UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 000-20848
UNIVERSAL INSURANCE HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 65-0231984
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1110 W. Commercial Blvd.
Suite 100
Fort Lauderdale, Florida 33309
(Address of principal executive offices)
(954) 958-1200
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the last practicable date: 39,057,103 shares of common
stock as of August [13], 2007.
Transitional Small Business Disclosure Format Yes No X
--- ---
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Universal Insurance Holdings, Inc. and Subsidiaries
Fort Lauderdale, Florida
We have reviewed the accompanying condensed consolidated balance sheet of
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES as of June 30, 2007 and the
related condensed consolidated statements of operations for the six-month and
three-month periods ended June 30, 2007 and 2006, and the condensed consolidated
statements of cash flows for each of the six-month periods ended June 30, 2007
and 2006. These interim financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Blackman Kallick Bartelstein, LLP
Chicago, Illinois
August 13, 2007
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2007
(Unaudited)
ASSETS
Cash and cash equivalents $ 256,049,954
Real estate, net 3,211,986
Prepaid reinsurance premiums 180,970,635
Reinsurance recoverables and other reinsurance receivable 86,036,298
Premiums and other receivables, net 19,223,252
Property and equipment, net 607,620
Deferred income taxes 9,874,117
Other assets 16,222
-------------
Total assets $ 555,990,084
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 52,130,976
Unearned premiums 271,885,614
Deferred ceding commission, net 1,558,077
Accounts payable 1,673,508
Reinsurance payable 101,898,123
Federal and state income taxes payable 19,401,565
Dividends payable 2,446,392
Other accrued expenses 13,279,300
Other liabilities 11,987,103
Loans payable 3,025,940
Long-term debt 25,040,870
-------------
Total liabilities 504,327,468
-------------
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, 55,000,000 shares authorized, 39,057,103
shares issued and 35,762,729 shares outstanding 390,572
Common stock in treasury, at cost - 394,374 shares (974,746)
Common stock held in trust, at cost - 2,900,000 shares (2,349,000)
Additional paid-in capital 21,759,615
Retained earnings 32,834,788
-------------
Total stockholders' equity 51,662,616
-------------
Total liabilities and stockholders' equity $ 555,990,084
=============
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
3
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
June 30, 2007 June 30, 2006 June 30, 2007 June 30, 2006
------------- ------------- ------------- -------------
PREMIUMS EARNED AND OTHER REVENUES:
Direct premiums written $ 262,563,270 $ 114,003,676 $ 131,573,917 $ 77,159,159
Ceded premiums written (185,148,008) (77,945,774) (91,071,965) (45,963,214)
------------- ------------- ------------- ------------
Net premiums written 77,415,262 36,057,902 40,501,952 31,195,945
Decrease (increase) in net unearned premiums 5,228,113 (25,079,437) 2,703,160 (24,503,066)
------------- ------------- ------------- ------------
Premiums earned, net 82,643,375 10,978,465 43,205,112 6,692,879
Net investment income 5,475,079 969,183 2,748,858 585,216
Commission revenue 9,773,589 2,715,592 7,420,733 1,762,219
Other revenue 110,233 16,202 58,531 9,853
------------- ------------- ------------- ------------
Total premiums earned and other revenues 98,002,276 14,679,442 53,433,234 9,050,167
------------- ------------- ------------- ------------
OPERATING COSTS AND EXPENSES
Losses and loss adjustment expenses 24,866,277 5,974,787 12,497,543 4,597,154
General and administrative expenses 21,304,473 2,041,208 11,292,398 2,579,902
------------- ------------- ------------- ------------
Total operating costs and expenses 46,170,750 8,015,995 23,789,941 7,177,056
------------- ------------- ------------- ------------
INCOME BEFORE INCOME TAXES 51,831,526 6,663,447 29,643,293 1,873,111
------------- ------------- ------------- ------------
Income taxes, current 23,105,624 2,615,933 13,731,190 1,337,068
Income taxes, deferred (1,202,361) (1,238,670) (1,641,331) (1,437,547)
------------- ------------- ------------- ------------
Income taxes, net 21,903,263 1,377,263 12,089,859 (100,479)
------------- ------------- ------------- ------------
NET INCOME $ 29,928,263 $ 5,286,184 $ 17,553,434 $ 1,973,590
============= ============= ============= ============
INCOME PER COMMON SHARE:
Basic $ 0.84 $ 0.15 $ 0.49 $ 0.06
============= ============= ============= ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 35,528,000 34,373,000 35,577,000 34,306,000
============= ============= ============= ============
INCOME PER COMMON SHARE:
Diluted $ 0.73 $ 0.14 $ 0.43 $ 0.05
============= ============= ============= ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 41,217,000 36,863,000 40,851,000 37,300,000
============= ============= ============= ============
CASH DIVIDEND DECLARED PER
COMMON SHARE $ 0.07 $ 0.08 $ - $ 0.04
============= ============= ============= ============
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
4
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended Six Months Ended
June 30, 2007 June 30, 2006
----------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,928,263 $ 5,286,184
Adjustments to reconcile net income to cash provided by operations:
Amortization and depreciation 166,318 185,062
Loss on disposal of assets 25,627 -
Issuance of common stock as compensation 793,508 1,138,764
Deferred taxes (1,202,361) (1,238,670)
Tax benefit on exercise of stock options (1,143,325) -
Net change in assets and liabilities relating to operating activities:
Reinsurance recoverables and other reinsurance receivable (10,481,569) 25,229,631
Prepaid reinsurance premiums (46,767,461) (29,603,121)
Premiums and other receivables 3,687,011 (16,941,815)
Allowance for doubful accounts 1,384,390 -
Deferred acquisition costs, net 2,106,116 (3,491,263)
Other assets 1,502 735,913
Reinsurance payable (958,956) 9,180,607
Deferred ceding commission, net 1,558,077 (1,043,544)
Other liabilities 7,458,003 2,441,954
Accounts payable (1,052,541) 1,315,294
Taxes payable 5,529,959 2,385,577
Other accrued expenses (1,689,970) 3,402,278
Unpaid losses and loss adjustment expenses 2,566,462 (31,991,634)
Unearned premiums 41,539,348 54,682,552
------------ ------------
Net cash provided by operating activities 33,448,401 21,673,769
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (123,287) (51,826)
Building improvements (16,290) (115,027)
------------ ------------
Net cash used in investing activities (139,577) (166,853)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividend (24,975) (24,976)
Issuance of common stock 835,500 44,251
Acquisition of treasury stock (872,926) -
Tax benefit on exercise of stock options 1,143,325 -
Common stock dividend paid (1,915,354) (1,488,851)
Repayments of loans payable (9,314,737) (51,238)
------------ ------------
Net cash used in financing activities (10,149,167) (1,520,814)
NET INCREASE IN CASH AND CASH EQUIVALENTS 23,159,657 19,986,102
CASH AND CASH EQUIVALENTS, Beginning of period 232,890,297 48,038,736
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $256,049,954 $ 68,024,838
============ ============
Non-cash items
Declared dividends payable $ 2,446,392 $ 1,518,284
============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
5
UNIVERSAL INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Universal Insurance Holdings, Inc. ("Company"), its wholly owned
property and casualty insurance subsidiary, Universal Property & Casualty
Insurance Company, and other wholly owned subsidiaries including Atlas Florida
Financial Corporation (parent of Atlas Premium Finance Company), Atlas Premium
Finance Company, and the Universal Insurance Holdings, Inc. Stock Grantor Trust.
All intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying 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. In addition, the accompanying
financial statements have been prepared in accordance with the instructions to
Form 10-QSB and Regulation S-B. Accordingly, they omit or condense certain
footnotes and other information normally included in financial statements
prepared in conformity with GAAP and thus should be read in conjunction with the
audited consolidated financial statements and notes included in the Company's
annual report on Form 10-KSB for the year ended December 31, 2006.
