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Derivatives
 9 Months Ended
Sep. 30, 2013
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, 2013 and December 31, 2012, the total guarantee value was approximately ¥217.1 billion (approximately $2.2 billion at exchange rates on that date) and ¥230.0 billion (approximately $2.7 billion at exchange rates on that date), respectively. The collective account values of the underlying variable annuities were approximately 98% and 87% of the guarantee value at September 30, 2013 and December 31, 2012, respectively. 
The following table summarizes the pre-tax operating results of WM Life Re for the three and nine months ended September 30, 2013 and 2012.
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2013
 
2012
 
2013
 
2012
Fees, included in other revenue
 
$
6.2

 
$
8.1

 
$
19.2

 
$
24.1

Change in fair value of variable annuity liability,
   included in other revenue
 
49.1

 
(11.3
)
 
289.3

 
89.4

Change in fair value of derivatives, included in other revenue
 
(63.1
)
 
(11.0
)
 
(308.4
)
 
(122.0
)
Foreign exchange, included in other revenue
 
.6

 
9.0

 
(13.9
)
 
(6.4
)
Other investment income and gains (losses)
 
.2

 
3.8

 
(5.2
)
 
2.9

Total revenue
 
(7.0
)
 
(1.4
)
 
(19.0
)
 
(12.0
)
Change in fair value of variable annuity death benefit liabilities,
   included in other general and administrative expenses
 
1.3

 
.7

 
8.5

 
6.7

Death benefit claims paid, included in general and
   administrative expenses
 
(.2
)
 
(1.5
)
 
(1.6
)
 
(4.9
)
General and administrative expenses
 
(1.0
)
 
(1.1
)
 
(3.8
)
 
(3.8
)
Pre-tax loss
 
$
(6.9
)
 
$
(3.3
)
 
$
(15.9
)
 
$
(14.0
)

 
During the first six months of 2013, the ratio of annuitants’ aggregate account values to the aggregate guarantee value provided by WM Life Re increased, and as a result, annuitants have been surrendering their policies at higher rates than WM Life Re has observed in the past. In response to this trend, WM Life Re adjusted the projected surrender assumptions used in the valuation of its variable annuity reinsurance liability slightly upward in the second quarter of 2013, which resulted in a gain of $1.5 million.
The following summarizes realized and unrealized derivative gains (losses) recognized in other revenue for the three and nine months ended September 30, 2013 and 2012 and the carrying values, included in other assets, at September 30, 2013 and December 31, 2012 by type of instrument:
 
 
 
 
 
 
 
 
Carrying Value
 
 
Three Months Ended
 
Nine Months Ended
 
As of
 
 
September 30,
 
September 30,
 
September 30,
2013
 
December 31, 2012
Millions
 
2013
 
2012
 
2013
 
2012
 
 
Fixed income/interest rate
 
$
(24.1
)
 
$
(22.6
)
 
$
(97.4
)
 
$
(73.1
)
 
$
102.4

 
$
27.1

Foreign exchange
 
(28.5
)
 
6.5

 
(144.5
)
 
(21.0
)
 
(7.1
)
 
52.8

Equity
 
(10.5
)
 
5.1

 
(66.5
)
 
(27.9
)
 
(3.8
)
 
18.4

Total
 
$
(63.1
)
 
$
(11.0
)
 
$
(308.4
)
 
$
(122.0
)
 
$
91.5

 
$
98.3



The following tables summarize the changes in White Mountains’ variable annuity reinsurance liabilities and derivative instruments for the three and nine months ended September 30, 2013 and 2012:
 
 
Three Months Ended September 30, 2013
 
 
Variable Annuity
(Liabilities)
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
(194.1
)
 
$
126.5

 
$
18.2

 
$
(3.4
)
 
$
141.3

Purchases
 
—

 
—

 
—

 
—

 
—

Realized and unrealized gains (losses)
 
50.4

(4) 
(24.1
)
 
(28.5
)
 
(10.5
)
 
(63.1
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
—

 
3.2

 
10.1

 
13.3

End of period
 
$
(143.7
)
 
$
102.4

 
$
(7.1
)
 
$
(3.8
)
 
$
91.5

 
 
Nine Months Ended September 30, 2013
 
 
Variable Annuity
(Liabilities)
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
(441.5
)
 
$
140.5

 
$
(20.5
)
 
$
(21.7
)
 
$
98.3

Purchases
 
—

 
59.3

 
—

 
—

 
59.3

Realized and unrealized gains (losses)
 
297.8

(4) 
(97.4
)
 
(144.5
)
 
