Investment Securities

White Mountains’s invested assets consist of securities and other long-term investments held for general investment purposes. The portfolio of investment securities includes fixed maturity investments, short-term investments, common equity securities, and convertible fixed maturity and preferred investments which are all classified as trading securities. Trading securities are reported at fair value as of the balance sheet date. Realized and unrealized investment gains and losses on trading securities are reported in pre-tax revenues.

Income on mortgage-backed and asset-backed securities is recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized prospectively over the remaining economic life.

Realized investment gains and losses resulting from sales of investment securities are accounted for using the specific identification method. Premiums and discounts on all fixed maturity investments are amortized or accreted to income over the anticipated life of the investment. Short-term investments consist of money market funds, certificates of deposit and other securities which, at the time of purchase, mature or become available for use within one year. Short-term investments are carried at amortized or accreted cost, which approximated fair value as of June 30, 2015 and December 31, 2014.

Other long-term investments consist primarily of hedge funds, private equity funds, surplus note investments, private equity securities and limited liability companies and other investments in limited partnerships.

Net Investment Income

Pre-tax net investment income for the three and six months ended June 30, 2015 and 2014 consisted of the following:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
Millions	2015			2014			2015			2014
Investment income:
Fixed maturity investments	$	23.4		$	25.6		$	46.5		$	48.0
Short-term investments	.7			.6			1.3			1.2
Common equity securities	3.3			5.5			6.7			10.9
Convertible fixed maturity and preferred investments	.1			.8			.3			1.2
Other long-term investments	.9			1.9			.8			2.6
Interest on funds held under reinsurance treaties	—			—			(.1		)	—
Total investment income	28.4			34.4			55.5			63.9
Third-party investment expenses	(4.6		)	(4.8		)	(8.4		)	(9.6		)
Net investment income, pre-tax	$	23.8		$	29.6		$	47.1		$	54.3

Net Realized and Unrealized Investment Gains and Losses

Net realized and unrealized investment gains and losses for the three and six months ended June 30, 2015 and 2014 consisted of the following:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
Millions	2015			2014			2015			2014
Net realized investment gains, pre-tax	$	112.9		$	30.5		$	165.7		$	52.2
Net unrealized investment (losses) gains, pre-tax	(174.0		)	83.4			(123.4		)	125.5
Net realized and unrealized investment (losses) gains, pre-tax	(61.1		)	113.9			42.3			177.7
Income tax benefit (expense) attributable to net realized and unrealized investment gains (losses)	16.5			(23.0		)	(9.8		)	(38.7		)
Net realized and unrealized investment (losses) gains, after tax	$	(44.6	)	$	90.9		$	32.5		$	139.0

Net realized investment gains (losses)

Net realized investment gains (losses) for the three and six months ended June 30, 2015 and 2014 consisted of the following:



	Three Months Ended									Three Months Ended
	June 30, 2015									June 30, 2014
Millions	Net realized gains (losses)			Net foreign currency gains			Total net realized gains (losses) reflected in earnings			Net realized gains			Net foreign currency gains			Total net realized gains reflected in earnings
Fixed maturity investments	$	2.7		$	14.3		$	17.0		$	5.7		$	3.0		$	8.7
Short-term investments	—			5.7			5.7			—			—			—
Common equity securities	65.9			7.2			73.1			19.4			—			19.4
Convertible fixed maturity and preferred investments	.6			—			.6			1.5			—			1.5
Other long-term investments	16.9			—			16.9			.6			.3			.9
Forward contracts	(.4		)	—			(.4		)	—			—			—
Net realized investment gains, pre-tax	85.7			27.2			112.9			27.2			3.3			30.5
Income tax (expense) attributable to net realized investment gains	(24.6		)	(6.4		)	(31.0		)	(5.3		)	(1.0		)	(6.3		)
Net realized investment gains, after tax	$	61.1		$	20.8		$	81.9		$	21.9		$	2.3		$	24.2



	Six Months Ended									Six Months Ended
	June 30, 2015									June 30, 2014
Millions	Net realized gains (losses)			Net foreign currency gains			Total net realized gains (losses) reflected in earnings			Net realized gains (losses)			Net foreign currency (losses) gains			Total net realized gains (losses) reflected in earnings
Fixed maturity investments	$	12.4		$	35.5		$	47.9		$	10.1		$	(.5	)	$	9.6
Short-term investments	—			9.3			9.3			—			—			—
Common equity securities	90.3			8.3			98.6			38.3			(.1		)	38.2
Convertible fixed maturity and preferred investments	(3.6		)	—			(3.6		)	3.9			—			3.9
Other long-term investments	12.8			1.1			13.9			.3			.3			.6
Forward contracts	(.4		)	—			(.4		)	(.1		)	—			(.1		)
Net realized investment gains (losses), pre-tax	111.5			54.2			165.7			52.5			(.3		)	52.2
Income tax (expense) attributable to net realized investment gains (losses)	(31.1		)	(13.1		)	(44.2		)	(9.9		)	(.1		)	(10.0		)
Net realized investment gains (losses), after tax	$	80.4		$	41.1		$	121.5		$	42.6		$	(.4	)	$	42.2

Net unrealized investment gains (losses)

The following table summarizes net unrealized investment gains (losses) for the three and six months ended June 30, 2015 and 2014:



