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Derivatives | 12 Months Ended
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Dec. 31, 2012
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | 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 December 31, 2012, the total guarantee value was approximately ¥230.0 billion (approximately $2.7 billion at exchange rates on that date). The collective account values of the underlying variable annuities were approximately 87% of the guarantee value at December 31, 2012. The following table summarizes the pre-tax operating results of WM Life Re for the years ended December 31, 2012, 2011 and 2010:
|  | Year Ended December 31,
Millions |  | 2012 |  | 2011 |  | 2010
Fees, included in other revenues |  | $ | 31.8 |  |  | $ | 32.5 |  |  | $ | 30.2 |
Change in fair value of variable annuity liability, included in other revenues |  | 312.8 |  |  | (156.5 | ) |  | (223.5 | )
Change in fair value of derivatives, included in other revenues |  | (339.0 | ) |  | 92.9 |  |  | 127.0 |
Foreign exchange, included in other revenues |  | (30.3 | ) |  | 15.1 |  |  | 21.4 |
Other investment income and gains (losses) |  | 2.5 |  |  | (.9 | ) |  | (.9 | )
Total revenues |  | (22.2 | ) |  | (16.9 | ) |  | (45.8 | )
Change in fair value of variable annuity death benefit liabilities, included in general and administrative expenses |  | 14.2 |  |  | (1.8 | ) |  | (6.0 | )
Death benefit claims paid, included in general and administrative expenses |  | (5.7 | ) |  | (3.8 | ) |  | (2.7 | )
General and administrative expenses |  | (5.2 | ) |  | (4.7 | ) |  | (6.3 | )
Pre-tax loss |  | $ | (18.9 | ) |  | $ | (27.2 | ) |  | $ | (60.8 | )
For the years ended December 31, 2011 and 2010 the change in the fair value of the variable annuity liability included $7.2 million, and $47.7 million of losses associated with changes in projected surrender assumptions. There was no change in projected surrender assumptions in 2012. All of White Mountains’ variable annuity reinsurance liabilities were classified as Level 3 measurements at December 31, 2012. The following table summarizes the changes in White Mountains’ variable annuity reinsurance liabilities and derivative instruments for the year ended December 31, 2012, 2011 and 2010:
|  | Variable Annuity (Liabilities) |  | Derivative Instruments
Millions |  | Level 3 |  | Level 3 (1) |  | Level 2 (1)(2) |  | Level 1 (3) |  | Total (4)
Balance at January 1, 2012 |  | $ | (768.5 | ) |  | $ | 247.1 |  |  | $ | 39.2 |  |  | $ | 4.1 |  |  | $ | 290.4 |
Purchases |  | — |  |  | 6.1 |  |  | — |  |  | — |  |  | 6.1 |
Realized and unrealized gains (losses) |  | 327.0 |  |  | (84.0 | ) |  | (186.9 | ) |  | (68.1 | ) |  | (339.0 | )
Transfers in (out) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales/settlements |  | — |  |  | (28.7 | ) |  | 127.2 |  |  | 42.3 |  |  | 140.8 |
Balance at December 31, 2012 |  | $ | (441.5 | ) |  | $ | 140.5 |  |  | $ | (20.5 | ) |  | $ | (21.7 | ) |  | $ | 98.3 |
|  | Variable Annuity (Liabilities) |  | Derivative Instruments
Millions |  | Level 3 |  | Level 3 (1) |  | Level 2 (1)(2) |  | Level 1 (3) |  | Total (4)
Balance at January 1, 2011 |  | $ | (610.2 | ) |  | $ | 275.3 |  |  | $ | 72.2 |  |  | $ | — |  |  | $ | 347.5 |
Purchases |  | — |  |  | 5.0 |  |  | — |  |  | — |  |  | 5.0 |
Realized and unrealized (losses) gains |  | (158.3 | ) |  | 14.5 |  |  | 67.7 |  |  | 10.7 |  |  | 92.9 |
Transfers in (out) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales/settlements |  | — |  |  | (47.7 | ) |  | (100.7 | ) |  | (6.6 | ) |  | (155.0 | )
Balance at December 31, 2011 |  | $ | (768.5 | ) |  | $ | 247.1 |  |  | $ | 39.2 |  |  | $ | 4.1 |  |  | $ | 290.4 |
|  | Variable Annuity (Liabilities) |  | Derivative Instruments
Millions |  | Level 3 |  | Level 3 (1) |  | Level 2 (1)(2) |  | Level 1 (3) |  | Total (4)
Balance at January 1, 2010 |  | $ | (380.7 | ) |  | $ | 208.5 |  |  | $ | 23.8 |  |  | $ | (38.0 | ) |  | $ | 194.3 |
Purchases |  | — |  |  | 19.4 |  |  | — |  |  | — |  |  | 19.4 |
Realized and unrealized (losses) gains |  | (229.5 | ) |  | 66.4 |  |  | 80.0 |  |  | (19.4 | ) |  | 127.0 |
Transfers in (out) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales/settlements |  | — |  |  | (19.0 | ) |  | (31.6 | ) |  | 57.4 |  |  | 6.8 |
Balance at December 31, 2010 |  | $ | (610.2 | ) |  | $ | 275.3 |  |  | $ | 72.2 |  |  | $ | — |  |  | $ | 347.5 |
