underwriting, rating, policy issuance, reinsurance negotiations and
administration functions for UPCIC are performed by UPCIC, Universal Risk
Advisors, Inc., a wholly owned subsidiary of the Company, and unaffiliated third
parties. Claims adjusting functions are performed by Universal Adjusting
Corporation, a wholly owned subsidiary of the Company and unaffiliated third
parties.
Dennis Downes and Associates, a multi-line insurance adjustment corporation
based in Deerfield Beach, Florida performs certain claims adjusting work for
UPCIC. Dennis Downes and Associates is owned by Dennis Downes, who is the father
of Sean P. Downes, COO and Senior Vice President of UPCIC. During 2005 and 2004,
the Company expensed claims adjusting fees of $1,075,188 and $1,092,851,
respectively, to Dennis Downes and Associates. As of December 31, 2005, the
Company had accrued adjusting fees of $95,221 to Dennis Downes and Associates.
During 2005, Sean P. Downes filed a claim on his homeowner's policy issued by
UPCIC as a result of damage incurred during Hurricane Wilma. UPCIC handled the
claim in the ordinary course of its business and has made a loss payment to Mr.
Downes in the amount of $214,409.
F-17
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.
NOTE 11- INCOME TAX PROVISION
Since its inception, the Company has incurred cumulative tax operating losses.
Therefore, the Company has not incurred any significant income tax liabilities
during that time. As of December 31, 2005, the Company had net operating loss
carryforwards totaling approximately $1,590,000 which are available to offset
future taxable income, if any, through 2023.
The following table reconciles the statutory federal income tax rate to the
Company's effective tax rate for the years ended December 31, 2005 and 2004:
2005 2004
---- ----
Statutory federal income tax rate 35.0% (34.0%)
Increases (decreases) resulting from:
Utilization of net operating loss
carry forward (28.5%) 0.0%
Change in valuation allowance (15.6%) 34.0%
Deferred taxes (10.1%) 0.0%
Insurance reserve discount 9.1% 0.0%
Alternative minimum tax 2.5% 0.0%
-------- --------
Effective tax rate (7.6)% -
======== ========
Deferred income taxes as of December 31, 2005 are provided for the temporary
differences between financial reporting basis and the tax basis of the Company's
assets and liabilities under SFAS 109. The tax effects of temporary differences
are as follows:
Deferred income tax assets:
Net operating loss carryforward $ 556,328
Unearned premiums 647,027
Unpaid losses 199,213
------------
1,402,568
------------
Deferred income tax liabilities:
Property and equipment (187,970)
------------
Net deferred income tax asset 1,214,598
Less: valuation allowance (607,299)
------------
Net deferred income tax asset $ 607,299
============
A valuation allowance is deemed appropriate because management believes that
there is the possibility that the Company will not generate substantial taxable
income sufficient to realize the tax benefits associated with the net deferred
income tax asset shown above in the near future.
F-18
The remaining net operating loss carryforwards will expire as follows:
Expiration
2021 911,000
2022 502,000
2023 177,000
-----------
$ 1,590,000
NOTE 12 - STOCKHOLDERS' EQUITY
CUMULATIVE PREFERRED STOCK
Each share of Series A and M Preferred Stock is convertible by the Company into
2.5 shares of Common Stock and 5 shares of Common Stock, respectively, into an
aggregate of 568,326 common shares. The Series A Preferred Stock pays a
cumulative dividend of $.25 per share per quarter.
STOCK OPTIONS
The Company adopted a 1992 Stock Option Plan (the "Plan") under which shares of
Common Stock are reserved for issuance upon the exercise of the options. The
Plan is designed to serve as an incentive for attracting and retaining qualified
and competent employees, officers, directors and consultants of the Company. All
employees, officers, directors and consultants of the Company or any subsidiary
are eligible to participate in the Plan. The Plan does not specify the number of
shares for which options are available for grant. The stock options may be
granted over a period not to exceed 10 years and generally vest as of the date
of grant or upon certain goals attained. The Plan has no provisions for the
exercising of options other than paying the cash exercise price.
