Investments 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. Net realized and unrealized investment gains (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 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 (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 interest-bearing 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 March 31, 2017 and December 31, 2016.

Other long-term investments consist primarily of hedge funds, private equity funds, unconsolidated private capital investments 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 and short-term investments and dividend income from its common equity securities and other long- term investments. Pre-tax net investment income for the three months ended March 31, 2017 and 2016 consisted of the following:



	Three Months Ended
	March 31,
Millions	2017			2016
Investment income:
Fixed maturity investments	$	24.5		$	14.5
Short-term investments	.3			.2
Common equity securities	2.1			1.2
Other long-term investments	(.1		)	2.8
Total investment income	26.8			18.7
Third-party investment expenses	(.7		)	(.8		)
Net investment income, pre-tax	$	26.1		$	17.9

Net Realized and Unrealized Investment Gains (Losses)

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



	Three Months Ended
	March 31,
Millions	2017			2016
Net realized investment gains, pre-tax	$	1.1		$	256.8
Net unrealized investment gains (losses), pre-tax	50.2			(227.3		)
Net realized and unrealized investment gains, pre-tax	51.3			29.5
Income tax expense attributable to net realized and unrealized investment gains	(7.2		)	(8.5		)
Net realized and unrealized investment gains, after tax	$	44.1		$	21.0

Net realized investment gains (losses)

Net realized investment gains (losses) for the three months ended March 31, 2017 and 2016 consisted of the following:



	Three Months Ended								Three Months Ended
	March 31, 2017								March 31, 2016
Millions	Net realized (losses) gains			Net foreign currency gains		Total net realized (losses) gains reflected in earnings			Net realized (losses) gains			Net foreign currency gains (losses)		Total net realized (losses) gains reflected in earnings
Fixed maturity investments	$	(2.2	)	$	.1	$	(2.1	)	$	(1.1	)	$	—	$	(1.1	)
Common equity securities	1.2			.1		1.3			257.6			—		257.6
Other long-term investments	1.9			—		1.9			.3			—		.3
Net realized investment gains, pre-tax	.9			.2		1.1			256.8			—		256.8
Income tax expense attributable to net realized investment gains	(.7		)	—		(.7		)	(42.9		)	—		(42.9		)
Net realized investment gains, after tax	$	.2		$	.2	$	.4		$	213.9		$	—	$	213.9

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
	March 31, 2017									March 31, 2016
Millions	Net unrealized gains			Net foreign currency gains (losses)			Total net unrealized gains reflected in earnings			Net unrealized gains (losses)			Net foreign currency gains		Total net unrealized gains (losses) reflected in earnings
Fixed maturity investments	$	17.5		$	1.7		$	19.2		$	21.7		$	—	$	21.7
Common equity securities	29.1			.5			29.6			(249.8		)	2.4		(247.4		)
Other long-term investments	4.2			.2			4.4			(2.0		)	.4		(1.6		)
Forward contracts	—			(3.0		)	(3.0		)	—			—		—
Net unrealized investment gains (losses), pre-tax	50.8			(.6		)	50.2			(230.1		)	2.8		(227.3		)
Income tax (expense) benefit attributable to net unrealized investment gains (losses)	(6.5		)	—			(6.5		)	34.4			—		34.4
Net unrealized investment gains (losses), after tax	$	44.3		$	(.6	)	$	43.7		$	(195.7	)	$	2.8	$	(192.9	)

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 months ended March 31, 2017 and 2016:



	Three Months Ended
	March 31,
Millions	2017			2016
Fixed maturity investments	$	.2		$	.5
Other long-term investments	(1.9		)	1.1
Total unrealized investment (losses) gains, pre-tax - Level 3 investments	$	(1.7	)	$	1.6

Investment Holdings

The cost or amortized cost, gross unrealized investment gains (losses), net foreign currency gains (losses), and carrying values of White Mountains’s fixed maturity investments as of March 31, 2017 and December 31, 2016 were as follows:



