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Derivatives
 9 Months Ended
Sep. 30, 2015
Derivatives
Derivatives
Variable Annuity  
Derivatives
Variable Annuity Reinsurance
White Mountains has entered into agreements to reinsure death and living benefit guarantees associated with certain variable annuities in Japan. At September 30, 2015 and December 31, 2014, the total guarantee value was approximately ¥76.3 billion (approximately $637.2 million at exchange rates on that date) and ¥134.2 billion (approximately $1.1 billion at exchange rates on that date), respectively. The collective account values of the underlying variable annuities were approximately 107% and 113% of the guarantee value at September 30, 2015 and December 31, 2014.  During the second quarter of 2015, the variable annuity contracts reinsured by WM Life Re began to mature.  WMLife Re is in runoff, and all of its contracts will mature by June 30, 2016.
The following table summarizes the pre-tax operating results of WM Life Re for the three and nine months ended September 30, 2015 and 2014.
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2015
 
2014
 
2015
 
2014
Fees, included in other revenue
 
$
2.1

 
$
4.5

 
$
7.7

 
$
15.0

Change in fair value of variable annuity liability,
   included in other revenue
 
(2.8
)
 
19.9

 
(1.7
)
 
40.5

Change in fair value of derivatives, included in other revenue
 
1.5

 
(23.8
)
 
(6.3
)
 
(56.5
)
Foreign exchange, included in other revenue
 
.4

 
(1.7
)
 
(.8
)
 
(1.2
)
Other investment income and (losses) gains
 
(.2
)
 
(.9
)
 
(.3
)
 
(.4
)
Total revenue
 
1.0

 
(2.0
)
 
(1.4
)
 
(2.6
)
Change in fair value of variable annuity death benefit liabilities,
   included in other general and administrative expenses
 
—

 
.2

 
—

 
.6

Death benefit claims paid, included in general and
   administrative expenses
 
—

 
—

 
—

 
(.1
)
General and administrative expenses
 
(.8
)
 
(.9
)
 
(3.1
)
 
(3.3
)
Pre-tax income (loss)
 
$
.2

 
$
(2.7
)
 
$
(4.5
)
 
$
(5.4
)

 
The following summarizes realized and unrealized derivative gains (losses) recognized in other revenue for the three and nine months ended September 30, 2015 and 2014 and the carrying values, included in other assets, at September 30, 2015 and December 31, 2014 by type of instrument:
 
 
Gains (losses)
 
Carrying Value
 
 
Three Months Ended
 
Nine Months Ended
 
As of
 
 
September 30,
 
September 30,
 
September 30,
2015
 
December 31, 2014
Millions
 
2015
 
2014
 
2015
 
2014
 
 
Fixed income/interest rate
 
$
2.6

 
$
(8.4
)
 
$
6.0

 
$
(20.4
)
 
$
—

 
$
(1.7
)
Foreign exchange
 
(3.1
)
 
(.4
)
 
(6.0
)
 
(13.3
)
 
27.9

 
44.1

Equity
 
2.0

 
(15.0
)
 
(6.3
)
 
(22.8
)
 
9.1

 
14.0

Total
 
$
1.5

 
$
(23.8
)
 
$
(6.3
)
 
$
(56.5
)
 
$
37.0

 
$
56.4



The following tables summarize the changes in White Mountains’s variable annuity reinsurance liabilities and derivative instruments for the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended September 30, 2015
 
 
Variable Annuity
Assets
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
1.8

 
$
8.3

 
$
32.5

 
$
(5.1
)
 
$
35.7

Purchases
 
—

 
—

 
—

 
—

 
—

Realized and unrealized gains (losses)
 
(2.8
)
 
3.4

 
3.2

 
(5.1
)
 
1.5

Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
(.5
)
 
(7.8
)
 
8.1

 
(.2
)
End of period
 
$
(1.0
)
 
$
11.2

 
$
27.9

 
$
(2.1
)
 
$
37.0

 
 
Nine Months Ended September 30, 2015
 
 
Variable Annuity
Assets
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
.7

 
$
18.9

 
$
33.8

 
$
3.7

 
$
56.4

Purchases
 
—

 
—

 
—

 
—

 
—

Realized and unrealized gains (losses)
 