	Three Months Ended									Three Months Ended
	June 30, 2015									June 30, 2014
Millions	Net unrealized (losses)			Net foreign currency (losses) gains			Total net unrealized (losses) reflected in earnings			Net unrealized gains (losses)			Net foreign currency gains			Total net unrealized gains (losses) reflected in earnings
Fixed maturity investments	$	(34.7	)	$	(39.0	)	$	(73.7	)	$	24.9		$	28.2		$	53.1
Short-term investments	—			—			—			—			—			—
Common equity securities	(63.9		)	(8.2		)	(72.1		)	21.0			1.4			22.4
Convertible fixed maturity and preferred investments	—			(.1		)	(.1		)	(2.4		)	.3			(2.1		)
Other long-term investments	(29.1		)	1.0			(28.1		)	8.7			1.3			10.0
Forward contracts	—			—			—			—			—			—
Net unrealized investment (losses) gains, pre-tax	(127.7		)	(46.3		)	(174.0		)	52.2			31.2			83.4
Income tax benefit (expense) attributable to net unrealized investment (losses) gains	36.0			11.5			47.5			(9.8		)	(6.9		)	(16.7		)
Net unrealized investment (losses) gains, after tax	$	(91.7	)	$	(34.8	)	$	(126.5	)	$	42.4		$	24.3		$	66.7



	Six Months Ended									Six Months Ended
	June 30, 2015									June 30, 2014
Millions	Net unrealized (losses) gains			Net foreign currency gains (losses)			Total net unrealized (losses) gains reflected in earnings			Net unrealized gains (losses)			Net foreign currency gains			Total net unrealized gains (losses) reflected in earnings
Fixed maturity investments	$	(22.6	)	$	1.2		$	(21.4	)	$	44.3		$	40.4		$	84.7
Short-term investments	—			—			—			—			—			—
Common equity securities	(68.1		)	(7.5		)	(75.6		)	25.0			1.9			26.9
Convertible fixed maturity and preferred investments	.7			—			.7			(1.7		)	.3			(1.4		)
Other long-term investments	(28.2		)	1.1			(27.1		)	13.6			1.7			15.3
Forward contracts	—			—			—			—			—			—
Net unrealized investment (losses) gains, pre-tax	(118.2		)	(5.2		)	(123.4		)	81.2			44.3			125.5
Income tax benefit (expense) attributable to net unrealized investment (losses) gains	33.2			1.2			34.4			(18.9		)	(9.8		)	(28.7		)
Net unrealized investment (losses) gains, after tax	$	(85.0	)	$	(4.0	)	$	(89.0	)	$	62.3		$	34.5		$	96.8

The following table summarizes the amount of total pre-tax unrealized investment (losses) gains included in earnings for Level 3 investments for the three and six months ended June 30, 2015 and 2014:



	Three Months Ended					Six Months Ended
	June 30,					June 30,
Millions	2015			2014		2015			2014
Fixed maturity investments	$	.3		$	.2	$	(.4	)	$	.4
Common equity securities	4.9			2.0		3.1			2.8
Convertible fixed maturity and preferred investments	.7			3.2		.8			3.2
Other long-term investments	(27.2		)	8.9		(30.0		)	15.0
Total unrealized investment (losses) gains, pre-tax - Level 3 investments	$	(21.3	)	$	14.3	$	(26.5	)	$	21.4

Investment Holdings

The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and losses, and carrying values of White Mountains’s fixed maturity investments as of June 30, 2015 and December 31, 2014 were as follows:



	June 30, 2015
Millions	Cost or amortized cost⁽¹⁾		Gross unrealized gains		Gross unrealized losses			Net foreign currency (losses) gain⁽¹⁾			Carrying value
U.S. Government and agency obligations	$	183.9	$	.3	$	(.2	)	$	(.4	)	$	183.6
Debt securities issued by corporations	2,232.7		27.7		(7.0		)	57.7			2,311.1
Municipal obligations	118.0		.8		(1.1		)	—			117.7
Mortgage-backed and asset-backed securities	2,057.4		9.2		(4.7		)	15.5			2,077.4
Foreign government, agency and provincial obligations	98.9		.3		(1.1		)	.6			98.7
Preferred stocks	79.5		6.3		—			.2			86.0
Total fixed maturity investments	$	4,770.4	$	44.6	$	(14.1	)	$	73.6		$	4,874.5

(1) The cost of investment securities is determined using the functional currency of the White Mountains consolidated entity that holds the investment. As a result, the table includes unrealized foreign currency gains from U.S. dollar denominated investments held at Sirius Group.



	December 31, 2014
Millions	Cost or amortized cost⁽¹⁾		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains (losses)⁽¹⁾			Carrying value
U.S. Government and agency obligations	$	184.7	$	.1	$	(.3	)	$	3.6		$	188.1
Debt securities issued by corporations	2,221.3		45.2		(5.1		)	49.8			2,311.2
Municipal obligations	82.0		1.4		(.2		)	—			83.2
Mortgage-backed and asset-backed securities	1,811.1		7.6		(3.5		)	25.7			1,840.9
Foreign government, agency and provincial obligations	274.6		4.2		(1.0		)	(2.7		)	275.1
Preferred stocks	79.6		6.1		—			.1			85.8
Total fixed maturity investments	$	4,653.3	$	64.6	$	(10.1	)	$	76.5		$	4,784.3

⁽¹⁾ The cost of investment securities is determined using the functional currency of the White Mountains consolidated entity that holds the investment. As a result, the table includes unrealized foreign currency gains from U.S. dollar denominated investments held at Sirius Group.