	March 31, 2017
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains		Carrying value
U.S. Government and agency obligations	$	110.7	$	—	$	(.4	)	$	—	$	110.3
Debt securities issued by corporations	1,680.2		10.5		(7.6		)	3.7		1,686.8
Municipal obligations	328.9		2.8		(1.4		)	—		330.3
Mortgage and asset-backed securities	2,020.0		5.1		(8.7		)	—		2,016.4
Foreign government, agency and provincial obligations	17.3		.4		—			.2		17.9
Preferred stocks	8.3		5.4		—			—		13.7
Total fixed maturity investments	$	4,165.4	$	24.2	$	(18.1	)	$	3.9	$	4,175.4



	December 31, 2016
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains		Carrying value
U.S. Government and agency obligations	$	281.7	$	.1	$	(3.5	)	$	—	$	278.3
Debt securities issued by corporations	1,512.6		8.4		(13.7		)	2.1		1,509.4
Municipal obligations	308.8		1.9		(1.7		)	—		309.0
Mortgage and asset-backed securities	2,141.7		2.6		(11.4		)	—		2,132.9
Foreign government, agency and provincial obligations	12.9		.3		—			—		13.2
Preferred stocks	8.3		5.7		—			—		14.0
Total fixed maturity investments	$	4,266.0	$	19.0	$	(30.3	)	$	2.1	$	4,256.8
Less: fixed maturity investments reclassified to assets held for sale related to SSIE										(6.6		)
Total fixed maturity investments										$	4,250.2

The cost or amortized cost, gross unrealized investment gains (losses), net foreign currency gains (losses), and carrying values of White Mountains’s common equity securities and other long-term investments as of March 31, 2017 and December 31, 2016 were as follows:



	March 31, 2017
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency gains (losses)			Carrying value
Common equity securities	$	537.9	$	65.0	$	(2.4	)	$	.5		$	601.0
Other long-term investments	$	321.9	$	39.7	$	(23.3	)	$	(6.6	)	$	331.7



	December 31, 2016
Millions	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Net foreign currency (losses)			Carrying value
Common equity securities	$	440.8	$	35.9	$	(2.4	)	$	—		$	474.3
Other long-term investments	$	314.9	$	40.3	$	(28.0	)	$	(3.9	)	$	323.3

Other Long-term Investments

Other long-term investments consist of the following as of March 31, 2017 and December 31, 2016:



	Carrying Value at
Millions	March 31, 2017			December 31, 2016
Hedge funds and private equity funds, at fair value	$	147.2		$	131.0
Private equity securities and limited liability companies, at fair value ⁽¹⁾⁽²⁾	72.4			72.0
OneBeacon Surplus Notes, at fair value ⁽¹⁾	69.6			71.9
Private convertible preferred securities, at fair value ⁽¹⁾	30.7			30.6
Tax advantaged federal affordable housing development fund ⁽³⁾	11.7			12.3
Partnership investments accounted for under the equity method	3.0			3.5
Forward Contracts	(4.2		)	(1.2		)
Other	1.3			3.2
Total other-long term investments	$	331.7		$	323.3

⁽¹⁾See Fair Value Measurements by Level table.

⁽²⁾White Mountains holds a 20% ownership interest in OneTitle Holdings LLC (“OTH”) and has provided a $10.0 million surplus note facility under which OTH’s wholly-owned insurance subsidiary, OneTitle National Guaranty Company, Inc. may, under certain circumstances, draw funds. At March 31, 2017, no funds had been drawn on the surplus note facility.

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

Hedge Funds and Private Equity Funds

White Mountains holds investments in hedge funds and private equity funds, which are included in other long-term investments. The fair value of these investments are generally estimated using the net asset value (“NAV”) of the funds. As of March 31, 2017, White Mountains held investments in 5 hedge funds and 20 private equity funds. The largest investment in a single fund was $54.2 million as of March 31, 2017 and $36.5 million as of December 31, 2016. The following table summarizes investments in hedge funds and private equity funds by investment objective and sector as of March 31, 2017 and December 31, 2016:



	March 31, 2017				December 31, 2016
Millions	Fair Value		Unfunded Commitments		Fair Value		Unfunded Commitments
Hedge funds
Long/short banks and financials	$	54.2	$	—	$	36.5	$	—
Long/short equity REIT	19.7		—		19.9		—
Other	2.2		—		3.4		—
Total hedge funds	76.1		—		59.8		—

Private equity funds
Aerospace/Defense/Government	24.4		23.6		19.4		25.9
Manufacturing/Industrial	18.8		22.2		15.9		22.4
Multi-sector	11.0		2.0		11.4		2.0
Direct lending/Mezzanine debt	5.5		32.0		1.8		35.7
Healthcare	3.4		.4		3.5		.4
Energy infrastructure & services	2.8		3.0		14.1		3.2
Private equity secondaries	2.5		2.1		3.0		2.1
Financial Services	1.5		4.5		1.0		5.0
Insurance	.9		41.3		.8		41.3
Real estate	.3		.1		.3		.1
Total private equity funds	71.1		131.2		71.2		138.1
Total hedge funds and private equity funds included in other long-term investments	$	147.2	$	131.2	$	131.0	$	138.1

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. As of March 31, 2017, one hedge fund with a fair value of $38.3 million was subject to a lock-up period that expires on September 1, 2018.

The following summarizes the March 31, 2017 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	15.9		—		—		15.9
Semi-annual	38.3		19.7		—		58.0
Annual	—		—		2.2		2.2
Total	$	54.2	$	19.7	$	2.2	$	76.1

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 March 31, 2017, the hedge funds in liquidation had no value. The actual amount of any final distribution remittances remain subject to market fluctuations. The date at which such remittances, if any, will be received is not determinable as of March 31, 2017.

White Mountains has also submitted redemption requests for certain of its investments in active hedge funds. As of March 31, 2017, redemptions of $2.2 million are outstanding that would be subject to market fluctuations. The date at which such redemptions will be received is not determinable as of March 31, 2017. 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 March 31, 2017, 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	$18.4	$23.3	$22.2	$7.2	$71.1

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 the OneBeacon Surplus Notes with a par value of $101.0 million, which had a fair value of $69.6 million and $71.9 million as of March 31, 2017 and December 31, 2016. Subsequent to closing, the OneBeacon 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 of the OneBeacon Surplus Notes is based on discounted expected cash flows using information as of the measurement date. The estimated fair value of the surplus notes is sensitive to changes in 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. For the purposes of estimating fair value, OneBeacon has assumed that all accrued but unpaid interest on the seller priority note since the date of issuance is paid in 2020, with regular annual interest payments on both the seller priority note and the pari passu note beginning in 2021, all accrued but unpaid interest on the pari passu note since the date of issuance is paid in 2025 and principal repayments begin on a graduated basis in 2030 for the seller priority note and 2035 for the pari passu note. Although these variables involve considerable judgment, OneBeacon does not currently expect any resulting changes in the estimated value of the surplus notes to be material to its financial position. An interest payment of $2.4 million was received in the three months ended March 31, 2016.

Below is a table illustrating the valuation adjustments taken to arrive at estimated fair value of the OneBeacon Surplus Notes as of March 31, 2017 and December 31, 2016:



	Type of Surplus Note						Total as of March 31, 2017			Total as of December 31, 2016
Millions	Seller Priority			Pari Passu			Total as of March 31, 2017			Total as of December 31, 2016
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⁾	7.2			1.8			9.0			5.1
Regulatory approval ⁽²⁾	2.9			(13.2		)	(10.3		)	(15.6		)
Liquidity adjustment ⁽³⁾	(19.9		)	(10.2		)	(30.1		)	(18.6		)
Total adjustments	(9.8		)	(21.6		)	(31.4		)	(29.1		)
Fair value⁽⁴⁾	$	48.1		$	21.5		$	69.6		$	71.9

⁽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 under the National Association of Insurance Commissioners’ risk-based capital standards for property and casualty companies. The favorable year-to-date change in impact is due principally to the narrowing of non-investment grade credit spreads as well as the time value of money benefit from moving three months closer to modeled cash receipts.

