Investment Securities

Net Investment Income

White Mountains’s net investment income is comprised primarily of interest income associated with White Mountains’s fixed maturity investments, dividend income from its equity investments and interest income from its short-term investments.

Pre-tax net investment income for 2015, 2014 and 2013 consisted of the following:



	Year Ended December 31,
Millions	2015			2014			2013
Investment income:
Fixed maturity investments	$	52.6		$	51.3		$	48.1
Short-term investments	.2			.1			.8
Common equity securities	10.1			16.6			16.5
Other long-term investments	3.3			4.4			6.8
Total investment income	66.2			72.4			72.2
Third-party investment expenses	(5.4		)	(12.9		)	(12.4		)
Net investment income, pre-tax	$	60.8		$	59.5		$	59.8

Net Realized and Unrealized Investment Gain (Losses)

Net realized and unrealized investment gains (losses) consisted of the following:



	Year Ended December 31,
Millions	2015			2014			2013
Net realized investment gains, pre-tax	$	77.3		$	166.8		$	95.5
Net unrealized investment gains (losses), pre-tax	148.1			(88.3		)	38.4
Net realized and unrealized investment gains, pre-tax	225.4			78.5			133.9
Income tax expense attributable to net realized and unrealized investment gains	(35.2		)	(18.0		)	(12.8		)
Net realized and unrealized investment gains, after tax	$	190.2		$	60.5		$	121.1

Net realized investment gains

Net realized investment gains for 2015, 2014 and 2013 consisted of the following:



	Year ended December 31, 2015
Millions	Net realized gains (losses)			Net foreign exchange gains		Total changes in fair value reflected in earnings
Fixed maturity investments	$	1.9		$	—	$	1.9
Common equity securities	64.4			.4		64.8
Other long-term investments	10.6			—		10.6
Net realized investment gains, pre-tax	76.9			.4		77.3
Income tax expense attributable to realized investment gains	(22.8		)	—		(22.8		)
Net realized investment gains, after-tax	$	54.1		$	.4	$	54.5



	Year ended December 31, 2014
Millions	Net realized gains (losses)			Net foreign exchange gains		Total changes in fair value reflected in earnings
Fixed maturity investments	$	5.8		$	—	$	5.8
Common equity securities	138.0			—		138.0
Other long-term investments	23.0			—		23.0
Net realized investment gains, pre-tax	166.8			—		166.8
Income tax expense attributable to realized investment gains	(28.4		)	—		(28.4		)
Net realized investment gains, after-tax	$	138.4		$	—	$	138.4



	Year ended December 31, 2013
Millions	Net realized gains (losses)			Net foreign exchange gains			Total changes in fair value reflected in earnings
Fixed maturity investments	$	(.2	)	$	(.2	)	$	(.4	)
Short-term investments	.1			—			.1
Common equity securities	89.4			—			89.4
Other long-term investments	6.4			—			6.4
Net realized investment gains (losses), pre-tax	95.7			(.2		)	95.5
Income tax (expense) benefit attributable to realized investment gains (losses)	(16.2		)	.1			(16.1		)
Net realized investment gains (losses), after-tax	$	79.5		$	(.1	)	$	79.4

Net unrealized investment gains (losses)

The following table summarizes net unrealized investment gains (losses) and changes in the carrying value of investments measured at fair value:



	Year ended December 31, 2015
Millions	Net unrealized gains (losses)			Net foreign exchange gains (losses)			Total net unrealized gains (losses) reflected in earnings
Fixed maturity investments	$	(15.6	)	$	—		$	(15.6	)
Common equity securities	207.6			(3.7		)	203.9
Other long-term investments	(39.1		)	(1.1		)	(40.2		)
Net unrealized investment gains (losses), pre-tax	152.9			(4.8		)	148.1
Income tax expense attributable to unrealized investment gains (losses)	(12.3		)	(.1		)	(12.4		)
Net unrealized investment gains (losses), after-tax	$	140.6		$	(4.9	)	$	135.7