(66.5
)
 
(308.4
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
—

 
157.9

 
84.4

 
242.3

End of period
 
$
(143.7
)
 
$
102.4

 
$
(7.1
)
 
$
(3.8
)
 
$
91.5


 
 
Three Months Ended September 30, 2012
 
 
Variable Annuity
(Liabilities)
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
(661.8
)
 
$
213.0

 
$
61.0

 
$
(23.7
)
 
$
250.3

Purchases
 
—

 
—

 
—

 
—

 
—

Realized and unrealized (losses) gains
 
(10.6
)
(4) 
6.7

 
(15.3
)
 
(2.4
)
 
(11.0
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
(6.7
)
 
(12.5
)
 
22.0

 
2.8

End of period
 
$
(672.4
)
 
$
213.0

 
$
33.2

 
$
(4.1
)
 
$
242.1

 
 
Nine Months Ended September 30, 2012
 
 
Variable Annuity
(Liabilities)
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
(768.5
)
 
$
247.1

 
$
39.2

 
$
4.1

 
$
290.4

Purchases
 
—

 
6.1

 
—

 
—

 
6.1

Realized and unrealized gains (losses)
 
96.1

(4) 
(24.1
)
 
(71.8
)
 
(26.1
)
 
(122.0
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
(16.1
)
 
65.8

 
17.9

 
67.6

End of period
 
$
(672.4
)
 
$
213.0

 
$
33.2

 
$
(4.1
)
 
$
242.1

(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.
(4) Includes $(1.3) and $(8.5) for the three and nine months ended September 30, 2013 and $(0.7) and $(6.7) for the three and nine months ended September 30, 2012 related to the change in the fair value of variable annuity death benefit liabilities, which are included in general and administrative expenses.

In addition to derivative instruments, WM Life Re held cash, short-term and fixed maturity investments posted as collateral to its variable annuity reinsurance counterparties.  The total collateral comprises the following:
Millions
 
September 30, 2013
 
December 31, 2012
 
September 30, 2012
Cash
 
$
74.4

 
$
249.8

 
$
341.7

Short-term investments
 
15.8

 
5.1

 
14.6

Fixed maturity investments
 
24.6

 
138.7

 
121.2

Total
 
$
114.8

 
$
393.6

 
$
477.5



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’ variable annuity reinsurance liabilities were classified as Level 3 measurements at September 30, 2013 and 2012. The fair value of White Mountains’ 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, 2013
Description
 
Fair 
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
 
Weighted
Average
Variable annuity benefit guarantee liabilities
 
$
143.7

 
Discounted cash flows
 
Surrenders
 
 
 
 
 
 
 
 
 
 
     1 year
 
0.3
%
-
10.8%
 
2.4
%
 
 
 
 
     2 year
 
0.2
%
-
8.7%
 
2.6
%
 

 
 
 
     3 year
 
0.1
%
-
6.6%
 
1.9
%
 

 
 
 
Mortality
 
0.0
%
-
5.3%
 
1.0
%
 

 
 
 
Foreign exchange volatilities
 
 
 
 
 
 
 
 
 
 
 
 
     1 year
 
11.2
%
-
13.5%
 
12.0
%
 
 
 
 
 
 
     2 year
 
12.3
%
-
14.5%
 
13.2
%
 
 
 
 
 
 
     3 year
 
13.8
%
-
17.6%
 
14.7
%
 
 
 
 
 
 
Index volatilities
 
 
 
 
 
 
 
 
 
 
 
 
     1 year
 
15.6
%
-
19.6%
 
16.6
%
 
 
 
 
 
 
     2 year
 
17.6
%
-
21.4%
 
19.0
%
 
 
 
 
 
 
     3 year
 
19.6
%
-
22.4%
 
21.3
%
Foreign exchange options
 
$
57.8

 
Counterparty valuations, adjusted for unwind quote discount
 
Adjustment to counterparty valuations
 
0.1
%
-
3.2%
 
2.1
%
 

 
 
 
 
 
 
 
Equity index options
$
44.6

 
Counterparty valuations, adjusted for unwind quote discount
 
Adjustment to counterparty valuations
 
1.7
%
-
3.0%
 
2.6
%
 
 
 
 
 
 
 
 
 


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, 2013
 
December 31, 2012
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
 
$
.2

 
$
(13.1
)
 
$
(12.9
)
 
$
52.6

 
$
(26.9
)
 
$
25.7

Exchange traded
 
.7

 
(3.2
)
 
(2.5
)
 
1.6

 
(.2
)
 
