Derivatives

12 Months Ended

Dec. 31, 2018

Foreign Currency Forward Contracts

White Mountains’s investment portfolio includes investments denominated in GBP, Euros, Japanese Yen and other foreign currencies. White Mountains previously entered into foreign currency forward contracts to manage its foreign currency exposure related to certain of these investments. The foreign currency forward contracts did not meet the criteria to be accounted for as a hedge. 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). White Mountains’s foreign currency forward contracts were traded over-the-counter. The fair value of the foreign currency forward contracts were estimated using OTC quotes for similar instruments and accordingly, the measurements were classified as Level 2 measurements.

During the fourth quarter of 2017, White Mountains closed the foreign currency forward contracts associated with certain non-U.S. common equity securities. In conjunction with the liquidation of the GBP investment grade corporate bond mandate in the first quarter of 2018, White Mountains closed the associated foreign currency forward contract.

As of December 31, 2018, White Mountains no longer has any open foreign currency forward contracts. As of December 31, 2017, White Mountains held $206.3 million (GBP 152.0 million) total gross notional value of a foreign currency forward contract.

The derivative (losses) recognized in net realized and unrealized investment gains (losses) for the years ended

December 31, 2018, 2017 and 2016 were $(3.5) million, $(23.8) million and $(1.2) million. White Mountains’s foreign currency forward contracts were subject to a master netting agreement. As of December 31, 2017 and 2016, the gross liability amount offset under the master netting agreement and the net amount recognized in other long-term investments was $(3.7) million and $(1.2) million.

White Mountains did not hold or provide any collateral under its foreign currency forward contract.

The following table presents the gross notional amounts and carrying values associated with the foreign currency forward contracts as of December 31, 2017:



	December 31, 2017
Millions	Notional Amount		Carrying Value			Standard & Poor’s Rating ⁽¹⁾
Barclays Bank PLC	$	206.3	$	(3.7	)	A

⁽¹⁾“A” is the sixth highest of 23 credit ratings assigned by Standard & Poor’s.

Variable Annuity Reinsurance

Derivative [Line Items]

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. WM Life Re was liquidated in the third quarter of 2017.

The following table presents the pre-tax operating results of WM Life Re for the year ended December 31, 2016:



Millions	Year Ended December 31, 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	1.3
Total revenues	.2
Death benefit claims paid, included in general and administrative expenses	(.3		)
General and administrative expenses	(2.6		)
Pre-tax loss	$	(2.7	)

The following table presents realized and unrealized derivative gains (losses) recognized in other revenue for the year ended December 31, 2016 by type of instrument:



Millions	Gains (Losses) Year Ended December 31, 2016
Fixed income/interest rate	$	1.8
Foreign exchange	(4.8		)
Equity	1.0
Total	$	(2.0	)

The following tables present the changes in White Mountains’s variable annuity reinsurance liabilities and derivative instruments for the year ended December 31, 2016:



	Variable Annuity Liabilities			Derivative Instruments
Millions	Level 3			Level 3 ⁽¹⁾			Level 2 ⁽¹⁾⁽²⁾			Level 1 ⁽³⁾			Total
Balance at January 1, 2016	$	.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		)
Balance at December 31, 2016	$	—		$	—		$	—		$	—		$	—


⁽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. 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.