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Investment Securities
 9 Months Ended
Sep. 30, 2014
Investments, Debt and Equity Securities [Abstract]  
Investment Securities
Investment Securities
 
White Mountains’s invested assets consist of securities and other long-term investments held for general investment purposes.  The portfolio of investment securities includes short-term investments, fixed maturity investments, convertible fixed maturity investments and common equity securities 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 investments in fixed maturity investments, including mortgage-backed and asset-backed securities, are generally valued using industry standard pricing models. 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 September 30, 2014 and December 31, 2013.
Other long-term investments are primarily comprised of White Mountains’s investments in hedge funds and private equity funds.

Net Investment Income
Pre-tax net investment income for the three and nine months ended September 30, 2014 and 2013 consisted of the following:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2014
 
2013
 
2014
 
2013
Investment income:
 
 
 
 
 
 
 
 
Fixed maturity investments
 
$
24.4

 
$
25.1

 
$
72.4

 
$
76.3

Short-term investments
 
.8

 
1.1

 
2.0

 
2.9

Common equity securities
 
4.3

 
4.4

 
15.2

 
14.0

Convertible fixed maturity investments
 
1.1

 
.7

 
2.3

 
2.1

Other long-term investments
 
.1

 
1.2

 
1.8

 
2.7

Interest on funds held under reinsurance treaties
 
(.1
)
 
—

 
(.1
)
 
.2

Total investment income
 
30.6

 
32.5

 
93.6

 
98.2

Less third-party investment expenses
 
(5.9
)
 
(5.2
)
 
(15.5
)
 
(13.7
)
Net investment income, pre-tax
 
$
24.7

 
$
27.3

 
$
78.1

 
$
84.5



Net Realized and Unrealized Investment Gains and Losses
Net realized and unrealized investment gains and losses for the three and nine months ended September 30, 2014 and 2013 consisted of the following:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2014
 
2013
 
2014
 
2013
Net realized investment gains, pre-tax
 
$
76.0

 
$
11.7

 
$
128.3

 
$
60.2

Net unrealized investment (losses) gains, pre-tax
 
(55.2
)
 
16.5

 
70.2

 
5.9

Net realized and unrealized investment gains, pre-tax
 
20.8

 
28.2

 
198.5

 
66.1

Income tax expense attributable to net realized and
     unrealized investment gains
 
(6.6
)
 
(1.2
)
 
(45.4
)
 
(2.5
)
Net realized and unrealized investment gains, after tax
 
$
14.2

 
$
27.0

 
$
153.1

 
$
63.6

Net realized investment gains (losses)
Net realized investment gains (losses) for the three and nine months ended September 30, 2014 and 2013 consisted of the following:
 
 
Three Months Ended
 
Three Months Ended
 
 
September 30, 2014
 
September 30, 2013
Millions
 
Net
realized
gains
(losses)
 
Net
foreign
exchange
gains
(losses)
 
Total net realized
gains (losses)
reflected in
earnings
 
Net
realized
gains
(losses)
 
Net
foreign
currency
gains
(losses)
 
Total net realized
gains (losses)
reflected in
earnings
Fixed maturity investments
 
$
6.9

 
$
7.6

 
$
14.5

 
$
(9.1
)
 
$
(.3
)
 
$
(9.4
)
Short-term investments
 
—

 
1.1

 
1.1

 
—

 
(.6
)
 
(.6
)
Common equity securities
 
54.6

 
.1

 
54.7

 
23.5

 
(3.0
)
 
20.5

Convertible fixed maturity
   investments
 
2.1

 
—

 
2.1

 
(.2
)
 
—

 
(.2
)
Other long-term investments
 
3.9

 
(.6
)
 
3.3

 
(1.1
)
 
3.0

 
1.9

Forward contracts
 
.3

 
—

 
.3

 
(.5
)
 
—

 
(.5
)
Net realized investment
   gains (losses), pre-tax
 
67.8

 
8.2

 
76.0

 
12.6

 
(.9
)
 
11.7

Income tax (expense) benefit
   attributable to net realized
   investment gains (losses)
 
(9.6
)
 
(2.0
)
 
(11.6
)
 
(.4
)
 
.4

 
—

Net realized investment
   gains (losses), after tax
 
$
58.2

 
$
6.2

 
$
64.4

 
$
12.2

 
$
(.5
)
 