The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and losses, and carrying values of White Mountains’s common equity securities, convertible fixed maturity and preferred investments and other long-term investments as of June 30, 2015 and December 31, 2014 were as follows:



	June 30, 2015
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains		Carrying value
Common equity securities	$	656.7	$	69.1	$	(12.2	)	$	.2	$	713.8
Convertible fixed maturity and preferred investments	$	3.1	$	1.4	$	—		$	—	$	4.5
Other long-term investments	$	346.0	$	54.0	$	(11.9	)	$	2.0	$	390.1



	December 31, 2014
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency (losses) gains			Carrying value
Common equity securities	$	633.6	$	175.1	$	(5.2	)	$	(1.9	)	$	801.6
Convertible fixed maturity and preferred investments	$	19.1	$	.9	$	(.2	)	$	.7		$	20.5
Other long-term investments	$	343.3	$	73.0	$	(10.9	)	$	1.6		$	407.0

Other Long-term Investments

Other long-term investments consist of the following as of June 30, 2015 and December 31, 2014:



	Carrying Value at
Millions	June 30, 2015		December 31, 2014
Hedge funds and private equity funds, at fair value⁽¹⁾	$	210.8	$	242.9
Surplus notes investments, at fair value⁽¹⁾	66.3		65.1
Private equity securities and limited liability companies, at fair value⁽¹⁾⁽²⁾	89.9		69.7
Tax advantaged federal affordable housing development fund⁽³⁾	15.8		16.8
Partnership investments accounted for under the equity method	3.9		5.2
Other⁽¹⁾	3.4		7.3
Total other-long term investments	$	390.1	$	407.0

⁽¹⁾See Fair Value Measurements by Level table.

⁽²⁾On April 2, 2015, White Mountains invested $21.0 in PassportCard. White Mountains has chosen to take the fair value election for its investment.

⁽³⁾Fund accounted for using the proportional amortization method.

Hedge Funds and Private Equity Funds

White Mountains holds investments in hedge funds and private equity funds, which are included in other long-term investments. The fair value of these investments has been estimated using the net asset value of the funds. As of June 30, 2015, White Mountains held investments in 14 hedge funds and 29 private equity funds. The largest investment in a single fund was $25.0 million as of June 30, 2015. The following table summarizes investments in hedge funds and private equity funds by investment objective and sector as of June 30, 2015 and December 31, 2014:



	June 30, 2015				December 31, 2014
Millions	Fair Value		Unfunded Commitments		Fair Value		Unfunded Commitments
Hedge funds
Long/short equity REIT	$	20.5	—		$	20.3	—
Long/short credit & distressed	19.2		—		21.4		—
Long/short equity banks and financial	15.9		$	—	29.9		$	—
Other	22.1		—		20.4		—
Total hedge funds	77.7		—		92.0		—

Private equity funds
Energy infrastructure & services	45.7		9.9		59.6		11.0
Manufacturing/Industrial	25.9		2.9		23.2		7.3
Multi-sector	24.5		4.4		24.2		5.3
Aerospace/Defense/Government	18.7		32.2		20.7		5.1
Healthcare	6.3		.8		6.1		2.8
Private equity secondaries	7.4		3.2		8.5		3.1
Insurance	2.1		41.3		2.1		41.2
Real estate	1.8		.1		3.6		3.3
Venture capital	.3		—		1.4		.3
International multi-sector, Europe	.4		—		1.5		2.3
Total private equity funds	133.1		94.8		150.9		81.7

Total hedge funds and private equity funds included in other long-term investments	$	210.8	$	94.8	$	242.9	$	81.7

Redemption of investments in certain hedge funds is subject to restrictions including lock-up periods where no redemptions or withdrawals are allowed, restrictions on redemption frequency and advance notice periods for redemptions. Amounts requested for redemptions remain subject to market fluctuations until the redemption effective date, which generally falls at the end of the defined redemption period.

The following summarizes the June 30, 2015 fair value of hedge funds subject to restrictions on redemption frequency and advance notice period requirements for investments in active hedge funds:



	Notice Period
Millions Redemption frequency	30-59 days notice		60-89 days notice		90-119 days notice		120+ days notice		Total
Monthly	$	5.2	$	—	$	—	$	—	$	5.2
Quarterly	17.8		19.2		—		8.0		45.0
Semi-annual	—		22.5		—		—		22.5
Annual	—		—		4.9		.1		5.0
Total	$	23.0	$	41.7	$	4.9	$	8.1	$	77.7

Certain of the hedge fund investments in which White Mountains is invested are no longer active and are in the process of disposing of their underlying investments. Distributions from such funds are remitted to investors as the fund’s underlying investments are liquidated. As of June 30, 2015, distributions of $2.0 million were outstanding from these investments. The actual amount of the final distribution remittances remain subject to market fluctuations. The date at which such remittances will be received is not determinable as of June 30, 2015.

White Mountains has also submitted redemption requests for certain of its investments in active hedge funds. As of June 30, 2015, redemptions of $10.2 million are outstanding and are subject to market fluctuations. The date at which such redemptions will be received is not determinable as of June 30, 2015. Redemptions are recorded as receivables when the investment is no longer subject to market fluctuations.

Investments in private equity funds are generally subject to a “lock-up” period during which investors may not request a redemption. Distributions prior to the expected termination date of the fund may be limited to dividends or proceeds arising from the liquidation of the fund’s underlying investments. In addition, certain private equity funds provide an option to extend the lock-up period at either the sole discretion of the fund manager or upon agreement between the fund and the investors.

As of June 30, 2015, investments in private equity funds were subject to lock-up periods as follows:



Millions	1-3 years	3 – 5 years	5 – 10 years	>10 years	Total
Private Equity Funds — expected lock-up period remaining	$27.0	$29.5	$72.5	$4.1	$133.1

The Prospector Offshore Fund is a hedge fund managed by Prospector Partners LLC (“Prospector”) that pursues investment opportunities in a variety of equity and equity-related instruments, with a principle focus on the financial services sector and a special emphasis on the insurance industry. White Mountains had determined that the Prospector Offshore Fund was a VIE that White Mountains was required to consolidate. In the second quarter of 2015, White Mountains redeemed the Prospector-managed hedge funds (the Prospector Offshore Fund and the Prospector Partners Fund LP, together the “Prospector Funds”). As of December 31, 2014, White Mountains’s investment in the Prospector Offshore Fund was $64.9 million. As of December 31, 2014, White Mountains consolidated total assets of $135.8 million and total liabilities of $39.8 million of the Prospector Offshore Fund. As of December 31, 2014, White Mountains also recorded non-controlling interest of $31.1 million in the Prospector Offshore Fund.