The condensed consolidated balance sheet of the Company as of June 30, 2007, the
related condensed consolidated statements of operations for the six-month and
three-month periods ended June 30, 2007 and 2006 and condensed consolidated
statements of cash flows for the six-month periods ended June 30, 2007 and 2006
are unaudited. There were no items comprising comprehensive income for the six
months ended June 30, 2007 and 2006. Accordingly, consolidated statements of
comprehensive income are not presented. The significant accounting policies
followed for quarterly financial reporting are the same as those disclosed in
the Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2006, except for the
adoption of a new accounting pronouncement as noted below.
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 at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The accompanying financial statements reflect all adjustments
(consisting primarily of normal and recurring accruals and adjustments) which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented.
Results of operations for the six months ended June 30, 2007 are not necessarily
indicative of the results for the year ending December 31, 2007.
6
SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity's financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes." FIN 48 prescribes that a company should use a more-likely-than-not
recognition threshold based on the technical merits of the tax position taken.
Tax positions that meet the more-likely-than-not threshold should be measured in
order to determine the tax benefit to be recognized in the financial statements.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company analyzed its tax positions in accordance with this interpretation and
determined that it did not result in a reserve for uncertain tax positions as of
June 30, 2007. Therefore, no cumulative effect of a change in accounting
principle or adjustment to a liability for unrecognized tax benefits was
recognized as a result of adoption of FIN 48. As of January 1, 2007, the Company
had zero unrecognized tax benefits. Accordingly, the adoption of FIN 48 did not
have an effect on the results of operations or financial position of the
Company.
In September 2005, the FASB issued SFAS No. 157 which redefines fair value,
establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 applies where other
accounting pronouncements require or permit fair value measurements. SFAS No.
157 is effective for fiscal years beginning after November 15, 2007. The effects
of adoption will be determined by the types of instruments carried at fair value
in the Company's financial statements at the time of adoption as well as the
method utilized to determine their fair values prior to adoption. Based on the
Company's current use of fair value measurements, SFAS No. 157 is not expected
to have a material effect on the results of operations or financial position of
the Company.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159") which permits entities
to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS 159
will become effective for the Company on January 1, 2008. The Company is
currently evaluating the impact of adopting SFAS 159 on its financial position,
cash flows, and results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. Management has reassessed the
critical accounting policies as disclosed in the Company's 2006 Annual Report to
Stockholders on Form 10-KSB and determined that no changes, additions or
deletions are needed to the policies as disclosed. Also there were no
significant changes in the Company's estimates associated with those policies.
7
NOTE 2 -- RESULTS OF OPERATIONS
INSURANCE OPERATIONS
UPCIC commenced its insurance activity in February 1998 by assuming policies
from the Florida Residential Property and Casualty Joint Underwriting
Association ("JUA"). UPCIC received the unearned premiums of the assumed
policies and began servicing such policies. Since then, UPCIC has developed its
business by actively soliciting business in the open market through independent
agents.
Unearned premiums represent amounts that UPCIC would be required to refund
policyholders if their policies were canceled. UPCIC determines unearned
premiums by calculating the pro-rata amount that would be due to the
policyholders at a given point in time based upon the premiums due for the full
policy term. At June 30, 2007, UPCIC had direct unearned premiums totaling
$271,885,614 and in-force premiums of approximately $510,000,000.
Premiums earned are included in earnings on a pro-rata basis over the terms of
the policies. UPCIC does not have policies that provide for retroactive premium
adjustments.
Policy acquisition costs, consisting of commissions and other costs that vary
with and are directly related to the production of business, net of ceding
commissions, are deferred and amortized over the terms of the policies, but only
to the extent that unearned premiums are sufficient to cover all related costs
and expenses. Deferred policy acquisition costs are reviewed to determine if
they are recoverable from unearned premiums, and if not, are charged to expense.
For the six-month periods ended June 30, 2007 and June 30, 2006, respectively,
no amounts of deferred policy acquisition costs were charged to expense as a
result of the recoverability testing. As of June 30, 2007, deferred ceding
commissions exceeded deferred policy acquisition costs and were recorded as a
net liability in the amount of $1,558,077.
An allowance for doubtful accounts is established when it becomes evident that
collection is doubtful, typically after 90 days past due. As of June 30, 2007,
UPCIC had recorded an allowance for doubtful accounts in the amount of
$1,993,369.
Loss and loss adjustment expenses ("LAE"), less related reinsurance, are
recorded as claims are incurred. The provision for unpaid loss and LAE includes:
(1) the accumulation of individual case estimates for loss and LAE reported, but
not paid prior to the close of the accounting period; (2) estimates for incurred
but unreported claims based on past experience modified for current trends; and
(3) estimates of expenses for investigating and adjusting claims based on past
experience.
Management continues to take action to strengthen UPCIC's financial condition.
On the Company's Homeowner's program ("HO"), premium rate increases averaging
10.1% and 13.2% statewide were approved by the Florida Office of Insurance
Regulation ("OIR") and implemented with effective dates in May 2006 and October
2006, respectively. On the Company's Dwelling Fire program ("DP"), premium rate
increases averaging 11.2% and 30.6% statewide were also approved by the OIR and
implemented with effective dates in May 2006 and September 2006, respectively.
Further, a rate decrease averaging 11.1% statewide (HO) and 3.2% statewide (DP)
reflecting anticipated reinsurance savings was filed March 15, 2007 and
8
implemented in UPCIC's rates on June 1, 2007 and is subject to approval by the
OIR. UPCIC will make a subsequent rate filing by September 30, 2007, reflecting
any changes that took place from the June 1, 2007 filing.
In light of the four windstorm catastrophes Florida experienced in 2004, and
three windstorm catastrophes Florida experienced in 2005, there was a
significant increase in the cost of catastrophe reinsurance coverage for the
June 1, 2006 renewal which the Company had anticipated and factored into its
policy pricing. Effective May 1, 2004 the Company brought in house the system it
utilizes for policy issuance and administration. This has enhanced UPCIC's
operating results through its ability to improve and better control underwriting
and loss adjusting activities. In addition, UPCIC changed the geographic and
coverage mix of the property insurance it writes, which is a key determinant in
the amount and pricing of reinsurance procured by UPCIC. Management believes the
implementation of, and results attributable to, the actions described above will
continue to enhance UPCIC's surplus. However, there can be no assurance of the
ultimate success of these plans, or that the Company will be able to maintain
profitability.
NOTE 3 -- REINSURANCE
In the normal course of business, UPCIC seeks to reduce the loss that may arise
from catastrophes or other events that cause unfavorable underwriting results by
reinsuring certain levels of risk in various areas of exposure with other
insurance enterprises or reinsurers. Amounts recoverable from reinsurers are
estimated in a manner consistent with the reinsurance contracts. Reinsurance
premiums, losses and loss adjustment expenses are accounted for on bases
consistent with those used in accounting for the original policies issued and
the terms of the reinsurance contracts. Reinsurance ceding commissions received
are deferred and netted against policy acquisition costs and amortized over the
effective period of the related insurance policies.
UPCIC limits the maximum net loss that can arise from large risks or risks in
concentrated areas of exposure by reinsuring (ceding) certain levels of risks
with other insurers or reinsurers, either on an automatic basis under general
reinsurance contracts known as "treaties" or by negotiation on substantial
individual risks. The reinsurance arrangements are intended to provide UPCIC
with the ability to maintain its exposure to loss within its capital resources.