A summary of the option activity for the years ended December 31, 2005 and 2004
is presented below:
Options Exercisable Weighted
------------------- Average
Number Option Price per Share Number Exercise
of Shares Low High Weighted of Shares Price
--------- --- ---- -------- --------- -----
Outstanding January 1, 2004 7,032,999 $ 0.04 $ 3.88 $ 1.14 7,032,299 $ 1.14
Issued 1,000,000 $ 0.06 $ 0.06 $ 0.06
-----------
Outstanding December 31, 2004 8,032,999 $ 0.04 $ 3.88 $ 1.00 8,032,999 $ 1.00
Cancelled (517,999) $ 0.50 $ 3.88 $ 1.66
-----------
Outstanding December 31, 2005 7,515,000 $ 0.04 $ 1.87 $ 0.95 7,515,000 $ 0.95
===========
The weighted average remaining contractual life on the 7,515,000 options
outstanding and exercisable as of December 31, 2005 was 2.8 years.
The Company adopted a 2000 Stock Option Plan (the "Tigerquote.com Plan") under
which shares of common stock of Tigerquote.com are reserved for issuance upon
the exercise of the options. The Tigerquote.com Plan is designed to serve as an
incentive for attracting and retaining qualified and competent employees,
officers, directors and consultants. All employees, officers, directors and
consultants of the Company or any subsidiary are eligible to participate in the
Tigerquote.com Plan. The Tigerquote.com Plan does not specify the number of
shares for which options are available for grant. The stock options may be
granted over a period not to exceed 10 years and generally vest as of the date
of grant or upon certain goals attained. The Tigerquote.com Plan has no
provisions for the exercising of options other than paying the cash exercise
price.
F-19
A summary of the option activity of the Tigerquote.com Plan for the years ended
December 31, 2005 and 2004 is presented below:
Options Exercisable Weighted
------------------- Average
Number Option Price per Share Number Exercise
of Shares Low High Weighted of Shares Price
--------- --- ---- -------- --------- -----
Outstanding January 1, 2004 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50
Granted - $ - $ - $ -
--------
Outstanding December 31, 2004 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50
Granted - $ - $ - $ -
--------
Outstanding December 31, 2005 835,000 $ 0.50 $ 0.50 $ 0.50 835,000 $ 0.50
========
The weighted average remaining contractual life on the 850,000 options
outstanding and exercisable as of December 31, 2005 was 4.25 years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes Option Pricing Model with the following weighted-average
assumptions:
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
Dividend yield N/A 0%
Expected life of option N/A 5
Risk free interest rate N/A 6.5%
Expected volatility N/A 154.5%
F-20
Using the Black-Scholes Option Pricing Model, the estimated weighted average
fair value per option granted during the year ended December 31, 2004 was
$0.056. There were no options granted in 2005.
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, such models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options.
The pro forma amounts may not be representative of the future effects on
reported net income (loss) and net income (loss) per share that will result from
the future granting of stock options since the pro forma compensation expense is
allocated over the periods in which options become exercisable and new option
awards are granted periodically.
WARRANTS
A summary of the warrant activity for the years ended December 31, 2005 and 2004
is presented below:
Warrants Exercisable
--------------------
Weighted Weighted
Average Average
Number Warrant Price per Share Number Exercise
of Shares Low High Weighted of Shares Price
--------- --- ---- -------- --------- -----
Outstanding January 1, 2004 2,643,652 $ 0.03 $ 4.25 $ 1.47 2,643,652 $ 1.47
Granted 425,000 $ - $ - $ -
------------
Outstanding December 31, 2004 3,068,652 $ 0.03 $ 4.25 $ 1.27 3,068,652 $ 1.27
Granted 200,000 $ 0.05 $ 0.05 $ 0.05
Cancelled (1,336,646) $ 1.00 $ 4.25 $ 2.29
------------
Outstanding December 31, 2005 1,932,006 $ 0.03 $ 3.00 $ 1.11 1,932,006 $ 1.11
============
The following table summarizes the information about warrants outstanding as of
December 31, 2005:
Warrants Outstanding and Exercisable
------------------------------------
Weighted Average
Remaining Weighted
Range of Number Contractual Life Average
Exercise Prices Outstanding (in years) Exercise Price
--------------- ----------- ---------- --------------
$0.03 - $1.25 1,906,700 2.2 $0.59
$3.00 25,306 0.02 $3.00
-----------
1,932,006
===========
OTHER STOCK ISSUANCES
In May 2005, the Company issued 860,000 shares of Common Stock to Bradley I.
