The underwriter for our initial public offering surrendered 100,000 of the 450,000 unit purchase options it owned. They also agreed to accelerate the expiration date of their remaining 350,000 unit purchase options to October 4, 2010. The unit purchase options expired unexercised.
Multi-Line Per Risk Excess of Loss Reinsurance Agreement (Per Risk Agreement) between United Property & Casualty Insurance Company and Various Reinsurance Companies
Our SBA note requires that we maintain a 2:1 ratio of net written premium to surplus (the SBA note agreement defines surplus as the $20,000 of capital contributed to UPC under the agreement plus the outstanding balance of the note) or a 6:1 ratio of gross written premium to surplus to avoid additional interest penalties. At December 31, 2010, our net writing ratio was 1.7:1 and our gross writing ratio was 4:1, resulting in a default on the note. Since we did not meet either writing ratio established by the SBA, we must pay additional interest of 25 basis points during the first quarter of 2011. Should we fail to exceed either a net writing ratio of 1.5:1 or a gross writing ratio of 4.5:1, our interest rate will increase by 450 basis points above the stated rate of the note. Any other writing ratio deficiencies result in an interest rate penalty of 25 basis points above the stated rate of the note.
On September 30, 2008, we completed the acquisition of, and merger with, UIH. Since UIH was deemed the acquirer for accounting purposes, we accounted for the merger as a reverse acquisition and recapitalization with UIH being the surviving entity. Accordingly, our historical consolidated financial statements reflect the assets, liabilities and operations of UIH prior to the merger date, recorded on a historical cost basis. We then recorded and consolidated UIHC’s (formerly FMG’s) assets and liabilities at their fair value on the date of the merger.
Since the transaction costs did not exceed the $25,000 cash received in the transaction, we recorded the $2,891 of transaction costs associated with the merger as a reduction of Additional Paid-in Capital on our Consolidated Balance Sheets.
The states in which we operate require us, by statute, to maintain deposits to secure the payment of claims. In Florida, we have assigned a twelve-month, automatically renewing certificate of deposit in the amount of $300 to the state regulatory authority to satisfy the Florida requirement. In South Carolina, we have assigned a U.S. Treasury Note with a book value of $1,004 and a fair value of $1,008 to the state regulatory authority to satisfy the requirement. We report the certificate of deposit in Other Long-Term Investments, while we report the U.S. Treasury Note in Fixed Maturities. To obtain the approval of our application to write policies in Massachusetts, we purchased a Massachusetts municipal bond with a par value of $1,000 and assigned a tranche with a $100 par value to the state regulatory authority during 2010. At December 31, 2010, the book value of the assigned tranche was $104 and the fair value was $98. We expect to begin writing policies in Massachusetts during 2011.
The SBA note states that if we fail to exceed either a net writing ratio of 1:1 or a gross writing ratio of 3:1 for three consecutive quarters, we will be obligated to repay a portion of the SBA note such that the appropriate minimum writing ratio will be obtained for the following quarter. Our SBA note further provides that the SBA may, among other things, declare its loan immediately due and payable for all defaults existing under the SBA note; however, the state regulatory authority in Florida would only authorize a payment to the SBA if such payment did not create a hazardous financial condition at UPC.
On September 29, 2008, we issued notes payable to two of our former stockholders as well as a note payable to United Noteholders, LLC, which is owned in part by one of our directors and is managed by two of our other directors. All three notes are part of the merger notes we issued on September 29, 2008. At December 31, 2009, these notes totaled $7,674, net of $390 discount. As described in Note 12, we repaid the merger notes in full in May 2010. For the years ended December 31, 2010, 2009 and 2008, total interest incurred related to these notes was $308, $892 and $222, respectively, and total discount amortized related to these notes was $70, $185 and $43, respectively. We also recognized a loss on the extinguishment of $726.