⁽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. The favorable year-to-date change in impact is driven primarily by the narrowing of non-investment grade credit spreads, which causes negative valuation impact from the anticipated delay in securing regulatory approval to be lower.

⁽³⁾ Represents impact of liquidity spread to account for OneBeacon's sole ownership of the notes, lack of a trading market, and unique nature of the ongoing regulatory approval process. The unfavorable year-to-date change in impact is due largely to an increase in the assumed liquidity spread to 400 basis points at March 31, 2017 from 250 basis points at December 31, 2016.

⁽⁴⁾ The decrease in the fair value of the surplus notes during the three months ended March 31, 2017 was driven primarily by an increase in the assumed liquidity spread, partially offset by the narrowing of non-investment grade credit spreads as well as the time value of money benefit generated by moving three months closer to modeled cash receipts.

Fair value measurements as of March 31, 2017

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”). As of March 31, 2017 and December 31, 2016, White Mountains used quoted market prices or other observable inputs to determine fair value for approximately 93% and 94% of its investment portfolio. Investments valued using Level 1 inputs include fixed maturity investments, primarily investments in U.S. Treasuries, short-term investments, which include U.S. Treasury Bills and common equity securities. 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. Investments valued using Level 2 inputs also include certain passive exchange traded funds (“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 manager’s published NAV to account for the difference in market close times. Fair value estimates for investments that trade infrequently and have few or no observable market prices are classified as Level 3 measurements. Level 3 fair value estimates based upon unobservable inputs include White Mountains’s investments in the OneBeacon 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, the evaluation of pricing methodologies and a review of the pricing services’ quality control processes and procedures on at least an annual basis, a comparison of its invested asset prices obtained from alternate independent pricing vendors on at least a semi-annual basis, monthly analytical reviews of certain prices and a review of the underlying assumptions utilized by the pricing services for select 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 assessment procedures are considered outliers. Also considered outliers are prices that have not 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 vendor provided 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 described 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 follows:

Debt securities issued by corporations: The fair value of debt securities issued by corporations is determined from a pricing evaluation technique 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 a pricing evaluation technique 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 evaluation technique 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 a pricing evaluation technique 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 a pricing evaluation technique 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 generally been determined using the fund manager's NAV. In the event White Mountains believes that its estimate of NAV of a hedge fund or private equity fund differs from that reported by the fund manager due to illiquidity or other factors, White Mountains will adjust the reported NAV to more appropriately represent the fair value of its interest in the hedge fund or private equity fund investment. As of March 31, 2017 and December 31, 2016, White Mountains recorded negative adjustments of $1.0 million and $5.0 million to the reported NAV of certain investments in hedge funds and private equity funds.

Fair Value Measurements by Level

The following tables summarize White Mountains’s fair value measurements for investments as of March 31, 2017 and December 31, 2016 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 and 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 Bloomberg Barclays U.S. 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.



	March 31, 2017
Millions	Fair Value		Level 1		Level 2		Level 3
Fixed maturity investments:
U.S. Government and agency obligations	$	110.3	$	100.8	$	9.5	$	—

Debt securities issued by corporations:
Consumer	362.9		—		362.9		—
Financials	263.3		—		263.3		—
Health Care	248.4		—		248.4		—
Utilities	229.3		—		229.3		—
Industrial	174.5		—		174.5		—
Communications	135.9		—		135.9		—
Technology	118.1		—		118.1		—
Materials	101.9		—		101.9		—
Energy	52.5		—		52.5		—
Total debt securities issued by corporations	1,686.8		—		1,686.8		—

Mortgage and asset-backed securities	2,016.4		—		1,958.1		58.3
Municipal obligations	330.3		—		330.3		—
Foreign government, agency and provincial obligations	17.9		.6		17.3		—
Preferred stocks	13.7		—		13.7		—
Total fixed maturity investments	4,175.4		101.4		4,015.7		58.3