Such reinsurance includes quota share, excess of loss and catastrophe forms of
reinsurance. While ceding premiums to reinsurers reduces UPCIC's risk of
exposure in the event of catastrophic losses, it also reduces UPCIC's potential
for greater profits should such catastrophic events fail to occur. The Company
submits the UPCIC reinsurance program for regulatory review to the OIR.
In light of the four windstorm catastrophes Florida experienced in 2004, and
three windstorm catastrophes Florida experienced in 2005, there was a
significant increase in catastrophe reinsurance cost for the June 1, 2006
renewal which the Company had planned and factored into its policy pricing.
Effective June 1, 2006, UPCIC reduced the rate of cession on its quota share
reinsurance. Quota share reinsurance is used primarily to increase UPCIC's
underwriting capacity and to reduce exposure to losses. Quota share reinsurance
refers to a form of reinsurance under which the reinsurer participates in a
specified percentage of the premiums and losses on all reinsured policies in a
given class of business. As a result of this reduction of UPCIC's quota share
reinsurance from 80% to 50%, UPCIC has retained and earned more premiums UPCIC
9
writes, but has also retained more related losses. UPCIC's increased exposure to
potential losses could have a material adverse effect on the business, financial
condition and results of operations of UPCIC and the Company. During 2006 and
the six months ended June 30, 2007, UPCIC did not experience any catastrophic
events.
Effective June 1, 2007, UPCIC entered into a quota share reinsurance treaty and
excess per risk agreements with various reinsurers. Under the quota share
treaty, through May 31, 2008, UPCIC cedes 50% of its gross written premiums,
losses and LAE for policies with coverage for wind risk with a ceding commission
payable to UPCIC equal to 31% of ceded gross written premiums. In addition, the
quota share treaty has a limitation for any one occurrence of 40% of gross
premiums earned, not to exceed $100,000,000 (of which UPCIC's net liability in a
first event scenario is $45,000,000, in a second event scenario is $9,300,000
and in a third event scenario is $9,300,000) and a limitation from losses
arising out of events that are assigned a catastrophe serial number by the
Property Claims Services ("PCS") office of 112% of Gross Premiums Earned, not to
exceed $280,000,000. Effective June 1, 2007 through May 31, 2008, 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, 2007 through May 31, 2008, UPCIC entered into a property per risk excess
agreement covering ex-wind only policies. Under the property per risk excess
agreement, UPCIC obtained coverage of $300,000 in excess of $200,000 for each
property loss. A $2,100,000 aggregate limit applies to the term of the contract.
Effective June 1, 2007 through May 31, 2008, under an excess catastrophe
contract, UPCIC obtained catastrophe coverage of $576,000,000 in excess of
$100,000,000 covering certain loss occurrences including hurricanes. The
contract contains a provision for one reinstatement in the event coverage is
exhausted; additional premium is calculated pro rata as to amount and 100% as to
time. Effective June 1, 2007 through May 31, 2008, UPCIC purchased a
reinstatement premium protection contract which reimburses UPCIC for its cost to
reinstate the catastrophe coverage of the first $426,000,000 in excess of
$100,000,000. Effective June 1, 2007, UPCIC also obtained subsequent catastrophe
event excess of loss reinsurance to cover certain levels of UPCIC's net
retention through three catastrophe events including hurricanes. UPCIC also
obtained coverage from the Florida Hurricane Catastrophe Fund ("FHCF"). The
approximate coverage is estimated to be for 90% of $1,071,600,000 in excess of
$209,900,000. Also at June 1, 2007, the FHCF made available, and UPCIC obtained,
$10,000,000 of additional catastrophe excess of loss coverage with one free
reinstatement of coverage to carriers qualified as Limited Apportionment
Companies or companies that participated in the Insurance Capital Build-Up
Incentive Program, such as UPCIC. This particular layer of coverage is
$10,000,000 in excess of $18,600,000. UPCIC also purchased Florida Hurricane
Catastrophe Fund Recovery Shortfall Reinsurance in the event FHCF cannot fulfill
its payment obligations for the 2007-2008 Hurricane Season.
The total cost of UPCIC's underlying catastrophe private reinsurance program
effective June 1, 2007 through May 31, 2008 is $113,178,000 of which UPCIC's
cost is 50%, or $56,589,000, and the quota share reinsurers' cost is the
remaining 50%. In addition, UPCIC purchases reinsurance premium protection as
described above which amounts to $14,213,402 of cost. The cost of subsequent
10
event catastrophe reinsurance is $11,184,125. The estimated premium UPCIC plans
to cede to the FHCF for the 2007 hurricane season is $43,100,000 of which
UPCIC's cost is 50%, or $21,550,000, and the quota share reinsurers' cost is the
remaining 50%. UPCIC is also participating in the additional coverage option for
Limited Apportionment Companies or companies that participated in the Insurance
Capital Build-Up Incentive Program offered by the FHCF, the premium for which is
$5,000,000 of which UPCIC's cost is 50%, or $2,500,000, and the quota share
reinsurers' cost is the remaining 50%. The total cost of UPCIC's Florida
Hurricane Catastrophe Fund Recovery Shortfall Reinsurance is $7,715,520, of
which UPCIC's cost is 50%, or $3,857,760.
Effective June 1, 2007, the Company obtained $30,000,000 of coverage via a
catastrophe risk-linked transaction product in the event UPCIC's catastrophe
coverage and FHCF coverage are exhausted. The total cost of the Company's
risk-linked transaction product is $3,525,000.
UPCIC is responsible for losses related to catastrophic events with incurred
losses in excess of coverage provided by UPCIC's reinsurance program which could
have a material adverse effect on the UPCIC's and the Company's business,
financial condition and results of operations.
The reinsurance arrangements had the following effect on certain items in the
accompanying consolidated financial statements:
Six Months Ended Six Months Ended
June 30, 2007 June 30, 2006
------------------------------------------------------ ---------------------------------------------------------
Premiums Premiums Loss and Loss Premiums Premiums Loss and Loss
Written Earned Adjustment Written Earned Adjustment
------- ------ Expenses ------- ------ Expenses
-------- --------
Direct 262,563,270 221,023,922 48,700,037 $114,003,676 $59,321,123 $33,430,134
Ceded (185,148,008) (138,380,547) (23,833,760) (77,945,774) (48,342,658) (27,455,347)
--------------- --------------- --------------- --------------- --------------- ---------------
Net 77,415,262 82,643,375 24,866,277 $ 36,057,902 $10,978,465 $5,974,787
=============== =============== =============== =============== =============== ===============
Three Months Ended Three Months Ended
June 30, 2007 June 30, 2006
------------------------------------------------------ ---------------------------------------------------------
Premiums Premiums Loss and Loss Premiums Premiums Loss and Loss
Written Earned Adjustment Written Earned Adjustment
------- ------ Expenses ------- ------ Expenses
-------- --------
Direct 131,573,917 120,510,374 25,333,276 $ 77,159,159 $34,436,949 $26,282,514
Ceded (91,071,965) (77,305,262) (12,835,733) (45,963,214) (27,744,070) (21,685,360)
--------------- --------------- --------------- --------------- --------------- ---------------
Net 40,501,952 43,205,112 12,497,543 $31,195,945 $6,692,879 $4,597,154
=============== =============== =============== =============== =============== ===============
OTHER AMOUNTS:
June 30, 2007
-------------
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses 40,869,163
Other reinsurance receivable 45,167,135
----------
Reinsurance recoverables and other reinsurance receivable $86,036,298
===========
11
UPCIC's reinsurance contracts do not relieve UPCIC from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to UPCIC; consequently, allowances are established for amounts deemed
uncollectible. No allowance is deemed necessary at June 30, 2007. UPCIC
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies. UPCIC currently has reinsurance contracts with
various reinsurers located throughout the United States and internationally.
