Municipal Bond Guarantee Insurance

12 Months Ended

Dec. 31, 2020

HG Global was established to fund the startup of BAM, a newly formed mutual municipal bond insurer, and, through HG Re, to provide up to 15%-of-par, first loss reinsurance protection for policies underwritten by BAM. At inception in 2012, HG Global was capitalized with $594.5 million from White Mountains and $14.5 million from non-controlling interests. HG Global, together with its subsidiaries, provided the initial capitalization of BAM through the purchase of $503.0 million of BAM Surplus Notes. As of December 31, 2020, White Mountains owned 96.9% of HG Global’s preferred equity and 88.4% of its common equity.

Reinsurance Treaties

FLRT

BAM is a party to a first loss reinsurance treaty (“FLRT”) with HG Re under which HG Re provides first loss protection up to 15%-of-par outstanding on each municipal bond insured by BAM. For capital appreciation bonds, par is adjusted to the estimated equivalent par value for current interest paying bonds. In return, BAM cedes up to 60% of the risk premium charged for insuring the municipal bond, which is net of a ceding commission. The FLRT is a perpetual agreement, with an initial term through the end of 2022.

Fidus Re

In addition to the FLRT, BAM is party to a collateralized financial guarantee excess of loss reinsurance agreement that serves to increase BAM’s claims paying resources and is provided by Fidus Re, Ltd. (“Fidus Re”), a Bermuda based special purpose insurer created in 2018 solely to provide reinsurance protection to BAM. Fidus Re was capitalized by the issuance of $100.0 million of insurance linked securities. The proceeds from issuance were placed in a collateral trust supporting Fidus Re’s obligations to BAM. The insurance linked securities were issued by Fidus Re with an initial term of 12 years and are callable five years after the date of issuance. Fidus Re reinsures 90% of aggregate losses exceeding $165.0 million on a portion of BAM’s financial guarantee portfolio (the “Covered Portfolio”) up to a total reimbursement of $100.0 million. The Fidus Re agreement does not provide coverage for losses in excess of $276.1 million. The Covered Portfolio consists of approximately 42% of BAM’s portfolio of financial guaranty policies issued through December 31, 2020. The agreement is accounted for using deposit accounting and any related financing expenses are recorded in general and administrative expenses as the agreement does not meet the risk transfer requirements necessary to be accounted for as reinsurance.

XOLT

In January 2020, BAM entered into an excess of loss reinsurance agreement (the “XOLT”) with HG Re. Under the XOLT, HG Re provides last dollar protection for exposures on municipal bonds insured by BAM in excess of NYDFS single issuer limits. The XOLT is subject to an aggregate limit equal to the lesser of $75.0 million or the assets held in the Supplemental Trust at any point in time. The agreement is accounted for using deposit accounting and any related financing expenses are recorded in general and administrative expenses as the agreement does not meet the risk transfer requirements necessary to be accounted for as reinsurance.

Collateral Trusts

HG Re’s obligations under the FLRT are limited to the assets in two collateral trusts: a Regulation 114 Trust and a supplemental collateral trust (the “Supplemental Trust” and together with the Regulation 114 Trust, the “Collateral Trusts”). Losses required to be reimbursed under the FLRT are subject to an aggregate limit equal to the assets held in the Collateral Trusts at any point in time.

At inception, the Supplemental Trust contained the original $300.0 million of Series B Notes and $100.0 million of cash and fixed income securities. During 2017, in order to further support BAM’s long-term capital position and business prospects, HG Global agreed to contribute the original $203.0 million of Series A Notes into the Supplemental Trust. In connection with the contribution, the Series A Notes were merged into the Series B Notes.

On a monthly basis, BAM deposits cash equal to ceded premiums, net of ceding commissions, due to HG Re under the FLRT directly into the Regulation 114 Trust. The Regulation 114 Trust target balance is equal to gross ceded unearned premiums and unpaid ceded loss and LAE expenses, if any. If, at the end of any quarter, the Regulation 114 Trust balance is below the target balance, funds will be withdrawn from the Supplemental Trust and deposited into the Regulation 114 Trust in an amount equal to the shortfall. If, at the end of any quarter, the Regulation 114 Trust balance is above 102% of the target balance, funds will be withdrawn from the Regulation 114 Trust and deposited into the Supplemental Trust. The Regulation 114 Trust balance as of December 31, 2020 and 2019 was $222.8 million and $190.3 million.

The Supplemental Trust target balance is $603.0 million, less the amount of cash and securities in the Regulation 114 Trust in excess of its target balance (the “Supplemental Trust Target Balance”). If, at the end of any quarter, the Supplemental Trust balance exceeds the Supplemental Trust Target Balance, such excess may be distributed to HG Re. The distribution will be made first as an assignment of accrued interest on the BAM Surplus Notes and second in cash and/or fixed income securities. 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 Supplemental Trust balance as of December 31, 2020 and 2019 was $604.3 million and $596.4 million.

