Bermuda-based White Mountains Insurance Group is funding a new mutual municipal bond insurer to guarantee US state and municipal debt.Build America Mutual Assurance Co (BAM) will start with $600 million of initial capital and its business will be backed by a Bermuda special purpose insurer, HG Re Ltd.As a mutual, BAM will be owned by the issuers of municipal bonds that it insures. It will insure bonds of up to $75 million. BAM has been licensed by New York State’s insurance regulator.Yesterday New York Governor Andrew Cuomo hailed the creation of the new company which he said would help “small local governments raise the funds they need to build necessary projects, while saving taxpayers’ money”.Cities and states issuing bonds pay premiums to bond insurers to guarantee their debt. This saves them money, because investors will accept lower interest rates for bonds guaranteed by strongly rated companies.The new company will be of particular value now, given the shaky state the finances of many US local government authorities which have been hard hit by the slow economy.BAM is the brainchild of bond insurance veterans Robert Cochran and Sean McCarthy, founders of Hudson-Greenwich Partners LLC.BAM’s funding has come from HG Global, in which White Mountains an 89 percent stake in its common equity and 98 percent of its preferred equity. Management owns the remaining equity.Ray Barrette, chairman and CEO of White Mountains, said: “Bob and Sean, our old partners from Financial Security Assurance (FSA), have created a unique organisation to serve the municipal finance market.“We are very excited to be part of such an innovative solution to the financing needs of local governments. BAM expects to write its first policies in September.”Mr Cochran co-founded Financial Security Assurance Inc (FSA), once the largest insurer of municipal bonds before being acquired by Bermuda-based rival Assured Guaranty. Mr McCarthy was Assured Guaranty’s chief operating officer after it bought FSA in 2009.The new company will provide some competition for Assured Guaranty, the only company that still offers insurance in the $2.8 trillion municipal bond market.The market was left without a AAA-rated bond insurer, after many insurers suffered huge losses ventured beyond their core municipal bond markets to insure mortgages that soured during the US housing market collapse from 2007.Assured Guaranty was the last to lose its AAA rating in October 2010, after industry giants MBIA and Ambac were stripped of their top ratings in 2008. BAM is rated AA by Standard & Poor’s with a stable outlook.White Mountains said in a statement yesterday that HG Global has provided the initial capitalisation of BAM through the purchase of approximately $500 million of BAM surplus notes.HG Re provides first loss reinsurance protection for policies underwritten by BAM. HG Re’s obligations to BAM are collateralised in NY trusts.HG Re has contributed $300 million of BAM surplus notes and $100 million in cash to the collateral trusts as initial reinsurance capital support. The reinsurance treaty between BAM and HG Re is continuous with limited amendment provisions in order to guarantee BAM the long-term support it requires for its obligations.