$
11.7

 
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2013
Millions
 
Net
realized
gains
(losses)
 
Net
foreign
exchange
gains
(losses)
 
Total net realized
gains (losses)
reflected in
earnings
 
Net
realized
gains
(losses)
 
Net
foreign
currency
gains
(losses)
 
Total net realized
gains (losses)
reflected in
earnings
Fixed maturity investments
 
$
17.1

 
$
7.1

 
$
24.2

 
$
12.9

 
$
(14.4
)
 
$
(1.5
)
Short-term investments
 
—

 
1.1

 
1.1

 
.2

 
—

 
.2

Common equity securities
 
92.9

 
—

 
92.9

 
60.7

 
(3.0
)
 
57.7

Convertible fixed maturity
   investments
 
5.9

 
—

 
5.9

 
(.7
)
 
—

 
(.7
)
Other long-term investments
 
4.2

 
(.2
)
 
4.0

 
4.8

 
—

 
4.8

Forward contracts
 
.2

 
—

 
.2

 
(.3
)
 
—

 
(.3
)
Net realized investment gains
  (losses), pre-tax
 
120.3

 
8.0

 
128.3

 
77.6

 
(17.4
)
 
60.2

Income tax (expense) benefit
   attributable to net realized
   investment gains (losses)
 
(19.6
)
 
(2.1
)
 
(21.7
)
 
(17.8
)
 
5.1

 
(12.7
)
Net realized investment
   gains (losses), after tax
 
$
100.7

 
$
5.9

 
$
106.6

 
$
59.8

 
$
(12.3
)
 
$
47.5


Net unrealized investment gains (losses)
The following table summarizes net unrealized investment gains (losses) for the three and nine months ended September 30, 2014 and 2013:
 
 
Three Months Ended
 
Three Months Ended
 
 
September 30, 2014
 
September 30, 2013
Millions
 
Net
unrealized
gains
(losses)
 
Net
foreign
exchange
gains
(losses)
 
Total net unrealized
gains (losses)
reflected in
earnings
 
Net
unrealized
gains
(losses)
 
Net
foreign
exchange
gains
(losses)
 
Total net unrealized
gains (losses)
reflected in
earnings
Fixed maturity investments
 
$
(14.3
)
 
$
37.6

 
$
23.3

 
$
9.3

 
$
(30.5
)
 
$
(21.2
)
Short-term investments
 
—

 
—

 
—

 
—

 
.1

 
.1

Common equity securities
 
(67.8
)
 
(2.1
)
 
(69.9
)
 
35.6

 
(2.0
)
 
33.6

Convertible fixed maturity investments
 
(4.0
)
 
.1

 
(3.9
)
 
2.4

 
(.1
)
 
2.3

Other long-term investments
 
(6.4
)
 
1.7

 
(4.7
)
 
3.1

 
(1.4
)
 
1.7

Net unrealized investment
   (losses) gains, pre-tax
 
(92.5
)
 
37.3

 
(55.2
)
 
50.4

 
(33.9
)
 
16.5

Income tax benefit (expense)
   attributable to net unrealized
   investment (losses) gains
 
15.8

 
(10.8
)
 
5.0

 
(8.6
)
 
7.4

 
(1.2
)
Net unrealized investment
   (losses) gains, after tax
 
$
(76.7
)
 
$
26.5

 
$
(50.2
)
 
$
41.8

 
$
(26.5
)
 
$
15.3


 
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2013
Millions
 
Net
unrealized
gains
(losses)
 
Net
foreign
exchange
gains
(losses)
 
Total net unrealized
gains (losses)
reflected in
earnings
 
Net
unrealized
gains
(losses)
 
Net
foreign
currency
gains
(losses)
 
Total net unrealized
gains (losses)
reflected in
earnings
Fixed maturity investments
 
$
30.0

 
$
78.0

 
$
108.0

 
$
(94.8
)
 
$
6.2

 
$
(88.6
)
Common equity securities
 
(42.8
)
 
(.2
)
 
(43.0
)
 
85.2

 
(1.0
)
 
84.2

Convertible fixed maturity investments
 
(5.8
)
 
.4

 
(5.4
)
 
(.5
)
 