	Year ended December 31, 2014
Millions	Net unrealized gains (losses)			Net foreign exchange gains (losses)			Total net unrealized gains (losses) reflected in earnings
Fixed maturity investments	$	11.3		$	—		$	11.3
Common equity securities	(83.0		)	(7.7		)	(90.7		)
Other long-term investments	(7.6		)	(1.3		)	(8.9		)
Net unrealized investment losses, pre-tax	(79.3		)	(9.0		)	(88.3		)
Income tax benefit attributable to unrealized investment losses	9.9			.5			10.4
Net unrealized investment losses, after-tax	$	(69.4	)	$	(8.5	)	$	(77.9	)



	Year ended December 31, 2013
Millions	Net unrealized gains (losses)			Net foreign exchange gains (losses)			Total net unrealized gains (losses) reflected in earnings
Fixed maturity investments	$	(49.9	)	$	—		$	(49.9	)
Common equity securities	86.1			(1.9		)	84.2
Other long-term investments	4.1			—			4.1
Net unrealized investment gains (losses), pre-tax	40.3			(1.9		)	38.4
Income tax benefit attributable to unrealized investment gains (losses)	3.3			—			3.3
Net unrealized investment gains (losses), after-tax	$	43.6		$	(1.9	)	$	41.7

White Mountains recognized gross realized investment gains of $112.9 million, $194.0 million and $152.8 million and gross realized investment losses of $35.6 million, $27.2 million and $57.3 million on sales of investment securities during 2015, 2014 and 2013.

The following table summarizes the amount of total gains (losses) included in earnings attributable to unrealized investment gains (losses) for Level 3 investments for the years ended December 31, 2015, 2014 and 2013.



	Year Ended December 31,
Millions	2015			2014		2013
Fixed maturity investments	$	(1.1	)	$	1.9	$	(1.6	)
Common equity securities	(9.0		)	5.8		.9
Other long-term investments	(40.1		)	—		2.1
Total net unrealized investment (losses) gains, pre-tax - Level 3 investments	$	(50.2	)	$	7.7	$	1.4

The components of White Mountains’s net realized and unrealized investment gains (losses), after-tax, as recorded on the statements of operations and comprehensive income were as follows:



	Year Ended December 31,
Millions	2015			2014			2013
Net change in pre-tax unrealized gains (losses) on investments in unconsolidated affiliates	$	(39.2	)	$	81.2		$	(106.4	)
Income tax benefit (expense)	2.9			(5.9		)	8.3
Net change in unrealized (losses) gains on investments in unconsolidated affiliates, after tax	(36.3		)	75.3			(98.1		)
Reversal of accumulated other comprehensive income related to change in accounting for the investment in Symetra	1.4			—			—
Total investment (losses) gains through accumulated other comprehensive income	(34.9		)	75.3			(98.1		)
Net realized and unrealized investment gains, after-tax	190.2			60.5			121.1
Total investment gains recorded during the period, after-tax	$	155.3		$	135.8		$	23.0

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 December 31, 2015 and 2014, were as follows:



	December 31, 2015
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains (losses)		Carrying value
US Government and agency obligations	$	160.4	$	—	$	(.4	)	$	—	$	160.0
Debt securities issued by corporations	1,001.0		4.3		(5.3		)	—		1,000.0
Municipal obligations	227.8		2.2		(1.2		)	—		228.8
Mortgage-backed and asset-backed securities	1,170.6		2.0		(5.6		)	—		1,167.0
Foreign government, agency and provincial obligations	1.0		.2		—			—		1.2
Preferred stocks	78.3		4.4		—			—		82.7
Total fixed maturity investments	$	2,639.1	$	13.1	$	(12.5	)	$	—	$	2,639.7



	December 31, 2014
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency losses		Carrying value
US Government and agency obligations	$	105.4	$	.1	$	(.3	)	$	—	$	105.2
Debt securities issued by corporations	1,162.0		13.1		(3.4		)	—		1,171.7
Municipal obligations	81.0		1.4		(.2		)	—		82.2
Mortgage-backed and asset-backed securities	967.5		2.8		(2.4		)	—		967.9
Foreign government, agency and provincial obligations	11.5		.3		(1.0		)	—		10.8
Preferred stocks	78.3		5.9		—			—		84.2
Total fixed maturity investments	$	2,405.7	$	23.6	$	(7.3	)	$	—	$	2,422.0

The weighted average duration of White Mountains’s fixed income portfolio as of December 31, 2015 was approximately 2.2 years, including short-term investments, and approximately 2.4 years excluding short-term investments.