1.4

Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
OTC
 
80.7

 
(10.1
)
 
70.6

 
87.8

 
(34.4
)
 
53.4

Exchange traded
 
.7

 
(.3
)
 
0.4

 
.8

 
(1.4
)
 
(.6
)
Equity contracts
 
 
 
 
 
 
 
 
 
 
 
 
OTC
 
44.6

 
(6.9
)
 
37.7

 
63.6

 
(22.9
)
 
40.7

Exchange traded
 
.6

 
(2.4
)
 
(1.8
)
 
.1

 
(22.4
)
 
(22.3
)
Total(2)
 
$
127.5

 
$
(36.0
)
 
$
91.5

 
$
206.5

 
$
(108.2
)
 
$
98.3

(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, 2013
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
 
$
43.1

 
$
—

 
$
—

 
$
43.1

 
$
—

 
$
—

 
$
—

 
$
43.1

 
A
 
Barclays
 
2.6

 
—

 
—

 
2.6

 
—

 
—

 
—

 
2.6

 
A

JP Morgan
 
12.5

 
—

 
—

 
12.5

 
19.4

 
—

 
—

 
31.9

 
A
+
Royal Bank
   of Scotland
 
18.3

 
—

 
—

 
18.3

 
—

 
—

 
—

 
18.3

 
A
 
Nomura
 
(4.3
)
 
3.6

 
.7

 
—

 
—

 
23.8

 
—

 
23.8

 
BBB
+
Goldman Sachs
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
A
-
Citigroup - OTC
 
23.1

 
—

 
—

 
23.1

 
2.4

 
—

 
—

 
25.5

 
A
 
Citigroup -
  Exchange Traded
 
(3.8
)
 
3.8

 
—

 
—

 
19.8

 
—

 
—

 
19.8

 
A
 
   Total
 
$
91.5

 
$
7.4

 
$
.7

 
$
99.6

 
$
41.6

 
$
23.8

 
$
—

 
$
165.0

 
 
 

 
 
December 31, 2012
 
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
 
$
78.5

 
$
—

 
—

 
$
78.5

 
$
—

 
$
—

 
$
30.6

 
$
47.9

 
A
 
Barclays
 
11.6

 
—

 
—

 
11.6

 
—

 
—

 
—

 
11.6

 
A
+
JP Morgan
 
(22.8
)
 
22.8

 
—

 
—

 
32.8

 
—

 
—

 
32.8

 
A
+
Royal Bank
   of Scotland
 
33.6

 
—

 
—

 
33.6

 
—

 
—

 
—

 
33.6

 
A
 
Nomura
 
(.9
)
 
.9

 
—

 
—

 
.8

 
28.0

 
—

 
28.8

 
BBB
+
Goldman Sachs
 
(.1
)
 
.1

 
—

 
—

 
3.1

 
—

 
—

 
3.1

 
A
-
Citigroup - OTC
 
19.9

 
—

 
—

 
19.9

 
30.8

 
—

 
—

 
50.7

 
A
 
Citigroup -
   Exchange Traded
 
(21.5
)
 
21.5

 
—

 
—

 
13.6

 
—

 
—

 
13.6

 
A
 
   Total
 
$
98.3

 
$
45.3

 
$
—

 
$
143.6

 
$
81.1

 
$
28.0

 
$
30.6

 
$
222.1

 
 
 
(1) Standard & Poor’s ratings as detailed above are: “A+” (Strong, which is the fifth highest of twenty-one creditworthiness ratings), “A” (Strong, which is the sixth highest of twenty-one creditworthiness ratings), “A-” (Strong, which is the seventh highest of twenty-one creditworthiness ratings) and
“BBB+” (Adequate, which is the eighth highest of twenty-one creditworthiness ratings).
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, 2013 and December 31, 2012, the total guarantee value was approximately ¥217.1 billion (approximately $2.2 billion at exchange rates on that date) and ¥230.0 billion (approximately $2.7 billion at exchange rates on that date), respectively. The collective account values of the underlying variable annuities were approximately 98% and 87% of the guarantee value at September 30, 2013 and December 31, 2012, respectively. 
The following table summarizes the pre-tax operating results of WM Life Re for the three and nine months ended September 30, 2013 and 2012.
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2013
 
2012
 
2013
 
2012
Fees, included in other revenue
 
$
6.2

 
$
8.1

 
$
19.2

 
$
24.1

Change in fair value of variable annuity liability,
   included in other revenue
 
49.1

 
(11.3
)
 
289.3

 
89.4

Change in fair value of derivatives, included in other revenue
 
(63.1
)
 