—

 
(.5
)
Other long-term investments
 
7.2

 
3.4

 
10.6

 
7.6

 
3.2

 
10.8

Net unrealized investment
    (losses) gains, pre-tax
 
(11.4
)
 
81.6

 
70.2

 
(2.5
)
 
8.4

 
5.9

Income tax (expense) benefit
   attributable to net unrealized
   investment (losses) gains
 
(3.1
)
 
(20.6
)
 
(23.7
)
 
13.1

 
(2.9
)
 
10.2

Net unrealized investment
   (losses) gains, after tax
 
$
(14.5
)
 
$
61.0

 
$
46.5

 
$
10.6

 
$
5.5

 
$
16.1



The following table summarizes the amount of total pre-tax (losses) gains included in earnings attributable to unrealized investment (losses) gains for Level 3 investments for the three and nine months ended September 30, 2014 and 2013:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2014
 
2013
 
2014
 
2013
Fixed maturity investments
 
$
1.8

 
$
(2.2
)
 
$
2.2

 
$
(2.4
)
Common equity securities
 
.9

 
(.7
)
 
3.7

 
—

Convertible fixed maturity investments
 
.1

 
—

 
3.3

 
—

Other long-term investments
 
(6.7
)
 
.9

 
8.3

 
8.7

Total unrealized investment (losses) gains,
   pre-tax - Level 3 investments
 
$
(3.9
)
 
$
(2.0
)
 
$
17.5

 
$
6.3



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 September 30, 2014 and December 31, 2013 were as follows: 
 
 
September 30, 2014
Millions
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
gains (losses)
 
Carrying
value
U.S. Government and agency obligations
 
$
254.4

 
$
.2

 
$
(.5
)
 
$
5.6

 
$
259.7

Debt securities issued by corporations
 
2,314.6

 
48.9

 
(6.3
)
 
30.1

 
2,387.3

Municipal obligations
 
78.9

 
1.3

 
(.3
)
 
—

 
79.9

Mortgage-backed and asset-backed securities
 
1,846.7

 
6.8

 
(4.6
)
 
16.0

 
1,864.9

Foreign government, agency and provincial obligations
 
311.6

 
3.7

 
(.8
)
 
(3.3
)
 
311.2

Preferred stocks
 
79.7

 
6.7

 
—

 
—

 
86.4

Total fixed maturity investments including assets
    held for sale
 
$
4,885.9

 
$
67.6

 
$
(12.5
)
 
$
48.4

 
$
4,989.4

Fixed maturity investments reclassified to assets
    held for sale related to the Runoff Transaction
 
 
 
 
 
 
 
 
 
(203.9
)
Total fixed maturity investments
 
 
 
 
 
 
 
 
 
$
4,785.5

 
 
 
December 31, 2013
Millions
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
losses
 
Carrying
value
U.S. Government and agency obligations
 
$
365.5

 
$
.5

 
$
(1.0
)
 
$
(2.5
)
 
$
362.5

Debt securities issued by corporations
 
2,330.7

 
44.0

 
(13.2
)
 
(14.3
)
 
2,347.2

Municipal obligations
 
18.3

 
—

 
(.4
)
 
—

 
17.9

Mortgage-backed and asset-backed securities
 
2,027.3

 
2.4

 
(9.9
)
 
(5.3
)
 
2,014.5

Foreign government, agency and provincial obligations
 
444.2

 
3.7

 
(3.2
)
 
(4.8
)
 
439.9

Preferred stocks
 
79.9

 
5.1

 
—

 
(.2
)
 
84.8

Total fixed maturity investments including assets
    held for sale
 
$
5,265.9

 
$
55.7

 
$
(27.7
)
 
$
(27.1
)
 
$
5,266.8

Fixed maturity investments reclassified to assets
    held for sale related to the Runoff Transaction
 
 

 
 

 
 

 
 

 
(236.3
)
Total fixed maturity investments
 
 

 
 

 
 

 
 

 
$
5,030.5


The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and losses, and carrying values of White Mountains’s common equity securities, convertible fixed maturity investments and other long-term investments as of September 30, 2014 and December 31, 2013 were as follows:
 
 
September 30, 2014
Millions
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
gains (losses)
 
Carrying
value
Common equity securities
 
$
766.7

 
$
229.9

 
$
(9.1
)
 