Fair value measurements as of June 30, 2015

Fair value measurements are categorized into a hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity's internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). Quoted prices in active markets for identical assets or liabilities have the highest priority (“Level 1”), followed by observable inputs other than quoted prices, including prices for similar but not identical assets or liabilities (“Level 2”) and unobservable inputs, including the reporting entity's estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”).

Investments valued using Level 1 inputs include fixed maturity investments, primarily investments in U.S. Treasuries, common equity securities and short-term investments, which include U.S. Treasury Bills. Investments valued using Level 2 inputs are primarily comprised of fixed maturity investments, which have been disaggregated into classes, including debt securities issued by corporations, municipal obligations, mortgage and asset-backed securities, foreign government obligations and preferred stocks. Fair value estimates for investments that trade infrequently and have few or no observable market prices are classified as Level 3 measurements. Level 3 fair value estimates based upon unobservable inputs include White Mountains's investments in surplus notes, hedge funds and private equity funds, as well as certain investments in fixed maturity investments, common equity securities, and convertible fixed and preferred maturity investments where quoted market prices are unavailable or are not considered reasonable. White Mountains determines when transfers between levels have occurred as of the beginning of the period.

White Mountains uses brokers and outside pricing services to assist in determining fair values. For investments in active markets, White Mountains uses the quoted market prices provided by outside pricing services to determine fair value. The outside pricing services White Mountains uses have indicated that they will only provide prices where observable inputs are available. In circumstances where quoted market prices are unavailable or are not considered reasonable, White Mountains estimates the fair value using industry standard pricing models and observable inputs such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, prepayment speeds, reference data including research publications and other relevant inputs. Given that many fixed maturity investments do not trade on a daily basis, the outside pricing services evaluate a wide range of fixed maturity investments by regularly drawing parallels from recent trades and quotes of comparable securities with similar features. The characteristics used to identify comparable fixed maturity investments vary by asset type and take into account market convention.

White Mountains's process to assess the reasonableness of the market prices obtained from the outside pricing sources covers substantially all of its fixed maturity investments and includes, but is not limited to, evaluation of model pricing methodologies, review of the pricing services' quality control processes and procedures on at least an annual basis, comparison of market prices to prices obtained from different independent pricing vendors on at least a semi-annual basis, monthly analytical reviews of certain prices and review of assumptions utilized by the pricing service for selected measurements on an ad hoc basis throughout the year. White Mountains also performs back-testing of selected purchases and sales activity to determine whether there are any significant differences between the market price used to value the security prior to purchase or sale and the actual purchase or sale price on an ad-hoc basis throughout the year. Prices provided by the pricing services that vary by more than 5% and $1.0 million from the expected price based on these procedures are considered outliers. Also considered outliers are prices that haven’t changed from period to period and prices that have trended unusually compared to market conditions. In circumstances where the results of White Mountains's review process does not appear to support the market price provided by the pricing services, White Mountains challenges the price. If White Mountains cannot gain satisfactory evidence to support the challenged price, it relies upon its own pricing methodologies to estimate the fair value of the security in question.

The valuation process above is generally applicable to all of White Mountains’s fixed maturity investments. The techniques and inputs specific to asset classes within White Mountains’s fixed maturity investments for Level 2 securities that use observable inputs are as follow:

Debt securities issued by corporations: The fair value of debt securities issued by corporations is determined from an evaluated pricing model that uses information from market sources and integrates relative credit information, observed market movements, and sector news. Key inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including sector, coupon, credit quality ratings, duration, credit enhancements, early redemption features and market research publications.

Municipal obligations: The fair value of municipal obligations is determined from an evaluated pricing model that uses information from market makers, brokers-dealers, buy-side firms, and analysts along with general market information. Key inputs include benchmark yields, reported trades, issuer financial statements, material event notices and new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including type, coupon, credit quality ratings, duration, credit enhancements, geographic location and market research publications.

Mortgage and asset-backed securities: The fair value of mortgage and asset-backed securities is determined from an evaluated pricing model that uses information from market sources and leveraging similar securities. Key inputs include benchmark yields, reported trades, underlying tranche cash flow data, collateral performance, plus new issue data, as well as broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including issuer, vintage, loan type, collateral attributes, prepayment speeds, default rates, recovery rates, cash flow stress testing, credit quality ratings and market research publications.

Foreign government obligations: The fair value of foreign government obligations is determined from an evaluated pricing model that uses feeds from data sources in each respective country, including active market makers and inter-dealer brokers. Key inputs include benchmark yields, reported trades, broker-dealer quotes, two-sided markets, benchmark securities, bids, offers, local exchange prices, foreign exchange rates and reference data including coupon, credit quality ratings, duration and market research publications.

Preferred stocks: The fair value of preferred stocks is determined from an evaluated pricing model that calculates the appropriate spread over a comparable security for each issue. Key inputs include exchange prices (underlying and common stock of same issuer), benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including sector, coupon, credit quality ratings, duration, credit enhancements, early redemption features and market research publications.

Level 3 valuations are generated from techniques that use assumptions not observable in the market. These unobservable assumptions reflect White Mountains’s assumptions that market participants would use in valuing the investment. Generally, certain securities may start out as Level 3 when they are originally issued but as observable inputs become available in the market, they may be reclassified to Level 2.

White Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its other long-term investments, including obtaining and reviewing the audited annual financial statements of each hedge fund and private equity fund and periodically discussing each fund’s pricing with the fund manager. However, since the fund managers do not provide sufficient information to evaluate the pricing inputs and methods for each underlying investment, the inputs are considered to be unobservable. Accordingly, the fair values of White Mountains’s investments in hedge funds and private equity funds have been classified as Level 3 measurements. The fair value of White Mountains’s investments in hedge funds and private equity funds has been determined using net asset value.

