Derivatives

3 Months Ended

Mar. 31, 2017

Derivatives

Derivatives

Variable Annuity Reinsurance

White Mountains entered into agreements to reinsure death and living benefit guarantees associated with certain variable annuities in Japan. During the third quarter of 2015, the variable annuity contracts reinsured by WM Life Re began to mature and were fully runoff by June 30, 2016. The reinsurance agreement was commuted in December 2016.

The following table summarizes the pre-tax operating results of WM Life Re for the three months ended March 31, 2016.

	Three Months Ended
	March 31,
Millions		2016
Fees, included in other revenue		$	1.0
Change in fair value of variable annuity liability,    included in other revenue		(.4		)
Change in fair value of derivatives, included in other revenue		(1.7		)
Foreign exchange, included in other revenue		.9
Other investment income and losses		—
Total revenue		(.2		)
Death benefit claims paid, included in general and administrative expenses		(.1		)
General and administrative expenses		(.8		)
Pre-tax loss		$	(1.1	)

The following summarizes realized and unrealized derivative gains (losses) recognized in other revenue for the three months ended March 31, 2016 and the carrying values, included in other assets, as of December 31, 2016 by type of instrument:

	Gains (losses)
	Three Months Ended			Carrying Value
	March 31,			As of
Millions	2016			December 31, 2016
Fixed income/interest rate	$	1.8		$	—
Foreign exchange	(4.2		)	—
Equity	.7			—
Total	$	(1.7	)	$	—

The following tables summarize the changes in White Mountains’s variable annuity reinsurance liabilities and derivative instruments for the three months ended March 31, 2016.

	Three Months Ended March 31, 2016
	Variable Annuity Liabilities			Derivative Instruments
Millions	Level 3			Level 3 (1)			Level 2 (1)(2)			Level 1 (3)			Total
Beginning of period	$	.3		$	2.7		$	16.5		$	.9		$	20.1
Purchases	—			—			—			—			—
Realized and unrealized (losses) gains	(.4		)	1.2			1.1			(4.0		)	(1.7		)
Transfers in	—			—			—			—			—
Sales/settlements	—			(1.3		)	(7.3		)	3.3			(5.3		)
End of period	$	(.1	)	$	2.6		$	10.3		$	.2		$	13.1

⁽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.

All of White Mountains’s variable annuity reinsurance liabilities were classified as Level 3 measurements. The fair value of White Mountains’s variable annuity reinsurance liabilities were 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, were generally unobservable inputs and significantly impacted the fair value estimates. Generally, the liabilities associated with these guarantees increased with declines in the equity markets, interest rates and currencies against the Japanese yen, as well as with increases in market volatilities. White Mountains used derivative instruments 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, were generally the same as those used to estimate the fair value of variable annuity liabilities.

WM Life Re entered 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 had exposure to credit risk for amounts that were uncollateralized by counterparties. WM Life Re’s internal risk management guidelines established net counterparty exposure thresholds that took into account OTC counterparties’ credit ratings. The OTC derivative contracts were 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 had exposure to credit risk for amounts uncollateralized by margin balances. WM Life Re had master netting agreements with certain of its counterparties whereby the collateral provided (held) was calculated on a net basis. The following summarizes amounts offset under master netting agreements:

	March 31, 2016
Millions	Gross asset amounts before offsets (1)		Gross liability amounts offset under master netting arrangements			Net amounts recognized in Other Assets
Interest rate contracts
OTC	$	2.2	$	(2.5	)	$	(.3	)
Foreign exchange contracts
OTC	12.7		—			12.7
Exchange traded	—		(.1		)	(.1		)
Equity contracts
OTC	1.5		(.9		)	.6
Exchange traded	.3		(.1		)	.2
Total(2)	$	16.7	$	(3.6	)	$	13.1

⁽¹⁾ Amount equal to fair value of instrument as recognized in other assets

⁽²⁾ All derivative instruments held by WM Life Re were subject to master netting arrangements.

There were no open derivatives instruments and no exposure to credit losses on OTC and exchanged traded derivatives subsequent to June 30, 2016.

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 as of March 31, 2016:

	March 31, 2016
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 WM Life Re- Cash		Net amount of exposure to counter-party		Standard & Poor's Rating(1)
JP Morgan	$	6.5	$	—	$	—	$	6.5	$	—	$	—	$	5.4	$	1.1	A	+
Bank of America	1.4		—		—		1.4		—		—		—		1.4		A
Citigroup - OTC	5.0		—		—		5.0		—		—		.5		4.5		A
Citigroup - Exchange Traded	.2		—		—		.2		7.9		—		—		8.1		A
Total	$	13.1	$	—	$	—	$	13.1	$	7.9	$	—	$	5.9	$	15.1

⁽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).

Forward Contracts

Derivatives

Forward Contracts

White Mountains investment portfolio contains investment grade fixed maturity investments denominated in British Pound Sterling (GBP) and common equity securities denominated in Euro (EUR). White Mountains entered into foreign currency forward contracts to manage its GBP and EUR foreign currency exposure. The contracts do not meet the criteria to be accounted for as a hedge. White Mountains monitors its exposure to foreign currency and adjusts its foreign currency positions within the risk guidelines and ranges established by senior management. While White Mountains actively manages its foreign currency positions, mismatches between movements in foreign currency rates and its foreign currency forward contract may result in foreign currency positions being outside pre-defined ranges and/or foreign currency losses. At March 31, 2017, White Mountains held $299.9 million (GBP 200.0 million and EUR 50.0 million) total gross notional value of foreign currency forward contracts.

White Mountains’s foreign currency forward contracts are traded over-the-counter. The fair value of the contracts have been estimated using OTC quotes for similar instruments and accordingly, the measurements have been classified as Level 2 measurements at March 31, 2017.

The net realized and unrealized derivative loss recognized in net realized and unrealized investment gains (losses) for the period ended March 31, 2017 was $3.0 million. White Mountains’s forward contracts are subject to master netting agreements. As of March 31, 2017 and December 31, 2016, the gross liability amount offset under the master netting agreement and the net amount recognized in other long-term investments was $(4.2) million and $(1.2) million.

White Mountains does not hold or provide any collateral under its forward contracts.  The following table summarizes the notional amount and the uncollateralized balance associated with the forward currency contracts:

	March 31, 2017
Millions	Notional Amount		Carrying Value			Standard & Poor's  Rating (1)
Barclays Bank PLC	$	247.2	$	(3.2	)	A-
JP Morgan	52.7		(1.0		)	A-
Total	$	299.9	$	(4.2	)

⁽¹⁾ Standard & Poor’s ratings “A-” (Strong, which is the ninth highest of twenty-one creditworthiness ratings).