Build America Mutual, the only mutual insurer of U.S. municipal bonds, said it will add to its internal capital growth and expand its claims-paying resources by $100 million through a collateralized reinsurance agreement with Fidus Re Ltd., a special-purpose insurer created solely to provide collateralized reinsurance protection to BAM.

Sean McCarthy, CEO of Build America Mutual.
Seán W. McCarthy

“As a mutual insurer, BAM was designed to generate unparalleled capital strength to support its guaranty and benefit our investors and issuer members,” said Seán W. McCarthy, chief executive officer of BAM. “We have delivered on that promise with capital strength well in excess of rating agency and regulatory requirements. This transaction, the first of its kind, is a creative way for us to expand that surplus even further, at an attractive price, which speaks to the quality of BAM's insured portfolio and the strength of BAM's position in the marketplace.”

The company said the reinsurance protection is scheduled to become effective during the second quarter. A person familiar with the transaction said Fidus Re will sell $100 million of insurance-linked securities and deposit the proceeds into a trust account.

The reinsurance covers nearly all of the exposures in BAM’s portfolio as of Dec. 31, 2017, the person said. If losses on those transactions were to exceed $165 million, the funds in the Fidus account would be tapped to pay 90% of the losses beyond that amount. The protection will be in force for up to 12 years. The structure may be a template for mutual insurers in other insurance sectors.

“Having a stable and durable foundation of financial strength allows BAM to remain focused on our mission: Providing efficient capital markets access to U.S. public sector issuers who finance essential public infrastructure, and serving municipal bond investors with durable ratings, transparency, and protection against default,” said Robert Cochran, BAM Chairman. “This foundation was built into our structure from day one when BAM was organized as a mutual insurer, has continued as we have grown our capital base organically, and is further enhanced today by the Fidus transaction.”

Kroll Bond Rating Agency rates the Fidus RE notes AA, while BAM is rated AA by S&P Global Ratings.

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Aaron Weitzman

Aaron Weitzman

Aaron Weitzman is a markets reporter for The Bond Buyer, focusing on the sell side of the municipal bond market.