UPCIC believes that ceding risks to reinsurers whom it considers to be
financially sound combined with the distribution of reinsurance contracts to an
array of reinsurers adequately minimizes UPCIC's risk from any potential
operating difficulties of its reinsurers.
UPCIC may also be subject to assessments by Citizens Property Insurance
Corporation ("Citizens"), the state-run insurer of last resort and the FHCF as a
result of operating deficiencies related to windstorm catastrophes. In addition,
the Company is subject to assessments by the Florida Insurance Guaranty
Association ("FIGA"). FIGA services pending claims by or against Florida
policyholders of member insurance companies which become insolvent and are
ordered liquidated. FIGA's membership is composed of all Florida licensed direct
writers of property or casualty insurance. Under current regulations, insurers
may recoup the amount of their assessments from policyholders, or in some cases
collect the amount of the assessments from policyholders as surcharges for the
benefit of the assessing entity.
On June 12, 2006, the OIR ordered an emergency FHCF assessment of 1% of direct
premiums written for policies with effective dates beginning January 1, 2007,
which UPCIC is currently collecting from policyholders, as the assessment is to
policyholders, not UPCIC. This assessment was a result of catastrophe losses
Florida experienced in 2004 and 2005. The assessments collected from
policyholders are remitted to FHCF quarterly.
On September 14, 2006, the Board of Governors of Citizens authorized the levying
of a regular assessment on assessable insurers to recoup the 2005 Plan Year
Deficit incurred in the High Risk Account. The assessment is based upon UPCIC's
share of direct written premium for the subject lines of business in the State
of Florida for the calendar year preceding the plan year in which the deficit
occurred. UPCIC's participation in this assessment totaled $263,650. Pursuant to
Florida statutes, insurers are permitted to recoup the assessment by adding a
surcharge to policies in an amount not to exceed the amount paid by the insurer
to Citizens. As a result, UPCIC recorded this assessment as an expense during
the year ended December 31, 2006 and is implementing the recoupment in
connection with this assessment in 2007.
During its meeting on December 14, 2006, the Board of Directors of FIGA
determined the need for an emergency assessment upon its member companies. The
Board decided on an emergency assessment on member companies of 2% of the
Florida net direct premiums for the calendar year 2005. Based on the 2005 net
direct premiums of $11.2 billion, this would generate approximately $225
million. UPCIC's participation in this assessment totaled $1,772,861. Pursuant
to Florida statutes, insurers are permitted to recoup the assessment by adding a
surcharge to policies in an amount not to exceed the amount paid by the insurer
to FIGA. As a result, UPCIC recorded this assessment as an expense during the
year ended December 31, 2006 and is implementing the recoupment in connection
with this assessment in 2007.
12
NOTE 4 -- EARNINGS PER SHARE
Earnings per share ("EPS") amounts are calculated in accordance with SFAS No.
128, EARNINGS PER SHARE. Basic EPS is based on the weighted average number of
shares outstanding for the period, excluding any dilutive common share
equivalents. Diluted EPS reflects the potential dilution that could occur if
securities to issue common stock were exercised.
A reconciliation of shares used in calculating basic and diluted EPS for the
six-month periods ended June 30, 2007 and June 30, 2006, respectively, follows:
Six Months Ended
----------------
June 30, 2007 June 30, 2006
------------------- ----------------
Number of shares used in calculating basic EPS 35,528,000 34,373,000
Effect of assumed conversion of common stock 5,689,000 2,490,000
equivalents ------------------- ----------------
Number of shares used in calculating diluted EPS 41,217,000 36,863,000
Three Months Ended
------------------
June 30, 2007 June 30, 2006
---------------- -------------
Number of shares used in calculating basic EPS 35,577,000 34,306,000
Effect of assumed conversion of common stock 5,274,000 2,994,000
equivalents ------------------- ----------------
Number of shares used in calculating diluted EPS 40,851,000 37,300,000
NOTE 5 -- STOCK-BASED COMPENSATION PLANS AND WARRANTS
Effective January, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 (R), "Share-Based Payments," and began recognizing
compensation expense in its Consolidated Statements of Operations for its stock
option grants based on the fair value of the awards. Prior to January 1, 2006
the Company 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 equal the market price of underlying stock
on the date of the grant, no compensation expense was recognized. The Company
expensed the fair value (determined as of the grant date) of options and
warrants granted to non-employees in accordance with SFAS No. 123. SFAS 123 (R)
was adopted using the modified prospective transition method. Under this
transition method, compensation cost recognized in the periods after adoption
includes (i) compensation cost for all share-based payments granted prior to,
but not yet vested as of January 1, 2006 based on the grant-date fair value
estimated in accordance with the original provision of SFAS 123, and (ii)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123 (R). Results from prior periods have not been restated.
As a result of adopting SFAS 123 (R), the Company's income before income taxes
and net income for the six months ended June 30, 2007 are $679,911 and $407,945
13
lower, respectively, and for the three months ended June 30, 2007 are $22,089
and $13,253 lower, than if it had continued to account for share-based
compensation under APB 25. In addition, during the six months ended June 30,
2007, the Company issued common stock valued at $925,000 as compensation. This
expense is being recognized over a three-year vesting period which commenced
March 14, 2007.
At June 30, 2007, there were options outstanding to purchase 5,530,000 shares of
common stock with an intrinsic value of $28,020,000, a weighted average
remaining contract term of 3.34 years and a weighted exercise price of $1.13. Of
the total options outstanding, options to purchase 3,780,000 shares of common
stock are currently exerciseable with an intrinsic value of $19,025,000, a
weighted average remaining contract term of 3.71 years, and a weighted exercise
price of $1.16. Options to purchase 435,000 shares of common stock were granted
during the six months ended June 30, 2007 at a weighted average exercise price
of $3.70. There were 750,000 options exercised during the six months ended June
30, 2007. On July 12, 2007, the Company granted options to purchase an aggregate
of 1,575,000 shares of common stock to the Company's directors and executive
officers. All of the options granted on July 12, 2007 vest on July 12, 2008,
have an exercise price of $6.50 per share, and expire on July 12, 2012. The
options granted to Bradley I. Meier, the Company's President and Chief Executive
Officer, and to Sean P. Downes, the Company's Chief Operating Officer and Senior
Vice President, shall only be exercisable on such date or dates as the fair
market value (as defined in their respective option agreements) of the Company's
common stock is and has been at least one hundred fifty percent (150%) of the
exercise price for the previous twenty (20) consecutive trading days.
At June 30, 2007, there were warrants outstanding and currently exercisable to
purchase 850,000 shares of common stock with an intrinsic value of $4,659,500, a
weighted average remaining contract term of 2.99 years and a weighted average
exercise price of $0.72. There were no warrants exercised during the six months
ended June 30, 2007.
The Company estimated the fair value of all stock options awards as of the grant
date by applying the Black-Scholes-Merton option pricing model. The use of this
valuation model involves assumptions that are judgmental and highly sensitive in
the determination of compensation expense and include the expected life of the
option, stock price volatility, risk-free interest rate, dividend yield,
exercise price, and forfeiture rate. Under SFAS 123(R), forfeitures are
estimated at the time of valuation and reduce expense ratably over the vesting
period. The forfeiture rate is adjusted periodically based on the extent to
which actual forfeitures differ, or are expected to differ, from the previous
estimate. Under SFAS 123 and APB 25, the Company elected to account for
forfeitures when awards were actually forfeited and reflect the forfeitures as a
cumulative adjustment to the pro forma expense.