As of December 31, 2020 and 2019, the Collateral Trusts held assets of $827.1 million and $786.7 million, which included $434.5 million and $321.6 million of cash and investments, $388.2 million and $457.6 million of BAM Surplus Notes and $4.4 million and $7.5 million of interest receivable on the BAM Surplus Notes.

BAM Surplus Notes

Through 2024, the interest rate on the BAM Surplus Notes is a variable rate equal to the one-year U.S. Treasury rate plus 300 basis points, set annually. During 2021, the interest rate on the BAM Surplus Notes will be 3.1%. Beginning in 2025, the interest rate will be fixed at the higher of the then current variable rate or 8.0%. BAM is required to seek regulatory approval to pay interest and principal on the BAM Surplus Notes only to the extent that its remaining qualified statutory capital and other capital resources continue to support its outstanding obligations, its business plan and its “AA/stable” rating from Standard & Poor’s. No payment of principal or interest on the BAM Surplus Notes may be made without the approval of the NYDFS.

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

In December 2020, BAM made a $30.1 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $21.5 million was a repayment of principal held in the Supplemental Trust, $0.2 million was a payment of accrued interest held inside the Supplemental Trust and $8.4 million was a payment of accrued interest held outside the Supplemental Trust.

In January 2020, BAM made a one-time $65 million cash payment of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $47.9 million was a repayment of principal held in the Supplemental Trust, $0.9 million was a payment of accrued interest held inside the Supplemental Trust and $16.2 million was a payment of accrued interest held outside the Supplemental Trust.

In December 2019, BAM made a $32.0 million cash payment (which included a one-time $10.0 million cash payment) of principal and interest on the BAM Surplus Notes held by HG Global. Of this payment, $23.7 million was a repayment of principal held in the Supplemental Trust, $0.3 million was a payment of accrued interest held in the Supplemental Trust and $8.0 million was a payment of accrued interest held outside the Supplemental Trust.

As of December 31, 2020 and 2019, total interest receivable on the BAM Surplus Notes was $155.7 million and $162.7 million.

Insured Obligations and Premiums

The following table presents a schedule of BAM’s insured obligations as of December 31, 2020 and 2019:


	December 31, 2020		December 31, 2019
Contracts outstanding	10,997		8,987
Remaining weighted average contract period (in years)	10.7		10.7
Contractual debt service outstanding (in millions):
Principal	$	75,287.7	$	62,250.5
Interest and capital appreciation	36,448.8		31,799.7
Total debt service outstanding	$	111,736.5	$	94,050.2

Gross unearned insurance premiums	$	237.5	$	198.4

The following table presents a schedule of BAM’s future premium revenues as of December 31, 2020:


Millions	December 31, 2020
January 1, 2021 - March 31, 2021	$	5.6
April 1, 2021 - June 30, 2021	5.5
July 1, 2021 - September 30, 2021	5.5
October 1, 2021 - December 31, 2021	5.4
	22.0
2022	20.9
2023	19.8
2024	18.3
2025	17.0
2026 and thereafter	139.5
Total gross unearned insurance premiums	$	237.5

The following table presents a schedule of written premiums and earned premiums included in White Mountains’s HG Global/BAM segment for the years ended December 31, 2020, 2019 and 2018:


Millions	December 31, 2020		December 31, 2019		December 31, 2018
Written premiums:
Direct	$	61.5	$	28.1	$	44.8
Assumed	.2		10.6		8.1
Gross written premiums	$	61.7	$	38.7	$	52.9
Earned premiums:
Direct	$	19.4	$	13.6	$	13.6
Assumed	3.4		2.7		.3
Gross earned premiums	$	22.8	$	16.3	$	13.9

In September 2019, BAM entered into facultative quota share reinsurance agreements under which it assumed a portfolio of municipal bond guarantee contracts with a par value of $1.1 billion. In the second quarter of 2020, BAM assumed an additional municipal bond guarantee contract with a par value of $36.9 million through an endorsement to the facultative quota share reinsurance agreement.

In November 2018, BAM entered into a 100% quota share facultative reinsurance agreement under which it assumed a portfolio of municipal bond guarantee contracts with a par value of $2.2 billion.

None of the contracts assumed under these reinsurance agreements were non-performing and no loss reserves have been established for any of the contracts, either as of the transaction dates or as of December 31, 2020. The agreements, which cover future claims exposure only, meets the risk transfer criteria under ASC 944-20, Insurance Activities and accordingly has been accounted for as reinsurance.