Investment Securities

White Mountains’s invested assets consist of investment 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 other-long term 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.

White Mountains’s fixed maturity investments are generally valued using industry standard pricing methodologies. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. 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, 2016 and December 31, 2015.

Other long-term investments consist primarily of hedge funds, private equity funds, direct investments in privately held common and convertible securities and the OneBeacon surplus notes.

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 the three and six months ended June 30, 2016 and 2015 consisted of the following:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
Millions	2016			2015			2016			2015
Investment income:
Fixed maturity investments	$	17.9		$	12.4		$	32.5		$	24.8
Short-term investments	.5			.1			.6			.1
Common equity securities	.9			2.1			2.0			4.3
Other long-term investments	.6			.9			3.4			.9
Total investment income	19.9			15.5			38.5			30.1
Third-party investment expenses	(.7		)	(2.3		)	(1.4		)	(4.3		)
Net investment income, pre-tax	$	19.2		$	13.2		$	37.1		$	25.8

Net Realized and Unrealized Investment Gains (Losses)

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



	Three Months Ended						Six Months Ended
	June 30,						June 30,
Millions	2016			2015			2016			2015
Net realized investment gains, pre-tax	$	2.7		$	42.3		$	259.5		$	57.1
Net unrealized investment gains (losses), pre-tax	25.4			(57.3		)	(201.9		)	(47.1		)
Net realized and unrealized investment gains (losses), pre-tax	28.1			(15.0		)	57.6			10.0
Income tax (expense) benefit attributable to net realized and unrealized investment gains (losses)	(9.9		)	4.5			(18.4		)	(2.6		)
Net realized and unrealized investment gains (losses), after tax	$	18.2		$	(10.5	)	$	39.2		$	7.4

Net realized investment gains (losses)

Net realized investment gains (losses) for the three and six months ended June 30, 2016 and 2015 consisted of the following:



	Three Months Ended								Three Months Ended
	June 30, 2016								June 30, 2015
Millions	Net realized gains (losses)			Net foreign currency gains		Total net realized gains (losses) reflected in earnings			Net realized gains			Net foreign currency losses			Total net realized gains reflected in earnings
Fixed maturity investments	$	1.8		$	—	$	1.8		$	1.6		$	—		$	1.6
Short-term investments	.1			—		.1			—			—			—
Common equity securities	3.8			—		3.8			25.5			(.1		)	25.4
Other long-term investments	(3.0		)	—		(3.0		)	15.3			—			15.3
Net realized investment gains (losses), pre-tax	2.7			—		2.7			42.4			(.1		)	42.3
Income tax expense attributable to net realized investment gains (losses)	(.4		)	—		(.4		)	(12.7		)	—			(12.7		)
Net realized investment gains (losses), after tax	$	2.3		$	—	$	2.3		$	29.7		$	(.1	)	$	29.6



	Six Months Ended								Six Months Ended
	June 30, 2016								June 30, 2015
Millions	Net realized gains (losses)			Net foreign currency gains		Total net realized (losses) gains reflected in earnings			Net realized gains			Net foreign currency gains		Total net realized gains reflected in earnings
Fixed maturity investments	$	.7		$	—	$	.7		$	2.1		$	—	$	2.1
Short-term investments	.2			—		.2			—			—		—
Common equity securities	261.4			—		261.4			47.5			.4		47.9
Other long-term investments	(2.8		)	—		(2.8		)	7.1			—		7.1
Net realized investment gains, pre-tax	259.5			—		259.5			56.7			.4		57.1
Income tax expense attributable to net realized investment gains	(43.3		)	—		(43.3		)	(17.2		)	—		(17.2		)
Net realized investment gains, after tax	$	216.2		$	—	$	216.2		$	39.5		$	.4	$	39.9

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:



	Three Months Ended									Three Months Ended
	June 30, 2016									June 30, 2015
Millions	Net unrealized gains (losses)			Net foreign currency losses			Total net unrealized gains (losses) reflected in earnings			Net unrealized losses			Net foreign currency gains			Total net unrealized losses reflected in earnings
Fixed maturity investments	$	20.7		$	—		$	20.7		$	(13.4	)	$	—		$	(13.4	)
Short-term investments	—			—			—			—			—			—
Common equity securities	(10.6		)	—			(10.6		)	(22.6		)	1.6			(21.0		)
Other long-term investments	15.5			(.2		)	15.3			(23.1		)	.2			(22.9		)
Net unrealized investment gains (losses), pre-tax	25.6			(.2		)	25.4			(59.1		)	1.8			(57.3		)
Income tax (expense) benefit attributable to net unrealized investment gains (losses)	(9.5		)	—			(9.5		)	17.3			(.1		)	17.2
Net unrealized investment gains (losses), after tax	$	16.1		$	(.2	)	$	15.9		$	(41.8	)	$	1.7		$	(40.1	)



	Six Months Ended								Six Months Ended
	June 30, 2016								June 30, 2015
Millions	Net unrealized gains (losses)			Net foreign currency gains		Total net unrealized gains (losses) reflected in earnings			Net unrealized losses			Net foreign currency losses			Total net unrealized losses reflected in earnings
Fixed maturity investments	$	42.4		$	—	$	42.4		$	(2.0	)	$	—		$	(2.0	)
Short-term investments	—			—		—			—			—			—
Common equity securities	(260.4		)	2.4		(258.0		)	(25.3		)	(2.4		)	(27.7		)
Other long-term investments	13.5			.2		13.7			(16.6		)	(.8		)	(17.4		)
Net unrealized investment (losses) gains, pre-tax	(204.5		)	2.6		(201.9		)	(43.9		)	(3.2		)	(47.1		)
Income tax benefit (expense) attributable to net unrealized investment (losses) gains	24.9			—		24.9			14.7			(.1		)	14.6
Net unrealized investment (losses) gains, after tax	$	(179.6	)	$	2.6	$	(177.0	)	$	(29.2	)	$	(3.3	)	$	(32.5	)

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 three and six months ended June 30, 2016 and 2015:



	Three Months Ended					Six Months Ended
	June 30,					June 30,
Millions	2016		2015			2016		2015
Fixed maturity investments	$	.8	$	(.2	)	$	1.3	$	—
Common equity securities	—		4.7			—		2.9
Other long-term investments	11.8		(5.5		)	12.9		.2
Total unrealized investment gains (losses), pre-tax - Level 3 investments	$	12.6	$	(1.0	)	$	14.2	$	3.1

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, 2016 and December 31, 2015 were as follows:



	June 30, 2016
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains (losses)		Carrying value
U.S. Government and agency obligations	$	261.2	$	.7	$	—		$	—	$	261.9
Debt securities issued by corporations	1,046.9		19.3		(.1		)	—		1,066.1
Municipal obligations	294.8		8.2		(.1		)	—		302.9
Mortgage and asset-backed securities	2,646.8		10.4		(2.0		)	—		2,655.2
Foreign government, agency and provincial obligations	1.0		.2		—			—		1.2
Preferred stocks	78.3		6.4		—			—		84.7
Total fixed maturity investments	$	4,329.0	$	45.2	$	(2.2	)	$	—	$	4,372.0
Less: fixed maturity investments reclassified to assets held for sale related to SSIE										9.2
Total fixed maturity investments										$	4,362.8



	December 31, 2015
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains (losses)		Carrying value
U.S. 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 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
Less: fixed maturity investments reclassified to assets held for sale related to SSIE										9.5
Total fixed maturity investments										$	2,630.2

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 June 30, 2016 and December 31, 2015 were as follows:



	June 30, 2016
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency (losses)			Carrying value
Common equity securities	$	374.1	$	43.5	$	(10.1	)	$	—		$	407.5
Other long-term investments	$	305.0	$	36.7	$	(10.3	)	$	(2.2	)	$	329.2



	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

Other Long-term Investments

Other long-term investments consist of the following as of June 30, 2016 and December 31, 2015:



	Carrying Value at
Millions	June 30, 2016		December 31, 2015
Hedge funds and private equity funds, at fair value⁽¹⁾	$	127.8	$	127.8
Private equity securities and limited liability companies, at fair value⁽¹⁾	84.3		82.1
Surplus notes investments, at fair value⁽¹⁾	62.8		51.5
Private convertible preferred securities⁽¹⁾	34.1		32.7
Tax advantaged federal affordable housing development fund⁽²⁾	13.4		14.7
Partnership investments accounted for under the equity method	3.5		3.8
Other	3.3		3.2
Total other-long term investments	$	329.2	$	315.8

⁽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 June 30, 2016, White Mountains held investments in 5 hedge funds and 24 private equity funds. The largest investment in a single fund was $21.5 million as of June 30, 2016. The following table summarizes investments in hedge funds and private equity funds by investment objective and sector as of June 30, 2016 and December 31, 2015:



	June 30, 2016				December 31, 2015
Millions	Fair Value		Unfunded Commitments		Fair Value		Unfunded Commitments
Hedge funds
Long/short equity REIT	$	20.5	$	—	$	20.6	$	—
Long/short banks and financial	13.6		—		12.8		—
Other	3.5		—		3.6		—
Total hedge funds	37.6		—		37.0		—

Private equity funds
Aerospace/Defense/Government	25.9		23.5		19.8		30.3
Manufacturing/Industrial	24.8		20.2		24.9		2.5
Energy infrastructure & services	19.1		3.2		20.7		3.4
Multi-sector	11.1		2.1		14.8		2.1
Private equity secondaries	3.8		2.1		4.4		2.1
Healthcare	3.5		.4		3.8		.4
Insurance	1.7		41.3		2.0		41.3
Real estate	.3		.1		.4		.1
Direct lending/Mezzanine debt	—		37.5		—		—
Total private equity funds	90.2		130.4		90.8		82.2

Total hedge funds and private equity funds included in other long-term investments	$	127.8	$	130.4	$	127.8	$	82.2

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, 2016 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		Total
Monthly	$	—	$	—	$	—	$	—
Quarterly	14.6		—		—		14.6
Semi-annual	—		20.5		—		20.5
Annual	—		—		2.5		2.5
Total	$	14.6	$	20.5	$	2.5	$	37.6

Certain of White Mountains’s investments in hedge funds 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, 2016, the fair value of hedge funds in liquidation was $1.0 million. 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, 2016.

White Mountains has also submitted redemption requests for certain of its investments in active hedge funds. As of June 30, 2016, 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 June 30, 2016. 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, 2016, 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	$27.1	$3.5	$59.6	$—	$90.2

OneBeacon Surplus Notes

In the fourth quarter of 2014, in conjunction with OneBeacon's sale of its runoff business to an affiliate of Armour Group Holdings Limited (the "OneBeacon 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 $62.8 million and $51.5 million as of June 30, 2016 and December 31, 2015, respectively. 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 U.S. treasury rates and public corporate 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. An interest payment of $2.4 million was received in the six months ended June 30, 2016. OneBeacon has assumed for valuation purposes that subsequent interest payments will begin in year five (2020) and principal repayments begin on a graduated basis in year ten (2025) for the seller priority note and year fifteen (2030) for the pari passu note. Although these variables involve considerable judgment, the Company does not currently expect any resulting changes in the estimated value of the surplus notes to be material to its financial position.

Below is a table illustrating the valuation adjustments taken to arrive at estimated fair value of the surplus notes as of June 30, 2016 and December 31, 2015:



	Type of Surplus Note						Total as of June 30, 2016			Total as of December 31, 2015
Millions	Seller Priority			Pari Passu			Total as of June 30, 2016			Total as of December 31, 2015
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⁾	2.7			(8.4		)	(5.7		)	(15.1		)
Regulatory approval ⁽²⁾	(7.4		)	(12.5		)	(19.9		)	(24.2		)
Liquidity adjustment ⁽³⁾	(9.0		)	(3.6		)	(12.6		)	(10.2		)
Total adjustments	(13.7		)	(24.5		)	(38.2		)	(49.5		)
Fair value⁽⁴⁾	$	44.2		$	18.6		$	62.8		$	51.5