Prior to the liquidation of the Prospector Offshore Fund, in addition to the investments described above, White Mountains had $38.0 million of investment-related liabilities recorded at fair value and included in other liabilities as of December 31, 2014. These liabilities relate to securities that have been sold short by limited partnerships in which White Mountains has investments and was required to consolidate under GAAP. These liabilities have a Level 1 designation.

Fair Value Measurements by Level

The following tables summarize White Mountains’s fair value measurements for investments as of June 30, 2015 and December 31, 2014, by major security type and class by level. The major security types were based on the legal form of the securities, with a separate break-out for convertible fixed maturity investments as they may react similar to either debt securities or equity securities, depending on prevailing market conditions. White Mountains has disaggregated its fixed maturity investments based on the issuing entity type, which impacts credit quality, with debt securities issued by U.S. government entities carrying minimal credit risk, while the credit and other risks associated with other issuers, such as corporations, foreign governments, municipalities or entities issuing asset-backed securities vary depending on the nature of the issuing entity type. White Mountains further disaggregates debt securities issued by corporations and equity securities by industry sector because investors often reference commonly used benchmarks and their subsectors to monitor risk and performance. Accordingly, White Mountains has further disaggregated these asset classes into subclasses based on the similar sectors and industry classifications it uses to evaluate investment risk and performance against commonly used benchmarks, such as the Barclays Intermediate Aggregate and S&P 500 indices:



	June 30, 2015
Millions	Fair Value		Level 1		Level 2		Level 3
Fixed maturity investments:
U.S. Government and agency obligations	$	183.6	$	131.5	$	52.1	$	—

Debt securities issued by corporations:
Consumer	544.0		—		544.0		—
Financials	405.0		—		405.0		—
Health Care	306.2		—		306.2		—
Industrial	281.3		—		281.3		—
Communications	237.2		—		237.2		—
Energy	194.2		—		194.2		—
Utilities	149.0		—		149.0		—
Technology	90.3		—		90.3		—
Materials	98.4		—		98.4		—
Other	5.5		—		5.5		—
Total debt securities issued by corporations	2,311.1		—		2,311.1		—

Municipal obligations	117.7		—		117.7		—
Mortgage-backed and asset-backed securities	2,077.4		—		2,070.0		7.4
Foreign government, agency and provincial obligations	98.7		18.8		79.9		—
Preferred stocks	86.0		—		14.8		71.2
Total fixed maturity investments	4,874.5		150.3		4,645.6		78.6

Short-term investments	840.5		838.3		2.2		—

Common equity securities:
Exchange traded funds⁽²⁾	361.5		340.1		21.4		—
Financials	93.7		60.6		—		33.1
Consumer	51.6		51.6		—		—
Health Care	25.8		25.8		—		—
Industrial	32.3		32.3		—		—
Technology	38.2		38.2		—		—
Communications	23.8		23.8		—		—
Energy	2.5		2.5		—		—
Materials	3.6		3.6		—		—
Utilities	1.1		1.1		—		—
Other	79.7		—		79.7		—
Total common equity securities	713.8		579.6		101.1		33.1

Convertible fixed maturity and preferred investments	4.5		—		—		4.5
Other long-term investments ⁽¹⁾	370.6		—		—		370.6
Total investments	$	6,803.9	$	1,568.2	$	4,748.9	$	486.8

⁽¹⁾Excludes carrying value of $3.9 associated with other long-term investment limited partnerships accounted for using the equity method. Excludes carrying value of $15.8 associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method and $(0.2) related to forward contracts.

⁽²⁾ETFs traded on foreign exchanges are priced with an adjusted NAV and are therefore included within level 2 measurements.



	December 31, 2014
Millions	Fair Value		Level 1		Level 2		Level 3
Fixed maturity investments:
U.S. Government and agency obligations	$	188.1	$	134.1	$	54.0	$	—

Debt securities issued by corporations:
Consumer	575.3		—		575.3		—
Financials	431.4		—		431.4		—
Health Care	284.2		—		284.2		—
Industrial	225.4		—		219.8		5.6
Communications	214.3		—		214.3		—
Energy	177.9		—		177.9		—
Utilities	173.6		—		173.6		—
Technology	118.0		—		118.0		—
Materials	103.0		—		103.0		—
Other	8.1		—		8.1		—
Total debt securities issued by corporations	2,311.2		—		2,305.6		5.6

Municipal obligations	83.2		—		83.2		—
Mortgage-backed and asset-backed securities	1,840.9		—		1,840.9		—
Foreign government, agency and provincial obligations	275.1		21.3		253.8		—
Preferred stocks	85.8		—		14.7		71.1
Total fixed maturity investments	4,784.3		155.4		4,552.2		76.7

Short-term investments	871.7		868.8		2.9		—

Common equity securities:
Financials	237.5		197.3		—		40.2
Consumer	161.2		161.1		.1		—
Health Care	101.9		101.9		—		—
Industrial	67.5		67.5		—		—
Technology	54.3		54.3		—		—
Communications	32.9		32.9		—		—
Energy	32.6		32.6		—		—
Materials	21.2		21.2		—		—
Utilities	9.5		9.4		.1		—
Other	83.0		9.7		73.3		—
Total common equity securities	801.6		687.9		73.5		40.2

Convertible fixed maturity and preferred investments	20.5		—		12.3		8.2
Other long-term investments⁽¹⁾	385.0		—		—		385.0
Total investments	$	6,863.1	$	1,712.1	$	4,640.9	$	510.1

⁽¹⁾Excludes carrying value of $5.2 associated with other long-term investment limited partnerships accounted for using the equity method. Excludes carrying value of $16.8 associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.