(11.0
)
 
(308.4
)
 
(122.0
)
Foreign exchange, included in other revenue
 
.6

 
9.0

 
(13.9
)
 
(6.4
)
Other investment income and gains (losses)
 
.2

 
3.8

 
(5.2
)
 
2.9

Total revenue
 
(7.0
)
 
(1.4
)
 
(19.0
)
 
(12.0
)
Change in fair value of variable annuity death benefit liabilities,
   included in other general and administrative expenses
 
1.3

 
.7

 
8.5

 
6.7

Death benefit claims paid, included in general and
   administrative expenses
 
(.2
)
 
(1.5
)
 
(1.6
)
 
(4.9
)
General and administrative expenses
 
(1.0
)
 
(1.1
)
 
(3.8
)
 
(3.8
)
Pre-tax loss
 
$
(6.9
)
 
$
(3.3
)
 
$
(15.9
)
 
$
(14.0
)

 
During the first six months of 2013, the ratio of annuitants’ aggregate account values to the aggregate guarantee value provided by WM Life Re increased, and as a result, annuitants have been surrendering their policies at higher rates than WM Life Re has observed in the past. In response to this trend, WM Life Re adjusted the projected surrender assumptions used in the valuation of its variable annuity reinsurance liability slightly upward in the second quarter of 2013, which resulted in a gain of $1.5 million.
The following summarizes realized and unrealized derivative gains (losses) recognized in other revenue for the three and nine months ended September 30, 2013 and 2012 and the carrying values, included in other assets, at September 30, 2013 and December 31, 2012 by type of instrument:
 
 
 
 
 
 
 
 
Carrying Value
 
 
Three Months Ended
 
Nine Months Ended
 
As of
 
 
September 30,
 
September 30,
 
September 30,
2013
 
December 31, 2012
Millions
 
2013
 
2012
 
2013
 
2012
 
 
Fixed income/interest rate
 
$
(24.1
)
 
$
(22.6
)
 
$
(97.4
)
 
$
(73.1
)
 
$
102.4

 
$
27.1

Foreign exchange
 
(28.5
)
 
6.5

 
(144.5
)
 
(21.0
)
 
(7.1
)
 
52.8

Equity
 
(10.5
)
 
5.1

 
(66.5
)
 
(27.9
)
 
(3.8
)
 
18.4

Total
 
$
(63.1
)
 
$
(11.0
)
 
$
(308.4
)
 
$
(122.0
)
 
$
91.5

 
$
98.3



The following tables summarize the changes in White Mountains’ variable annuity reinsurance liabilities and derivative instruments for the three and nine months ended September 30, 2013 and 2012:
 
 
Three Months Ended September 30, 2013
 
 
Variable Annuity
(Liabilities)
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
(194.1
)
 
$
126.5

 
$
18.2

 
$
(3.4
)
 
$
141.3

Purchases
 
—

 
—

 
—

 
—

 
—

Realized and unrealized gains (losses)
 
50.4

(4) 
(24.1
)
 
(28.5
)
 
(10.5
)
 
(63.1
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
—

 
3.2

 
10.1

 
13.3

End of period
 
$
(143.7
)
 
$
102.4

 
$
(7.1
)
 
$
(3.8
)
 
$
91.5

 
 
Nine Months Ended September 30, 2013
 
 
Variable Annuity
(Liabilities)
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
(441.5
)
 
$
140.5

 
$
(20.5
)
 
$
(21.7
)
 
$
98.3

Purchases
 
—

 
59.3

 
—

 
—

 
59.3

Realized and unrealized gains (losses)
 
297.8

(4) 
(97.4
)
 
(144.5
)
 
(66.5
)
 
(308.4
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
—

 
157.9

 
84.4

 
242.3

End of period
 
$
(143.7
)
 
$
102.4

 
$
(7.1
)
 
$
(3.8
)
 
$
91.5


 
 
Three Months Ended September 30, 2012
 
 
Variable Annuity
(Liabilities)
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
(661.8
)
 
$
213.0

 
$
61.0

 
$
(23.7
)
 
$
250.3

Purchases
 
—

 
—

 
—

 
—

 
—

Realized and unrealized (losses) gains
 
(10.6
)
(4) 
6.7

 
(15.3
)
 
(2.4
)
 
(11.0
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
(6.7
)
 
(12.5
)
 
22.0

 
2.8

End of period
 
$
(672.4
)
 
$
213.0

 
$
33.2

 
$
(4.1
)
 
$
242.1

 
 
Nine Months Ended September 30, 2012
 
 
Variable Annuity
(Liabilities)
 