The cost or amortized cost and carrying value of White Mountains’s fixed maturity investments as of December 31, 2015 is presented below by contractual maturity. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.



	December 31, 2015
Millions	Cost or amortized cost		Carrying value
Due in one year or less	$	241.6	$	242.0
Due after one year through five years	982.3		981.5
Due after five years through ten years	96.4		96.1
Due after ten years	69.9		70.4
Mortgage-backed and asset-backed securities	1,170.6		1,167.0
Preferred stocks	78.3		82.7
Total	$	2,639.1	$	2,639.7

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 and other long-term investments as of December 31, 2015 and 2014 were as follows:



	December 31, 2015
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency losses			Carrying value
Common equity securities	$	822.5	$	302.8	$	(11.4	)	$	—		$	1,113.9
Other long-term investments	$	304.5	$	32.0	$	(18.4	)	$	(2.3	)	$	315.8



	December 31, 2014
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency losses			Carrying value
Common equity securities	$	495.3	$	127.4	$	(3.6	)	$	(7.4	)	$	611.7
Other long-term investments	$	286.7	$	53.3	$	(6.8	)	$	(1.3	)	$	331.9

Proceeds from the sales and maturities of investments, excluding short-term investments, totaled $2.2 billion, $3.3 billion and $2.7 billion for the years ended December 31, 2015, 2014 and 2013.

Investments Held on Deposit or as Collateral

As of December 31, 2015 and 2014, investments of $104.8 million and $103.4 million, respectively, were held in trusts required to be maintained in relation to various reinsurance agreements. White Mountains’s consolidated insurance and reinsurance operations are required to maintain deposits with certain insurance regulatory agencies in order to maintain their insurance licenses. The fair value of such deposits which are included within total investments totaled $88.0 million and $68.9 million as of December 31, 2015 and 2014.

As of December 31, 2015 and 2014, OneBeacon held unrestricted collateral from its customers, which is included in cash and invested assets, relating to its surety business of $137.7 million and $81.0 million. The obligation to return these funds is included in funds held under insurance and reinsurance contracts in the consolidated balance sheets.

As of December 31, 2014, White Mountains held $9.5 million of restricted collateral in the form of fixed maturity investments associated with variable annuity reinsurance agreements. See Note 9 - “Derivatives”.

Fair value measurements as of December 31, 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”).

White Mountains used quoted market prices or other observable inputs to determine fair value for 91% of its investment portfolio. 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. Investments valued using Level 2 inputs also include certain ETFs that track U.S. stock indices such as the S&P 500 but are traded on foreign exchanges and that management values using the fund's published NAV to account for the difference in market close times. Level 3 fair value estimates based upon unobservable inputs include White Mountains's investments in hedge funds and private equity funds, surplus notes, 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 sales activity to determine whether there are any significant differences between the market price used to value the security prior to sale and the actual 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.

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.

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.

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 hedge funds and private equity funds 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 $31.6 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 December 31, 2015 and 2014 by level. The major security types were based on the legal form of the securities. 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. The fair value measurements for derivative assets associated with White Mountains’s variable annuity business are presented in Note 9.



	December 31, 2015
Millions	Fair value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Fixed maturity investments:
U.S. Government and agency obligations	$	160.0	$	133.4	$	26.6	$	—
Debt securities issued by corporations:
Consumer	253.3		—		253.3		—
Financials	175.9		—		175.9		—
Health Care	151.3		—		151.3		—
Industrial	135.6		—		135.6		—
Energy	82.0		—		82.0		—
Utilities	61.5		—		61.5		—
Technology	60.0		—		60.0		—
Communications	49.2		—		49.2		—
Materials	31.2		—		31.2		—
Other	—		—		—		—
Total debt securities issued by corporations:	1,000.0		—		1,000.0		—

Mortgage-backed and asset-backed securities	1,167.0		—		1,167.0		—
Municipal obligations	228.8		—		228.8		—
Foreign government, agency and provincial obligations	1.2		.6		.6		—
Preferred stocks	82.7		—		12.7		70.0
Total fixed maturity investments	2,639.7		134.0		2,435.7		70.0

