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Derivatives | 9 Months Ended
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Sep. 30, 2014
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. WM Life Re reinsured ¥200 billion (approximately $1.7 billion at the then current exchange rate) of guarantees in September 2006 and an additional ¥56 billion (approximately $0.5 billion at the then current exchange rate) in March 2007. At September 30, 2014 and December 31, 2013, the total guarantee value was approximately ¥156.8 billion (approximately $1.4 billion at exchange rates on that date) and ¥203.6 billion (approximately $1.9 billion at exchange rates on that date), respectively. The collective account values of the underlying variable annuities were approximately 107% and 104% of the guarantee value at September 30, 2014 and December 31, 2013, respectively. WM Life Re is in runoff, and all of its contracts will mature by June 30, 2016. The following table summarizes the pre-tax operating results of WM Life Re for the three and nine months ended September 30, 2014 and 2013.
|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
Millions |  | 2014 |  | 2013 |  | 2014 |  | 2013
Fees, included in other revenue |  | $ | 4.5 |  |  | $ | 6.2 |  |  | $ | 15.0 |  |  | $ | 19.2 |
Change in fair value of variable annuity liability, included in other revenue |  | 19.9 |  |  | 49.1 |  |  | 40.5 |  |  | 289.3 |
Change in fair value of derivatives, included in other revenue |  | (23.8 | ) |  | (63.1 | ) |  | (56.5 | ) |  | (308.4 | )
Foreign exchange, included in other revenue |  | (1.7 | ) |  | .6 |  |  | (1.2 | ) |  | (13.9 | )
Other investment income and (losses) gains |  | (.9 | ) |  | .2 |  |  | (.4 | ) |  | (5.2 | )
Total revenue |  | (2.0 | ) |  | (7.0 | ) |  | (2.6 | ) |  | (19.0 | )
Change in fair value of variable annuity death benefit liabilities, included in other general and administrative expenses |  | .2 |  |  | 1.3 |  |  | .6 |  |  | 8.5 |
Death benefit claims paid, included in general and administrative expenses |  | — |  |  | (.2 | ) |  | (.1 | ) |  | (1.6 | )
General and administrative expenses |  | (.9 | ) |  | (1.0 | ) |  | (3.3 | ) |  | (3.8 | )
Pre-tax loss |  | $ | (2.7 | ) |  | $ | (6.9 | ) |  | $ | (5.4 | ) |  | $ | (15.9 | )
The following summarizes realized and unrealized derivative gains (losses) recognized in other revenue for the three and nine months ended September 30, 2014 and 2013 and the carrying values, included in other assets, at September 30, 2014 and December 31, 2013 by type of instrument:
|  | Gains (losses) |  | Carrying Value
|  | Three Months Ended |  | Nine Months Ended |  | As of
|  | September 30, |  | September 30, |  | September 30, 2014 |  | December 31, 2013
Millions |  | 2014 |  | 2013 |  | 2014 |  | 2013 |  |
Fixed income/interest rate |  | $ | (8.4 | ) |  | $ | (24.1 | ) |  | $ | (20.4 | ) |  | $ | (97.4 | ) |  | $ | (2.1 | ) |  | $ | (9.7 | )
Foreign exchange |  | (.4 | ) |  | (28.5 | ) |  | (13.3 | ) |  | (144.5 | ) |  | 52.3 |  |  | 58.0 |
Equity |  | (15.0 | ) |  | (10.5 | ) |  | (22.8 | ) |  | (66.5 | ) |  | 15.1 |  |  | 20.9 |
Total |  | $ | (23.8 | ) |  | $ | (63.1 | ) |  | $ | (56.5 | ) |  | $ | (308.4 | ) |  | $ | 65.3 |  |  | $ | 69.2 |
The following tables summarize the changes in White Mountains’s variable annuity reinsurance liabilities and derivative instruments for the three and nine months ended September 30, 2014 and 2013:
|  | Three Months Ended September 30, 2014
|  | Variable Annuity (Liabilities) |  | Derivative Instruments
Millions |  | Level 3 |  | Level 3 (1) |  | Level 2 (1)(2) |  | Level 1 (3) |  | Total