$
(1.4
)
 
$
986.1

Convertible fixed maturity investments
 
$
45.0

 
$
4.4

 
$
(1.1
)
 
$
.6

 
$
48.9

Other long-term investments
 
$
256.1

 
$
85.5

 
$
(21.6
)
 
$
.9

 
$
320.9

 
 
December 31, 2013
Millions
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
losses
 
Carrying
value
Common equity securities
 
$
890.2

 
$
271.0

 
$
(3.6
)
 
$
(.8
)
 
$
1,156.8

Convertible fixed maturity investments
 
$
71.7

 
$
9.9

 
$
(.9
)
 
$
(.2
)
 
$
80.5

Other long-term investments
 
$
238.3

 
$
79.6

 
$
(26.6
)
 
$
(2.4
)
 
$
288.9


Other Long-term Investments
Other long-term investments consist of the following at September 30, 2014 and December 31, 2013:
 
 
Fair Value at
Millions
 
September 30, 2014
 
December 31, 2013
Hedge funds and private equity funds, at fair value(1)
 
$
241.9

 
$
239.0

Partnership investments accounted for under the equity method
 
23.5

 
26.6

Limited liability companies and private equity securities, at fair value(1)
 
50.1

 
20.3

Other(1)
 
5.2

 
3.1

Forward contracts at fair value (see Note 8)
 
.2

 
(.1
)
Total other-long term investments
 
$
320.9

 
$
288.9

(1) See Fair Value Measurements by Level table.

Hedge Funds and Private Equity Funds
White Mountains owns 67% of the limited partnership interests in Prospector Offshore Fund, Ltd. and 69% of the limited partnership interests in Prospector Turtle Fund (collectively, the “Prospector Funds”).  At September 30, 2014 and December 31, 2013, White Mountains’s investment in the Prospector Funds was $95.4 million and $112.4 million. The Prospector Funds are hedge funds that pursue investment opportunities in a variety of equity and equity-related instruments, primarily in the financial services sector. White Mountains has determined that the Prospector Funds are VIEs that White Mountains is required to consolidate. At September 30, 2014 and December 31, 2013, White Mountains consolidated total assets of $223.5 million and $249.2 million and total liabilities of $82.7 million and $90.6 million of the Prospector Funds. At September 30, 2014 and December 31, 2013, White Mountains also recorded non-controlling interest of $45.4 million and $46.2 million in the Prospector Funds.
In addition to the Prospector 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. At September 30, 2014, White Mountains held investments in 14 hedge funds and 32 private equity funds.  The largest investment in a single fund was $19.5 million at September 30, 2014. The following table summarizes investments in hedge funds and private equity funds by investment objective and sector at September 30, 2014 and December 31, 2013:
 
 
September 30, 2014
 
December 31, 2013
Millions
 
Fair Value
 
Unfunded
Commitments
 
Fair Value
 
Unfunded
Commitments
Hedge funds
 
 

 
 

 
 

 
 

Long/short equity
 
$
54.8

 
$
—

 
$
62.6

 
$
—

Long/short credit & distressed
 
22.9

 
—

 
22.8

 
—

Long/short equity REIT
 
19.5

 
—

 
18.3

 
—

Long/short equity activist
 
17.2

 
—

 
16.8

 
—

Long bank loan
 
.2

 
—

 
.2

 
—

Long diversified strategies
 
—

 
—

 
.1

 
—

Total hedge funds
 
114.6

 
—

 
120.8

 
—

 
 
 
 
 
 
 
 
 
Private equity funds
 
 

 
 

 
 

 
 

Energy infrastructure & services
 
46.8

 
11.0

 
45.9

 
13.1

Multi-sector
 
24.5

 
5.9

 
23.8

 
6.5

Manufacturing/Industrial
 
18.8

 
14.8

 
11.2

 
15.5

Aerospace/Defense/Government
 
12.1

 
13.4

 
5.8

 
19.2

Private equity secondaries
 
9.4

 
3.1

 
9.5

 
3.1

Healthcare
 
5.8

 
2.8

 
5.6

 
2.8

Real estate
 
3.5

 
3.3

 
8.2

 
3.3

Insurance
 
2.2

 
41.3

 
2.3

 
41.3

Venture capital
 
1.4

 
.3

 
1.6

 
.3

International multi-sector, Asia
 
—

 
—

 
—

 
2.7

International multi-sector, Europe
 
2.8

 
2.5

 
3.9

 
2.8

Distressed residential real estate
 
—

 
—

 
.4

 
—

Total private equity funds
 
127.3

 
98.4

 
118.2

 
110.6

 
 