(1.7
)
 
(5.5
)
 
(2.7
)
 
1.9

 
(6.3
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
(2.2
)
 
(3.2
)
 
(7.7
)
 
(13.1
)
End of period
 
$
(1.0
)
 
$
11.2

 
$
27.9

 
$
(2.1
)
 
$
37.0


 
 
Three Months Ended September 30, 2014
 
 
Variable Annuity
Assets
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
(31.8
)
 
$
53.3

 
$
22.3

 
$
(.8
)
 
$
74.8

Purchases
 
—

 
—

 
—

 
—

 
—

Realized and unrealized gains (losses)
 
20.1

 
(17.4
)
 
(19.8
)
 
13.4

 
(23.8
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
—

 
22.5

 
(8.2
)
 
14.3

End of period
 
$
(11.7
)
 
$
35.9

 
$
25.0

 
$
4.4

 
$
65.3


 
 
Nine Months Ended September 30, 2014
 
 
Variable Annuity
(Liabilities)
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
(52.8
)
 
$
63.4

 
$
4.7

 
$
1.1

 
$
69.2

Purchases
 
—

 
—

 
—

 
—

 
—

Realized and unrealized gains (losses)
 
41.1

 
(27.5
)
 
(42.1
)
 
13.1

 
(56.5
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
—

 
62.4

 
(9.8
)
 
52.6

End of period
 
$
(11.7
)
 
$
35.9

 
$
25.0

 
$
4.4

 
$
65.3

(1) Consists of over-the-counter instruments.
(2) Consists of interest rate swaps, total return swaps, foreign currency forward contracts, and bond forwards. Fair value measurement based upon bid/ask pricing quotes for similar instruments that are actively traded, where available.  Swaps for which an active market does not exist have been priced using observable inputs including the swap curve and the underlying bond index.
(3) Consists of exchange traded equity index, foreign currency and interest rate futures. Fair value measurements based upon quoted prices for identical instruments that are actively traded.

In addition to derivative instruments, WM Life Re held cash and fixed maturity investments posted as collateral to its variable annuity reinsurance counterparties.  The total collateral includes the following:
Millions
 
September 30, 2015
 
December 31, 2014
 
September 30, 2014
Cash
 
$
16.8

 
$
23.7

 
$
23.8

Fixed maturity investments
 
—

 
9.5

 
10.4

Total
 
$
16.8

 
$
33.2

 
$
34.2



    
Collateral in the form of fixed maturity securities consists of Government of Japan Bonds, which are recorded at fair value. Collateral in the form of short-term investments consists of money-market instruments, carried at amortized cost, which approximates fair value. 
All of White Mountains’s variable annuity reinsurance liabilities were classified as Level 3 measurements at September 30, 2015 and 2014. The fair value of White Mountains’s variable annuity reinsurance liabilities are estimated using actuarial and capital market assumptions related to the projected discounted cash flows over the term of the reinsurance agreement. Actuarial assumptions regarding future policyholder behavior, including surrender and lapse rates, are generally unobservable inputs and significantly impact the fair value estimates. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates as well as the variations in actuarial assumptions regarding policyholder behavior may result in significant fluctuations in the fair value estimates. Generally, the liabilities associated with these guarantees increase with declines in the equity markets, interest rates and currencies against the Japanese yen, as well as with increases in market volatilities. White Mountains uses derivative instruments, including put options, interest rate swaps, total return swaps on bond and equity indices and forwards and futures contracts on major equity indices, currency pairs and government bonds, to mitigate the risks associated with changes in the fair value of the reinsured variable annuity guarantees. The types of inputs used to estimate the fair value of these derivative instruments, with the exception of actuarial assumptions regarding policyholder behavior and risk margins, are generally the same as those used to estimate the fair value of variable annuity liabilities.
The following summarizes quantitative information about significant unobservable inputs associated with the fair value estimates for variable annuity reinsurance liabilities and derivative instruments that have been classified as Level 3 measurements:
 ($ in Millions)
 
September 30, 2015
Description
 
Fair 
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
 
Weighted
Average
Variable annuity benefit guarantee liabilities
 
$
1.0

 
Discounted cash flows
 
Surrenders
 
 
 