Derivative Instruments
Millions
 
Level 3
 
Level 3 (1)
 
Level 2 (1)(2)
 
Level 1 (3)
 
Total
Beginning of period
 
$
(768.5
)
 
$
247.1

 
$
39.2

 
$
4.1

 
$
290.4

Purchases
 
—

 
6.1

 
—

 
—

 
6.1

Realized and unrealized gains (losses)
 
96.1

(4) 
(24.1
)
 
(71.8
)
 
(26.1
)
 
(122.0
)
Transfers in
 
—

 
—

 
—

 
—

 
—

Sales/settlements
 
—

 
(16.1
)
 
65.8

 
17.9

 
67.6

End of period
 
$
(672.4
)
 
$
213.0

 
$
33.2

 
$
(4.1
)
 
$
242.1

(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.
(4) Includes $(1.3) and $(8.5) for the three and nine months ended September 30, 2013 and $(0.7) and $(6.7) for the three and nine months ended September 30, 2012 related to the change in the fair value of variable annuity death benefit liabilities, which are included in general and administrative expenses.

In addition to derivative instruments, WM Life Re held cash, short-term and fixed maturity investments posted as collateral to its variable annuity reinsurance counterparties.  The total collateral comprises the following:
Millions
 
September 30, 2013
 
December 31, 2012
 
September 30, 2012
Cash
 
$
74.4

 
$
249.8

 
$
341.7

Short-term investments
 
15.8

 
5.1

 
14.6

Fixed maturity investments
 
24.6

 
138.7

 
121.2

Total
 
$
114.8

 
$
393.6

 
$
477.5



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’ variable annuity reinsurance liabilities were classified as Level 3 measurements at September 30, 2013 and 2012. The fair value of White Mountains’ 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, 2013
Description
 
Fair 
Value
 
Valuation Technique(s)
 
Unobservable Input
 
Range
 
Weighted
Average
Variable annuity benefit guarantee liabilities
 
$
143.7

 
Discounted cash flows
 
Surrenders
 
 
 
 
 
 
 
 
 
 
     1 year
 
0.3
%
-
10.8%
 
2.4
%
 
 
 
 
     2 year
 
0.2
%
-
8.7%
 
2.6
%
 

 
 
 
     3 year
 
0.1
%
-
6.6%
 
1.9
%
 

 
 
 
Mortality
 
0.0
%
-
5.3%
 
1.0
%
 

 
 
 
Foreign exchange volatilities
 
 
 
 
 
 
 
 
 
 
 
 
     1 year
 
11.2
%
-
13.5%
 
12.0
%
 
 
 
 
 
 
     2 year
 
12.3
%
-
14.5%
 
13.2
%
 
 
 
 
 
 
     3 year
 
13.8
%
-
17.6%
 
14.7
%
 
 
 
 
 
 
Index volatilities
 
 
 
 
 
 
 
 
 
 
 
 
     1 year
 
15.6
%
-
19.6%
 
16.6
%
 
 
 
 
 
 
     2 year
 
17.6
%
-
21.4%
 
19.0
%
 
 
 
 
 
 
     3 year
 
19.6
%
-
22.4%
 
21.3
%
Foreign exchange options
 
$
57.8

 
Counterparty valuations, adjusted for unwind quote discount
 
Adjustment to counterparty valuations
 
0.1
%
-
3.2%
 
2.1
%
 

 
 
 
 
 
 
 
Equity index options
$
44.6

 
Counterparty valuations, adjusted for unwind quote discount
 
Adjustment to counterparty valuations
 
1.7
%
-
3.0%
 
2.6
%
 
 
 
 
 
 
 
 
 


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, 2013
 
December 31, 2012
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
 
$
.2

 
$
(13.1
)
 
$
(12.9
)
 
$
52.6

 
$
(26.9
)
 
$
25.7

Exchange traded
 
.7

 
(3.2
)
 
(2.5
)
 
1.6

 
(.2
)
 
1.4

Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
OTC
 
80.7

 
(10.1
)
 
70.6

 
87.8

 
(34.4
)
 
53.4

Exchange traded
 
.7

 
(.3
)
 
0.4

 
.8

 
(1.4
)
 
(.6
)
Equity contracts
 
 
 
 
 
 
 
 
 
 
 
 
OTC
 
44.6

 
(6.9
)
 
37.7

 
63.6

 
(22.9
)
 
40.7

Exchange traded
 
.6

 
(2.4
)
 
(1.8
)
 
.1

 
(22.4
)
 
(22.3
)
Total(2)
 