⁽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 timing of securing regulatory approvals for interest and principal payments to reflect graduated changes in Issuer’s statutory surplus. The monetary impact of the anticipated timing is measured based on credit spreads of publicly traded debt 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 increase in the fair value of the surplus notes during the six months ended June 30, 2016 was driven primarily by the narrowing of non-investment grade credit spreads as well as the time value of money benefit generated by moving six months closer to modeled cash receipts, partially offset by the impact of an interest payment received in the first quarter of 2016.

Fair value measurements as of June 30, 2016

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 as of June 30, 2016. 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, agency and provincial 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 surplus notes, as well as certain investments in fixed maturity investments, common equity securities and other long-term investments where quoted market prices are unavailable or are not considered reasonable. Transfers between levels are based on investments held 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 methodologies and observable inputs such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers, credit ratings, 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 pricing methodologies, and review of the pricing services’ quality control processes and procedures on at least an annual basis, comparison of market prices to prices obtained from alternate 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 a 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, agency and provincial obligations: The fair value of foreign government, agency and provincial 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 periodic and audited annual financial statements of hedge funds and private equity funds and discussing each fund’s pricing with the fund manager throughout the year. 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. The fair value of White Mountains’s investments in hedge funds and private equity funds has been determined using net asset value.

Fair Value Measurements by Level

The following tables summarize White Mountains’s fair value measurements for investments as of June 30, 2016 and December 31, 2015 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 mortgage-backed or asset-backed securities vary depending on the nature of the issuing entity type. White Mountains further disaggregates debt securities issued by corporations and common 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 U.S. Intermediate Aggregate and S&P 500 indices.



	June 30, 2016
Millions	Fair Value		Level 1		Level 2		Level 3
Fixed maturity investments:
U.S. Government and agency obligations	$	261.9	$	252.3	$	9.6	$	—

Debt securities issued by corporations:
Consumer	333.5		—		333.5		—
Health Care	157.3		—		157.3		—
Financials	154.8		—		154.8		—
Industrial	139.0		—		139.0		—
Utilities	94.3		—		94.3		—
Energy	60.6		—		60.6		—
Technology	57.3		—		57.3		—
Communications	43.3		—		43.3		—
Materials	26.0		—		26.0		—
Total debt securities issued by corporations	1,066.1		—		1,066.1		—

Mortgage and asset-backed securities	2,655.2				2,573.2		82.0
Municipal obligations	302.9		—		302.9		—
Foreign government, agency and provincial obligations	1.2		.6		.6		—
Preferred stocks	84.7		—		13.5		71.2
Total fixed maturity investments⁽⁴⁾	4,372.0		252.9		3,965.9		153.2

Short-term investments⁽⁴⁾	422.1		422.1		—		—

Common equity securities:
Consumer	152.8		152.8		—		—
Exchange traded funds ⁽¹⁾	87.5		65.6		21.9		—
Health Care	36.4		36.4		—		—
Communications	32.7		32.7		—		—
Technology	24.8		24.8		—		—
Other	73.3		—		73.3		—
Total common equity securities	407.5		312.3		95.2		—

Other long-term investments ⁽²⁾⁽³⁾	184.5		—		—		184.5
Total investments⁽⁴⁾	$	5,386.1	$	987.3	$	4,061.1	$	337.7

⁽¹⁾ETFs traded on foreign exchanges are priced using the fund's published NAV to account for the difference in market close times and are therefore designated a level 2 measurement.

⁽²⁾Excludes carrying value of $3.5 associated with other long-term investment limited partnerships accounted for using the equity method. Excludes carrying value of $13.4 associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.

⁽³⁾Excludes carrying value of $127.8 associated with hedge funds and private equity funds for which fair value is measured at net asset value using the practical expedient.

⁽⁴⁾Includes carrying value of $9.2 in fixed maturity investments and $0.3 in short-term investments that are classified as assets held for sale related to SSIE.