Beginning of period |  | $ | (31.8 | ) |  | $ | 53.3 |  |  | $ | 22.3 |  |  | $ | (.8 | ) |  | $ | 74.8 |
Purchases |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Realized and unrealized gains (losses) |  | 20.1 |  | (4) | (17.4 | ) |  | (19.8 | ) |  | 13.4 |  |  | (23.8 | )
Transfers in |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales/settlements |  | — |  |  | — |  |  | 22.5 |  |  | (8.2 | ) |  | 14.3 |
End of period |  | $ | (11.7 | ) |  | $ | 35.9 |  |  | $ | 25.0 |  |  | $ | 4.4 |  |  | $ | 65.3 |
|  | Nine Months Ended September 30, 2014
|  | Variable Annuity (Liabilities) |  | Derivative Instruments
Millions |  | Level 3 |  | Level 3 (1) |  | Level 2 (1)(2) |  | Level 1 (3) |  | Total
Beginning of period |  | $ | (52.8 | ) |  | $ | 63.4 |  |  | $ | 4.7 |  |  | $ | 1.1 |  |  | $ | 69.2 |
Purchases |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Realized and unrealized gains (losses) |  | 41.1 |  | (4) | (27.5 | ) |  | (42.1 | ) |  | 13.1 |  |  | (56.5 | )
Transfers in |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales/settlements |  | — |  |  | — |  |  | 62.4 |  |  | (9.8 | ) |  | 52.6 |
End of period |  | $ | (11.7 | ) |  | $ | 35.9 |  |  | $ | 25.0 |  |  | $ | 4.4 |  |  | $ | 65.3 |
|  | 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 |
(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 $0.2 and $0.6 for the three and nine months ended September 30, 2014 and $1.3 and $8.5 for the three and nine months ended September 30, 2013 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 includes the following:
Millions |  | September 30, 2014 |  | December 31, 2013 |  | September 30, 2013
Cash |  | $ | 23.8 |  |  | $ | 56.1 |  |  | $ | 74.4 |
Short-term investments |  | — |  |  | 2.0 |  |  | 15.8 |
Fixed maturity investments |  | 10.4 |  |  | 23.2 |  |  | 24.6 |
Total |  | $ | 34.2 |  |  | $ | 81.3 |  |  | $ | 114.8 |
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’s variable annuity reinsurance liabilities were classified as Level 3 measurements at September 30, 2014 and 2013. The fair value of White Mountains’s 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, 2014
Description |  | Fair Value |  | Valuation Technique(s) |  | Unobservable Input |  | Range |  | Weighted Average
Variable annuity benefit guarantee liabilities |  | $ | 11.7 |  |  | Discounted cash flows |  | Surrenders |  |  |  |  |  |
|  |  |  | 1 year |  | 0.2 | % | - | 32.0% |  | 26.0 | %
|  |  |  | 2 year |  | 0.1 | % | - | 14.0% |  | 7.2 | %
|  |  |  |  | Mortality |  | 0.0 | % | - | 5.9% |  | 1.0 | %
|  |  |  |  | Foreign exchange volatilities |  |  |  |  |  |
|  |  |  |  |  | 1 year |  | 10.3 | % | - | 13.0% |  | 10.9 | %
|  |  |  |  |  | 2 year |  | 10.6 | % | - | 12.6% |  | 11.4 | %
|  |  |  |  |  | Index volatilities |  |  |  |  |  |
|  |  |  |  |  | 1 year |  | 18.3 | % | - | 21.0% |  | 20.3 | %
|  |  |  |  |  | 2 year |  | 18.2 | % | - | 21.1% |  | 20.3 | %
Foreign exchange options |  | $ | 15.4 |  |  | Counterparty valuations, adjusted for unwind quote discount |  | Adjustment to counterparty valuations |  | (1.2 | )% | - | 8.0% |  | 2.6 | %
Equity index options | $ | 20.5 |  |  | Counterparty valuations, adjusted for unwind quote discount |  | Adjustment to counterparty valuations |  | 0.5 | % | - | 9.7% |  | 3.2 | %
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, 2014 |  | December 31, 2013
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 |  |  | $ | (3.1 | ) |  | $ | (2.9 | ) |  | $ | 2.4 |  |  | $ | (11.7 | ) |  | $ | (9.3 | )
Exchange traded |  | .8 |  |  | — |  |  | .8 |  |  | 1.0 |  |  | (1.6 | ) |  | (.6 | )
