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

Senior Unsecured Debt Due 2022 (“Senior Notes”)

On October 5, 2012, the Company issued $300.0 million in principal amount of Senior Notes. The 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 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 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 Senior Notes, after deducting the issuance discount and debt issuance costs, were $296.4 million. The debt issuance costs of $2.7 million associated with the Senior Notes have been capitalized within other assets in the Company’s consolidated balance sheets and will be amortized over the life of the Senior Notes.

The carrying value of the Senior Notes at March 31, 2014 and December 31, 2013, was $299.2 million.

The Company incurred interest expense on the Senior Notes of $3.5 million during each of the three month periods ended March 31, 2014 and 2013, respectively. The Company was not obligated to pay any interest on the Senior Notes during the three month periods ended March 31, 2014 and 2013.

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 equal to the 3-month LIBOR plus 380 basis points, reset quarterly. This floating rate varied from 4.03% to 4.05% and from 4.08% to 4.11% during the three month periods ended March 31, 2014 and 2013, 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.

The Company incurred and paid interest on the Trust Preferred Securities of $1.0 million during each of the three month periods ended March 31, 2014 and 2013, respectively.

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 LIBOR Swap 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 statements of operations and comprehensive income, as opposed to interest and financing expenses. The fair value of the LIBOR Swap is derived based on other observable (Level 2) inputs. 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 $31.9 million and $32.0 million as of March 31, 2014 and December 31, 2013, respectively. The following table outlines these facilities as of March 31, 2014:

Secured Operational Letter of Credit Facilities	Total Capacity		Amount Drawn		Expiry Date

Bilateral Facility	$	75.0	$	18.9	None
Four Year Committed Facility	75.0		2.3		Oct. 2016

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 March 31, 2014 and December 31, 2013, the Company and Montpelier Re were in compliance with all covenants.

Montpelier Re’s Bilateral Facility, which has a capacity of $75.0 million, is subject to an annual commitment fee of 0.45%. The commitment fee is charged on drawn balances only. As of March 31, 2014, there were $18.9 million in outstanding letters of credit drawn under this facility.

In October 2012 Montpelier Re entered into the Four Year Committed Facility with a commercial bank for the provision of a secured letter of credit facility. This facility, which has a capacity of $75.0 million, 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. As of March 31, 2014, there were $2.3 million in outstanding letters of credit drawn under this facility.

Trust Arrangements

Blue Water Re and Blue Capital Re have each established trusts as a means of providing collateralized reinsurance protection to its cedants.

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

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

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

Montpelier has 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.