	December 31, 2015
Millions	Fair Value		Level 1		Level 2		Level 3
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		—
Total debt securities issued by corporations	1,000.0		—		1,000.0		—

Mortgage 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⁽⁴⁾	2,639.7		134.0		2,435.7		70.0

Short-term investments⁽⁴⁾	211.3		211.3		—		—

Common equity securities:
Financials	694.7		694.7		—		—
Exchange traded funds⁽¹⁾	141.8		120.5		21.3		—
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⁽²⁾⁽³⁾	169.5		—		—		169.5
Total investments⁽⁴⁾	$	4,134.4	$	1,363.5	$	2,531.4	$	239.5

⁽¹⁾ETFs traded on foreign exchanges are priced using the fund's published NAV to account for the difference in market close times and are therefore designated a level 2 measurement.

⁽²⁾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.

⁽³⁾Excludes carrying value of $127.8 associated with hedge funds and private equity funds for which fair value is measured at net asset value using the practical expedient.

⁽⁴⁾Includes carrying value of $9.5 in fixed maturity investments and $0.1 in short-term investments that are classified as assets held for sale related to SSIE.

Debt securities issued by corporations

The following table summarizes the ratings of debt securities issued by corporations held in White Mountains’s investment portfolio as of June 30, 2016 and December 31, 2015:



	Fair Value at
Millions	June 30, 2016		December 31, 2015
AAA	$	—	$	—
AA	125.7		95.2
A	376.6		397.7
BBB	563.8		507.1
Other	—		—
Debt securities issued by corporations⁽¹⁾	$	1,066.1	$	1,000.0

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

Mortgage and 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 RMBS 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 $31.2 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 RMBS.

The following table summarizes the carrying value of White Mountains’s mortgage and asset-backed securities as of June 30, 2016 and December 31, 2015:



	June 30, 2016						December 31, 2015
Millions	Fair Value		Level 2		Level 3		Fair Value		Level 2		Level 3
Mortgage-backed securities:
Agency:
GNMA	$	284.7	$	284.7	$	—	$	265.5	$	265.5	$	—
FNMA	203.5		152.5		51.0		42.2		42.2		—
FHLMC	37.5		37.5		—		22.8		22.8		—
Total Agency⁽¹⁾	525.7		474.7		51.0		330.5		330.5		—
Non-agency:
Residential	194.3		194.3		—		133.2		133.2		—
Commercial	104.5		104.5		—		140.4		140.4		—
Total Non-agency	298.8		298.8		—		273.6		273.6		—

Total mortgage-backed securities	824.5		773.5		51.0		604.1		604.1		—
Other asset-backed securities:
Credit card receivables	689.1		658.1		31.0		217.7		217.7		—
Vehicle receivables	977.4		977.4		—		269.7		269.7		—
Other	164.2		164.2		—		75.5		75.5		—
Total other asset-backed securities	1,830.7		1,799.7		31.0		562.9		562.9		—
Total mortgage and asset-backed securities	$	2,655.2	$	2,573.2	$	82.0	$	1,167.0	$	1,167.0	$	—

⁽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 June 30, 2016 are as follows:



							Security Issuance Year
Millions	Fair Value		2004		2005		2006		2007		2008		2009		2010		2011		2012		2013		2014		2015
Non-agency RMBS	$	194.3	$	21.9	$	6.4	$	3.4	$	—	$	3.2	$	—	$	10.8	$	11.8	$	6.9	$	12.3	$	65.3	$	52.3
Non-agency CMBS	104.5		—		—		—		—		—		—		5.0		—		18.4		11.6		23.4		46.1
Total	$	298.8	$	21.9	$	6.4	$	3.4	$	—	$	3.2	$	—	$	15.8	$	11.8	$	25.3	$	23.9	$	88.7	$	98.4

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 June 30, 2016:



Millions	Fair Value		Super Senior ⁽¹⁾		Senior ⁽²⁾		Subordinate ⁽³⁾
Prime	$	187.4	$	133.6	$	53.8	$	—
Non-prime	6.9		—		6.9		—
Sub-prime	—		—		—		—
Total	$	194.3	$	133.6	$	60.7	$	—

⁽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 30 points of subordination on average for both fixed rate CMBS and floating rate CMBS as of June 30, 2016. 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, 2016, none of the underlying loans of the non-agency CMBS held by White Mountains were reported as non-performing.