The fair value of options granted in 2007 was estimated assuming the following:
weighted average expected life of 2.5 years, dividend yield of 4.0 percent,
risk-free interest rate of 4.76 percent, and expected volatility of 65.4
percent. In accordance with SFAS 123(R), fair values of options granted prior to
adoption and determined for purposes of disclosure under SFAS 123 have not been
changed. The fair values of options granted prior to adoption of SFAS 123(R) was
estimated assuming the following: weighted average expected life of five years,
dividend yield of 0.0 percent, risk-free interest rate of 6.5 percent, and
expected volatility of 154.5 percent and 126.3 percent for grants issued in 2004
and 2002, respectively.
14
NOTE 6 -- 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 affiliated and
unaffiliated third parties.
Downes and Associates, a multi-line insurance adjustment corporation based in
Deerfield Beach, Florida performs certain claims adjusting work for UPCIC.
Downes and Associates is owned by Dennis Downes, who is the father of Sean P.
Downes, Chief Operating Officer and Senior Vice President of UPCIC. During the
six months ended June 30, 2007 and 2006, the Company expensed claims adjusting
fees of $540,000 and $496,000, respectively, to Downes and Associates.
In September 2006, the Company initiated the process of acquiring all of the
outstanding common stock of Atlas Florida Financial Corporation, which owned all
of the outstanding common stock of Sterling Premium Finance Company, Inc.
("Sterling"), from the Company's Chief Executive Officer and Chief Operating
Officer for $50,000, which approximated Sterling's book value. The Company
intends to seek approval of the acquisition from the OIR during the third
quarter of 2007. Sterling has been renamed Atlas Premium Finance Company.
NOTE 7 -- STOCK ISSUANCES
On March 14, 2007, the Company issued 250,000 shares of restricted common stock
at a price of $3.70 per share to an employee in consideration for services
rendered pursuant to the terms of an employee agreement. The shares will vest
over a three year period. On May 1, 2007, the Company issued 22,143 shares of
restricted common stock at a price of $1.87 per share, on a "cashless" basis, to
James M. Lynch, CFO of the Company, pursuant to Mr. Lynch's exercise of stock
options. Also on May 1, 2007, the Company issued 387,234 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Norman M.
Meier, a director of the Company, pursuant to Mr. Meier's exercise of stock
options. Also on May 1, 2007, the Company issued 77,447 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Joel
Wilentz, a director of the Company, pursuant to Mr. Wilentz's exercise of stock
options. Also on May 1, 2007, the Company issued 77,447 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Reed
Slogoff, a director of the Company, pursuant to Mr. Slogoff's exercise of stock
options. Unless otherwise specified, such as in the case of the exercise of
stock options or warrants, the per share prices were determined using the
closing price of the Company's common stock as quoted on the OTC Bulletin Board
or the AMEX and the shares were issued in private transactions pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
NOTE 8 -- PROVISION FOR INCOME TAX EXPENSE
A provision for income tax expense of $21,903,263 was recorded for the six
months ended June 30, 2007 as a result of current profitable operations. A
provision for income tax expense of $1,377,263 was recorded for the six months
ended June 30, 2006 due to operating loss carry-forwards that existed at that
time.
15
NOTE 9 -- SUBSEQUENT EVENTS
On July 12, 2007, the Company's Board of Directors declared a dividend of $.08
per share on its Common Stock. The dividend is payable on October 22, 2007 to
stockholders of record as of September 27, 2007.
On July 12, 2007, the Company granted options to purchase an aggregate of
1,575,000 shares of common stock to the Company's directors and executive
officers. All of the options granted on July 12, 2007 vest on July 12, 2008,
have an exercise price of $6.50 per share, and expire on July 12, 2012. The
options granted to Bradley I. Meier, the Company's President and Chief Executive
Officer, and to Sean P. Downes, the Company's Chief Operating Officer and Senior
Vice President, shall only be exercisable on such date or dates as the fair
market value (as defined in their respective option agreements) of the Company's
common stock is and has been at least one hundred fifty percent (150%) of the
exercise price for the previous twenty (20) consecutive trading days.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis by management of the Company's
consolidated financial condition and results of operations should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
Notes thereto.
FORWARD-LOOKING STATEMENTS
Certain statements made by the Company's management may be considered to be
"forward-looking statements" within the meaning of the Private Securities Reform
Litigation Act of 1995. Forward-looking statements are based on various factors
and assumptions that include known and unknown risks and uncertainties. The
words "believe," "expect," "anticipate," and "project," and similar expressions,
identify forward-looking statements, which speak only as of the date the
statement was made. Such statements may include, but not be limited to,
projections of revenues, income or loss, expenses, plans, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
results could differ materially from those described in forward-looking
statements as a result of the risks set forth in the following discussion and in
the section below entitled "Factors Affecting Operation Results and Market Price
of Stock," among others.
OVERVIEW
The Company is a vertically integrated insurance holding company. The Company,
through its subsidiaries, is currently engaged in insurance underwriting,
distribution and claims. UPCIC generates revenue from the collection and
investment of premiums. The Company's agency operations, which include Universal
Florida Insurance Agency and Coastal Homeowners Insurance Specialists, Inc.,
generate income from commissions. Universal Risk Advisors, Inc., the Company's
managing general agent, generates revenue through policy fee income and other
administrative fees from the marketing of UPCIC's and third-party insurance
products through the Company's distribution network and UPCIC. Universal Risk
16
Life Advisors, Inc. was formed to be the Company's managing general agent for
life insurance products. In addition, the Company has formed an independent
claims adjusting company, Universal Adjusting Corporation, which adjusts UPCIC
claims, and an inspection company, Universal Inspection Corporation, which
performs property inspections for homeowners' policies underwritten by UPCIC.
UPCIC is in the process of preparing Certificate of Authority (COA) applications
to write homeowners insurance policies in five additional states. Those states
are Texas, Hawaii, Georgia, South Carolina and North Carolina. UPCIC has
notified the Florida OIR that it intends to file COA applications in the
additional states.
FINANCIAL CONDITION
Cash and cash equivalents at June 30, 2007 aggregated $256,049,954. The source
of liquidity for possible claims payments consists of the collection of net
premiums after deductions for expenses, reinsurance recoverables and short-term
loans.
The Company believes that premiums will be sufficient to meet the Company's
working capital requirements for at least the next twelve months. The Company's
policy is to invest amounts considered to be in excess of current working
capital requirements. At June 30, 2007, the Company's investments were comprised
of $218,485,216 in cash and overnight repurchase agreements, $37,564,738 in a
money market account, and $3,211,986 in real estate consisting of a building
purchased by UPCIC that the Company is currently using as its home office.
Policies originally assumed from the Florida Residential Property and Casualty
Joint Underwriting Association ("JUA") provided the opportunity for UPCIC to
solicit future renewal premiums. UPCIC does not expect to assume additional
policies from the JUA. As of June 30, 2007, UPCIC was servicing approximately
341,000 homeowners' and dwelling fire insurance policies and in-force premiums
of approximately $510,000,000.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS
ENDED JUNE 30, 2006
Gross premiums written increased 130.3% to $262,563,270 for the six-month period
ended June 30, 2007 from $114,003,676 for the six-month period ended June 30,
2006. The increase in gross premiums written is primarily attributable to an
increase in new business as well as premium rate increases. The increase in new
business is attributable to improving relationships with existing agents, an
increase in new agents due to increased marketing efforts to agents, a new
web-based policy administration platform and the disruption in the marketplace
as a result of the windstorm catastrophes in 2004 and 2005.
Net premiums earned increased 652.8% to $82,643,375 for the six-month period
ended June 30, 2007 from $10,978,465 for the six-month period ended June 30,
2006. The increase is due to an increase in new business, premium rate increases
and changes in the reinsurance program as described in Note 3 - Reinsurance.
Investment income increased 464.9% to $5,475,079 for the six-month period ended
June 30, 2007 from $969,183 for the six-month period ended June 30, 2006. The
increase is primarily due to higher investment balances and a higher interest
rate environment during the six-month period ended June 30, 2007.