Short-term investments	211.3		211.3		—		—

Common equity securities:
Exchange traded funds	141.8		120.5		21.3		—
Financials	694.7		694.7		—		—
Consumer	70.0		70.0		—		—
Communications	43.7		43.7		—		—
Health Care	35.7		35.7		—		—
Technology	27.0		27.0		—		—
Industrial	26.6		26.6		—		—
Other	74.4		—		74.4		—
Total common equity securities	1,113.9		1,018.2		95.7		—
Other long-term investments ⁽¹⁾	297.3		—		—		297.3
Total investments ⁽¹⁾	$	4,262.2	$	1,363.5	$	2,531.4	$	367.3


⁽¹⁾	Excludes carrying value of $3.8 associated with other long-term investment limited partnerships accounted for using the equity method. Excludes carrying value of $14.7 associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.



	December 31, 2014
Millions	Fair value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Fixed maturity investments:
U.S. Government and agency obligations	$	105.2	$	51.2	$	54.0	$	—
Debt securities issued by corporations:
Consumer	259.2		—		259.2		—
Financials	254.7		—		254.7		—
Health Care	181.8		—		181.8		—
Industrial	107.3		—		102.0		5.3
Communications	71.5		—		71.5		—
Energy	65.6		—		65.6		—
Utilities	84.1		—		84.1		—
Technology	88.3		—		88.3		—
Materials	51.7		—		51.7		—
Other	7.5		—		7.5		—
Total debt securities issued by corporations:	1,171.7		—		1,166.4		5.3

Mortgage-backed and asset-backed securities	967.9		—		967.9		—
Municipal obligations	82.2		—		82.2		—
Foreign government, agency and provincial obligations	10.8		.6		10.2		—
Preferred stocks	84.2		—		13.1		71.1
Total fixed maturity investments	2,422.0		51.8		2,293.8		76.4

Short-term investments	376.8		376.3		.5		—

Common equity securities:
Financials	180.7		141.2		—		39.5
Consumer	116.0		115.9		.1		—
Health Care	74.4		74.4		—		—
Industrial	57.1		57.1		—		—
Technology	44.8		44.8		—		—
Communications	28.5		28.5		—		—
Energy	18.1		18.1		—		—
Materials	12.0		12.0		—		—
Utilities	4.9		4.9		—		—
Other	75.2		1.9		73.3		—
Total common equity securities	611.7		498.8		73.4		39.5
Other long-term investments ⁽¹⁾	309.9		—		5.7		304.2
Total investments ⁽¹⁾	$	3,720.4	$	926.9	$	2,373.4	$	420.1


⁽¹⁾	Excludes the carrying value of $5.2 associated with other long-term investment limited partnerships accounted for using the equity method and the 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 December 31, 2014 and 2013:



	Fair Value at
	December 31,
Millions	2015		2014
AA	$	95.2	$	144.9
A	397.7		594.9
BBB	507.1		426.5
Other	—		5.4
Debt securities issued by corporations⁽¹⁾	$	1,000.0	$	1,171.7


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

Mortgage-backed, Asset-backed Securities

White Mountains purchases commercial mortgage-backed securities (“CMBS”) and residential mortgage-backed securities (“RMBS”) with the goal of maximizing risk adjusted returns in the context of a diversified portfolio. 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).

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’s non-agency residential mortgage-backed portfolio is generally 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 $39.6 million of non-agency residential mortgage 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.



