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Derivatives
 6 Months Ended
Jun. 30, 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 and six months ended June 30, 2016.
 
 
Three Months Ended
 
Six Months Ended
Millions
 
June 30, 2016
 
June 30, 2016
Fees, included in other revenue
 
$
.3

 
$
1.2

Change in fair value of variable annuity liability, included in other revenue
 
.1

 
(.3
)
Change in fair value of derivatives, included in other revenue
 
(.3
)
 
(2.0
)
Foreign exchange, included in other revenue
 
.4

 
1.3

Total revenue
 
.5

 
.2

Death benefit claims paid, included in general and administrative expenses
 
(.2
)
 
(.3
)
General and administrative expenses
 
(1.2
)
 
(1.9
)
Pre-tax loss
 
$
(.9
)
 
$
(2.0
)

 
The following summarizes realized and unrealized derivative gains (losses) recognized in other revenue for the three and six months ended June 30, 2016 and the carrying values, included in other assets, as of December 31, 2016 by type of instrument:
 
 
Gains (losses)
 
Carrying Value
 
 
Three Months Ended
 
Six Months Ended
 
As of
Millions
 
June 30, 2016
 
June 30, 2016
 
December 31, 2016
Fixed income/interest rate
 
$
—

 
$
1.8

 
$
—

Foreign exchange
 
(.6
)
 
(4.8
)
 
—

Equity
 
.3

 
1.0

 
—

Total
 
$
(.3
)
 
$
(2.0
)
 
$
—



The following tables summarize the changes in White Mountains’s variable annuity reinsurance liabilities and derivative instruments for the three and six months ended June 30, 2016.
 
 
Three Months Ended June 30, 2016
 
 
Variable Annuity
Liabilities
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
(.1
)
 
$
2.6

 
$
10.3

 
$
.2

 
$
13.1

Purchases
 
—

 
—

 
—

 
—

 
—

Realized and unrealized gains (losses)
 
.1

 
1.7

 
(1.8
)
 
(.2
)
 
(.3
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
(4.3
)
 
(8.5
)
 
—

 
(12.8
)
End of period
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
Six Months Ended June 30, 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
 
(.3
)
 
2.9

 
(.7
)
 
(4.2
)
 
(2.0
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
(5.6
)
 
(15.8
)
 
3.3

 
(18.1
)
End of period
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

(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.
Forward Contracts  
Derivatives
Forward Contracts
White Mountains’s investment portfolio contains investment grade fixed maturity investments denominated in British Pound Sterling (GBP) and common equity securities denominated in Euro (EUR) and other European currencies. White Mountains has entered into foreign currency forward contracts to manage its foreign currency exposure related to these investments. The contracts do not meet the criteria to be accounted for as a hedge. White Mountains actively manages its net foreign currency exposure and adjusts its foreign currency positions within ranges established by senior management. Mismatches between currency driven movements in foreign denominated investments and foreign currency forward contracts may result in net foreign currency positions being outside pre-defined ranges and/or net foreign currency gains/(losses). At June 30, 2017, White Mountains held $302.0 million (GBP 150.0 million and EUR 104.0 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 has been estimated using OTC quotes for similar instruments and accordingly, the measurements have been classified as Level 2 measurements at June 30, 2017.
The net realized derivative loss recognized in net realized and unrealized investment gains (losses) for both the three and six months ended June 30, 2017 was $1.7 million. The net unrealized derivative loss recognized in net realized and unrealized investment gains (losses) for the three and six months ended June 30, 2017 was $8.5 million and $11.3 million. White Mountains’s forward contracts are subject to master netting agreements. As of June 30, 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 $12.5 million and $1.2 million.
White Mountains does not hold or provide any collateral under its forward contracts.  The following table summarizes the gross notional amount associated with the forward currency contracts:
 
 
June 30, 2017
Millions
 
Notional Amount(1)
 
Carrying Value
 
Standard & Poor's Rating (2)
Barclays Bank PLC
 
$
187.3

 
$
(8.2
)
 
A-
JP Morgan
 
114.7

 
(4.3
)
 
A+
Total
 
$
302.0

 
$
(12.5
)
 
 
(1) At June 30, 2017, WTM entered into a spot trade of $57.0 (EUR 50.0) in anticipation of settling a forward currency contract (gross notional: $52.7 (EUR 50.0) with JP Morgan set to expire on July 6, 2017.
(2) Standard & Poor’s ratings as detailed above are: “A+” (Strong, which is the fifth highest of twenty-three creditworthiness ratings) and “A-” (Strong, which is the seventh highest of twenty-three creditworthiness ratings).