Meier, the Company's President and CEO, in conjunction with an amendment
approved by the Board of Directors to Mr. Meier's employment agreement whereby
Mr. Meier elected to receive shares of Common Stock in lieu of $21,500 in
accrued salary. The shares were issued at a discount to current market value,
which discount was intended to take into account the restricted and controlling
person status of the shares and to reflect the lack of liquidity of the shares.
Mr. Meier acquired the shares in a private transaction performed in accordance
with the terms of the amendment and pursuant to Section 4(2) of the Securities
Act of 1933, as amended. In January and May of 2005, Sean P. Downes, COO and
Senior Vice President of the Company, elected to receive an aggregate of
1,044,444 shares of Common Stock in lieu of $25,000 in salary and bonus. The
shares were issued at a discount to current market value, which discount was
intended to take into account the restricted and controlling person status of
the shares and to reflect the lack of liquidity of the shares. Mr. Downes
F-21
acquired the shares in private transactions pursuant to Section 4(2) of the
Securities Act of 1933, as amended. Also in 2005, pursuant to Section 4(2) of
the Securities Act of 1933, as amended, James M. Lynch, CFO of the Company, was
granted 50,000 shares of Common Stock, valued at $3,000, in recognition of
service to the Company. In addition, in February 2005, the Company issued
100,000 shares of restricted Common Stock to a private investor in connection
with a $100,000 loan made to the Company in September 2004.
During the year ended December 31, 2004, the Company issued 2,823,529 shares of
Common Stock in conjunction with an amendment approved by the Board of Directors
to the employment agreement between the Company and Bradley I. Meier whereby Mr.
Meier elected to receive shares of Common Stock in lieu of $72,000 in accrued
salary. The shares were issued at a discount to current market value, which
discount was intended to take into account the restricted and controlling person
status of the shares and to reflect the lack of liquidity of the shares. The
shares were issued to Mr. Meier in a private transaction performed in accordance
with the terms of the amendment and pursuant to Section 4(2) of the Securities
Act of 1933, as amended. Also in April 2004, Sean P. Downes elected to receive
2,000,000 shares of Common Stock in lieu of a $50,000 bonus. The shares were
issued at a discount to current market value, which discount was intended to
take into account the restricted and controlling person status of the shares and
to reflect the lack of liquidity of the shares. 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 2004, pursuant to Section 4(2) of the Securities
Act of 1933, as amended, Patric Allan, former CEO of Tigerquote.com, was granted
100,000 shares of Common Stock, valued at $10,000, consistent with the terms of
his employment with the Company, and Janet Conde, Human Resources Director of
the Company, was granted 125,000 shares of Common Stock, valued at $8,750 in
recognition of service to the Company. Patric Allan subsequently forfeited his
right to receive the 100,000 shares in connection with the settlement of a
dispute with the Company and the shares were never issued.
At the Company's Annual Meeting of Shareholders held on December 7, 2005, the
shareholders voted to amend the Company's certificate of incorporation to
increase the number of authorized shares of Common Stock from 40,000000 to
50,000,000 shares.
STOCK GRANTOR TRUST
On April 3, 2000, the Company established the Universal Insurance Holdings, Inc.
Stock Grantor Trust ("SGT") to fund its obligations arising from its various
stock option agreements. The Company funded the SGT with 2,900,000 shares of
Company Common Stock. In exchange, the SGT has delivered $29,000 and a
promissory note to the Company for approximately $2,320,000 which together
represents the purchase price of the shares. Amounts owed by the SGT to the
Company will be repaid by cash received by the SGT, which will result in the SGT
releasing shares to satisfy Company obligations for stock options. The
consolidated financial statements include the accounts of the SGT.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
As of August 11, 1999, the Company entered into a four-year employment agreement
with Bradley I. Meier, the Company's President and Chief Executive Officer,
amending and restating the previous employment agreement of May 1, 1997 between
the Company and Mr. Meier. Under the terms of the employment agreement, Mr.