	December 31, 2015						December 31, 2014
Millions	Fair Value		Level 2		Level 3		Fair Value		Level 2		Level 3
Mortgage-backed securities:
Agency:
GNMA	$	265.5	$	265.5	$	—	$	308.7	$	308.7	$	—
FNMA	42.2		42.2		—		33.4		33.4		—
FHLMC	22.8		22.8		—		28.9		28.9		—
Total Agency⁽¹⁾	330.5		330.5		—		371.0		371.0		—
Non-agency:
Residential	133.2		133.2		—		71.0		71.0		—
Commercial	140.4		140.4		—		109.3		109.3		—
Total Non-agency	273.6		273.6		—		180.3		180.3		—

Total mortgage-backed securities	604.1		604.1		—		551.3		551.3		—
Asset-backed securities:
Credit card receivables	217.7		217.7		—		218.1		218.1		—
Vehicle receivables	269.7		269.7		—		152.8		152.8		—
Other	75.5		75.5		—		45.7		45.7		—
Total asset-backed securities	562.9		562.9		—		416.6		416.6		—
Total mortgage and asset-backed securities	$	1,167.0	$	1,167.0	$	—	$	967.9	$	967.9	$	—


⁽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 RMBS and non-agency CMBS securities as of December 31, 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	$	133.2	$	17.3	$	8.6	$	3.9	$	—	$	3.6	$	—	$	15.2	$	13.5	$	9.8	$	14.0	$	47.3	$	—
Non-agency CMBS	140.4		—		—		—		—		—		—		5.4		—		18.0		17.2		55.0		$	44.8
Total	$	273.6	$	17.3	$	8.6	$	3.9	$	—	$	3.6	$	—	$	20.6	$	13.5	$	27.8	$	31.2	$	102.3	$	44.8

Non-agency Residential Mortgage-backed Securities

The classification of the underlying collateral quality and the tranche levels of White Mountains’s non-agency RMBS securities are as follows as of December 31, 2015:



Millions	Fair Value		Super Senior⁽¹⁾		Senior⁽²⁾		Subordinate⁽³⁾
Prime	$	133.1	$	65.6	$	67.5	$	—
Non-prime	.1		—		.1		—
Sub-prime	—		—		—		—
Total	$	133.2	$	65.6	$	67.6	$	—


⁽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 and were senior to other “AAA” or “Aaa” bonds.


⁽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” bonds.


⁽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” bonds.

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 December 31, 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 December 31, 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 December 31, 2015:



Millions	Fair Value		Super Senior⁽¹⁾		Senior⁽²⁾		Subordinate⁽³⁾
Fixed rate CMBS	$	101.1	$	8.7	$	48.6	$	43.8
Floating rate CMBS	39.3		—		—		39.3
Total	$	140.4	$	8.7	$	48.6	$	83.1


⁽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 and were senior to other “AAA” or “Aaa” bonds.


⁽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” bonds.


⁽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” bonds.

Other Long-term Investments

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



	Carrying Value at
Millions	December 31, 2015		December 31, 2014
Hedge funds and private equity funds, at fair value⁽¹⁾	$	127.8	$	178.5
Private equity securities and limited liability companies, at fair value⁽¹⁾	82.1		45.3
Surplus notes investments, at fair value⁽¹⁾	51.5		65.1
Convertible preferred securities⁽¹⁾	32.7		8.3
Tax advantaged federal affordable housing development fund⁽²⁾	14.7		16.8
Partnership investments accounted for under the equity method	3.8		5.2
Convertible fixed maturity investments⁽¹⁾	—		5.6
Other⁽¹⁾	3.2		7.1
Total other-long term investments	$	315.8	$	331.9

⁽¹⁾See Fair Value Measurements by Level table.

⁽²⁾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 December 31, 2015, White Mountains held investments in 5 hedge funds and 22 private equity funds. The largest investment in a single fund was $22.7 million as of December 31, 2015 and $22.0 million as of December 31, 2014. The following table summarizes investments in hedge funds and private equity funds by investment objective and sector as of December 31, 2015 and 2014:



	December 31, 2015				December 31, 2014
Millions	Fair Value		Unfunded Commitments		Fair Value		Unfunded Commitments
Hedge funds
Long/short equity REIT	$	20.6	$	—	$	20.4	$	—
Long/short credit & distressed	—		—		8.4		—
Long/short banks and financial	12.8		—		29.9		—
Other	3.6		—		15.7		—
Total hedge funds	37.0		—		74.4		—

