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 March 31, 2017, 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. Through HG Re, which had statutory capital and surplus of $467.4 million at December 31, 2016, HG Global provides first loss reinsurance protection for policies underwritten by BAM of up to 15% of par outstanding, on a per policy basis. 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.

For the three months ended March 31, 2017, HG Global had pre-tax income of $6.6 million, which included $4.8 million of interest income on the BAM Surplus Notes. For the three months ended March 31, 2016, HG Global had pre-tax income of $7.3 million, which included $4.5 million of interest income on the BAM Surplus Notes.

For the three months ended March 31, 2017, White Mountains reported pre-tax losses of $12.2 million on BAM that were recorded in net loss attributable to non-controlling interests, which included $4.8 million of interest expense on the BAM Surplus Notes. For the three months ended March 31, 2016, White Mountains reported pre-tax losses of $7.6 million on BAM that were recorded in net loss attributable to non-controlling interests, which included $4.5 million of interest expense on the BAM Surplus Notes.

Effective January 1, 2014, HG Global and BAM agreed to change the interest rate on the BAM Surplus Notes for the five years ending December 31, 2018 from a fixed rate of 8% to a variable rate equal to the one-year U.S. treasury rate plus 300 basis points, set annually, which is 3.54% and 3.78% for 2016 and 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%. BAM is required to seek regulatory approval to pay interest and principal on its surplus notes only when adequate capital resources have accumulated beyond BAM’s initial capitalization and a level that continues to support its outstanding obligations, business plan and ratings.

All of the contracts issued by BAM are accounted for as insurance contracts under ASC 944-605, Financial Guarantee Insurance Contracts. Premiums are received upfront and an unearned premium revenue liability, equal to the amount of the cash received, is established at contract inception. Premium revenues are recognized in revenue over the period of the contracts in proportion to the amount of insurance protection provided using a constant rate. The constant rate is calculated based on the relationship between the par outstanding in a given reporting period compared with the sum of each of the par amounts outstanding for all periods.

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



	March 31, 2017		December 31, 2016
Contracts outstanding	5,191		4,807
Remaining weighted average contract period outstanding (in years)	10.8		10.8
Contractual debt service outstanding (in millions):
Principal	$	35,222.1	$	33,057.3
Interest	17,589.9		16,396.6
Total debt service outstanding	$	52,812.0	$	49,453.9

Gross unearned insurance premiums	$	99.8	$	83.0

The following table is a schedule of BAM’s future premium revenues as of March 31, 2017:



Millions	March 31, 2017
April 1, 2017 - December 31, 2017	$	6.3

January 1, 2018 - March 31, 2018	2.1
April 1, 2018 - June 30, 2018	2.0
July 1, 2018 - September 30, 2018	2.0
October 1, 2018 - December 31, 2018	2.0
	8.1

2019	7.8
2020	7.4
2021	7.0
2022 and thereafter	63.2
Total gross unearned insurance premiums	$	99.8