Short-term investments⁽⁴⁾	230.9		227.9		3.0		—

Common equity securities:
Exchange traded funds ⁽¹⁾	384.8		330.6		54.2		—
Consumer	32.2		32.2		—		—
Health Care	27.1		27.1		—		—
Financials	18.2		18.2		—		—
Technology	16.1		16.1		—		—
Communications	13.9		13.9		—		—
Industrial	9.0		9.0		—		—
Energy	7.7		7.7		—		—
Materials	5.1		5.1		—		—
Utilities	1.0		1.0		—		—
Other	85.9		—		85.9		—
Total common equity securities	601.0		460.9		140.1		—

Other long-term investments ⁽²⁾⁽³⁾	174.0		—		—		174.0
Total investments	$	5,181.3	$	790.2	$	4,158.8	$	232.3

⁽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 $3.0 associated with other long-term investment limited partnerships accounted for using the equity method and $(4.2) related to foreign currency forward contracts. Excludes carrying value of $11.7 associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.

⁽³⁾Excludes carrying value of $147.2 associated with hedge funds and private equity funds for which fair value is measured at NAV using the practical expedient.

⁽⁴⁾Short-term investments are measured at amortized cost, which approximates fair value.



	December 31, 2016
Millions	Fair Value		Level 1		Level 2		Level 3
Fixed maturity investments:
U.S. Government and agency obligations	$	278.3	$	268.8	$	9.5	$	—

Debt securities issued by corporations:
Consumer	385.6		—		385.6		—
Health Care	244.2		—		244.2		—
Utilities	180.3		—		180.3		—
Financials	176.0		—		176.0		—
Industrial	146.4		—		146.4		—
Communications	131.4		—		131.4		—
Materials	102.6		—		102.6		—
Technology	89.4		—		89.4		—
Energy	53.5		—		53.5		—
Total debt securities issued by corporations	1,509.4		—		1,509.4		—

Mortgage and asset-backed securities	2,132.9		—		2,132.9		—
Municipal obligations	309.0		—		309.0		—
Foreign government, agency and provincial obligations	13.2		.6		12.6		—
Preferred stocks	14.0		—		14.0		—
Total fixed maturity investments⁽⁴⁾	4,256.8		269.4		3,987.4		—

Short-term investments⁽⁴⁾⁽⁵⁾	287.1		274.4		12.7		—

Common equity securities:
Exchange traded funds⁽¹⁾	321.6		270.4		51.2		—
Health Care	20.9		20.9		—		—
Consumer	12.9		12.9		—		—
Financials	11.6		11.6		—		—
Technology	11.0		11.0		—		—
Communications	10.5		10.5		—		—
Energy	3.7		3.7		—		—
Industrial	2.2		2.2		—		—
Other	79.9		—		79.9		—
Total common equity securities	474.3		343.2		131.1		—

Other long-term investments⁽²⁾⁽³⁾	177.7		—		—		177.7
Total investments⁽⁴⁾	$	5,195.9	$	887.0	$	4,131.2	$	177.7

⁽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 and $(1.2) related to foreign currency forward contracts. Excludes carrying value of $12.3 associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.

⁽³⁾Excludes carrying value of $131.0 associated with hedge funds and private equity funds for which fair value is measured at NAV using the practical expedient.

⁽⁴⁾Includes carrying value of $6.6 in fixed maturity investments and $0.1 in short-term investments that are classified as assets held for sale related to SSIE.

⁽⁵⁾Short-term investments are measured at amortized cost, which approximates fair value.

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 March 31, 2017 and December 31, 2016:



	Fair Value at
Millions	March 31, 2017		December 31, 2016
AA	93.1		100.9
A	484.7		381.9
BBB	846.5		786.5
BB	240.2		214.0
B	22.3		26.1
Debt securities issued by corporations⁽¹⁾	$	1,686.8	$	1,509.4

⁽¹⁾Credit ratings are assigned based on the following hierarchy: 1) Standard & Poor’s Financial Services LLC ("Standard & Poor's") and 2) Moody's Investor Services ("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 did not hold any RMBS categorized as sub-prime as of March 31, 2017.