Private equity funds
Energy infrastructure & services	20.7		3.4		33.1		4.8
Manufacturing/Industrial	24.9		2.5		23.2		7.3
Multi-sector	14.8		2.1		14.5		2.2
Aerospace/Defense/Government	19.8		30.3		20.7		5.1
Healthcare	3.8		.4		3.1		1.4
Private equity secondaries	4.4		2.1		5.7		2.1
Insurance	2.0		41.3		2.1		41.3
Real estate	.4		.1		1.7		0.1
Total private equity funds	90.8		82.2		104.1		64.3
Total hedge and private equity funds included in other long-term investments	$	127.8	$	82.2	$	178.5	$	64.3

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 December 31, 2015 fair value of hedge funds subject to restrictions on redemption frequency and advance notice period requirements for investments in active hedge funds:



Redemption frequency	Notice Period
Millions	30-59 days notice		60-89 days notice		90-119 days notice		120+ days notice		Total
Monthly	$	—	$	—	$	—	$	—	$	—
Quarterly	13.8		—		—		—		13.8
Semi-annual	—		20.6		—		—		20.6
Annual	—		—		2.6		—		2.6
Total	$	13.8	$	20.6	$	2.6	$	—	$	37.0

Certain of the hedge fund and private equity 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 December 31, 2015, distributions of $1.0 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 December 31, 2015.

White Mountains has also submitted redemption requests for certain of its investments in active hedge funds. As of December 31, 2015, redemptions of $2.5 million are outstanding that would be subject to market fluctuations. The date at which such redemptions will be received is not determinable as of December 31, 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 December 31, 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	$	24.3	$	10.9	$	55.6	$	—	$	90.8

OneBeacon Surplus Notes

In the fourth quarter of 2014, in conjunction with the Runoff Transaction, OneBeacon provided financing in the form of surplus notes with a par value of $101.0 million, which had a fair value of $64.9 million at the date of closing and $65.1 million at December 31, 2014. Subsequent to closing, the surplus notes are included in OneBeacon’s investment portfolio, classified within other long-term investments.

The internal valuation model used to estimate the fair value is based on discounted expected cash flows. The estimated fair value of the surplus notes is sensitive to changes in treasury rates and public debt credit spreads, as well as changes in estimates with respect to other variables including a discount to reflect the private nature of the notes (and the related lack of liquidity), the credit quality of the notes - based on the financial performance of the Issuer relative to expectations, and the timing, amount, and likelihood of interest and principal payments on the notes, which are subject to regulatory approval and therefore may vary from the contractual terms.

Below is a table illustrating the valuation adjustments taken to arrive at the estimated fair value of the OneBeacon surplus notes as of December 31, 2015 and 2014:



	Type of Surplus Note						Total as of December 31, 2015			Total as of December 31, 2014
Millions	Seller Priority			Pari Passu			Total as of December 31, 2015			Total as of December 31, 2014
Par Value	$	57.9		$	43.1		$	101.0		$	101.0
Fair value adjustments to reflect:
Current market rates on public debt and contract-based repayments⁽¹⁾	(.4		)	(14.7		)	(15.1		)	(6.6		)
Regulatory approval ⁽²⁾	(11.7		)	(12.5		)	(24.2		)	(12.6		)
Liquidity adjustment ⁽³⁾	(7.8		)	(2.4		)	(10.2		)	(16.7		)
Total adjustments	(19.9		)	(29.6		)	(49.5		)	(35.9		)
Fair value⁽⁴⁾	$	38.0		$	13.5		$	51.5		$	65.1


⁽¹⁾	Represents the value of the surplus notes, at current market yields on comparable publicly traded debt, and assuming issuer is allowed to make principal and interest payments when its financial capacity is available, as measured by statutory capital in excess of a 250% RBC score.


⁽²⁾	Represents anticipated delay in securing regulatory approvals of interest and principal payments to reflect graduated changes in Issuer’s statutory surplus. The monetary impact of the anticipated delay is measured based on credit spreads of public securities with roughly equivalent percentages of discounted payments missed.

⁽³⁾Represents impact of liquidity spread to account for OneBeacon’s sole ownership of the surplus notes, lack of a trading market and ongoing regulatory approval risk.

⁽⁴⁾The decrease in the fair value of the surplus notes during the twelve months ended December 31, 2015 was primarily due to widening of non-investment grade credit spreads.