Debt securities issued by corporations

The following table summarizes the ratings of the corporate debt securities held in White Mountains’s investment portfolio as of June 30, 2015 and December 31, 2014:



	Fair Value at
Millions	June 30, 2015		December 31, 2014
AAA	$	—	$	—
AA	200.5		236.9
A	887.6		957.8
BBB	1,213.5		1,105.9
BB	6.4		—
Other	3.1		10.6
Debt securities issued by corporations⁽¹⁾	$	2,311.1	$	2,311.2

⁽¹⁾Credit ratings are assigned based on the following hierarchy: 1) Standard and Poor's Financial Services LLC (“Standard & Poor’s”) and 2) Moody’s Investor Service (“Moody's”).

Mortgage-backed, Asset-backed Securities

White Mountains purchases commercial and residential mortgage-backed securities with the goal of maximizing risk adjusted returns in the context of a diversified portfolio. White Mountains categorizes mortgage-backed securities as “non-prime” (also called “Alt A” or “A-”) if they are backed by collateral that has overall credit quality between prime and sub-prime based on White Mountains’s review of the characteristics of their underlying mortgage loan pools, such as credit scores and financial ratios.

White Mountains considers sub-prime mortgage-backed securities as those that have underlying loan pools that exhibit weak credit characteristics, or those that are issued from dedicated sub-prime shelves or dedicated second-lien shelf registrations (i.e., White Mountains considers investments backed primarily by second-liens to be sub-prime risks regardless of credit scores or other metrics).

The following table summarizes mortgage and asset-backed securities as of June 30, 2015 and December 31, 2014:



	June 30, 2015						December 31, 2014
Millions	Fair Value		Level 2		Level 3		Fair Value		Level 2		Level 3
Mortgage-backed securities:
Agency:
GNMA	$	355.4	$	355.4	$	—	$	411.2	$	411.2	$	—
FNMA	38.9		38.9		—		36.6		36.6		—
FHLMC	34.8		34.8		—		49.6		49.6		—
Total Agency⁽¹⁾	429.1		429.1		—		497.4		497.4		—
Non-agency:
Residential	204.5		204.5		—		131.2		131.2		—
Commercial	301.0		301.0		—		236.9		236.9		—
Total Non-agency	505.5		505.5		—		368.1		368.1		—

Total mortgage-backed securities	934.6		934.6		—		865.5		865.5		—
Other asset-backed securities:
Credit card receivables	518.6		518.6		—		522.2		522.2		—
Vehicle receivables	430.0		430.0		—		289.4		289.4		—
Other	194.2		186.8		7.4		163.8		163.8		—
Total other asset-backed securities	1,142.8		1,135.4		7.4		975.4		975.4		—
Total mortgage and asset-backed securities	$	2,077.4	$	2,070.0	$	7.4	$	1,840.9	$	1,840.9	$	—

⁽¹⁾Represents publicly traded mortgage-backed securities which carry the full faith and credit guaranty of the U.S. government (i.e., GNMA) or are guaranteed by a government sponsored entity (i.e., FNMA, FHLMC).

Non-agency Mortgage-backed Securities

The security issuance years of White Mountains’s investments in non-agency residential mortgage-backed securities ("RMBS") and non-agency commercial mortgage-backed securities (“CMBS”) as of June 30, 2015 are as follows:



					Security Issuance Year
Millions	Fair Value		2004		2005		2006		2007		2008		2009		2010		2011		2012		2013		2014		2015
Non-agency RMBS	$	204.5	$	33.0	$	12.3	$	8.7	$	—	$	14.0	$	—	$	47.4	$	18.4	$	4.1	$	25.8	$	40.8	$	—
Non-agency CMBS	301.0		—		—		8.3		—		—		—		10.7		—		25.8		58.6		121.4		76.2
Total	$	505.5	$	33.0	$	12.3	$	17.0	$	—	$	14.0	$	—	$	58.1	$	18.4	$	29.9	$	84.4	$	162.2	$	76.2

Non-agency Residential Mortgage-backed Securities

White Mountains’s non-agency RMBS portfolio is generally of moderate-term and structurally senior. White Mountains does not own any collateralized loan obligations. White Mountains does not own any collateralized debt obligations, with the exception of $73.1 million of non-agency RMBS resecuritization tranches, each a senior tranche in its own right and each collateralized by a single earlier vintage Super Senior or Senior non-agency residential mortgage backed security.

The classification of the underlying collateral quality and the tranche levels of White Mountains’s non-agency RMBS securities are as follows as of June 30, 2015:



Millions	Fair Value		Super Senior ⁽¹⁾		Senior ⁽²⁾		Subordinate ⁽³⁾
Prime	$	202.5	$	69.1	$	133.4	$	—
Non-prime	2.0		—		2.0		—
Sub-prime	—		—		—		—
Total	$	204.5	$	69.1	$	135.4	$	—

⁽¹⁾At issuance, Super Senior, or in the case of resecuritization, the underlying securities, were rated “AAA” by Standard & Poor’s, “Aaa” by Moody’s or “AAA” by Fitch Ratings (“Fitch”) and were senior to other “AAA” or “Aaa” securities.

⁽²⁾At issuance, Senior, or in the case of resecuritization, the underlying securities, were rated “AAA” by Standard & Poor’s, “Aaa” by Moody’s or “AAA” by Fitch and were senior to non-“AAA” or non-“Aaa” securities.

⁽³⁾At issuance, Subordinate were not rated “AAA” by Standard & Poor’s, “Aaa” by Moody’s or "AAA" by Fitch and were junior to “AAA” or “Aaa” securities.

Non-agency Commercial Mortgage-backed Securities

White Mountains’s non-agency CMBS portfolio is generally short-term and structurally subordinate, with more than 25 points of subordination on average for both fixed rate CMBS and floating rate CMBS as of June 30, 2015. In general, subordination represents the percentage principal loss on the underlying collateral that would be absorbed by other securities lower in the capital structure before the more senior security incurs a loss. As of June 30, 2015, on average less than 1% of the underlying loans were reported as non-performing for all non-agency CMBS held by White Mountains.

