- BAM’s underwriting guidelines and credit policies permit BAM to insure only very low risk exposures;
- BAM’s mutual model permits capital growth to track insured portfolio growth, eliminating the need to “go public” to raise capital, to drive earnings growth to satisfy equity markets, or to engage in mission creep by taking on risks outside of the core municipal market; and
- In addition to its own strong capital base, BAM will have the benefit of collateralized first loss reinsurance protection for losses up to the first 15% of par on each policy written.
BAM is chartered to insure U.S. municipal bonds, exclusively. We guarantee only fixed rate, long-term, essential public purpose municipal bonds in core sectors for municipalities or municipal entities that are an integral part thereof or entities qualifying under Section 115 of the Internal Revenue Code. We do not insure riskier municipal exposures, such as healthcare, housing, variable rate notes or derivatives. In addition, to this low risk business rule, BAM has set very low single and aggregate risk limits.
CAPITAL GROWTH IN LINE WITH ISSUANCE
BAM is sizably capitalized, with half a billion dollars in initial funding (plus $100 million pledged in the collateral trusts), and BAM’s capital will grow as its insured portfolio grows. Each municipal issuer insured by BAM will become a “member” of BAM. The cost of the policy will be comprised of a risk premium and a contribution to BAM’s surplus (a “Member Surplus Contribution”), which fund the growth of BAM’s claims-paying resources. BAM’s claims-paying resources are further strengthened by first loss reinsurance protection up to 15% of each insured issue, which is collateralized and held in trusts. The combination of BAM’s low risk business, low single risk limits and strong capital resources results in low operating leverage on an absolute and risk-adjusted basis.
FINANCIAL ADVANTAGES FOR ISSUERS
In addition to interest cost savings, BAM provides issuers with other significant benefits. BAM members have the right to 1) receive future dividends when declared by the board and subject to regulatory approval; 2) to pay, at their option, only a 10-year risk premium up front at closing and annual premiums after 10 years if bonds are not refunded; and 3) to re-utilize the Member Surplus Contribution for the life of any refunding issue. Each of these elements of BAM membership is unique and will lower the long-term cost of public borrowing. (SEE COST OF BAM INSURANCE)
PUTTING POLICYHOLDERS’ INTERESTS FIRST
Another important feature of our structure relates to our governance. BAM’s Board includes three representatives of issuer members, who along with other Directors, must approve any changes to BAM’s credit policies, underwriting guidelines, surveillance procedures and investment guidelines. This includes any change in the types of municipal bonds that BAM insures and the single, sector and correlated risk limits that govern BAM’s underwriting.
BAM maintains a unique level of transparency with respect to its insured portfolio and each insured issuer. In order to allow issuers and investors in BAM-insured bonds to monitor our financial strength first-hand, each quarter BAM discloses claims-paying resources, leverage ratios, capital ratios and material information on its insured portfolio. And to increase liquidity and transparency of BAM-insured bonds, we publish obligor disclosure briefs on every issuer insured. These briefs are easily accessible by CUSIP, obligor, state or sector on our website. This information assists broker-dealers in meeting disclosure rules for secondary market issues.
In short, BAM’s mutual structure has created a new kind of bond insurer, one that aligns all stakeholder interests and supports the building and maintaining of exceptional financial strength and rating durability.
THE COST OF BAM INSURANCE. BAM charges a fee payable by the municipal issuer at closing from bond proceeds for the issuance of each municipal bond insurance policy. BAM allocates a portion of this fee as a Member Surplus Contribution (MSC), which gives the issuer the right to receive dividends. The remainder of the cost of the policy is a variable “Risk Premium” to compensate BAM and its reinsurer for the cost of risk.
In the event of a refunding, MSC from the original issuance will be reutilized and serve as a credit toward the insurance cost on the refunding bonds.
Alternatively, BAM will entertain charging the risk premium portion of the fee for only the first ten years up front. After 10 years, an annual premium, payable with each bond principal payment, will be paid to BAM as long as the insured bonds remain outstanding. As with the more traditional fee payment method, the MSC on the original issuance can be reutilized for refunding bonds.