17
Commission revenue increased 259.9% to $9,773,589 for six-month period ended
June 30, 2007 from $2,715,592 for the six-month period ended June 30, 2006.
Commission revenue is comprised principally of the managing general agent's
policy fee income and service fee income on all new and renewal insurance
policies, reinsurance commission sharing agreements, and commissions generated
from agency operations. The increase is primarily attributable to an increase in
managing general agent's policy fee income and a greater amount of reinsurance
commission sharing.
Other revenue increased to $110,233 for the six-month period ended June 30, 2007
from $16,202 for the six-month period ended June 30, 2006.
Net losses and LAE incurred increased 316.2% to $24,866,277 for the six-month
period ended June 30, 2007 from $5,974,787 for the six-month period ended June
30, 2006. Losses and LAE incurred increased as a result of increased premium
volume and changes in UPCIC's reinsurance program. The Company's net loss ratio
for the six-month period ended June 30, 2007 was 30.1% compared to 54.4% for the
six-month period ended June 30, 2006. Losses and LAE are influenced by loss
severity and frequency. Losses and LAE, the Company's most significant expenses,
represent actual payments made net of reinsurance and changes in estimated
future net payments to be made to or on behalf of its policyholders, including
expenses required to settle claims and losses.
Catastrophes are an inherent risk of the property-liability insurance business
which may contribute to material year-to-year fluctuations in UPCIC's and the
Company's results of operations and financial position. During 2006 and the six
months ended June 30, 2007, UPCIC did not experience any catastrophic events.
The level of catastrophe loss experienced in any year cannot be predicted and
could be material to the results of operations and financial position. While
management believes UPCIC's and the Company's catastrophe management strategies
will reduce the severity of future losses, UPCIC and the Company continue to be
exposed to catastrophic losses.
General and administrative expenses increased 943.7% to $21,304,473 for the
six-month period ended June 30, 2007 from $2,041,208 for the six-month period
ended June 30, 2006. The increase in general and administrative expenses was due
to several factors. Commission expense increased by approximately $19,400,000
due to the increase in direct written premium. The increase in commission
expense was offset by an increase in ceding commissions of approximately
$22,000,000 due to an increase in ceded written premium and a higher commission
rate. Ceded written premium increased due to the increase in direct written
premium as well as changes in UPCIC's reinsurance program. Compensation expense
increased nearly $6,400,000 as the Company hired additional staff and increased
incentive compensation in order to retain existing staff to support the
substantial growth of the Company. Inspection expense increased approximately
$500,000 due to the increase in the number of policies underwritten. General and
administrative expenses increased approximately $3,400,000 due to the purchase
of a catastrophe risk-linked transaction product that protects the Company from
catastrophic losses. There was an increase in expenses in the approximate amount
of $5,600,000 for the change in deferred policy acquisition costs, net of
deferred ceding commissions, which relates to an increase in direct and ceded
unearned premiums as well as changes in UPCIC's reinsurance program. Premium
taxes increased nearly $2,200,000 as a result of the increase in direct written
18
premium. Expenses related to assessments decreased approximately $1,800,000 as
there were no assessments incurred by UPCIC during the first six months of 2007.
As UPCIC's balance of premiums receivable increased as a result of the increase
in production, the Company recorded an additional allowance for doubtful
accounts in the approximate amount of $1,400,000. Interest expense increased
approximately $1,100,000 due to outstanding debt balances on the Florida State
Board of Administration surplus note and Benfield Greig (Holdings), Inc. secured
promissory note described in the "Liquidity and Capital Resources" section
below. Other general and administrative expenses increased approximately
$3,100,000 primarily due to increases in premium volume.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE
MONTHS ENDED JUNE 30, 2006
Gross premiums written increased 70.5% to $131,573,917 for the three-month
period ended June 30, 2007 from $77,159,159 for the three-month period ended
June 30, 2006. The increase in gross premiums written is primarily attributable
to an increase in new business as well as premium rate increases. The increase
in new business is attributable to improving relationships with existing agents,
an increase in new agents due to increased marketing efforts to agents, a new
web-based policy administration platform and the disruption in the marketplace
as a result of the windstorm catastrophes in 2004 and 2005.
Net premiums earned increased 545.5% to $43,205,112 for the three-month period
ended June 30, 2007 from $6,692,879 for the three-month period ended June 30,
2006. The increase is due to an increase in new business, premium rate increases
and changes in the reinsurance program as described in Note 3 - Reinsurance.
Investment income increased 369.7% to $2,748,858 for the three-month period
ended June 30, 2007 from $585,216 for the three-month period ended June 30,
2006. The increase is primarily due to higher investment balances and a higher
interest rate environment during the three-month period ended June 30, 2007.
Commission revenue increased 321.1% to $7,420,733 for three-month period ended
June 30, 2007 from $1,762,219 for the three-month period ended June 30, 2006.
Commission revenue is comprised principally of the managing general agent's
policy fee income and service fee income on all new and renewal insurance
policies, reinsurance commission sharing agreements, and commissions generated
from agency operations. The increase is primarily attributable to greater
reinsurance commission sharing and to an increase in managing general agent's
policy fee income.
Other revenue increased to $58,531 for the three-month period ended June 30,
2007 from $9,853 for the three-month period ended June 30, 2006.
Net losses and LAE incurred increased 171.9% to $12,497,543 for the three-month
period ended June 30, 2007 from $4,597,154 for the three-month period ended June
30, 2006. Losses and LAE incurred increased as a result of increased premium
volume and changes in UPCIC's reinsurance program. The Company's net loss ratio
for the three-month period ended June 30, 2007 was 28.9% compared to 68.7% for
the three-month period ended June 30, 2006. Losses and LAE are influenced by
19
loss severity and frequency. Losses and LAE, the Company's most significant
expenses, represent actual payments made net of reinsurance and changes in
estimated future net payments to be made to or on behalf of its policyholders,
including expenses required to settle claims and losses.
Catastrophes are an inherent risk of the property-liability insurance business
which may contribute to material year-to-year fluctuations in UPCIC's and the
Company's results of operations and financial position. During the three-month
periods ended June 30, 2007 and June 30, 2006, respectively, UPCIC did not
experience any catastrophic events. The level of catastrophe loss experienced in
any year cannot be predicted and could be material to the results of operations
and financial position. While management believes UPCIC's and the Company's
catastrophe management strategies will reduce the severity of future losses,
UPCIC and the Company continue to be exposed to catastrophic losses.
General and administrative expenses increased 337.7% to $11,292,398 for the
three-month period ended June 30, 2007 from $2,579,902 for the three-month
period ended June 30, 2006. The increase in general and administrative expenses
was due to several factors. Commission expense increased by approximately
$7,800,000 due to the increase in direct written premium. The increase in
commission expense was offset by an increase in ceding commissions of
approximately $13,200,000 due to an increase in ceded written premium and a
higher commission rate. Ceded written premium increased due to the increase in
direct written premium as well as changes in UPCIC's reinsurance program.
Compensation expense increased nearly $2,700,000 as the Company hired additional
staff and increased incentive compensation in order to retain existing staff to
support the substantial growth of the Company. General and administrative
expenses also increased approximately $3,600,000 due to the purchase of a
catastrophe risk-linked transaction product that protects the Company from
catastrophic losses. There was an increase in expenses in the approximate amount
of $5,900,000 for the change in deferred policy acquisition costs, net of
deferred ceding commissions, which relates to an increase in direct and ceded
unearned premiums as well as changes in UPCIC's reinsurance program. Premium
taxes increased nearly $1,100,000 as a result of the increase in direct written
premium. Expenses related to assessments decreased approximately $1,800,000 as
there were no assessments incurred by UPCIC during the second quarter of 2007.