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, 2016:



Millions	Fair Value		Super Senior ⁽¹⁾		Senior ⁽²⁾		Subordinate ⁽³⁾
Fixed rate CMBS	$	93.2	$	8.9	$	46.1	$	38.2
Floating rate CMBS	11.3		—		—		11.3
Total	$	104.5	$	8.9	$	46.1	$	49.5

⁽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” 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.

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 June 30, 2016 and 2015 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 six months ended June 30, 2016 and 2015:



							Level 3 Investments
Millions	Level 1 investments			Level 2 investments			Fixed maturity investments			Common equity securities		Other long-term investments		Hedge Funds and Private Equity Funds measured at NAV⁽³⁾			Total
Balance at January 1, 2016	$	1,152.2		$	2,531.4		$	70.0		$	—	$	169.5	$	127.8		$	4,050.9		^(1)(2)(4)
Total realized and unrealized gains (losses)	7.1			38.3			1.3			—		12.9		(2.0		)	57.6
Amortization/Accretion	.1			(8.1		)	—			—		—		—			(8.0		)
Purchases	1,449.7			2,076.9			84.7			—		2.1		9.1			3,622.5
Sales	(2,043.9		)	(577.4		)	(2.8		)	—		—		(7.1		)	(2,631.2		)
Transfers in	—			—			—			—		—		—			—
Transfers out	—			—			—			—		—		—			—
Balance at June 30, 2016	$	565.2		$	4,061.1		$	153.2		$	—	$	184.5	$	127.8		$	5,091.8		^(1)(2)(4)

⁽¹⁾Excludes carrying value of $3.8 and $3.5 at January 1, 2016 and June 30, 2016 associated with other long-term investments accounted for using the equity method. Excludes carrying value of $14.7 and $13.4 at January 1, 2016 and June 30, 2016 associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.

⁽²⁾Excludes carrying value of $211.3 and $422.1 at January 1, 2016 and June 30, 2016 associated with short-term investments, of which $0.1 and $0.3 is classified as held for sale at January 1, 2016 and June 30, 2016.

⁽³⁾Investments for which fair value is measured at net asset value using the practical expedient are no longer classified within the fair value hierarchy. (See Note 1 - “Summary of Significant Accounting Policies”).

⁽⁴⁾Includes carrying value of $9.5 and $9.2 of fixed maturity investments at January 1, 2016 and June 30, 2016 that is classified as assets held for sale related to SSIE.



							Level 3 Investments
Millions	Level 1 investments			Level 2 investments			Fixed maturity investments			Common equity securities			Other long-term investments			Hedge Funds and Private Equity Funds measured at NAV⁽⁴⁾			Total
Balance at January 1, 2015	$	550.6		$	2,372.9		$	76.4		$	39.5		$	126.9		$	177.3		$	3,343.6		^(1)(2)(5)
Total realized and unrealized gains (losses)	9.0			5.9			—			6.6			(6.8		)	(3.6		)	11.1			⁽³⁾
Amortization/Accretion	—			(9.9		)	—			—			—			—			(9.9		)
Purchases	495.4			734.3			35.3			—			22.5			6.2			1,293.7
Sales	(604.2		)	(616.0		)	—			(13.1		)	(2.3		)	(23.3		)	(1,258.9		)
Transfers in	—			34.9			—			—			—			—			34.9
Transfers out	—			—			(34.9		)	—			—			—			(34.9		)
Balance at June 30, 2015	$	450.8		$	2,522.1		$	76.8		$	33.0		$	140.3		$	156.6		$	3,379.6		^(1)(2)(5)

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

⁽²⁾Excludes carrying value of $376.8 and $401.3 at January 1, 2015 and June 30, 2015 associated with short-term investments of which $1.9 and $1.1 is classified as held for sale at January 1, 2015 and June 30, 2015.