 
 
 
 
 
 
 
     0-1 year
 
0.1
 %
-
40.0%
 
40.0
%
 

 
 
 
Mortality
 
0.0
 %
-
6.4%
 
1.0
%
 

 
 
 
Foreign exchange volatilities
 
 
 
 
 
 
 
 
 
 
 
 
     0-1 year
 
11.6
 %
-
18.6%
 
12.5
%
 
 
 
 
 
 
Index volatilities
 
 
 
 
 
 
 
 
 
 
 
 
     0-1 year
 
26.2
 %
-
29.9%
 
28.2
%
Foreign exchange options
 
$
2.6

 
Counterparty valuations, adjusted for unwind quote discount
 
Adjustment to counterparty valuations
 
0.5
 %
-
11.6%
 
3.7
%
 

 
 
 
 
 
 
 
Equity index options
$
8.6

 
Counterparty valuations, adjusted for unwind quote discount
 
Adjustment to counterparty valuations
 
(0.7
)%
-
6.5%
 
2.0
%
 
 
 
 
 
 
 
 
 


WM Life Re enters into both over-the-counter (“OTC”) and exchange traded derivative instruments to economically hedge the liability from the variable annuity benefit guarantee.  In the case of OTC derivatives, WM Life Re has exposure to credit risk for amounts that are uncollateralized by counterparties. WM Life Re’s internal risk management guidelines establish net counterparty exposure thresholds that take into account OTC counterparties’ credit ratings. The OTC derivative contracts are subject to restrictions on liquidation of the instruments and distribution of proceeds under collateral agreements. 
In the case of exchange traded instruments, WM Life Re has exposure to credit risk for amounts uncollateralized by margin balances. WM Life Re has entered into master netting agreements with certain of its counterparties whereby the collateral provided (held) is calculated on a net basis. The following summarizes amounts offset under master netting agreements:
 
 
September 30, 2015
 
December 31, 2014
Millions
 
Gross asset amounts before offsets (1)
 
Gross liability amounts offset under master netting arrangements
 
Net amounts recognized in Other Assets
 
Gross asset amounts before offsets (1)
 
Gross liability amounts offset under master netting arrangements
 
Net amounts recognized in Other Assets
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
OTC
 
$
.5

 
$
(.8
)
 
$
(0.3
)
 
$
1.0

 
$
(5.4
)
 
$
(4.4
)
Exchange traded
 
.3

 
(.1
)
 
.2

 
2.8

 
(.1
)
 
2.7

Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
OTC
 
27.9

 
—

 
27.9

 
45.5

 
—

 
45.5

Exchange traded
 
.1

 
(.1
)
 
—

 
—

 
(1.4
)
 
(1.4
)
Equity contracts
 
 
 
 
 
 
 
 
 
 
 
 
OTC
 
11.5

 
—

 
11.5

 
11.7

 
(.2
)
 
11.5

Exchange traded
 
—

 
(2.3
)
 
(2.3
)
 
3.4

 
(.9
)
 
2.5

Total(2)
 
$
40.3

 
$
(3.3
)
 
$
37.0

 
$
64.4

 
$
(8.0
)
 
$
56.4

(1) Amount equal to fair value of instrument as recognized in other assets
(2) All derivative instruments held by WM Life Re are subject to master netting arrangements.

The following summarizes the value, collateral held or provided by WM Life Re and net exposure to credit losses on OTC and exchange traded derivative instruments by counterparty recorded within other assets:
 
 
September 30, 2015
Millions
 
Net amount of assets reflected in Balance Sheet
 
Collateral provided to counterparty - Cash
 
Collateral provided to counter-party - Financial Instruments
 
Net amount of exposure after effect of collateral provided
 
Excess collateral provided to counter-party- Cash
 
Excess collateral provided - Financial Instruments
 
Counter-party collateral held by WMLife Re - Cash
 
Net amount of exposure to counter-party
 
Standard
& Poor's
Rating(1)
Bank of America
 
$
3.2

 
$
—

 
$
—

 
$
3.2

 
$
—

 
$
—

 
$
—

 
$
3.2

 
A
 
Barclays
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
A
-
JP Morgan
 
15.9

 
—

 
—

 
15.9

 
—

 
—

 
5.9

 
10.0

 
A
+
Royal Bank
   of Scotland
 
1.5

 
—

 
—

 
1.5

 
—

 
—

 
—

 
1.5

 
BBB
+
Nomura
 
(.1
)
 