 
 
 
 
 
 
 
Total hedge funds and private equity funds included in other long-term investments
 
$
241.9

 
$
98.4

 
$
239.0

 
$
110.6


 
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 September 30, 2014 fair value of hedge funds subject to restrictions on redemption frequency and advance notice period requirements for investments in active hedge funds:
 
 
Notice Period
Millions
Redemption frequency
 
30-59 days
notice
 
60-89 days
notice
 
90-119 days
notice
 
120+ days
notice
 
Total
Monthly
 
$
4.5

 
$
—

 
$
—

 
$
—

 
$
4.5

Quarterly
 
30.7

 
22.9

 
11.1

 
8.4

 
73.1

Semi-annual
 
—

 
26.9

 
—

 
—

 
26.9

Annual
 
—

 
—

 
9.9

 
.2

 
10.1

Total
 
$
35.2

 
$
49.8

 
$
21.0

 
$
8.6

 
$
114.6


 
Certain of the hedge fund investments in which White Mountains is invested are no longer active and are in the process of disposing of their underlying investments. Distributions from such funds are remitted to investors as the fund’s underlying investments are liquidated.  At September 30, 2014, distributions of $2.1 million were outstanding from these investments. The actual amount of the final distribution remittances remain subject to market fluctuations. The date at which such remittances will be received is not determinable at September 30, 2014.
White Mountains has also submitted redemption requests for certain of its investments in active hedge funds.  At September 30, 2014, redemptions of $28.3 million are outstanding and are subject to market fluctuations. Such redemptions are expected to be received in the first quarter of 2015. Redemptions are recorded as receivables when the investment is no longer subject to market fluctuations.
Investments in private equity funds are generally subject to a “lock-up” period during which investors may not request a redemption. Distributions prior to the expected termination date of the fund may be limited to dividends or proceeds arising from the liquidation of the fund’s underlying investments. In addition, certain private equity funds provide an option to extend the lock-up period at either the sole discretion of the fund manager or upon agreement between the fund and the investors.
At September 30, 2014, 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
 
$14.4
 
$31.6
 
$60.6
 
$20.7
 
$127.3

 
Fair value measurements at September 30, 2014
White Mountains’s invested assets that are measured at fair value include fixed maturity investments, common equity securities, convertible fixed maturity securities and other long-term investments, such as interests in hedge funds and private equity funds. Fair value measurements reflect management’s best estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements fall into a hierarchy with three levels based on the nature of the inputs. Fair value measurements based on quoted prices in active markets for identical assets are at the top of the hierarchy (“Level 1”), followed by fair value measurements based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments (“Level 2”). Measurements based on unobservable inputs, including a reporting entity’s estimates of the assumptions that market participants would use are at the bottom of the hierarchy (“Level 3”).
White Mountains uses quoted market prices or other observable inputs to determine fair value for the vast majority of its investment portfolio. Investments valued using Level 1 inputs include fixed maturity investments, primarily investments in U.S. Treasuries, common equity securities and short-term investments, which include U.S. Treasury Bills. Investments valued using Level 2 inputs consist of fixed maturity investments including corporate debt, state and other governmental debt, convertible fixed maturity securities and mortgage and asset-backed securities. 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 hedge funds and private equity funds, as well as investments in certain debt and equity securities where quoted market prices are unavailable. 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 used by White Mountains have indicated that if no observable inputs are available for a security, they will not provide a price. In those circumstances, White Mountains estimates the fair value using industry standard pricing models and observable inputs such as benchmark interest rates, matrix pricing, market comparables, broker quotes, issuer spreads, bids, offers, credit rating, prepayment speeds and other relevant inputs. White Mountains performs procedures to validate the market prices obtained from the outside pricing sources. Such procedures, which cover substantially all of its fixed maturity investments include, but are not limited to, evaluation of model 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 different independent pricing vendors on at least a semi-annual basis, monthly analytical reviews of certain prices, and review of assumptions utilized by the pricing service for selected measurements on an ad hoc basis throughout the year. White Mountains also performs back-testing of selected sales activity to determine whether there are any significant differences between the market price used to value the security prior to sale and the actual sale price on an ad-hoc basis throughout the year. Prices provided by the pricing services that vary by more than 5% and $1.0 million from the expected price based on these procedures are considered outliers. In circumstances where the results of White Mountains’s review process do 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 fair values of such securities are considered to be Level 3 measurements.
White Mountains’s fixed maturity investments are generally valued using matrix and other pricing models. 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 or accreted prospectively over the remaining economic life.
White Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its other long-term investments, including obtaining and reviewing the audited annual financial statements of each hedge fund and private equity fund and periodically discussing each fund’s pricing with the fund manager. However, since the fund managers do not provide sufficient information to evaluate the pricing inputs and methods for each underlying investment, the inputs are considered to be unobservable. Accordingly, the fair values of White Mountains’s investments in hedge funds and private equity funds have been classified as Level 3 measurements. The fair value of White Mountains’s investments in hedge funds and private equity funds has been determined using net asset value.
In addition to the investments described above, White Mountains has $81.0 million and $86.3 million of investment-related liabilities recorded at fair value and included in other liabilities as of September 30, 2014 and December 31, 2013.  These liabilities relate to securities that have been sold short by limited partnerships in which White Mountains has investments and is required to consolidate under GAAP.  These liabilities have a Level 1 designation.
 