⁽³⁾Excludes $0.9 realized and unrealized losses associated with the Prospector Offshore Fund consolidation of investment-related liabilities.

⁽⁴⁾ Investments for which fair value is measured at net asset value using the practical expedient are no longer classified within the fair value hierarchy. (See Note 1 - “Summary of Significant Accounting Policies”).

⁽⁵⁾Includes carrying value of $10.1 and $9.1 of fixed maturity investments at January 1, 2015 and June 30, 2015 that is classified as assets held for sale related to SSIE.

Fair Value Measurements — transfers between levels - Six-month period ended June 30, 2016 and 2015

During the first six months of 2016, there were no fixed maturity investments classified as Level 3 measurements in the prior period that were transferred to Level 2 measurements.

During the first six months of 2015, five fixed maturity investments classified as Level 3 measurement in the prior period was transferred to Level 2 measurement because quoted market prices for similar securities that were considered reliable and could be validated against an alternative source were available at June 30, 2015. These measurements comprise “Transfers out” of Level 3 and “Transfers in” to Level 2 of $34.9 million for the period ended June 30, 2015.

Significant Unobservable Inputs

The following summarizes significant unobservable inputs used in estimating the fair value of investment securities classified within Level 3 as of June 30, 2016 and December 31, 2015. The fair value of investments in hedge funds and private equity funds are estimated using the net asset value of the funds.



Description	June 30, 2016
$ in millions, except share price	Rating⁽²⁾	Valuation Technique(s)	Fair Value⁽³⁾	Unobservable Input
Preferred Stock⁽¹⁾	NR	Discounted cash flow	$71.2	Discount yield	-	7.04%
Asset-backed securities ⁽¹⁾	AAA	Broker pricing	$31.0	Broker quote
Agency residential mortgage-backed securities ^{(1) (7)}	AA+	Discounted cash flow	$51.0	Prepayment	-	15 CPR
				Discount spread/Treasury	-	95 bps
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
Private equity security⁽¹⁾	NR	Share price of most recent transaction	$3.2	Share price	-	$2.52
Convertible preferred security⁽¹⁾	NR	Multiple of EBITDA	$7.1	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	$9.7
				Time until expiration	-	4 years
			Volatility/Standard deviation		-	60.0%
			Risk free rate		-	1.15%
Surplus notes:	NR
- Seller priority		Discounted cash flow	$44.2	Discount rate⁽⁴⁾	-	10.6%
			Timing of interest payments⁽⁶⁾		-	5 years
			Timing of principal payments⁽⁶⁾		-	10 years
- Pari passu		Discounted cash flow	$18.6	Discount rate⁽⁵⁾	-	18.0%
			Timing of interest payments⁽⁶⁾		-	5 years
			Timing of principal payments⁽⁶⁾		-	15 years

⁽¹⁾As of June 30, 2016, each asset type consists of one security.

⁽²⁾Credit ratings are assigned based on the following hierarchy: 1) Standard and 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⁾ OneBeacon has assumed for valuation purposes that subsequent interest payments will begin in year five (2020) and principal repayments begin on a graduated basis in year ten (2025) for the seller priority note and year fifteen (2030) for the pari passu note.

⁽⁷⁾ Conditional prepayment rate (“CPR”) is an annualized percentage of the existing mortgage pool that is expected to be prepaid in a year.

The assumed prepayment rate is a significant unobservable input used to estimate the fair value of investments in mortgage-backed securities. Generally for bonds priced at a premium, increases in prepayment speeds will result in a lower fair value, while decreases in prepayment speed may result in a higher fair value, with the inverse for bonds priced at a discount.



Description	December 31, 2015
$ in millions, except share price	Rating⁽²⁾	Valuation Technique(s)	Fair Value⁽³⁾	Unobservable Input
Preferred Stock⁽¹⁾⁽⁷⁾	NR	Par value⁽⁷⁾	$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:	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 and Poor's and 2) Moody’s.

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

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