NOTE 5. Debt, Letter of Credit Facilities and Trust Arrangements

Senior Unsecured Debt Due 2022 (“2022 Senior Notes”)

On October 5, 2012, the Company issued $300.0 million of 2022 Senior Notes. The 2022 Senior Notes bear interest at a fixed rate of 4.70% per annum, payable semi-annually in arrears on April 15 and October 15 of each year and were issued at a price of 99.682% of their principal amount, providing an effective yield to investors of 4.74%. The 2022 Senior Notes are scheduled to mature on October 15, 2022, and do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere. The Company may redeem the 2022 Senior Notes at any time, in whole or in part, at a “make-whole” redemption price, plus accrued and unpaid interest.

The net proceeds from the issuance of the 2022 Senior Notes, after deducting the issuance discount and debt issuance costs, were $296.4 million. The net proceeds were used to redeem the 2013 Senior Notes and for general corporate purposes. The debt issuance costs of $2.7 million have been capitalized within other assets on the Company’s consolidated balance sheets and are being amortized over the life of the 2022 Senior Notes.

The carrying value of the 2022 Senior Notes at June 30, 2013 and December 31, 2012, was $299.1 million.

The Company incurred interest expense on the 2022 Senior Notes of $3.5 million and $7.0 million during the three and six month periods ended June 30, 2013, respectively. The Company paid $7.4 million in interest on the 2022 Senior Notes during the six month period ended June 30, 2013.

Senior Unsecured Debt Due 2013 (“2013 Senior Notes”)

During 2003 the Company issued $250.0 million of 2013 Senior Notes. The 2013 Senior Notes bore interest at a fixed rate of 6.125% per annum, payable semi-annually in arrears on February 15 and August 15 of each year and were scheduled to mature on August 15, 2013.

On November 5, 2012, the Company fully redeemed the 2013 Senior Notes at a “make-whole” redemption price of $237.6 million (104.2% of the principal thereof), plus accrued and unpaid interest to the redemption date. At the time of redemption, the remaining principal amount of the 2013 Senior Notes was $227.9 million.

The Company incurred interest expense on the 2013 Senior Notes of $3.5 million and $7.0 million during the three and six month periods ended June 30, 2012, respectively. The Company paid $7.0 million in interest on the 2013 Senior Notes during the six month period ended June 30, 2012.

Trust Preferred Securities

In January 2006 the Company, through Montpelier Capital Trust III, participated in a private placement of $100.0 million of capital securities (the “Trust Preferred Securities”). The Trust Preferred Securities mature on March 30, 2036, are redeemable at Montpelier Capital Trust III’s option at par, and require quarterly distributions of interest to the holders. The Trust Preferred Securities bear interest at a floating rate of 3-month LIBOR plus 380 basis points, reset quarterly. This floating rate varied from 4.07% to 4.11% during the six month period ended June 30, 2013, and from 4.26% to 4.38% during the six month ended June 30, 2012.

The Company incurred interest expense on the Trust Preferred Securities of $1.1 million during each of the three month periods ended June 30, 2013 and 2012, respectively, and $2.1 million and $2.2 million during the six month periods ended June 30, 2013 and 2012, respectively. The Company paid $2.1 million and $2.2 million in interest on the Trust Preferred Securities during the six month periods ended June 30, 2013 and 2012, respectively.

The Trust Preferred Securities do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere.

LIBOR Swap

On February 7, 2012, the Company entered into a five-year swap agreement with a third party (the “LIBOR Swap”) which will result in the future net cash flows in connection with the Trust Preferred Securities, for the five-year period beginning March 30, 2012, being the same as if these securities bore interest at a fixed rate of 4.905%, provided the Company holds the swap agreement to its maturity. Net realized and unrealized gains and losses associated with the LIBOR Swap are reported within net income (loss) from derivative instruments on the Company’s consolidated statement of operations, as opposed to interest and financing expenses. See Note 6.

Letter of Credit Facilities

In the normal course of business, Montpelier Re maintains letter of credit facilities and provides letters of credit to third parties as a means of providing collateral and/or statutory credit in varying amounts to certain of its cedants. These letter of credit facilities were secured by collateral accounts containing cash and investments totaling $32.1 million and $128.0 million at June 30, 2013 and December 31, 2012, respectively. The following table outlines these facilities as of June 30, 2013:

Secured operational Letter of Credit Facilities	Total Capacity		Amount Drawn		Expiry Date
Four Year Committed Facility	$	75.0	$	2.3	Oct. 2016
Bilateral Facility	75.0		23.0		None

The agreements governing these letter of credit facilities contain covenants that limit Montpelier’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain burdensome agreements. In addition, the secured facilities require the Company to maintain debt leverage of no greater than 30% and Montpelier Re to maintain an A.M. Best financial strength rating of no less than “B++”. If the Company or Montpelier Re were to fail to comply with these covenants or fail to meet these financial ratios, the lenders could revoke the facilities and exercise remedies against the collateral. As of June 30, 2013 and December 31, 2012, the Company and Montpelier Re were in compliance with all covenants.

The Four Year Committed Facility is subject to an annual commitment fee of between 0.25% and 0.35% on drawn balances (depending on the type of collateral provided) and 0.125% on undrawn balances.

The Bilateral Facility is subject to an annual commitment fee of 0.45%. The commitment fee on this facility is charged on drawn balances only.

Trust Arrangements

In 2012 Blue Water Re commenced its operations and established the Blue Water Trusts as a means of providing collateralized reinsurance protection to its cedants.

In 2011 Montpelier Re established the MUSIC Trust as a means of providing statutory credit to MUSIC.

In 2010 Montpelier Re established the Reinsurance Trust as a means of providing statutory credit to certain of Montpelier Re’s U.S. cedants.

In 2011 Montpelier Re established the FL Trust in connection with its reduced collateral requirements to cedants domiciled in Florida.

In 2010 Montpelier established the Lloyd’s Capital Trust in order to meet MCL’s ongoing FAL requirements.

See Note 4 for further information regarding the aforementioned trust agreements.