Meier will devote substantially all of his time to the Company and will be paid
a base salary of $250,000 per year with a 5% annual increase. Additionally,
pursuant to the employment agreement, and during each year thereof, Mr. Meier is
entitled to a bonus equal to 3% of pretax profits up to $5,000,000 and 4% of
pretax profits in excess of $5,000,000. On May 4, 2001, Addendum No. 3 to the
employment agreement was approved by the Board of Directors, whereby Mr. Meier
was entitled to receive an additional fifteen percent (15%) increase in his base
compensation in addition to the cumulative base compensation and increase
calculated at the beginning of 2001, retroactive to January 1, 2001; and for
each successive year of the term of the employment agreement the base
compensation as adjusted by previous increase(s) shall be increased by ten
percent (10%). The employment agreement contains non-competition and
non-disclosure covenants. In addition, the agreement shall be extended
automatically for one year at each anniversary of the date of the agreement up
to the fourth year of the agreement, at the option of Mr. Meier. Under the terms
of the agreement in 1997, Mr. Meier was granted ten-year stock options to
purchase 1,500,000 shares of Common Stock at $1.00 per share, of which 500,000
options vested immediately, 500,000 options vested after one year and the
remaining options vested after two years. On March 4, 2004, Mr. Meier was
granted ten-year stock options to purchase 1,000,000 shares of Common Stock at
F-22
$0.056 per share, which vested immediately. The exercise price of the options
equaled the market price of the Company's Common Stock as of the date of grant.
See Note 12 for disclosure regarding stock issuance under this agreement.
As of January 1, 2005, the Company entered into a four-year employment
agreement with Sean P. Downes, the Company's Senior Vice President and Chief
Operating Officer. Under the terms of the employment agreement, Mr. Downes will
devote substantially all of his time to the Company and will be paid a base
salary of $350,000 per year which shall be increased by 20% each year beginning
with the first anniversary of the effective date. Additionally, pursuant to the
employment agreement, and during each year thereof, Mr. Downes will be entitled
to a bonus equal to 3% of pretax profits. The employment agreement with Mr.
Downes contains non-competition and non-disclosure covenants. The employment
agreement for Mr. Downes also contains provisions regarding pay and benefits
upon certain termination and Change in Control events (as such term is defined
in the employment agreement) which are normally found in executive employment
agreements. If Mr. Downes is terminated for "cause" (as such term is defined in
the employment agreement), any accrued but not paid benefits shall no longer be
an obligation of the Company. If a Change of Control occurs, Mr. Downes is
entitled to salary and bonus for one year in a lump sum and all options or
warrants granted to Mr. Downes shall immediately vest and become exercisable. In
addition, there shall be no automatic extension of the term of the agreement, or
the agreement itself, unless extended in accordance with the term of the
agreement or by written instrument executed by the Company and approved by the
Board of Directors of the Company. Under the terms of Mr. Downes's employment
agreement, the Company may grant him options or warrants to purchase the
Company's Common Stock. During the year ended December 31, 2005, Mr. Downes
converted salary and accrued vacation into 1,044,444 shares of Common Stock. The
shares were issued to Mr. Downes in private transactions performed in accordance
with the terms of the amendments and pursuant to Section 4(2) of the Securities
Act of 1933, as amended.
OPERATING LEASE
The Company has leased certain computer equipment and software under a master
equipment lease agreement with Relational Funding, Inc. with an original
equipment cost of $529,730. The following is a schedule of future minimum rental
payments required under the non-cancelable operating lease as of December 31,
2005:
2006 $ 177,575
2007 114,200
2008 56,948
----------
$ 348,723
==========
NOTE 14 - LITIGATION
Certain lawsuits have been filed against the Company. In the opinion of
management, none of these lawsuits are material and they are all adequately
reserved for or covered by insurance or, if not so covered, are without merit or
involve such amounts that if disposed of unfavorably would not have a material
adverse effect on the Company's financial position or results of operations.
On July 2, 2004, the Company and its subsidiary Tigerquote.com Insurance and
Financial Services Group, Inc. settled a dispute with former employee Patric
Allan. The subsidiary filed suit against Mr. Allan on June 12, 2004 in the
United States District Court for the Southern District of Florida. The suit
alleged that Mr. Allan breached his employment agreement with the subsidiary by
failing to perform his duties for an extended period and by establishing a
competing business while employed by the subsidiary. The former employee filed a
separate action in the Superior Court in and for Maricopa County, Arizona,
alleging that the subsidiary and the Company breached the employment agreement
and caused emotional distress to the former employee. Both actions were
dismissed pursuant to the settlement agreement entered into as of July 2, 2004.
Among its provisions, the settlement agreement specified that the Company and
the subsidiary pay Mr. Allan $92,292 in relation to a non-compete agreement and
transfer ownership of an Arizona-based insurance agency affiliate to Mr. Allan.