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. As of March 31, 2017, White Mountains did not hold any RMBS classified as non-prime. 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 $33.9 million of non-agency RMBS resecuritization tranches, each a senior tranche in its own right and each collateralized by a single earlier vintage Super Senior or Senior non-agency RMBS.

The following table summarizes the carrying value of White Mountains’s mortgage and asset-backed securities as of March 31, 2017 and December 31, 2016:



	March 31, 2017						December 31, 2016
Millions	Fair Value		Level 2		Level 3		Fair Value		Level 2		Level 3
Mortgage-backed securities:
Agency:
GNMA	$	249.0	$	249.0	$	—	$	283.9	$	283.9	$	—
FNMA	270.1		270.1		—		278.3		278.3		—
FHLMC	86.1		86.1		—		89.8		89.8		—
Total Agency⁽¹⁾	605.2		605.2		—		652.0		652.0		—
Non-agency:
Residential	309.9		251.6		58.3		205.3		205.3		—
Commercial	126.9		126.9		—		127.5		127.5		—
Total Non-agency	436.8		378.5		58.3		332.8		332.8		—

Total mortgage-backed securities	1,042.0		983.7		58.3		984.8		984.8		—
Other asset-backed securities:
Credit card receivables	383.0		383.0		—		438.3		438.3		—
Vehicle receivables	353.0		353.0		—		479.5		479.5		—
Other	238.4		238.4		—		230.3		230.3		—
Total other asset-backed securities	974.4		974.4		—		1,148.1		1,148.1		—
Total mortgage and asset-backed securities	$	2,016.4	$	1,958.1	$	58.3	$	2,132.9	$	2,132.9	$	—

⁽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 March 31, 2017 are as follows:



									Security Issuance Year
Millions	Fair Value		2004		2005		2006			2008		2010		2011		2012		2013		2014		2015		2016		2017
Non-agency RMBS	$	309.9	$	18.1	$	5.3	$	2.8		$	2.4	$	6.0	$	8.4	$	4.2	$	19.8	$	49.4	$	104.2	$	34.5	$	54.8
Non-agency CMBS	126.9		—		—		—			—		4.1		—		18.1		11.5		23.4		44.2		25.6		—
Total	$	436.8	$	18.1	$	5.3	$	2.8		$	2.4	$	10.1	$	8.4	$	22.3	$	31.3	$	72.8	$	148.4	$	60.1	$	54.8

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 March 31, 2017:



Millions	Fair Value		Super Senior ⁽¹⁾		Senior ⁽²⁾		Subordinate ⁽³⁾
Prime	$	309.9	$	104.9	$	205.0	$	—
Non-prime	—		—		—		—
Sub-prime	—		—		—		—
Total	$	309.9	$	104.9	$	205.0	$	—

⁽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 senior, with more than 25 points of subordination on average for both fixed rate and floating rate as of March 31, 2017. In general, subordination represents the percentage principal loss on the underlying collateral that would have to be absorbed by other securities lower in the capital structure before the more senior security incurs a loss. As of March 31, 2017, 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 March 31, 2017:



Millions	Fair Value		Super Senior ⁽¹⁾		Senior ⁽²⁾		Subordinate ⁽³⁾
Fixed rate CMBS	$	115.2	$	1.6	$	70.1	$	43.5
Floating rate CMBS	11.7		—		—		11.7
Total	$	126.9	$	1.6	$	70.1	$	55.2

⁽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 March 31, 2017 and 2016 consist of securities for which the estimated fair value has not been determined based upon quoted market price inputs for identical or similar securities.