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 and other long-term investments as of December 31, 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 years ended December 31, 2015 and 2014:



							Level 3 Investments
Millions	Level 1 Investments			Level 2 Investments			Fixed maturity investments			Common equity securities			Other long-term investments				Total
Balance at January 1, 2015	$	550.6		$	2,372.9		$	76.4		$	39.5		$	304.2		⁽¹⁾	$	3,343.6		⁽¹⁾⁽²⁾
Total realized and unrealized gains (losses)	263.0			(13.7		)	(1.1		)	7.8			(29.2		)		226.8			⁽³⁾⁽⁴⁾
Amortization/Accretion	—			(19.6		)	—			—			—				(19.6		)
Purchases	814.5			1,436.0			35.3			—			91.3				2,377.1
Sales	(825.7		)	(1,286.0		)	—			(43.7		)	(54.7		)		(2,210.1		)
Symetra transfer	394.5			—			—			—			—				394.5
Effect of redemption of Prospector hedge funds	(43.5		)	—			—			(3.6		)	(14.3		)		(61.4		)
Transfers in	—			41.8			—			—			—				41.8
Transfers out	(1.2		)	—			(40.6		)	—			—				(41.8		)
Balance at December 31, 2015	$	1,152.2		$	2,531.4		$	70.0		$	—		$	297.3		⁽¹⁾	$	4,050.9		⁽¹⁾⁽²⁾


⁽¹⁾	Excludes carrying value of $3.8 and $5.2 as of December 31, 2015 and January 1, 2015 associated with other long-term investments accounted for using the equity method.


⁽²⁾	Excludes carrying value of $211.3 and $376.8 as of December 31, 2015 and January 1, 2015 classified as short-term investments.


⁽³⁾	Excludes $0.8 of realized and unrealized losses associated with the Prospector Funds consolidation of investment-related liabilities.


⁽⁴⁾	Includes unrealized gains of $258.8 associated with the Symetra transfer from investments in unconsolidated affiliates to common equity securities.



							Level 3 Investments
Millions	Level 1 Investments			Level 2 Investments			Fixed maturity investments			Common equity securities			Other long-term investments				Total
Balance at January 1, 2014	$	997.2		$	2,575.4		$	81.8		$	45.4		$	189.2		⁽¹⁾	$	3,889.0		^(1)(2)(3)
Total realized and unrealized gains	50.1			8.9			1.8			6.2			16.3				83.3
Amortization/Accretion	.1			(18.7		)	.1			—			—				(18.5		)
Purchases	886.9			1,805.3			39.6			5.0			131.7				2,868.5
Sales	(1,384.2		)	(2,065.9		)	—			(17.1		)	(33.0		)		(3,500.2		)
Net change in investments related to purchases and sales of consolidated affiliates	(2.7		)	24.2			—			—			—				21.5
Exchange	3.4			(9.3		)	5.9			—			—				—
Transfers in	—			53.0			—			—			—				53.0
Transfers out	(.2		)	—			(52.8		)	—			—				(53.0		)
Balance at December 31, 2014	$	550.6		$	2,372.9		$	76.4		$	39.5		$	304.2		⁽¹⁾	$	3,343.6		^(1)(2)(3)


⁽¹⁾	Excludes carrying value of $5.2 and $6.8 as of December 31, 2014 and January 1, 2014 associated with other long-term investment limited partnerships accounted for using the equity method.


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


⁽³⁾	Excludes carrying value of $376.8 and $310.4 as of December 31, 2014 and January 1, 2014 classified as short-term investments.


⁽⁴⁾	Excludes $4.0 of realized and unrealized losses associated with the Prospector Funds and Prospector Turtle Fund consolidation of investment-related liabilities.

Fair Value Measurements — transfers between levels

During 2015, six fixed maturity 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 as of December 31, 2015. These measurements comprise “Transfers out” of Level 3 and “Transfers in” to Level 2 of $40.6 million for the period ended December 31, 2015.

During 2014, six fixed maturity 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 as of December 31, 2014. These measurements comprise “Transfers out” of Level 3 and “Transfers in” to Level 2 of $52.8 million for the period ended December 31, 2014. During the third quarter of 2014, one convertible fixed maturity investment that was classified within Level 2 was exchanged for common shares and a corporate debt security of the same entity. As of December 31, 2015, the common shares are classified within Level 1 since a quoted market price was available. As of December 31, 2015, the corporate debt security is classified within Level 3 since the fair value based upon observable market inputs has been adjusted to reflect a liquidity discount.

