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Derivatives | 3 Months Ended
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Mar. 31, 2013
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 March 31, 2013 and December 31, 2012, the total guarantee value was approximately ¥228.5 billion (approximately $2.4 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 94% and 87% of the guarantee value at March 31, 2013 and December 31, 2012, respectively. The following table summarizes the pre-tax operating results of WM Life Re for the three months ended March 31, 2013 and 2012
|  | Three Months Ended
|  | March 31,
Millions |  | 2013 |  | 2012
Fees, included in other revenues |  | $ | 6.8 |  |  | $ | 8.0 |
Change in fair value of variable annuity liability, included in other revenues |  | 184.3 |  |  | 211.2 |
Change in fair value of derivatives, included in other revenues |  | (181.8 | ) |  | (206.5 | )
Foreign exchange, included in other revenues |  | (14.6 | ) |  | (23.0 | )
Other investment income and gains (losses) |  | (4.0 | ) |  | (2.1 | )
Total revenues |  | (9.3 | ) |  | (12.4 | )
Change in fair value of variable annuity death benefit liabilities, included in other general and administrative expenses |  | 5.6 |  |  | 8.8 |
Death benefit claims paid, included in general and administrative expenses |  | (1.1 | ) |  | (1.8 | )
General and administrative expenses |  | (1.7 | ) |  | (1.3 | )
Pre-tax loss |  | $ | (6.5 | ) |  | $ | (6.7 | )
The following summarizes realized and unrealized derivative gains (losses) recognized in other revenues for the three months ended March 31, 2013 and 2012 and the carrying values, included in other assets, at March 31, 2013 and December 31, 2012 by type of instrument:
|  |  |  | Carrying Value
|  | Three Months Ended |  | As of
|  | March 31, |  | March 31, 2013 |  | December 31, 2012
Millions |  | 2013 |  | 2012 |  |
Fixed income/interest rate |  | $ | (30.9 | ) |  | $ | (79.0 | ) |  | $ | (16.2 | ) |  | $ | 27.1 |
Foreign exchange |  | (53.6 | ) |  | (55.0 | ) |  | 74.1 |  |  | 52.8 |
Equity |  | (97.3 | ) |  | (72.5 | ) |  | 17.9 |  |  | 18.4 |
Total |  | $ | (181.8 | ) |  | $ | (206.5 | ) |  | $ | 75.8 |  |  | $ | 98.3 |
The following tables summarize the changes in White Mountains’ variable annuity reinsurance liabilities and derivative instruments for the three months ended March 31, 2013 and 2012:
|  | Three Months Ended March 31, 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 |  | — |  |  | 36.1 |  |  | — |  |  | — |  |  | 36.1 |
Realized and unrealized gains (losses) |  | 189.9 |  | (4) | (49.2 | ) |  | (85.5 | ) |  | (47.1 | ) |  | (181.8 | )
Transfers in |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales/settlements |  | — |  |  | — |  |  | 63.1 |  |  | 60.1 |  |  | 123.2 |
End of period |  | $ | (251.6 | ) |  | $ | 127.4 |  |  | $ | (42.9 | ) |  | $ | (8.7 | ) |  | $ | 75.8 |
|  | Three Months Ended March 31, 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) |  | 220.0 |  | (4) | (60.3 | ) |  | (98.2 | ) |  | (48.0 | ) |  | (206.5 | )
Transfers in |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales/settlements |  | — |  |  | (9.1 | ) |  | 58.9 |  |  | 34.5 |  |  | 84.3 |
End of period |  | $ | (548.5 | ) |  | $ | 183.8 |  |  | $ | (.1 | ) |  | $ | (9.4 | ) |  | $ | 174.3 |
(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 $5.6 and $8.8 for the three months ended March 31, 2013 and 2012, respectively, related to the increase in the fair value of variable annuity death benefit liabilities, which are included in other general and administrative expenses. The U.S. dollar strengthened significantly against the Japanese Yen during the first quarter of 2013, which contributed to the decrease in the variable annuity liability during the quarter. 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 |  | March 31, 2013 |  | December 31, 2012 |  | March 31, 2012