.1

 
—

 
—

 
1.4

 
—

 
—

 
1.4

 
BBB
+
Citigroup - OTC
 
18.6

 
—

 
—

 
18.6

 
—

 
—

 
5.3

 
13.3

 
A
 
Citigroup -
  Exchange Traded
 
(2.1
)
 
2.1

 
—

 
—

 
12.8

 
—

 
—

 
12.8

 
A
 
   Total
 
$
37.0

 
$
2.2

 
$
—

 
$
39.2

 
$
14.2

 
$
—

 
$
11.2

 
$
42.2

 
 
 

 
 
December 31, 2014
 
Millions
 
Net amount of assets reflected in Balance Sheet
 
Collateral provided to counter-party - Cash
 
Collateral provided to counter-party - Financial Instruments
 
Net amount of exposure after effect of collateral provided
 
Excess collateral provided to counter-party- Cash
 
Excess collateral provided - Financial Instruments
 
Counter-party collateral held by WMLife Re- Cash
 
Net amount of exposure to counter-party
 
Standard
& Poor's
Rating(1)
Bank of America
 
$
5.6

 
$
—

 
$
—

 
$
5.6

 
$
—

 
$
—

 
$
—

 
$
5.6

 
A
 
Barclays
 
.1

 
—

 
—

 
.1

 
—

 
—

 
—

 
.1

 
A
 
JP Morgan
 
24.3

 
—

 
—

 
24.3

 
—

 
—

 
8.8

 
15.5

 
A
+
Royal Bank
   of Scotland
 
4.0

 
—

 
—

 
4.0

 
—

 
—

 
—

 
4.0

 
A
-
Nomura
 
(3.5
)
 
3.5

 
—

 
—

 
1.7

 
9.5

 
—

 
11.2

 
BBB
+
Citigroup - OTC
 
22.2

 
—

 
—

 
22.2

 
—

 
—

 
1.1

 
21.1

 
A
 
Citigroup -
   Exchange Traded
 
3.7

 
—

 
—

 
3.7

 
16.0

 
—

 
—

 
19.7

 
A
 
   Total
 
$
56.4

 
$
3.5

 
$
—

 
$
59.9

 
$
17.7

 
$
9.5

 
$
9.9

 
$
77.2

 
 
 
(1) Standard & Poor’s ratings as detailed above are: “A+” (Strong, which is the fifth highest of twenty-three creditworthiness ratings), “A” (Strong, which is the sixth highest of twenty-three creditworthiness ratings), “A-” (Strong, which is the seventh highest of twenty-three creditworthiness ratings) and
“BBB+” (Adequate, which is the eighth highest of twenty-three creditworthiness ratings).
Tranzact Interest Rate Swap  
Derivatives
Tranzact Interest Rate Swap
Tranzact has a $101.0 million term loan facility that carries a variable rate equal to the U.S. dollar LIBOR rate, plus an applicable margin. At September 30, 2015, the variable interest rate on the term loan was 4.70%, including a margin over LIBOR of 4.50%. Effective October 10, 2014, to effectively fix the rate it pays on this term loan, Tranzact entered into an interest rate swap agreement with an initial notional amount of $70.0 million. The notional amount decreases over the term of the swap by amounts equivalent to scheduled principal repayments made on Tranzact’s term loan. Under the terms of the swap agreement, Tranzact pays a fixed rate of 1.34% and receives a variable rate, which is reset monthly, based on the then-current U.S. dollar LIBOR rate. The variable rate received by Tranzact under the swap agreement was 0.15% at inception and 0.20% at September 30, 2015. The total current effective rate on Tranzact's debt was 6.04% at September 30, 2015.
The swap is measured at fair value with changes therein recognized within other revenues and is accounted for as a non-hedge derivative instrument. As of September 30, 2015, the estimated fair value of the swap was $(0.8) million. There are no collateral arrangements associated with the swap.