Municipal Bond Guarantee

9 Months Ended

Sep. 30, 2013

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 September 30, 2013, White Mountains owned 97.3% of HG Global’s preferred equity and 88.7% 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 of $428.2 million at September 30, 2013, 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 and nine months ended September 30, 2013, HG Global had pre-tax income of $10.5 million and $28.2 million, which included $10.1 million and $30.2 million of interest income on the BAM surplus notes. For the three and nine months ended September 30, 2013, BAM had a pre-tax loss of $15.1 million and $60.2 million that was recorded in net loss attributable to non-controlling interests, which included $10.1 million and $30.2 million of interest expense on the BAM surplus notes. BAM manages its affairs on a statutory accounting basis. BAM’s statutory surplus includes surplus notes and is not reduced by accruals of interest expense on the surplus notes. BAM’s statutory surplus is reduced only after a payment of principal or interest has been approved by the New York Department of Financial Services.

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:



	September 30, 2013		December 31, 2012
Contracts issued and outstanding	483		3
Remaining weighted average contract period (in years)	13.7		10.4
Contractual debt service outstanding (in millions):
Principal	$	3,128.3	$	25.8
Interest	$	1,824.6	$	8.9
Gross unearned insurance premiums	$	8.1	$	.1