The following tables summarize the changes in White Mountains’s fair value measurements by level for the three months ended March 31, 2017 and 2016:



							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, 2017	$	612.5		$	4,118.5		$	—	$	—	$	177.7		$	131.0		$	5,039.7		^(1)(2)(4)
Total realized and unrealized gains (losses)	22.4			25.5			.2		—		(1.9		)	8.2			54.4
Amortization/Accretion	—			(6.5		)	—		—		—			—			(6.5		)
Purchases	124.5			890.4			58.1		—		.2			22.1			1,095.3
Sales	(197.1		)	(866.9		)			—		(2.0		)	(14.1		)	(1,080.1		)
Deconsolidation of SSIE	—			(5.2		)	—		—		—						(5.2		)
Transfers in	—			—			—		—		—			—			—
Transfers out	—			—			—		—		—			—			—
Balance at March 31, 2017	$	562.3		$	4,155.8		$	58.3	$	—	$	174.0		$	147.2		$	5,097.6		⁽¹⁾⁽²⁾

⁽¹⁾Excludes carrying value of $3.5 and $3.0 at January 1, 2017 and March 31, 2017 associated with other long-term investments accounted for using the equity method and $(1.2) and $(4.2) related to foreign currency forward contracts. Excludes carrying value of $12.3 and $11.7 at January 1, 2017 and March 31, 2017 associated with a tax advantaged federal affordable housing development fund accounted for using the proportional amortization method.

⁽²⁾Excludes carrying value of $287.1 and $230.9 at January 1, 2017 and March 31, 2017 associated with short-term investments, of which $0.1 is classified as held for sale at January 1, 2017.

⁽³⁾Investments for which fair value is measured at NAV 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 $6.6 of fixed maturity investments at January 1, 2017 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⁽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)	11.3			19.1			.5		—		1.1		(2.4		)	29.6
Amortization/Accretion	—			(4.2		)	—		—		—		—			(4.2		)
Purchases	109.0			292.4			—		—		2.1		8.9			412.4
Sales	(852.9		)	(272.6		)	—		—		—		(3.0		)	(1,128.5		)
Transfers in	—			—			—		—		—		—			—
Transfers out	—			—			—		—		—		—			—
Balance at March 31, 2016	$	419.6		$	2,566.1		$	70.5	$	—	$	172.7	$	131.3		$	3,360.2		^(1)(2)(4)

⁽¹⁾Excludes carrying value of $3.8 and $3.7 at January 1, 2016 and March 31, 2016 associated with other long-term investment limited partnerships accounted for using the equity method. Excludes carrying value of $14.7 and $14.1 at January 1, 2016 and March 31, 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 million and $261.7 million at January 1, 2016 and March 31, 2016 associated with short-term investments of which $0.1 and $0.3 is classified as held for sale at January 1, 2016 and March 31, 2016.

⁽³⁾ Investments for which fair value is measured at NAV 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 $9.4 of fixed maturity investments at January 1, 2016 and March 31, 2016 that is classified as assets held for sale related to SSIE.

Fair Value Measurements — transfers between levels - Three-month period ended March 31, 2017 and 2016

Transfers between levels are recorded using the fair value measurement as of the end of the quarterly period in which the event or change in circumstance giving rise to the transfer occurred.

During the first three months of 2017 and the first three 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.

Significant Unobservable Inputs

The following summarizes significant unobservable inputs used in estimating the fair value of investment securities, other than hedge funds and private equity funds, classified within Level 3 as of March 31, 2017 and December 31, 2016. The fair value of investments in hedge funds and private equity funds are generally estimated using the NAV of the funds.



Description	March 31, 2017
$ in millions, except share price	Rating⁽⁶⁾	Valuation Technique(s)	Fair Value⁽¹⁾	Unobservable Input
Non-agency residential mortgage-backed securities	AAA	Broker pricing	$58.3	Broker quote		102.56
Private equity security	NR	Share price of most recent transaction	$21.0	Share price	-	$1.00
Private equity security	NR	Discounted cash flow	$22.1	Discount rate	-	25.0%
Private equity security	NR	Share price of most recent transaction	$3.4	Share price	-	$2.52
Private convertible preferred security	NR	Multiple of EBITDA	$3.7	EBITDA multiple	-	6.00
Private convertible preferred security	NR	Share price of most recent transaction	$27.0	Share price	-	$3.83
Community development tax incentive investment	NR	Member share of GAAP net equity	$14.5	GAAP net equity		$14.5
Private equity security	NR	Discounted cash flow/ Option pricing method	$9.4	Discount rate	-	21.0%
				Time until expiration	-	4 years
			Volatility/Standard deviation		-	50.0%
			Risk free rate		-	1.00%
OneBeacon Surplus Notes:	NR
- Seller priority		Discounted cash flow	$48.1	Discount rate ⁽²⁾	-	10.6%
			Timing of interest payments ⁽⁴⁾		-	2020
			Timing of principal payments ⁽⁴⁾		-	2030
- Pari passu		Discounted cash flow	$21.5	Discount rate ⁽³⁾	-	15.0%
			Timing of interest payments ⁽⁵⁾		-	2021
			Timing of principal payments ⁽⁵⁾		-	2035