Cash |  | $ | 188.5 |  |  | $ | 249.8 |  |  | $ | 360.1 |
Short-term investments |  | 15.6 |  |  | 5.1 |  |  | 1.5 |
Fixed maturity investments |  | 25.7 |  |  | 138.7 |  |  | 29.3 |
Total |  | $ | 229.8 |  |  | $ | 393.6 |  |  | $ | 390.9 |
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 March 31, 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) |  | March 31, 2013
Description |  | Fair Value |  | Valuation Technique(s) |  | Unobservable Input |  | Range |  | Weighted Average
Variable annuity benefit guarantee liabilities |  | $ | 251.6 |  |  | Discounted cash flows |  | Surrenders |  |  |  |  |  |
|  |  |  | 1 year |  | 0.3 | % | - | 3.0% |  | 0.7 | %
|  |  |  | 2 year |  | 0.2 | % | - | 3.0% |  | 0.8 | %
|  |  |  |  | 3 and more years |  | 0.1 | % | - | 3.0% |  | 0.7 | %
|  |  |  |  | Mortality |  | 0.0 | % | - | 5.3% |  | 0.9 | %
|  |  |  |  | Foreign exchange volatilities |  |  |  |  |  |
|  |  |  |  |  | 1 year |  | 11.2 | % | - | 13.3% |  | 12.2 | %
|  |  |  |  |  | 2 year |  | 11.7 | % | - | 14.0% |  | 12.6 | %
|  |  |  |  |  | 3 and more years |  | 12.3 | % | - | 14.6% |  | 13.2 | %
|  |  |  |  |  | Index volatilities |  |  |  |  |  |
|  |  |  |  |  | 1 year |  | 11.9 | % | - | 17.9% |  | 13.3 | %
|  |  |  |  |  | 2 year |  | 16.5 | % | - | 20.7% |  | 18.0 | %
|  |  |  |  |  | 3 and more years |  | 18.6 | % | - | 22.3% |  | 20.9 | %
Foreign exchange options |  | $ | 74.2 |  |  | Counterparty valuations, adjusted for unwind quote discount |  | Adjustment to counterparty valuations |  | (0.1 | )% | - | (3.2)% |  | (2.1 | )%
Equity index options | $ | 53.2 |  |  | Counterparty valuations, adjusted for unwind quote discount |  | Adjustment to counterparty valuations |  | (1.7 | )% | - | (3.0)% |  | (2.5 | )%
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:
|  | March 31, 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 |  | $ | — |  |  | $ | (15.6 | ) |  | $ | (15.6 | ) |  | $ | 52.6 |  |  | $ | (26.9 | ) |  | $ | 25.7 |
Exchange traded |  | 1.0 |  |  | (1.6 | ) |  | (.6 | ) |  | 1.6 |  |  | (.2 | ) |  | 1.4 |
Foreign exchange contracts |  |  |  |  |  |  |  |  |  |  |  |
OTC |  | 89.6 |  |  | (15.5 | ) |  | 74.1 |  |  | 87.8 |  |  | (34.4 | ) |  | 53.4 |
Exchange traded |  | .6 |  |  | (.6 | ) |  | — |  |  | .8 |  |  | (1.4 | ) |  | (.6 | )
Equity contracts |  |  |  |  |  |  |  |  |  |  |  |
OTC |  | 53.2 |  |  | (27.2 | ) |  | 26.0 |  |  | 63.6 |  |  | (22.9 | ) |  | 40.7 |
Exchange traded |  | .4 |  |  | (8.5 | ) |  | (8.1 | ) |  | .1 |  |  | (22.4 | ) |  | (22.3 | )
Total(2) |  | $ | 144.8 |  |  | $ | (69.0 | ) |  | $ | 75.8 |  |  | $ | 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:
|  | March 31, 2013
Millions |  | Net amount of assets reflected in Balance Sheet |  | Collateral provided - Financial Instruments |  | Collateral held - Financial Instruments |  | Collateral provided - Cash |  | Collateral held - Cash |  | Net amount of exposure after effect of collateral held |  | Standard & Poor's Rating(1)
Bank of America |  | $ | 60.0 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 10.8 |  |  | $ | 49.2 |  |  | A |
Barclays |  | 6.5 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 6.5 |  |  | A | +
JP Morgan |  | 3.1 |  |  | — |  |  | — |  |  | 31.3 |  |  | — |  |  | 34.4 |  |  | A | +
Royal Bank of Scotland |  | 26.4 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 26.4 |  |  | A |
Nomura |  | (6.2 | ) |  | 25.6 |  |  | — |  |  | 8.2 |  |  | — |  |  | 27.6 |  |  | BBB | +
Goldman Sachs |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | A | -
Citigroup - OTC |  | (5.3 | ) |  | — |  |  | — |  |  | 25.3 |  |  | — |  |  | 20.0 |  |  | A |
Citigroup - Exchange Traded |  | (8.7 | ) |  | — |  |  | — |  |  | 24.7 |  |  | — |  |  | 16.0 |  |  | A |
Total |  | $ | 75.8 |  |  | $ | 25.6 |  |  | $ | — |  |  | $ | 89.5 |  |  | $ | 10.8 |  |  | $ | 180.1 |  |  |  |