$
127.5

 
$
(36.0
)
 
$
91.5

 
$
206.5

 
$
(108.2
)
 
$
98.3

(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, 2013
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
 
$
43.1

 
$
—

 
$
—

 
$
43.1

 
$
—

 
$
—

 
$
—

 
$
43.1

 
A
 
Barclays
 
2.6

 
—

 
—

 
2.6

 
—

 
—

 
—

 
2.6

 
A

JP Morgan
 
12.5

 
—

 
—

 
12.5

 
19.4

 
—

 
—

 
31.9

 
A
+
Royal Bank
   of Scotland
 
18.3

 
—

 
—

 
18.3

 
—

 
—

 
—

 
18.3

 
A
 
Nomura
 
(4.3
)
 
3.6

 
.7

 
—

 
—

 
23.8

 
—

 
23.8

 
BBB
+
Goldman Sachs
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
A
-
Citigroup - OTC
 
23.1

 
—

 
—

 
23.1

 
2.4

 
—

 
—

 
25.5

 
A
 
Citigroup -
  Exchange Traded
 
(3.8
)
 
3.8

 
—

 
—

 
19.8

 
—

 
—

 
19.8

 
A
 
   Total
 
$
91.5

 
$
7.4

 
$
.7

 
$
99.6

 
$
41.6

 
$
23.8

 
$
—

 
$
165.0

 
 
 

 
 
December 31, 2012
 
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
 
$
78.5

 
$
—

 
—

 
$
78.5

 
$
—

 
$
—

 
$
30.6

 
$
47.9

 
A
 
Barclays
 
11.6

 
—

 
—

 
11.6

 
—

 
—

 
—

 
11.6

 
A
+
JP Morgan
 
(22.8
)
 
22.8

 
—

 
—

 
32.8

 
—

 
—

 
32.8

 
A
+
Royal Bank
   of Scotland
 
33.6

 
—

 
—

 
33.6

 
—

 
—

 
—

 
33.6

 
A
 
Nomura
 
(.9
)
 
.9

 
—

 
—

 
.8

 
28.0

 
—

 
28.8

 
BBB
+
Goldman Sachs
 
(.1
)
 
.1

 
—

 
—

 
3.1

 
—

 
—

 
3.1

 
A
-
Citigroup - OTC
 
19.9

 
—

 
—

 
19.9

 
30.8

 
—

 
—

 
50.7

 
A
 
Citigroup -
   Exchange Traded
 
(21.5
)
 
21.5

 
—

 
—

 
13.6

 
—

 
—

 
13.6

 
A
 
   Total
 
$
98.3

 
$
45.3

 
$
—

 
$
143.6

 
$
81.1

 
$
28.0

 
$
30.6

 
$
222.1

 
 
 
(1) Standard & Poor’s ratings as detailed above are: “A+” (Strong, which is the fifth highest of twenty-one creditworthiness ratings), “A” (Strong, which is the sixth highest of twenty-one creditworthiness ratings), “A-” (Strong, which is the seventh highest of twenty-one creditworthiness ratings) and
“BBB+” (Adequate, which is the eighth highest of twenty-one creditworthiness ratings).
Forward Contracts
  
Derivatives
Forward Contracts

Beginning in September 2012, White Mountains entered into forward contracts at Sirius Group. White Mountains monitors its exposure to foreign currency and adjusts its forward positions within the risk guidelines and ranges established by senior management for each currency, as necessary. While White Mountains actively manages its forward positions, mismatches between movements in foreign currency rates and its forward contracts may result in currency positions being outside the pre-defined ranges and/or foreign currency losses. At September 30, 2013, White Mountains held approximately $16.4 million (SEK 105.0 million) total gross notional value of foreign currency forward contracts.
All of White Mountains’ 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 September 30, 2013.
The following tables summarize the changes in White Mountains' forward contracts for the three and nine months ended September 30, 2013:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2013
 
2012
 
2013
 
2012
Beginning of period
 
$
(.1
)
 
$
—

 
$
(.1
)
 
$
—

    Purchases
 
—

 
—

 
—

 
—

    Net realized and unrealized (losses) gains
 
(.5
)
 
.3

 
(.3
)
 
.3

    Sales/settlements
 
.5

 
—

 
.3

 
—

End of period
 
$
(.1
)
 
$
.3

 
$
(.1
)
 
$
.3



The following summarizes realized and unrealized derivative gains (losses) recognized in net realized and unrealized investment gains for the three and nine months ended September 30, 2013 and the carrying values, included in other long-term investments, at September 30, 2013 and December 31, 2012 by type of currency:
 