As the UPCIC's balance of premiums receivable increased as a result of the
increase in production, the Company recorded an additional allowance for
doubtful accounts in the approximate amount of $400,000. Interest expense
increased approximately $500,000 due to outstanding debt balances on the Florida
State Board of Administration surplus note and Benfield Greig (Holdings), Inc.
secured promissory note described in the "Liquidity and Capital Resources"
section below. Other general and administrative expenses increased approximately
$1,700,000 primarily due to increases in premium volume
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company's primary sources of cash flow are the receipt of premiums,
commissions, policy fees, investment income, reinsurance recoverables and
short-term loans.
20
For the six-month period ended June 30, 2007, cash flows provided by operating
activities were $33,448,401. 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
entirely of cash, overnight repurchase agreements and a money market account.
The Company believes that its current capital resources are sufficient to
support current operations and expected growth for at least twelve months.
COMPANY BORROWINGS
In June 2005, the Company borrowed monies from two private investors and issued
two promissory notes for the aggregate principal sum of $1,000,000 payable in 10
monthly installments of $100,000. Payment on one note commenced in July 31, 2006
and commenced on the other note on November 30, 2006. As of March 28, 2007,
these loans were fully paid. The loan proceeds were subsequently 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 exercised price of $.05 per share, expiring in
June 2010. These transactions were approved by the Company's Board of Directors.
In order to improve the Company's financial position and achieve profitable
operations, management has implemented rate increases for new and renewal
business, has restructured the homeowners' coverage offered, has restructured
its catastrophic reinsurance coverage to reduce cost, and has worked to control
general and administrative expenses. However, there can be no assurance of the
ultimate success of these plans, or that the Company will be able to maintain
profitability.
On November 9, 2006, UPCIC entered into a $25.0 million surplus note with the
Florida State Board of Administration under Florida's Insurance Capital Build-Up
Incentive Program. Under the program, which was implemented by the Florida
legislature to encourage insurance companies to write additional residential
insurance coverage in Florida, the State Board of Administration matched UPCIC's
funds of $25.0 million that were earmarked for participation in the program. The
surplus note brings the current capital and surplus of UPCIC to approximately
$82.5 million. The $25.0 million is invested in a treasury money market account.
The surplus note has a twenty-year term and accrues interest at a rate
equivalent to the 10-year U.S. Treasury Bond Rate, adjusted quarterly based on
the 10-year Constant Maturity Treasury rate. For the first three years of the
term of the surplus note, UPCIC is required to pay interest only, although
principal payments can be made during this period. Any payment of principal or
interest by UPCIC on the surplus note must be approved by the Commissioner of
Florida's OIR.
An event of default will occur under the surplus note if UPCIC: (i) defaults in
the payment of the surplus note; (ii) fails to meet at least a 2:1 ratio of net
premium to surplus ("Minimum Writing Ratio") requirement by June 1, 2007; (iii)
fails to submit quarterly filings to the OIR; (iv) fails to maintain at least
$50 million of surplus during the term of the surplus note, except for certain
situations; (v) misuses proceeds of the surplus note; (vi) makes any
misrepresentations in the application for the program; or (vii) pays any
dividend when principal or interest payments are past due under the surplus
21
note. As of June 30, 2007, the Company is in compliance with each of the
aforementioned loan covenants except for the Minimum Writing Ratio.
If UPCIC fails to increase its writing ratio for two consecutive quarters prior
to June 1, 2007, fails to obtain the 2:1 Minimum Writing Ratio by June 1, 2007,
or drops below the 2:1 Minimum Writing Ratio once it is obtained for two
consecutive quarters, the interest rate on the surplus note will increase during
such deficiency by 25 basis points if the resulting writing ratio is between
1.5:1 and 2:1 and the interest rate will increase by 450 basis points if the
writing ratio is below 1.5:1. If the writing ratio remains below 1.5:1 for three
consecutive quarters after June 1, 2007, UPCIC must repay a portion of the
surplus note so that the Minimum Writing Ratio will be obtained for the
following quarter.
To meet its matching obligation under the Insurance Capital Build-Up Incentive
Program, on November 3, 2006, the Company entered into a Secured Promissory Note
with Benfield Greig (Holdings), Inc. in the aggregate principal amount of $12
million. Interest on the note accrues at the rate of 12.75% per annum. The
outstanding principal is due in six monthly installments of $1.5 million and a
final seventh monthly installment of the remaining balance plus all accrued
interest under the terms of the note starting on January 31, 2007 and ending on
July 31, 2007. In connection with the loan, the Company and its subsidiaries
appointed Benfield Inc. as their reinsurance intermediary for all of their
reinsurance placements for the contract year beginning on June 1, 2007. As of
June 30, 2007, the Company had made the first six payments in accordance with
the Note. Final payment was made on July 18, 2007.
There can be no assurance that the above described transactions will be
sufficient to ensure UPCIC's future compliance with Florida insurance
regulations, or that the Company will be able to maintain profitability. Failure
by UPCIC to maintain the required level of statutory capital and surplus could
result in the suspension of UPCIC's authority to write new or renewal business,
other regulatory actions or ultimately, in the revocation of UPCIC's certificate
of authority by the OIR.
AVAILABLE CASH
The balance of cash and cash equivalents at June 30, 2007 is $256,049,954, most
of which is available to pay claims. A portion of those paid losses would be
recoverable through the Company's catastrophic reinsurance 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 OIR. To
retain its certificate of authority, the Florida insurance laws and regulations
require that UPCIC maintain capital and surplus equal to the statutory minimum
capital and surplus requirement defined in the Florida Insurance Code as the
greater of 10% of the insurer's total liabilities or $4,000,000. UPCIC's
statutory capital and surplus was $82,678,719 at June 30, 2007 and exceeded the
minimum capital and surplus requirements. UPCIC is also required to adhere to
prescribed premium-to-capital surplus ratios.
The maximum amount of dividends which can be paid by Florida insurance companies
without prior approval of the OIR Commissioner is subject to restrictions
relating to statutory surplus. The maximum dividend that may be paid by UPCIC
22
without prior approval is limited to the lesser of statutory net income from
operations of the preceding calendar year or 10.0% of statutory unassigned
surplus as of the preceding year end. Statutory unassigned surplus (deficit) at
December 31, 2006 was $(1,088,159).
The Company is required to comply with the National Association of Insurance
Commissioners' ("NAIC") Risk-Based Capital ("RBC") requirements. RBC
requirements prescribe a method of measuring the amount of capital appropriate
for an insurance company to support its overall business operations in light of
its size and risk profile. NAIC's RBC requirements are used by regulators to
determine appropriate regulatory actions relating to insurers who show signs of
weak or deteriorating condition. As of December 31, 2006, based on calculations
using the appropriate NAIC RBC formula, the Company's reported total adjusted
capital was in excess of the requirements.
CASH DIVIDENDS
On March 15, 2007, the Company declared a dividend of $.07 per share on its
outstanding common stock to be paid on August 10, 2007 to the shareholders of
record of the Company at the close of business on July 20, 2007. The dividend
payable as of June 30, 2007 in the amount of $2,446,392 was subsequently paid on
August 10, 2007. During the second quarter, the Company paid a dividend of $.05
per share of outstanding Common Stock that was accrued at December 31, 2006. The
aggregate amount of the dividend was $1,747,423. On July 12, 2007, the Company's
Board of Directors declared a dividend of $.08 per share on its Common Stock.
The dividend is payable on October 22, 2007 to stockholders of record as of
September 27, 2007.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the six months ended June
30, 2007.
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, the role of federal or state government
in the insurance market, judicial or other authoritative interpretations of laws
23
and policies, 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 home 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
and to further disperse its geographic risk. 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, the
competitive environment, 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 maintain or 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.
