Municipal Bond Guarantee Insurance

In 2012, HG Global was capitalized with $594.5 million from White Mountains and $14.5 million from non-controlling interests to fund BAM, a newly formed mutual municipal bond insurer. As of September 30, 2018, White Mountains owned 96.9% of HG Global’s preferred equity and 88.4% of its common equity. HG Global, together with its subsidiaries, provided the initial capitalization of BAM through the purchase of $503.0 million of BAM Surplus Notes. At inception, BAM and HG Re also entered into a first loss reinsurance treaty (“FLRT”). HG Re provides first loss reinsurance protection up to 15% of par outstanding on each municipal bond insured by BAM. In return, BAM cedes 60% of the risk premium charged for insuring the municipal bond, net of a ceding commission. During 2017, HG Global and BAM made certain changes to the ceding commission arrangements under the FLRT. These changes serve to accelerate growth in BAM's statutory capital but do not impact the net risk premium ceded from BAM to HG Re. HG Re’s obligations to BAM are collateralized in trusts, and there is an aggregate loss limit that is equal to the total assets in the collateral trusts at any point in time.

The interest rate on the BAM Surplus Notes for the five years ending December 31, 2018 is a variable rate equal to the one-year U.S. treasury rate plus 300 basis points, set annually, which is 4.60% for 2018 and was 3.78% for 2017. Prior to the end of 2018, BAM has the option to extend the variable rate period for an additional three years. At the end of the variable rate period, the interest rate will be fixed at the higher of the then current variable rate or 8.0%. No payment of interest or principal on the BAM Surplus Notes may be made without the approval of the New York State Department of Financial Services (“NYDFS”). BAM has stated its intention to seek regulatory approval to pay interest and principal on its surplus notes only to the extent that its remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, business plan and its AA stable rating from S&P. BAM repaid $4.0 million of the BAM Surplus Notes and $1.0 million of the related accrued interest in 2017. There were no repayments for the three and nine months ended September 30, 2018.

In order to further support BAM’s long-term capital position and business prospects, in 2017 HG Global agreed to contribute the $203.0 million of Series A BAM Surplus Notes (“Series A Notes”) into the supplemental collateral trust (the “Supplemental Trust”) at HG Re. The Supplemental Trust already held the $300.0 million of Series B BAM Surplus Notes (“Series B Notes”). Assets held in the Supplemental Trust serve to collateralize HG Re’s obligations to BAM under the FLRT. HG Global and BAM also changed the payment terms of the Series B Notes, so that payments will reduce principal and accrued interest on a pro rata basis, consistent with the payment terms on the Series A Notes. The terms of the Series B Notes had previously stipulated that payments would first reduce interest owed, then reduce principal owed once all accrued interest had been paid. The Supplemental Trust target balance is equal to approximately $603.0 million. As the BAM Surplus Notes are repaid over time, the BAM Surplus Notes will be replaced in the Supplemental Trust by cash and fixed income securities. The collateral trust balances must be at target levels before capital can be distributed out of the Supplemental Trust. In connection with the contribution, the Series A Notes were merged with the Series B Notes.

As of September 30, 2018 and December 31, 2017, the collateral trusts held assets of $741.7 million and $715.1 million, which both included $499.0 million of BAM Surplus Notes. As of September 30, 2018 and December 31, 2017, HG Global has accrued $143.2 million and $126.0 million of interest receivable on the BAM Surplus Notes.

The following table presents a schedule of BAM’s insured obligations:



	September 30, 2018		December 31, 2017
Contracts outstanding	7,184		6,371
Remaining weighted average contract period outstanding (in years)	10.8		10.9
Contractual debt service outstanding (in millions):
Principal	$	47,259.1	$	42,090.6
Interest	23,707.4		21,057.1
Total debt service outstanding	$	70,966.5	$	63,147.7

Gross unearned insurance premiums	$	156.2	$	136.8

The following table presents a schedule of BAM’s future premium revenues as of September 30, 2018:



Millions	September 30, 2018
October 1, 2018 - December 31, 2018	$	3.3

January 1, 2019 - March 31, 2019	3.3
April 1, 2019 - June 30, 2019	3.3
July 1, 2019 - September 30, 2019	3.3
October 1, 2019 - December 31, 2019	3.2
Total 2019	13.1

2020	12.6
2021	12.1
2022	11.5
2023 and thereafter	103.6
Total gross unearned insurance premiums	$	156.2

The following table presents a schedule of net written premiums included in White Mountains’s HG Global/BAM segment for the three months years ended September 30, 2018 and 2017:



	Three Months Ended September 30,				Nine Months Ended September 30,
Millions	2018		2017		2018		2017
Gross written premiums	$	3.9	$	10.9	$	28.9	$	42.0
Assumed (ceded) written premiums	—		—		—		—
Net written premiums	$	3.9	$	10.9	$	28.9	$	42.0

In April 2018, BAM entered into a collateralized financial guarantee excess of loss reinsurance agreement with Fidus Re, a special purpose insurer. The agreement has a term of twelve years, but is callable by BAM after five years, and covers all polices written prior to December 31, 2017, excluding non-investment grade bonds and surety policies. Under the agreement, BAM retains the first $165.0 million of aggregate losses, before giving effect to HG’s reinsurance coverage, on the ceded business. Losses above BAM's $165.0 million retention will be split pro rata between BAM and Fidus Re, with BAM retaining 10% and Fidus Re assuming the remaining 90% of the losses under the agreement. The losses covered under the agreement may not exceed the principal and interest amount of the underlying bond guarantee during the risk period. The aggregate loss limit under the agreement is $276.1 million. Because the agreement does not meet the risk transfer requirements necessary to be accounted for as reinsurance, the agreement is accounted for using deposit accounting and any related financing expenses are recorded in general and administrative expenses.