(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) In addition to derivative instruments, WM Life Re held cash, short-term and fixed maturity investments of , $393.6, $485.3 and $326.0 at December 31, 2012, 2011 and 2010 posted as collateral to its reinsurance counterparties. The fair value of White Mountains’ variable annuity reinsurance liabilities are estimated using actuarial and capital market assumptions related to the projected discounted cash flows over the term of the reinsurance agreement. Assumptions regarding future policyholder behavior, including surrender and lapse rates, are generally unobservable inputs and significantly impact the fair value estimates. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and foreign currency exchange rates as well as the variations in actuarial assumptions regarding policyholder behavior may result in significant fluctuations in the fair value estimates. Generally, the liabilities associated with these guarantees increase with declines in the equity markets, interest rates and currencies against the Japanese yen, as well as with increases in market volatilities. White Mountains uses derivative instruments, including put options, interest rate swaps, total return swaps on bond and equity indices and forwards and futures contracts on major equity indices, currency pairs and government bonds, to mitigate the risks associated with changes in the fair value of the reinsured variable annuity guarantees. The types of inputs used to estimate the fair value of these derivative instruments, with the exception of actuarial assumptions regarding policyholder behavior and risk margins, are generally the same as those used to estimate the fair value of variable annuity liabilities. The following summarizes quantitative information about significant unobservable inputs associated with the fair value estimates for variable annuity reinsurance liabilities and derivative instruments that have been classified as Level 3 measurements:
|  | December 31, 2012
($ in Millions) Description |  | Fair Value |  | Valuation Technique(s) |  | Unobservable Input |  | Range |  | Weighted Average
Variable annuity benefit guarantee liabilities |  | $ | 441.5 |  |  | Discounted cash flows |  | Surrenders |  |  |  |  |  |  |
|  |  |  | 1 year |  | 0.3 | % | - | 3.0 | % |  | 0.5 | %
|  |  |  | 2 year |  | 0.2 | % | - | 3.0 | % |  | 0.4 | %
|  |  |  | 3 and more years |  | 0.1 | % | - | 3.0 | % |  | 0.4 | %
|  |  |  |  | Mortality |  | 0.0 | % | - | 4.8 | % |  | 0.9 | %
|  |  |  |  | Foreign exchange volatilities |  |  |  |  |  |  |
|  |  |  | 1 year |  | 11.3 | % | - | 12.5 | % |  | 12.2 | %
|  |  |  | 2 year |  | 10.7 | % | - | 13.2 | % |  | 12.1 | %
|  |  |  | 3 and more years |  | 10.0 | % | - | 15.4 | % |  | 13.1 | %
|  |  |  | Index volatilities |  |  |  |  |  |  |
|  |  |  | 1 year |  | 13.6 | % | - | 19.3 | % |  | 14.5 | %
|  |  |  | 2 year |  | 17.5 | % | - | 22.7 | % |  | 19.2 | %
|  |  |  |  | 3 and more years |  | 19.9 | % | - | 22.7 | % |  | 21.8 | %
Foreign Exchange Options |  | $ | 76.8 |  |  | Counterparty valuations, adjusted for unwind quote discount |  | Adjustment to counterparty valuations |  | (2.2 | )% | - | (7.9 | )% |  | (3.4 | )%
Equity Index Options |  | $ | 63.7 |  |  | Counterparty valuations, adjusted for unwind quote discount |  | Adjustment to counterparty valuations |  | (1.1 | )% | - | (2.5 | )% |  | (1.5 | )%
The following summarizes realized and unrealized gains (losses) recognized in other revenues for the years ended December 31, 2012, 2011 and 2010 and the carrying values at December 31, 2012 and 2011 by type of instrument:
|  |  |  |  |  |  |  | Carrying Value
|  | Year Ended December 31, |  | December 31,
Millions |  | 2012 |  | 2011 |  | 2010 |  | 2012 |  | 2011
Fixed income/interest rate |  | $ | (149.5 | ) |  | $ | 8.9 |  |  | $ | 17.6 |  |  | $ | 4.3 |  |  | $ | 31.1 |
Foreign exchange |  | (102.3 | ) |  | 29.5 |  |  | 144.6 |  |  | 51.3 |  |  | 161.3 |
Equity |  | (87.2 | ) |  | 54.5 |  |  | (35.2 | ) |  | 42.7 |  |  | 98.0 |
Total |  | $ | (339.0 | ) |  | $ | 92.9 |  |  | $ | 127.0 |  |  | $ | 98.3 |  |  | $ | 290.4 |
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 over-the-counter counterparties’ credit ratings. WM Life Re has entered into master netting agreements with certain of its OTC counterparties whereby the collateral provided (held) is calculated on a net basis. Collateral held consists of money-market instruments, carried at amortized cost, which approximates fair value. The OTC derivative contracts are subject to restrictions on liquidation of the instruments and distribution of proceeds under collateral agreements. The following summarizes the value of collateral provided (held) by WM Life Re and net exposure on OTC derivative instruments recorded within other assets:
Millions |  | December 31, 2012 |  | December 31, 2011
OTC derivative instruments (1) |  | $ | 123.5 |  |  | $ | 295.4 |
Collateral held |  | (30.6 | ) |  | (73.2 | )
Collateral provided |  | 119.3 |  |  | 83.0 |
Net exposure on fair value of OTC instruments |  | $ | 212.2 |  |  | $ | 305.2 |
(1)Value of OTC derivative instruments as of December 31, 2012 and 2011 excludes adjustments for counterparty credit risk of $(3.6) and $(9.1) included in fair value under GAAP. The following table summarizes uncollateralized amounts due under WM Life Re’s OTC derivative contracts as of December 31, 2012 by counterparty:
Millions |  | Uncollateralized balance as of December 31, 2012 |  | Standard & Poor’s Rating (1)
Citigroup (2) |  | $ | 54.9 |  |  | A
Bank of America |  | 49.6 |  |  | A
Royal Bank of Scotland |  | 34.5 |  |  | A
JP Morgan Chase (2) |  | 30.9 |  |  | A+
Nomura (2) |  | 26.9 |  |  | BBB+
Barclays |  | 12.3 |  |  | A+
Goldman Sachs |  | 3.1 |  |  | A-
Total |  | $ | 212.2 |  |  |
(1) | Standard & Poor’s ratings as detailed above are: “A+” (Strong, which is the fifth highest of twenty-one creditworthiness ratings),“A” (which is the sixth highest of twenty-one creditworthiness ratings), “A-” (which is the seventh highest of twenty-one creditworthiness ratings), and BBB+ (which is the eighth highest of twenty-one creditworthiness ratings).
(2) | Collateral provided (held) calculated under master netting agreement.
In addition, WM Life Re held cash and short-term investments posted as collateral to its variable annuity reinsurance counterparty. The total collateral comprises the following:
|  | Year Ended December 31,
Millions |  | 2012 |  | 2011
Cash |  | $ | 249.8 |  |  | $ | 453.5 |
Short-term investments |  | 5.1 |  |  | .6 |
Fixed maturity investments |  | 138.7 |  |  | 31.2 |
Total |  | $ | 393.6 |  |  | $ | 485.3 |
Forward Contracts White Mountains is exposed to foreign currency risk related to Sirius International as its functional currency is the Swedish krona (SEK). In addition, Sirius International holds net assets denominated in euros (EUR), British pound sterling (GBP), and U.S. Dollars (USD). Beginning in September 2012, White Mountains entered into forward contracts through a twelve month trial program with a third-party currency specialist manager to determine whether purchasing external forward currency contracts would improve the management of foreign currency exposure 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 December 31, 2012, White Mountains held approximately $31.2 million (SEK 202.8 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 December 31, 2012. The following tables summarize the changes in White Mountains’ forward contracts for the year ended December 31, 2012:
Millions |  | Year ended December 31, 2012
Beginning of period |  | $ | — |
Purchases |  | — |
Realized and unrealized gains(losses) |  | (.3 | )
Sales/settlements |  | .2 |
End of period |  | $ | (.1 | )
The following summarizes realized and unrealized derivative gains (losses) recognized in net realized and unrealized investment gains and the carrying values, included in other long-term investments, at December 31, 2012 by type of currency:
|  | December 31, 2012
Millions |  | Gains (Losses) |  | Carrying Value
USD |  | $ | (.2 | ) |  | $ | — |
SEK |  | — |  |  | — |
EUR |  | (.1 | ) |  | (.1 | )
GBP |  | — |  |  | — |
Currency Translation |  | — |  |  | — |
Total |  | $ | (.3 | ) |  | $ | (.1 | )
White Mountains does not hold or provide any collateral for the forward contracts. The following table summarizes the notional amounts and the uncollateralized balances associated with forward currency contracts by counterparty:
|  | December 31, 2012 |  |
Millions |  | Notional amount |  | Uncollateralized Balance |  | S&P Rating (1)
Deutsche Bank |  | $ | 11.1 |  |  | $ | — |  |  | A+
Barclays Bank London |  | 7.7 |  |  | (.1 | ) |  | A+
HSBC Bank plc |  | 10.1 |  |  | — |  |  | AA-
JP Morgan |  | 1.9 |  |  | — |  |  | A+
Goldman Sachs |  | .4 |  |  | — |  |  | A-
Total |  | $ | 31.2 |  |  | $ | (.1 | ) |  |
(1) Standard & Poor’s (“S&P”) 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 eighth highest of twenty-one creditworthiness ratings).

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