The amount of fixed and floating rate securities and their tranche levels of White Mountains’s non-agency CMBS securities are as follows as of June 30, 2015:



Millions	Fair Value		Super Senior ⁽¹⁾		Senior ⁽²⁾		Subordinate ⁽³⁾
Fixed rate CMBS	$	204.2	$	18.4	$	84.5	$	101.3
Floating rate CMBS	96.8		—		—		96.8
Total	$	301.0	$	18.4	$	84.5	$	198.1

⁽³⁾At issuance, Subordinate were not rated “AAA” by Standard & Poor’s, “Aaa” by Moody’s or "AAA" by Fitch and were junior to “AAA” or “Aaa” securities.

Rollforward of Fair Value Measurements by Level

White Mountains uses quoted market prices where available as the inputs to estimate fair value for its investments in active markets. Such measurements are considered to be either Level 1 or Level 2 measurements, depending on whether the quoted market price inputs are for identical securities (Level 1) or similar securities (Level 2). Level 3 measurements for fixed maturity investments, common equity securities, convertible fixed maturity and preferred investments and other long-term investments as of June 30, 2015 and 2014 consist of securities for which the estimated fair value has not been determined based upon quoted market price inputs for identical or similar securities.

The following tables summarize the changes in White Mountains’s fair value measurements by level for the three months ended June 30, 2015 and 2014:



							Level 3 Investments
Millions	Level 1 investments			Level 2 investments			Fixed maturity investments			Common equity securities			Convertible fixed maturity and preferred investments			Other long-term investments			Total
Balance at January 1, 2015	$	843.3		$	4,638.0		$	76.7		$	40.2		$	8.2		$	385.0		$	5,991.4		⁽¹⁾⁽²⁾
Total realized and unrealized gains (losses)	13.1			31.3			—			6.9			(3.7		)	(13.3		)	34.3			⁽³⁾
Foreign currency losses through OCI	(5.4		)	(62.3		)	(.2		)	—			—			(2.3		)	(70.2		)
Amortization/Accretion	(.1		)	(21.1		)	—			—			—			—			(21.2		)
Purchases	945.9			2,002.4			76.0			—			—			33.1			3,057.4
Sales	(1,017.8		)	(1,915.5		)	—			(9.5		)	—			(18.0		)	(2,960.8		)
Effect of redemption of Prospector hedge funds	(49.1		)	—			—			(4.5		)	—			(13.9		)	(67.5		)
Transfers in	—			73.9			—			—			—			—			73.9
Transfers out	—			—			(73.9		)	—			—			—			(73.9		)
Balance at June 30, 2015	$	729.9		$	4,746.7		$	78.6		$	33.1		$	4.5		$	370.6		$	5,963.4		⁽¹⁾⁽²⁾

⁽¹⁾Excludes carrying value of $5.2 and $3.9 at January 1, 2015 and June 30, 2015 associated with other long-term investments accounted for using the equity method. Excludes carrying value of $16.8 and $15.8 at January 1, 2015 and June 30, 2015 million associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method. Excludes $(0.2) related to forward contracts at June 30. 2015.

⁽²⁾Excludes carrying value of $871.7 and $840.5 at January 1, 2015 and June 30, 2015 associated with short-term investments.

⁽³⁾Excludes $0.9 realized and unrealized losses associated with the Prospector Offshore Fund consolidation of investment-related liabilities and realized and unrealized loss for the period of $9.3 associated with short-term investments.



							Level 3 Investments
Millions	Level 1 investments			Level 2 investments			Fixed maturity investments			Common equity securities		Convertible fixed maturity and preferred investments		Other long-term investments			Total
Balance at January 1, 2014	$	1,376.7		$	4,982.2		$	93.0		$	46.1	$	6.1	$	262.4		$	6,766.5		^(1)(2)(3)
Total realized and unrealized gains	67.3			89.8			.9			2.7		3.2		16.8			180.7			⁽⁴⁾
Foreign currency losses through OCI	(6.8		)	(50.8		)	(.4		)	—		—		(1.4		)	(59.4		)
Amortization/Accretion	(.3		)	(22.0		)	(.1		)	—		—		—			(22.4		)
Purchases	953.5			1,632.0			76.1			5.0		1.5		17.4			2,685.5
Sales	(896.1		)	(1,875.6		)	—			—		—		(6.8		)	(2,778.5		)
Net change in investments related to purchases of consolidated affiliates	(2.7		)	7.3			—			—		—		—			4.6
Transfers in	—			19.6			8.5			—		—		—			28.1
Transfers out	—			(8.5		)	(19.6		)	—		—		—			(28.1		)
Balance at June 30, 2014	$	1,491.6		$	4,774.0		$	158.4		$	53.8	$	10.8	$	288.4		$	6,777.0		^(1)(2)(3)

⁽¹⁾Excludes carrying value of $6.8 and $5.6 at January 1, 2014 and June 30, 2014 associated with other long-term investment limited partnerships accounted for using the equity method and $(0.1) and $0.1 at January 1, 2014 and June 30, 2014 related to forward contracts. Excludes carrying value of $19.1 and $18.0 at January 1, 2014 and June 30, 2014 associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.

⁽²⁾Carrying value includes $236.3 and 203.8 at January 1, 2014 and June 30, 2014 that is classified as assets held for sale relating to discontinued operations.

⁽³⁾Excludes carrying value of $635.9 and $564.0 at January 1, 2014 and June 30, 2014 associated with short-term investments.

⁽⁴⁾Excludes $1.8 realized and unrealized losses associated with the Prospector Offshore Fund and Prospector Turtle Fund consolidation of investment-related liabilities. The Prospector Turtle Fund was liquidated as of December 31, 2014.