 
 
 
 
 
 
 
 
 
Carrying Value
 
 
Three Months Ended
 
Nine Months Ended
 
As of
 
 
September 30,
 
September 30,
 
September 30,
2013
 
December 31, 2012
Millions
 
2013
 
2012
 
2013
 
2012
 
 
USD
 
$
(.4
)
 
$
.4

 
$
(1.0
)
 
$
.4

 
$
(.1
)
 
$
—

SEK
 
—

 
—

 
—

 
—

 
—

 
—

EUR
 
(.1
)
 
(.1
)
 
(.1
)
 
(.1
)
 
—

 
(.1
)
GBP
 
—

 
—

 
.8

 
—

 
—

 
—

Total
 
$
(.5
)
 
$
.3

 
$
(.3
)
 
$
.3

 
$
(.1
)
 
$
(.1
)


All of White Mountains’ forward contracts are subject to master netting agreements. The following summarizes amounts offset under master netting agreements:
 
 
September 30, 2013
 
December 31, 2012
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
USD
 
$
(.1
)
 
$
—

 
$
(.1
)
 
$
—

 
$
—

 
$
—

EUR
 
—

 
—

 
—

 
—

 
(.1
)
 
(.1
)
GBP
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
(.1
)
 
$
—

 
$
(.1
)
 
$
—

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

White Mountains does not hold or provide any collateral for the forward contracts.  The following table summarizes the notional amounts and uncollateralized balances associated with forward currency contracts:
 
 
September 30, 2013
 
December 31, 2012
Millions
 
Notional Amount
 
Carrying Value
 
Standard & Poor's
 Rating(1)
 
Notional Amount
 
Carrying Value
Barclays Bank Plc
 
$
3.1

 
$
(.1
)
 
A
 
$
7.7

 
$
(.1
)
Deutsche Bank
 
5.4

 
—

 
A
 
11.1

 
—

Goldman Sachs
 
2.5

 
—

 
A-
 
.4

 
—

HSBC
 
4.3

 
—

 
AA-
 
10.1

 
—

JP Morgan
 
—

 
—

 
A+
 
1.9

 
—

Royal Bank of Canada
 
1.1

 
—

 
AA-
 
—

 
—

   Total
 
$
16.4

 
$
(.1
)
 
 
 
$
31.2

 
$
(.1
)
(1) Standard & Poor's ratings as detailed above are: “AA-” (Very Strong, which is the sixth highest of twenty-one creditworthiness ratings), “A+” (Strong, which is the seventh highest of twenty-one creditworthiness ratings) and “A-” (Strong, which is the ninth highest of twenty-one creditworthiness ratings).
Forward Contracts

Beginning in September 2012, White Mountains entered into forward contracts at Sirius Group. White Mountains monitors its exposure to foreign currency and adjusts its forward positions within the risk guidelines and ranges established by senior management for each currency, as necessary. While White Mountains actively manages its forward positions, mismatches between movements in foreign currency rates and its forward contracts may result in currency positions being outside the pre-defined ranges and/or foreign currency losses. At September 30, 2013, White Mountains held approximately $16.4 million (SEK 105.0 million) total gross notional value of foreign currency forward contracts.
All of White Mountains’ 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 September 30, 2013.
The following tables summarize the changes in White Mountains' forward contracts for the three and nine months ended September 30, 2013:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2013
 
2012
 
2013
 
2012
Beginning of period
 
$
(.1
)
 
$
—

 
$
(.1
)
 
$
—

    Purchases
 
—

 
—

 
—

 
—

    Net realized and unrealized (losses) gains
 
(.5
)
 
.3

 
(.3
)
 
.3

    Sales/settlements
 
.5

 
—

 
.3

 
—

End of period
 
$
(.1
)
 
$
.3

 
$
(.1
)
 
$
.3



The following summarizes realized and unrealized derivative gains (losses) recognized in net realized and unrealized investment gains for the three and nine months ended September 30, 2013 and the carrying values, included in other long-term investments, at September 30, 2013 and December 31, 2012 by type of currency:
 
 
 
 
 
 
 
 
 
 
Carrying Value
 
 
Three Months Ended
 
Nine Months Ended
 
As of
 
 
September 30,
 
September 30,
 
September 30,
2013
 
December 31, 2012
Millions
 
2013
 
2012
 
2013
 
2012
 
 
USD
 
$
(.4
)
 
$
.4

 
$
(1.0
)
 
$
.4

 
$
(.1
)
 
