Derivatives

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives

NSM Interest Rate Swap

On June 15, 2018, NSM entered into an interest rate swap agreement to hedge its exposure to interest rate risk on $151.0 million of its USD denominated variable rate term loans under the NSM Bank Facility. Under the terms of the swap agreement, NSM pays a fixed rate of 2.97% and receives a variable rate, which is reset monthly, based on the then-current USD-LIBOR. As of September 30, 2020, the variable rate received by NSM under the swap agreement was 1.00%. Over the term of the swap, the notional amount decreases in accordance with the principal repayments NSM expects to make on its term loans. As of September 30, 2020, the interest rate, including the effect of the swap, for the outstanding term loans of $148.0 million that are hedged by the swap was 8.72%, excluding the effect of debt issuance costs. NSM’s obligations under the swap are secured by the same collateral securing the NSM Bank Facility on a pari passu basis. NSM does not currently hold any collateral deposits from or provide any collateral deposits to the swap counterparty.

NSM evaluated the effectiveness of the swap to hedge its interest rate risk associated with its variable rate debt and concluded at the swap inception date that the swap was highly effective in hedging that risk. NSM evaluates the effectiveness of the hedging relationship on an ongoing basis.

For the three and nine months ended September 30, 2020, White Mountains recognized net interest expense of $0.6 million and $1.9 million for the periodic net settlement payments on the swap. For the three and nine months ended September 30, 2019, White Mountains recognized net interest expense of $0.3 million and $0.6 million. As of September 30, 2020 and December 31, 2019, the estimated fair value of the swap and the accrual of the periodic net settlement payments recorded in other liabilities was $8.9 million and $6.6 million. There was no ineffectiveness in the hedge for the three and nine months ended September 30, 2020 and September 30, 2019. For the three and nine months ended September 30, 2020, the $0.5 million and $(2.3) million change in the fair value of the swap is included within White Mountains’s accumulated other comprehensive income (loss). For the three and nine months ended September 30, 2019, the $(0.8) million and $(5.1) million change in the fair value of the swap is included within White Mountains’s accumulated other comprehensive income (loss).

NSM Interest Rate Cap

On June 4, 2020, NSM entered into an interest rate cap agreement to limit its exposure to the risk of interest rate increases on the GBP denominated term loan under the NSM Bank Facility. The notional amount of the interest rate cap is £42.5 million (approximately $52.4 million based upon the foreign exchange spot rate as of the date of the transaction) and the termination date is June 4, 2022. On August 18, 2020, NSM entered into a separate interest rate cap agreement to extend the term of the original interest rate cap agreement by one year. The second interest rate cap agreement has an effective date of June 15, 2022 and a termination date of June 15, 2023.

NSM paid total initial premiums of approximately $0.1 million for the interest rate caps. Under the terms of the interest rate cap agreements, if the current GBP-LIBOR at the measurement date exceeds 1.25%, NSM will receive payments from the counterparty equal to the then-current GBP-LIBOR rate, less the 1.25% cap rate. As of September 30, 2020, the GBP-LIBOR rate was 0.06%.

NSM accounts for the interest rate caps as derivatives at fair value, with changes in fair value recognized in current period earnings within interest expense. For the three months and nine months ended September 30, 2020, White Mountains recognized a change in fair value of $(0.1) million on the interest rate caps within interest expense. As of September 30, 2020, the estimated fair value of the caps recorded in other assets was less than $0.1 million.