Fair Value Measurements — transfers between levels - Six-month period ended June 30, 2015 and 2014

During the first six months of 2015, five fixed maturity investments classified as a Level 3 measurement in the prior period were recategorized as a Level 2 measurement because quoted market prices for similar securities that were considered reliable and could be validated against an alternative source were available as of June 30, 2015. These measurements comprise “Transfers out” of Level 3 and “Transfers in” to Level 2 of $73.9 million for the period June 30, 2015.

During the first six months of 2014, two fixed income securities classified as Level 3 measurements in the prior

period were recategorized as Level 2 measurements because quoted market prices for similar securities that were considered reliable and could be validated against an alternative source were available at June 30, 2014. These measurements comprise “Transfers out” of Level 3 and “Transfers in” to Level 2 of $19.6 million for the period ended June 30, 2014.

During the first six months of 2014, two fixed income securities which had been classified as a Level 2 measurements in the prior period were recategorized as Level 3 measurements. The securities were priced with unobservable inputs and represent "Transfers out" of Level 2 and “Transfers in” to Level 3 of $8.5 million for the period ended June 30, 2014. The fair value of these securities was estimated using industry standard pricing methodology, in which management selected inputs using its best judgment. At June 30, 2014, the estimated fair value for these securities determined using the industry standard pricing models was $1.0 million less than the estimated fair value based upon quoted prices provided by a third party pricing vendor.

Significant Unobservable Inputs

The following summarizes significant unobservable inputs used in estimating the fair value of investment securities classified within Level 3 other than hedge funds and private equity funds as of June 30, 2015 and December 31, 2014. The fair value of investments in hedge funds and private equity funds, which are classified within Level 3, are estimated using the net asset value of the funds.



($ in millions)			June 30, 2015				December 31, 2014
Description	Rating⁽²⁾	Valuation Technique(s)	Fair Value⁽⁷⁾	Unobservable Input			Fair Value⁽⁷⁾	Unobservable Input
Preferred Stock⁽¹⁾	NR	Discounted cash flow	$71.2	Discount yield	-	7.1%	$71.1	Discount yield	-	7.1%
Private equity security⁽¹⁾	NR	Multiple of GAAP book value	$33.1	Book value multiple	-	1.20	$40.2	Book value multiple	-	1.10
Private equity security⁽¹⁾	NR	Share price of most recent transaction	$20.1	Share price	-	$1.06	$20.1	Share price	-	$1.06
Private equity security⁽¹⁾	NR	Share price of most recent transaction	$9.5	Share price	-	$290.96	$10.4	Share price	-	$290.96
Private equity security⁽¹⁾	NR	Share price of most recent transaction	$16.1	Share price	-	$0.13	$15.8	Share price	-	$0.13
Private equity security⁽¹⁾	NR	Share price of most recent transaction	$21.0	Share price	-	$1.00	N/A	N/A		N/A
Convertible preferred security⁽¹⁾	NR	Multiple of EBITDA	$4.5	EBITDA multiple	-	6.00	$3.8	EBITDA multiple	-	6.00
Convertible preferred security⁽¹⁾	NR	Share price of most recent transaction	N/A	N/A		N/A	$4.5	Share price	-	$0.71
Debt security issued by corporation⁽¹⁾	NR	Discounted cash flow	N/A	N/A		N/A	$5.6	Illiquidity discount⁽³⁾	-	10%
Asset-backed security⁽¹⁾	A	Broker pricing	$7.4	Broker quote		N/A	N/A	N/A		N/A
Surplus notes:	NR
- Seller priority		Discounted cash flow	$45.4	Discount rate ⁽⁴⁾	-	10.2%	$44.0	Discount rate ⁽⁴⁾	-	9.3%
			Timing of interest payments⁽⁵⁾		-	5 years	Timing of interest payments⁽⁵⁾		-	5 years
			Timing of principal payments⁽⁵⁾		-	10 years	Timing of principal payments⁽⁵⁾		-	10 years
- Pari passu		Discounted cash flow	$20.9	Discount rate⁽⁵⁾	-	15.5%	$21.1	Discount rate⁽⁵⁾	-	13.5%
			Timing of interest payments⁽⁶⁾		-	5 years	Timing of interest payments⁽⁶⁾		-	5 years
			Timing of principal payments⁽⁶⁾		-	15 years	Timing of principal payments⁽⁶⁾		-	10 years

⁽¹⁾As of June 30, 2015, consists of 1 security.

⁽²⁾Credit ratings are assigned based on the following hierarchy: 1) Standard and Poor's and 2) Moody’s.

⁽³⁾Judgmentally determined based on the Company’s limited trading ability of the issuer.

⁽⁴⁾Stochastic modeling supporting the fair value estimation indicates that the average percentage of discounted payments missed on the seller priority note is roughly equivalent to that of a conventional debt security with a credit rating of ‘B’. The corresponding credit spread increased by an additional 250 bps to reflect both a liquidity discount for a private debt instrument and regulatory payment approval uncertainty, was added to the treasury rate to determine the discount rate for the pari passu note.

⁽⁵⁾ Stochastic modeling supporting the fair value estimation indicates that the average percentage of discounted payments missed on the pari passu note is roughly equivalent to that of a conventional debt security with a credit rating of ‘CCC’. The corresponding credit spread increased by an additional 250 bps to reflect both a liquidity discount for a private debt instrument and regulatory payment approval uncertainty, was added to the treasury rate to determine the discount rate for the seller priority note.

⁽⁶⁾For estimated value purposes, the assumption has been made that interest payouts begin in year five and principal repayments begin on a graduated basis in year ten for the seller priority note and year fifteen for the pari passu note.

⁽⁷⁾ Includes the unrealized gains and losses associated with foreign currency; foreign currency effects based on observable inputs.