$
—

SEK
 
—

 
—

 
—

 
—

 
—

 
—

EUR
 
(.1
)
 
(.1
)
 
(.1
)
 
(.1
)
 
—

 
(.1
)
GBP
 
—

 
—

 
.8

 
—

 
—

 
—

Total
 
$
(.5
)
 
$
.3

 
$
(.3
)
 
$
.3

 
$
(.1
)
 
$
(.1
)


All of White Mountains’ forward contracts are subject to master netting agreements. The following summarizes amounts offset under master netting agreements:
 
 
September 30, 2013
 
December 31, 2012
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
USD
 
$
(.1
)
 
$
—

 
$
(.1
)
 
$
—

 
$
—

 
$
—

EUR
 
—

 
—

 
—

 
—

 
(.1
)
 
(.1
)
GBP
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
(.1
)
 
$
—

 
$
(.1
)
 
$
—

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

White Mountains does not hold or provide any collateral for the forward contracts.  The following table summarizes the notional amounts and uncollateralized balances associated with forward currency contracts:
 
 
September 30, 2013
 
December 31, 2012
Millions
 
Notional Amount
 
Carrying Value
 
Standard & Poor's
 Rating(1)
 
Notional Amount
 
Carrying Value
Barclays Bank Plc
 
$
3.1

 
$
(.1
)
 
A
 
$
7.7

 
$
(.1
)
Deutsche Bank
 
5.4

 
—

 
A
 
11.1

 
—

Goldman Sachs
 
2.5

 
—

 
A-
 
.4

 
—

HSBC
 
4.3

 
—

 
AA-
 
10.1

 
—

JP Morgan
 
—

 
—

 
A+
 
1.9

 
—

Royal Bank of Canada
 
1.1

 
—

 
AA-
 
—

 
—

   Total
 
$
16.4

 
$
(.1
)
 
 
 
$
31.2

 
$
(.1
)
(1) Standard & Poor's ratings as detailed above are: “AA-” (Very Strong, which is the sixth highest of twenty-one creditworthiness ratings), “A+” (Strong, which is the seventh highest of twenty-one creditworthiness ratings) and “A-” (Strong, which is the ninth highest of twenty-one creditworthiness ratings).
Interest Rate Cap
  
Derivatives
Interest Rate Cap

In May 2007, SIG issued the SIG Preference Shares, with an initial fixed annual dividend rate of 7.506%. In June 2017, the fixed rate will move to a floating rate equal to the greater of (i) 7.506% and (ii) 3-month LIBOR plus 320 bps. In July 2013, SIG executed the Interest Rate Cap for the period from June 2017 to June 2022 to protect against a significant increase in interest rates during that 5-year period. The Interest Rate Cap fixes the annual dividend rate on the SIG Preference Shares from June 2017 to June 2022 at 8.30%. The cost of the Interest Rate Cap was an upfront premium of 395 bps of the $250.0 million notional value, or approximately $9.9 million for the full notional amount.
The Interest Rate Cap does not qualify for hedge accounting. It is recorded in other assets at fair value. Changes in fair value are recognized as unrealized gains or losses and are presented within other revenues. Collateral held is recorded within short-term investments with an equal amount recognized as a liability to return collateral. The fair value of the interest rate cap has been estimated using a single broker quote and accordingly, has been classified as a Level 3 measurements at September 30, 2013.
The following tables summarize the changes in the fair value of the Interest Rate Cap for the three and nine months ended September 30, 2013:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2013
 
2013
Beginning of period
 
$
—

 
$
—

    Purchases
 
9.9

 
9.9

    Net realized and unrealized (losses) gains
 
(.3
)
 
(.3
)
    Sales/settlements
 
—

 
—

End of period
 
$
9.6

 
$
9.6



White Mountains does not provide any collateral to the interest rate counterparties. Under the terms of the Interest Rate Cap, White Mountains holds collateral in respect of future amounts due. White Mountains’ liability to return that collateral is based on the amounts provided by the counterparty and investment earnings thereon. The following table summarizes the Interest Rate Cap collateral balances held by White Mountains and ratings by counterparty:
 
 
September 30, 2013
Millions
 
Collateral Balances Held
 
Standard & Poor’s
 Rating(1)
Barclays Bank Plc
 
$
6.8

 
A
Nordea Bank Finland Plc
 
2.9

 
AA-
   Total
 
$
9.7

 
 
(1) Standard & Poor’s ratings as detailed above are: “A” (Strong, which is the sixth highest of twenty-one creditworthiness ratings) and “AA-” (Very Strong, which is the fourth highest of twenty-one creditworthiness ratings).