|  | December 31, 2012 |
Millions |  | Net amount of assets reflected in Balance Sheet |  | Collateral provided - Financial Instruments |  | Collateral held - Financial Instruments |  | Collateral provided - Cash |  | Collateral held - Cash |  | Net amount of exposure after effect of collateral held |  | Standard & Poor's Rating(1)
Bank of America |  | $ | 78.5 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 30.6 |  |  | $ | 47.9 |  |  | A |
Barclays |  | 11.6 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 11.6 |  |  | A | +
JP Morgan |  | (22.8 | ) |  | — |  |  | — |  |  | 55.6 |  |  | — |  |  | 32.8 |  |  | A | +
Royal Bank of Scotland |  | 33.6 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 33.6 |  |  | A |
Nomura |  | (0.9 | ) |  | 28.1 |  |  | — |  |  | 1.7 |  |  | — |  |  | 28.9 |  |  | BBB | +
Goldman Sachs |  | (0.1 | ) |  | — |  |  | — |  |  | 3.2 |  |  | — |  |  | 3.1 |  |  | A | -
Citigroup - OTC |  | 19.9 |  |  | — |  |  | — |  |  | 30.8 |  |  | — |  |  | 50.7 |  |  | A |
Citigroup - Exchange Traded |  | (21.5 | ) |  | — |  |  | — |  |  | 35.0 |  |  | — |  |  | 13.5 |  |  | A |
Total |  | $ | 98.3 |  |  | $ | 28.1 |  |  | $ | — |  |  | $ | 126.3 |  |  | $ | 30.6 |  |  | $ | 222.1 |  |  |  |
(1) Standard & Poor’s (“S&P”) 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 Beginning in September 2012, White Mountains entered into forward contracts to assist in maintaining currency positions within pre-defined ranges 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 March 31, 2013, White Mountains held approximately $79.3 million (SEK 517.5 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 March 31, 2013. The following tables summarize the changes in White Mountains' forward contracts for the three months ended March 31, 2013:
Millions |  | March 31, 2013
Beginning of period |  | $ | (.1 | )
Purchases |  | — |
Net realized and unrealized gains |  | .4 |
Sales/settlements |  | (.5 | )
End of period |  | $ | (.2 | )
The following summarizes realized and unrealized derivative gains (losses) recognized in net realized and unrealized investment gains for the three months ended March 31, 2013 and the carrying values, included in other long-term investments, at March 31, 2013 by type of currency:
|  | March 31, 2013
Millions |  | Gains (Losses) |  | Carrying Value
USD |  | $ | (.3 | ) |  | $ | (.3 | )
SEK |  | — |  |  | — |
EUR |  | — |  |  | — |
GBP |  | .7 |  |  | .1 |
Total |  | $ | .4 |  |  | $ | (.2 | )
All of White Mountains' forward contracts are over the counter instruments subject to master netting agreements. The following summarizes amounts offset under master netting agreements:
|  | March 31, 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 |  |  | $ | (.4 | ) |  | $ | (.3 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |
EUR |  | — |  |  | — |  |  | — |  |  | — |  |  | (.1 | ) |  | (.1 | )
GBP |  | .2 |  |  | (.1 | ) |  | .1 |  |  | — |  |  | — |  |  | — |
Total |  | $ | .3 |  |  | $ | (.5 | ) |  | $ | (.2 | ) |  | $ | — |  |  | $ | (.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:
|  | March 31, 2013 |  | December 31, 2012
Millions |  | Notional Amount |  | Carrying Value |  | Standard & Poor's Rating(1) |  | Notional Amount |  | Carrying Value
Barclays |  | 24.7 |  |  | .1 |  |  | A+ |  | 7.7 |  |  | (.1 | )
Deutsche Bank |  | 13.8 |  |  | (.2 | ) |  | A+ |  | 11.1 |  |  | — |
Goldman Sachs |  | 1.1 |  |  | — |  |  | A- |  | .4 |  |  | — |
HSBC |  | .1 |  |  | — |  |  | AA- |  | 10.1 |  |  | — |
JP Morgan |  | 22.1 |  |  | .1 |  |  | A+ |  | 1.9 |  |  | — |
Royal Bank of Canada |  | 17.5 |  |  | (.2 | ) |  | AA- |  | — |  |  | — |
Total |  | $ | 79.3 |  |  | $ | (.2 | ) |  |  |  | $ | 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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