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 equities as December 31, 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.



Description	December 31, 2015
$ in millions, except share price	Rating⁽²⁾	Valuation Technique(s)	Fair Value⁽³⁾	Unobservable Input
Preferred Stock⁽¹⁾	NR	Par value⁽⁸⁾	$70.0	Issuer’s intent to call	-	$70.0
Private equity security⁽¹⁾	NR	Share price of most recent transaction	$21.0	Share price	-	$1.00
Private equity security⁽¹⁾	NR	Share price of most recent transaction	$33.8	Share price	-	$1.03
Convertible preferred security⁽¹⁾	NR	Multiple of EBITDA	$5.7	EBITDA multiple	-	6.00
Convertible preferred security⁽¹⁾	NR	Share price of most recent transaction	$27.0	Share price	-	$3.83
Private equity security⁽¹⁾	NR	Option pricing method	$9.6
				Time until expiration	-	4 years
			Volatility/Standard deviation		-	60.0%
			Risk free rate		-	1.15%
Surplus notes⁽⁷⁾:	NR
- Seller priority		Discounted cash flow	$38.0	Discount rate⁽⁴⁾	-	13.0%
			Timing of interest payments⁽⁶⁾		-	5 years
			Timing of principal payments⁽⁶⁾		-	10 years
- Pari passu		Discounted cash flow	$13.5	Discount rate⁽⁵⁾	-	22.4%
			Timing of interest payments⁽⁶⁾		-	5 years
			Timing of principal payments⁽⁶⁾		-	15 years

⁽¹⁾As of December 31, 2015 each asset type consists of one security.

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

⁽³⁾Includes the unrealized gains and losses associated with foreign currency; foreign currency effects based on observable inputs.

⁽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 seller priority 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 that principal repayments being on a graduated basis in year ten for the seller priority notes and year fifteen for the pari passu note.

⁽⁷⁾The decrease in the fair value of the surplus notes during the twelve months ended December 31, 2015 was primarily due to widening of non-investment grade credit spreads.

⁽⁸⁾Valuation based on the issuer’s intent as of December 31, 2015 to call the security in the near term.



Description	December 31, 2014
$ in millions, except share price	Rating⁽²⁾	Valuation Technique(s)	Fair Value⁽⁷⁾	Unobservable Input
Preferred Stock⁽¹⁾	NR	Discounted cash flow	$71.1	Discount yield	-	7.1%
Private equity security⁽¹⁾	NR	Multiple of GAAP book value	$39.5	Multiple of GAAP book value	-	1.10
Private equity security⁽¹⁾	NR	Share price of most recent transaction	$20.1	Share price	-	$1.06
Convertible preferred security⁽¹⁾	NR	Multiple of EBITDA	$3.8	EBITDA multiple	-	6.00
Convertible preferred security⁽¹⁾	NR	Share price of most recent transaction	$4.5	Share price	-	$0.71
Debt security issued by corporation⁽¹⁾	NR	Discounted cash flow	$5.3	Illiquidity discount⁽³⁾	-	10.0%
Private equity security⁽¹⁾	NR	Share price of recent transaction	$10.4	Share price	-	$290.96
Surplus notes:	NR
- Seller priority		Discounted cash flow	$44.0	Discount rate⁽⁴⁾	-	9.3%
			Timing of interest payments⁽⁶⁾		-	5 years
			Timing of principal payments⁽⁶⁾		-	10 years
- Pari passu		Discounted cash flow	$21.1	Discount rate⁽⁵⁾	-	13.5%
			Timing of interest payments⁽⁶⁾		-	5 years
			Timing of principal payments⁽⁶⁾		-	15 years


⁽¹⁾	As of December 31, 2014 each asset type consists of one security.


⁽²⁾	Credit ratings are assigned based on the following hierarchy: 1) Standard & 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 seller priority 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 that principal repayments being on a graduated basis in year ten for the seller priority notes 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.