⁽¹⁾Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.

⁽²⁾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 to 400 bps as of March 31, 2017 from 250 bps as of December 31, 2016 to reflect an increase in the assumed liquidity spread for the seller priority note.

⁽³⁾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 to 400 bps as of March 31, 2017 from 250 bps as of December 31, 2016 to reflect an increase in the assumed liquidity spread for the pari passu note.

⁽⁴⁾As of March 31, 2017, OneBeacon has assumed for the purpose of estimating fair value that all accrued but unpaid interest on the seller priority note since the date of issuance is paid in 2020, with regular annual interest payments beginning thereafter. Principal repayments are assumed to begin on a graduated basis in 2030.

⁽⁵⁾As of March 31, 2017, OneBeacon has assumed for the purpose of estimating fair value that regular annual interest payments on the pari passu note begin in 2021. All accrued but unpaid interest since the date of issuance is assumed to be paid in 2025. Principal repayments are assumed to begin on a graduated basis in 2035.

⁽⁶⁾ Credit ratings are assigned based on the following hierarchy: 1) Standard and Poor's and 2) Moody’s.



Description	December 31, 2016
$ in millions, except share price	Valuation Technique(s)	Fair Value ⁽¹⁾	Unobservable Input
Private equity security	Share price of most recent transaction	$21.0	Share price	-	$1.00
Private equity security	Discounted cash flow	$22.1	Discount rate	-	25.0%
Private equity security	Share price of most recent transaction	$3.2	Share price	-	$2.52
Private convertible preferred security	Multiple of EBITDA	$3.6	EBITDA multiple	-	6.00
Private convertible preferred security	Share price of most recent transaction	$27.0	Share price	-	$3.83
Community development tax incentive investment	Member share of GAAP net equity	$14.3	GAAP net equity		$14.3
Private equity security	Discounted cash flow/ Option pricing method	$9.3	Discount rate	-	21.0%
			Time until expiration	-	4 years
		Volatility/Standard deviation		-	50.0%
		Risk free rate		-	1.00%
OneBeacon Surplus Notes:
- Seller priority	Discounted cash flow	$51.1	Discount rate ⁽²⁾	-	9.6%
		Timing of interest payments ⁽⁴⁾		-	2020
		Timing of principal payments ⁽⁴⁾		-	2030
- Pari passu	Discounted cash flow	$20.8	Discount rate ⁽³⁾	-	15.0%
		Timing of interest payments ⁽⁵⁾		-	2021
		Timing of principal payments ⁽⁵⁾		-	2035

⁽¹⁾Includes the net unrealized investment gains (losses) associated with foreign currency; foreign currency effects based on observable inputs.

⁽²⁾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 basis points 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.

⁽³⁾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 basis points to reflect both a liquidity discount for a private debt instrument and regulatory payment approval uncertainty, was added to the treasury rate to determine the discount rate for the pari passu note.

⁽⁴⁾As of December 31, 2016, OneBeacon has assumed for the purpose of estimating fair value that all accrued but unpaid interest on the seller priority note since the date of issuance is paid in 2020, with regular annual interest payments beginning thereafter. Principal repayments are assumed to begin on a graduated basis in 2030.

⁽⁵⁾As of December 31, 2016, OneBeacon has assumed for the purpose of estimating fair value that regular annual interest payments on the pari passu note begin in 2021. All accrued but unpaid interest since the date of issuance is assumed to be paid in 2025. Principal repayments are assumed to begin on a graduated basis in 2035.