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 "150
year Probable Maximum Loss" ("PML") as of the beginning of hurricane season on
June 1 of each year. UPCIC's reinsurance program consists of excess of loss,
quota share and catastrophe reinsurance for multiple hurricanes. UPCIC's
catastrophe reinsurance program currently covers three events. However, UPCIC
may not buy enough reinsurance to cover multiple storms going forward or be able
to timely obtain reinsurance. In addition, UPCIC is responsible for losses
related to catastrophic events with incurred losses in excess of coverage
provided by the UPCIC's reinsurance program such as losses beyond approximately
24
the 150 year PML which could have a material adverse effect on UPCIC's and the
Company's business, financial condition and results of operations.
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 $45,000,000 for the first event
and $9,300,000 for the second and third events up to approximately the 150 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. Future increases in
catastrophe reinsurance costs are possible and could adversely affect 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 and the Company. In addition, while ceding
premiums to reinsurers reduces UPCIC's risk of exposure in the event of
catastrophic losses, it also reduces the UPCIC's potential for greater profits
should such catastrophic events fail to occur. The Company believes that the
extent of UPCIC's 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. 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.
25
The profitability and financial condition of UPCIC and the Company 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 UPCIC's payment
of that loss. As required by insurance regulations and accounting rules, UPCIC
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.
When a claim involving a probable loss is reported, UPCIC establishes a
liability for the estimated amount of UPCIC'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"). UPCIC utilizes
independent actuaries to help establish its liability for unpaid losses and LAE.
UPCIC 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, UPCIC 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 UPCIC, the homeowners' liability
claims historically tend to have longer time lapses between the occurrence of
the event, the reporting of the claim to UPCIC 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 UPCIC's liability for unpaid losses and LAE will
be adequate to cover actual losses. If UPCIC's liability for unpaid losses and
LAE proves to be inadequate, UPCIC will be required to increase the liability
with a corresponding reduction in UPCIC's net income in the period in which the
26
deficiency is identified. Future loss experience substantially in excess of
established liability for unpaid losses and LAE could have a material adverse
effect on UPCIC's and the Company's business, results of operations and
financial condition.
GOVERNMENT REGULATION
Florida insurance companies are subject to regulation and supervision by the
Florida Office of Insurance Regulation ("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; review of reinsurance
contracts; 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 and actions by the OIR could adversely affect
the Company.
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.
LEGISLATIVE INITIATIVES
The State of Florida operates Citizens Property Insurance Corporation
("Citizens") to provide insurance to Florida homeowners in high-risk areas and
others without private insurance options. As of June 30, 2007, there were
1,308,431 Citizens policies in force. In May 2007, the State of Florida passed
legislation that freezes property insurance rates for Citizens customers at
December 2006 levels through December 31, 2008 and permits private insurance
customers to opt into Citizens when the price of a private policy is 15% more
than the Citizens rate, compared to the previous opt-in threshold of 25%. These
initiatives, together with any future initiatives that seek to further relax
eligibility requirements or reduce premium rates for Citizens customers, could
adversely affect the ability of UPCIC and the Company to do business profitably.
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 and the Company's financial condition and
results of operations.
27
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 private insurance
companies as well as Citizens 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.
ITEM 3. CONTROLS AND PROCEDURES
The Company carried out an evaluation under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the
period covered by this report. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that disclosure
controls and procedures were effective as of the end of the period covered by
this report to ensure that information required to be disclosed by the Company
in its reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms. There was
no change in the Company's internal controls over financial reporting that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company did not have any reportable legal proceedings during the six months
ending June 30, 2007. Certain claims and complaints have been filed or are
pending against the Company with respect to various matters. In the opinion of
management, none of these lawsuits is material, and they are adequately provided
for or covered by insurance or, if not so covered, are without any or have
little merit or involve such amounts that if disposed of unfavorably would not
have a material adverse effect on the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 14, 2007, the Company issued 250,000 shares of restricted common stock
at a price of $3.70 per share to an employee in consideration for services
rendered pursuant to the terms of an employee agreement. The shares will vest
over a three year period. On May 1, 2007, the Company issued 22,143 shares of
restricted common stock at a price of $1.87 per share, on a "cashless" basis, to
James M. Lynch, CFO of the Company, pursuant to Mr. Lynch's exercise of stock
options. Also on May 1, 2007, the Company issued 387,234 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Norman M.
Meier, a director of the Company, pursuant to Mr. Meier's exercise of stock
28
options. Also on May 1, 2007, the Company issued 77,447 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Joel
Wilentz, a director of the Company, pursuant to Mr. Wilentz's exercise of stock
options. Also on May 1, 2007, the Company issued 77,447 shares of restricted
common stock at a price of $1.06 per share, on a "cashless" basis, to Reed
Slogoff, a director of the Company, pursuant to Mr. Slogoff's exercise of stock
options. Unless otherwise specified, such as in the case of the exercise of
stock options or warrants, the per share prices were determined using the
closing price of the Company's common stock as quoted on the OTC Bulletin Board
or the AMEX and the shares were issued in private transactions pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 18, 2007 in Fort
Lauderdale, Florida. The following proposals were adopted at the meeting.
Proposal Election of two directors by holders of Series M Preferred Stock
1A:
Name For Withheld Abstain Broker Non-Vote
---- --- -------- ------- ---------------
Bradley I. Meier 88,690 0 0 0
0 0 0
Norman M. Meier 88,690
Proposal Election of four directors by holders of Common Stock, Series A Preferred Stock and Series M Preferred Stock,
1B: voting together as a class
Name For Withheld Abstain Broker Non-Vote
---- --- -------- ------- ---------------
Sean P. Downes 28,846,123 132,600 0 0
Reed J. Slogoff 28,953,153 25,600 0 0
Joel M. Wilentz 28,953,153 25,600 0 0
Ozzie A. Schindler 28,953,153 25,600 0 0
Proposal 2: Amendment of the Company's certificate of incorporation to increase the number of authorized shares of
Common Stock from 50,000,000 shares to 55,000,000 shares
29
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
28,789,894 187,453 1,406 0
Proposal 3: Approval of the formulas used to calculate performance bonuses in each of the amended employment
agreements of the Chief Executive Officer and the Chief Operating Officer of the Company
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
23,008,722 1,632,640 14,306 0
Proposal 4: Ratification of appointment of Blackman Kallick Bartelstein LLP as the Company's independent registered
public accounting firm for the year ending December 31, 2007.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
28,954,803 23,850 100 0
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS
Exhibit No. Exhibit
----------- -------
3.1 Registrant's Restated Amended and Restated Certificate of
Incorporation (1)
3.2 Certificate of Designation for Series A Convertible Preferred
Stock dated October 11, 1994 (2)
3.3 Certificate of Designations, Preferences, and Rights of Series M
Convertible Preferred Stock dated August 13, 1997 (3)
3.4 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated October 19, 1998 (2)
3.5 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated December 18, 2000 (2)
3.6 Certificate of Amendment of Certificate of Designations of the
Series A Convertible Preferred Stock dated October 29, 2001 (2)
30
3.7 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated December 7, 2005 filed herewith
3.8 Certificate of Amendment of Amended and Restated Certificate of
Incorporation dated May 18, 2007 filed herewith
11.1 Statement Regarding Computation of Per Share Income
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Title 18, United States Code, Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(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 December 31, 2002 filed on April 9, 2003
(3) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended April 30, 1997 filed on August 13, 1997, as
amended
31
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNIVERSAL INSURANCE HOLDINGS, INC.
Date: August 13, 2007 /s/ Bradley I. Meier
----------------------------------------
Bradley I. Meier, President and Chief
Executive Officer
/s/ James M. Lynch
----------------------------------------
James M. Lynch, Chief Financial Officer
32