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 the initial capitalization of BAM, a newly formed mutual municipal bond insurer. As of December 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. At inception, BAM and HG Re also entered into a first loss reinsurance treaty (“FLRT”). HG Re provides first loss 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.

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 8.0% to a variable rate equal to the one-year U.S. treasury rate plus 300 basis points, set annually, which was 3.54%, 3.78% and 4.60% for 2016, 2017 and 2018. 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 on the BAM Surplus Notes and $1.0 million on the accrued interest during the year ended December 31, 2017.

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, Series A Notes were merged with the Series B Notes.

Under GAAP, if the terms of a debt instrument are amended, unless there is a greater than 10% change in the expected discounted future cash flows of such instrument, a change in the instrument’s carrying value is not permitted. White Mountains has determined that the impact of the changes made during 2017 to the terms of the BAM Surplus Notes on the expected discounted future cash flows was not greater than 10%.

As of December 31, 2017 and 2016, the collateral trusts held assets of $715.1 million and $465.4 million, which included $499.0 million and $300.0 million of BAM Surplus Notes. As of December 31, 2017, HG Global has accrued $126.0 million of interest receivable on the BAM Surplus Notes.

The following table presents a schedule of BAM’s insured obligations as of December 31, 2017 and 2016:



	December 31, 2017		December 31, 2016
Contracts outstanding	6,371		4,807
Remaining weighted average contract period (in years)	10.9		10.8
Contractual debt service outstanding (in millions):
Principal	$	42,090.6	$	33,057.3
Interest	21,057.1		16,396.6
Total debt service outstanding	$	63,147.7	$	49,453.9

Gross unearned insurance premiums	$	136.8	$	82.9

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



Millions	December 31, 2017
January 1, 2018 - March 31, 2018	$	2.9
April 1, 2018 - June 30, 2018	2.9
July 1, 2018 - September 30, 2018	2.9
October 1, 2018 - December 31, 2018	2.8
	11.5

2019	11.1
2020	10.7
2021	10.2
2022	9.7
2023 and thereafter	83.6
Total gross unearned insurance premiums	$	136.8

The following table presents a schedule of net written premiums included in White Mountains’s HG Global/BAM segment for the years ended December 31, 2017, 2016 and 2015:



Millions	December 31, 2017		December 31, 2016		December 31, 2015
Gross written premiums	$	63.2	$	38.6	$	25.9
Assumed (ceded) written premiums	—		—		—
Net written premiums	$	63.2	$	38.6	$	25.9