Foreign exchange contracts |  |  |  |  |  |  |  |  |  |  |  |
OTC |  | 48.0 |  |  | — |  |  | 48.0 |  |  | 67.8 |  |  | (12.0 | ) |  | 55.8 |
Exchange traded |  | 5.0 |  |  | (.7 | ) |  | 4.3 |  |  | 2.3 |  |  | — |  |  | 2.3 |
Equity contracts |  |  |  |  |  |  |  |  |  |  |  |
OTC |  | 20.5 |  |  | (4.7 | ) |  | 15.8 |  |  | 30.7 |  |  | (9.2 | ) |  | 21.5 |
Exchange traded |  | .6 |  |  | (1.3 | ) |  | (.7 | ) |  | 1.8 |  |  | (2.3 | ) |  | (.5 | )
Total(2) |  | $ | 75.1 |  |  | $ | (9.8 | ) |  | $ | 65.3 |  |  | $ | 106.0 |  |  | $ | (36.8 | ) |  | $ | 69.2 |
(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, 2014
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 |  | $ | 16.5 |  |  | $ | — |  |  | $ | — |  |  | $ | 16.5 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 16.5 |  |  | A |
Barclays |  | .5 |  |  | — |  |  | — |  |  | .5 |  |  | — |  |  | — |  |  | — |  |  | .5 |  |  | A |
JP Morgan |  | 21.7 |  |  | — |  |  | — |  |  | 21.7 |  |  | — |  |  | — |  |  | — |  |  | 21.7 |  |  | A | +
Royal Bank of Scotland |  | 7.1 |  |  | — |  |  | — |  |  | 7.1 |  |  | — |  |  | — |  |  | — |  |  | 7.1 |  |  | A | -
Nomura |  | (.3 | ) |  | .3 |  |  | — |  |  | — |  |  | 2.6 |  |  | 10.4 |  |  | — |  |  | 13.0 |  |  | BBB | +
Citigroup - OTC |  | 15.5 |  |  | — |  |  | — |  |  | 15.5 |  |  | 6.9 |  |  | — |  |  | — |  |  | 22.4 |  |  | A |
Citigroup - Exchange Traded |  | 4.3 |  |  | — |  |  | — |  |  | 4.3 |  |  | 13.9 |  |  | — |  |  | — |  |  | 18.2 |  |  | A |
Total |  | $ | 65.3 |  |  | $ | .3 |  |  | $ | — |  |  | $ | 65.6 |  |  | $ | 23.4 |  |  | $ | 10.4 |  |  | $ | — |  |  | $ | 99.4 |  |  |  |
|  | December 31, 2013 |
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 |  | $ | 27.2 |  |  | $ | — |  |  | — |  |  | $ | 27.2 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 27.2 |  |  | A |
Barclays |  | 1.4 |  |  | — |  |  | — |  |  | 1.4 |  |  | — |  |  | — |  |  | — |  |  | 1.4 |  |  | A |
JP Morgan |  | 9.1 |  |  | — |  |  | — |  |  | 9.1 |  |  | 22.0 |  |  | — |  |  | — |  |  | 31.1 |  |  | A | +
Royal Bank of Scotland |  | 11.3 |  |  | — |  |  | — |  |  | 11.3 |  |  | — |  |  | — |  |  | — |  |  | 11.3 |  |  | A |
Nomura |  | (.4 | ) |  | — |  |  | .4 |  |  | — |  |  | — |  |  | 22.8 |  |  | (.8 | ) |  | 22.0 |  |  | BBB | +
Citigroup - OTC |  | 19.4 |  |  | — |  |  | — |  |  | 19.4 |  |  | 2.3 |  |  | — |  |  | — |  |  | 21.7 |  |  | A |
Citigroup - Exchange Traded |  | 1.2 |  |  | — |  |  | — |  |  | 1.2 |  |  | 19.8 |  |  | — |  |  | — |  |  | 21.0 |  |  | A |
Total |  | $ | 69.2 |  |  | $ | — |  |  | $ | .4 |  |  | $ | 69.6 |  |  | $ | 44.1 |  |  | $ | 22.8 |  |  | $ | (.8 | ) |  | $ | 135.7 |  |  |  |
(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 currency 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, 2014, White Mountains held approximately $9.4 million (SEK 68.0 million) total gross notional value of foreign currency forward contracts. All of White Mountains’s 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, 2014. As of September 30, 2014 and December 31, 2013, the carrying value of the forward contracts, included in other long-term investments, was $0.2 million and $(0.1) million. The net realized and unrealized derivative gains (losses) recognized in net realized and unrealized investment gains (losses) for the three and nine months ended September 30, 2014 were $0.3 million and $0.2 million. The realized and unrealized derivative gains (losses) recognized in net realized and unrealized investment gains (losses) for the three and nine months ended September 30, 2013 were $(0.5) million and $(0.3) million. All of White Mountains’s forward contracts are subject to master netting agreements. As of September 30, 2014, the gross liability amount offset under master netting arrangements and net amounts recognized in other investments was $0.2 million. As of December 31, 2013, the gross liability amount offset under master netting arrangements and the net amount recognized in other investments was $(0.1) million. 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, 2014 |  | December 31, 2013
