BAM Has 'Record Quarter'

Build America Mutual's primary market volume surged past $3 billion for the first time in the second quarter as the bond insurer posted the largest increase in claims-paying resources since its founding in 2012.

Volume rose to $3.2 billion in par insurance priced, from $2.9 billion in the year-earlier quarter, BAM reported in an internet posting on Aug 12. The mutually owned company reported $3.22 billion of bonds priced in the quarter, as its claims paying resources increased by $10.1 million. The pre-tax loss under general accepted accounting principles narrowed from a year earlier, as near record low interest rates continued to pose a challenge to bond insurers.

"It was a record quarter for BAM, as we wrapped $259 million of par in secondary markets, up 178% from the first quarter of this year," said Sean McCarthy, chief executive officer of BAM. "BAM's claims-paying resources also grew at a record pace, rising $10 million to $617 million reflecting positive cashflow. The conservative nature of BAM's portfolio was highlighted when Congress adopted legislation that allows for court-supervised restructuring of debts sold by U.S. territories and Puerto Rico defaulted on more than$700 million of general obligation bonds."

BAM has no exposure to Puerto Rico, and according to McCarthy, its underwriting standards exclude insurance for any territorial debts.

"We now offer pre-sale Credit Profiles so investors in BAM-insured bonds can obtain standardized financial information on a timely basis. This results in greater investor demand for BAM-insured bonds, including increasing interest from institutional investors," he said.

White Mountains Insurance Group LTD., an insurance holding company that maintains a portfolio of insurance-related investments that gave the insurer its startup investment when it was founded in 2012, on Aug. 3 reported a $9 million and $17 million of GAAP pre-tax loss related to BAM in the second quarter and first six months of 2016, compared to GAAP pre-tax loss of $14 million and $23 million in the second quarter and first six months of last year.

BAM's affairs are managed on a statutory accounting basis, and it does not report stand-alone GAAP financial results. BAM's statutory net loss was $8 million in both the second quarter of 2016 and the second quarter of last year. As a mutual insurance company that is owned by its members, BAM's results do not affect White Mountains's book value per share or adjusted book value per share. However, White Mountains is required to consolidate BAM's results in its GAAP financial statements and its results are attributed to non-controlling interests.

Each municipal issuer insured by BAM becomes a "member" of BAM. The cost of policies issued by BAM is comprised of a risk premium and a contribution to BAM's qualified statutory capital (a "member surplus contribution").

"We continued to see the trend towards larger transactions — the average primary-market transaction up 9% from first quarter — as well as strong growth in the secondary market business ($259 million, up 178% from first quarter). Both of those reflect increasing demand for our guaranty from institutional investors," said McCarthy.