Derivatives

9 Months Ended

Sep. 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 September 30, 2016. The reinsurance agreement was commuted in December 2016. WM Life Re was liquidated in the third quarter of 2017.

The following table summarizes the pre-tax operating results of WM Life Re for the three and nine months endedSeptember 30, 2016.

	Three Months Ended			Nine Months Ended
Millions	September 30, 2016			September 30, 2016
Fees, included in other revenue	$	—		$	1.2
Change in fair value of variable annuity liability, included in other revenue	—			(.3		)
Change in fair value of derivatives, included in other revenue	—			(2.0		)
Foreign exchange, included in other revenue	—			1.4
Total revenue	—			.3
Death benefit claims paid, included in general and administrative expenses	—			(.3		)
General and administrative expenses	(.5		)	(2.4		)
Pre-tax loss	$	(.5	)	$	(2.4	)

The following summarizes realized and unrealized derivative gains (losses) recognized in other revenue for the three and nine months endedSeptember 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		Nine Months Ended			As of
Millions	September 30, 2016		September 30, 2016			December 31, 2016
Fixed income/interest rate	$	—	$	1.8		$	—
Foreign exchange	—		(4.8		)	—
Equity	—		1.0			—
Total	$	—	$	(2.0	)	$	—

The following tables summarize the changes in White Mountains’s variable annuity reinsurance liabilities and derivative instruments for the nine months ended September 30, 2016.

	Nine Months Ended September 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 includes certain investment grade fixed maturity investments denominated in British Pound Sterling (GBP) and common equity securities denominated in Japanese Yen (JPY), Euro (EUR), GBP and other foreign 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 may result in net foreign currency gains/(losses). At September 30, 2017, White Mountains held $261.8 million (GBP 160.7 million, EUR 18.9 million and JPY 2,646.4 million) 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 as of September 30, 2017.

The net realized derivative loss recognized in net realized and unrealized investment gains (losses) for the three and nine months endedSeptember 30, 2017 was $7.2 million and $8.9 million. The net unrealized derivative loss recognized in net realized and unrealized investment gains (losses) for the three and nine months endedSeptember 30, 2017 was $2.8 million and $14.2 million. White Mountains’s forward contracts are subject to master netting agreements. As of September 30, 2017 and December 31, 2016, there were no offsets to the gross liability amount under the master netting agreement and the resulting net amount recognized in other long-term investments was $15.4 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 as of September 30, 2017:

	September 30, 2017
Millions	Notional Amount		Carrying Value			Standard & Poor's Rating (1)
Barclays Bank PLC	$	201.3	$	(14.1	)	A-
JP Morgan Chase Bank N.A.	60.5		(1.3		)	A+
Total	$	261.8	$	(15.4	)

⁽¹⁾ 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).