Millions |  | Notional Amount |  | Carrying Value |  | Standard & Poor's Rating(1) |  | Notional Amount |  | Carrying Value
Barclays Bank Plc |  | $ | 1.3 |  |  | $ | — |  |  | A |  | $ | 5.8 |  |  | $ | — |
Deutsche Bank |  | 2.2 |  |  | .1 |  |  | A |  | 7.7 |  |  | — |
Goldman Sachs |  | 3.6 |  |  | .1 |  |  | A |  | 2.1 |  |  | — |
HSBC Bank Plc |  | 1.1 |  |  | — |  |  | AA- |  | 3.3 |  |  | (.1 | )
JP Morgan |  | 1.2 |  |  | — |  |  | A+ |  | 1.3 |  |  | — |
Royal Bank of Canada |  | — |  |  | — |  |  | AA- |  | .2 |  |  | — |
Total |  | $ | 9.4 |  |  | $ | .2 |  |  |  |  | $ | 20.4 |  |  | $ | (.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 eighth 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 basis points. 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 economically 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 basis points 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 within other revenue. 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 measurement at September 30, 2014. The following tables summarize the changes in the fair value of the Interest Rate Cap for the three and nine months ended September 30, 2014:
|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
Millions |  | 2014 |  | 2014
Beginning of period |  | $ | 6.2 |  |  | $ | 11.1 |
Net realized and unrealized losses |  | (.8 | ) |  | (5.7 | )
End of period |  | $ | 5.4 |  |  | $ | 5.4 |
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’s 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, 2014
Millions |  | Collateral Balances Held |  | Standard & Poor’s Rating(1)
Barclays Bank Plc |  | $ | 3.7 |  |  | A
Nordea Bank Finland Plc |  | 1.7 |  |  | AA-
Total |  | $ | 5.4 |  |  |
(1) Standard & Poor’s ratings as detailed above are: “AA-” (Very Strong, which is the fourth highest of twenty-one creditworthiness ratings) and “A” (Strong, which is the sixth highest of twenty-one creditworthiness ratings).
Weather derivatives |
Derivatives | Weather Derivatives For the three and nine months ended September 30, 2014, Sirius Group recognized $0.8 million and $0.2 million of net gains on its weather and weather contingent derivatives portfolio. The fair values of the assumed contracts are subject to change in the near-term and reflect management’s best estimate based on various factors including, but not limited to, observed and forecasted weather conditions, changes in interest or foreign currency exchange rates and other market factors. Estimating the fair value of derivative instruments that do not have quoted market prices requires management’s judgment in determining amounts that could reasonably be expected to be received from or paid to a third party to settle the contracts. Such amounts could be materially different from the amounts that might be realized in an actual transaction to settle the contract with a third party. Because of the significance of the unobservable inputs used to estimate the fair value of Sirius Group’s weather risk contracts, the fair value measurements of the contracts are deemed to be Level 3 measurements in the fair value hierarchy.

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