F-23
On February 7, 2005, Marty Steinberg as a court appointed receiver for the
entities consisting of Lancer Management Group LLC, Lancer Management Group II
LLC, Lancer Offshore Inc., Omnifund Ltd., LSPV Inc., LSPV LLC, Alpha Omega Group
Inc. and G.H. Associates LLC (collectively the "Lancer Entities") filed suit
against Alfred Taubman, Anthony Cullen, British American Racing, Centrack
International, Inc., Kuwait & Middle East Financial Investment Co., Liberty
International Asset Management, Macroview Investments Limited, Opus Portfolio
Ltd., Reva Stocker, Roger Dodger, LLC, Signet Management Limited, Thornhill
Group Inc. Trust, World Class Boxing and the Company (collectively the
"Defendants") in the United States District Court for the Southern District of
Florida. The Company received the notice of suit by mail on September 8, 2005.
The suit alleged that the Lancer Entities fraudulently transferred funds to the
Defendants and that the transfers unduly enriched the Defendants. The receiver
asked the Company to pay $658,108. The Company had no record of the alleged
transfers and vigorously defended the suit. The lawsuit has since been dismissed
with prejudice by the receiver.
NOTE 15 - EARNINGS PER SHARE
The following table reconciles the numerator (earnings) and denominator (shares)
of the basic and diluted earnings per share computations for net income (loss)
for the years ended December 31, 2005 and 2004.
Options and warrants totaling 7,208,483 and 1,668,729 respectively were excluded
from the calculation of diluted earnings per share as their effect was
anti-dilutive for the year ended December 31, 2005.
Options and warrants totaling 7,923,469 and 3,068,652, respectively, were
excluded from the calculation of diluted earnings per share as their effect was
anti-dilutive for the year ended December 31, 2004.
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
Income Loss
Available to Available to
Common Common
Stockholders Per Share Stockholders Per Share
Amount Shares Amount Amount Shares Amount
------ ------ ------ ------ ------ ------
Net income (loss) $6,506,597 $ (260,133)
Less: Preferred stock dividends (49,950) (49,948)
----------- -----------
Income (loss) available
to common stockholders 6,456,647 32,807,521 $ 0.20 (310,081) 30,214,169 $ (0.01)
======== ========
Effect of dilutive securities:
Stock options and warrants - 569,793 (0.01) - - -
Preferred stock 49,950 568,325 - - - -
----------- ---------- --------- ---------- ---------- ---------
Income (loss) available to common
stockholders and assumed
conversion $6,506,597 33,945,639 $ 0.19 $ (310,081) 30,214,169 $(0.01)
=========== ========== ========= =========== =========== =======
NOTE 16 - 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 homeowners insurance and includes substantially all aspects of the
insurance, distribution and claims process. The online commerce segment consists
of Internet insurance leads generation through Tigerquote.com and commissions on
F-24
policies placed by Tigerquote.com Insurance Solutions, Inc. During the fourth
quarter of 2005, the Company closed its online commerce operations.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies and practices. The Company evaluates
its business segments based on GAAP pretax operating earnings. Corporate
overhead expenses are allocated to business segments. Transactions between
reportable segments are accounted for at fair value.
Operating segments that are not individually reportable, based on the extent of
the current operations in such segments, are included in the "All Other"
category. The "All Other" category currently includes the operations of
Universal Insurance Holdings, Inc., Tiger Home Services, Inc. and other
entities.
Information regarding components of operations for the year ended December 31,
2005 and 2004 follows:
Year ended December 31,
2005 2004
---- ----
Total revenue
Insurance segment $20,093,856 $ 6,626,669
Online commerce segment 294,616 1,732,480
Corporate and other 27,935 240,142
--------------- ----------------
Total operating segments 20,416,407 8,599,291
Intercompany eliminations (754,590) (600,518)
--------------- ----------------
Total revenues $19,661,817 $7,998,773
=============== ================
Earnings (loss) before income taxes
Insurance segment $8,915,457 $1,445,165
Online commerce segment (156,658) (397,603)
Corporate and other (2,707,357) (1,307,695)
--------------- ----------------
Total income (loss) before taxes $6,051,442 ($260,133)
=============== ================
Information regarding total assets as of December 31, 2005
December 31,
2005
----
Total assets
Insurance segment $177,695,897
Online commerce segment 83,832
Corporate and other 3,290,362
---------------
Total operating segments $181,070,091
Intercompany eliminations (36,657)
---------------
Total assets $181,033,434
===============
F-25