Fair Value Measurements by Level
The following tables summarize White Mountains’s fair value measurements for investments at September 30, 2014 and December 31, 2013, by level:
 
 
September 30, 2014
Millions
 
Fair value
 
Level 1
 
Level 2
 
Level 3
Fixed maturity investments:
 
 

 
 

 
 

 
 

U.S. Government and agency obligations
 
$
259.7

 
$
197.1

 
$
62.6

 
$
—

 
 
 
 
 
 
 
 
 
Debt securities issued by corporations:
 
 

 
 
 
 
 
 
Consumer
 
680.5

 
—

 
680.5

 
—

Financials
 
476.4

 
—

 
476.4

 
—

Communications
 
260.3

 
—

 
260.3

 
—

Industrial
 
407.8

 
—

 
407.8

 
—

Energy
 
179.8

 
—

 
179.8

 
—

Utilities
 
161.1

 
—

 
161.1

 
—

Basic Materials
 
140.7

 
—

 
134.7

 
6.0

Technology
 
56.8

 
—

 
56.8

 
—

Other
 
23.9

 
—

 
23.9

 
—

Total debt securities issued by corporations:
 
2,387.3

 
—

 
2,381.3

 
6.0

 
 
 
 
 
 
 
 
 
Mortgage-backed and asset-backed securities
 
1,864.9

 
—

 
1,842.9

 
22.0

Foreign government, agency and provincial obligations
 
311.2

 
22.1

 
289.1

 
—

Preferred stocks
 
86.4

 
—

 
14.9

 
71.5

Municipal obligations
 
79.9

 
—

 
79.9

 
—

Total fixed maturity investments (1)
 
4,989.4

 
219.2

 
4,670.7

 
99.5

 
 
 
 
 
 
 
 
 
Short-term investments
 
834.9

 
833.9

 
1.0

 
—

 
 
 
 
 
 
 
 
 
Common equity securities:
 
 

 
 

 
 

 
 

Financials
 
296.4

 
257.5

 
—

 
38.9

Consumer
 
277.5

 
277.2

 
.3

 
—

Industrial
 
97.1

 
97.1

 
—

 
—

Energy
 
58.8

 
58.8

 
—

 
—

Communications
 
54.6

 
54.6

 
—

 
—

Basic materials
 
38.9

 
38.9

 
—

 
—

Technology
 
36.8

 
36.8

 
—

 
—

Utilities
 
22.3

 
22.3

 
—

 
—

Other
 
103.7

 
27.5

 
76.2

 
—

Total common equity securities
 
986.1

 
870.7

 
76.5

 
38.9

 
 
 
 
 
 
 
 
 
Convertible fixed maturity investments
 
48.9

 
—

 
38.0

 
10.9

Other long-term investments (2) 
 
297.2

 
—

 
—

 
297.2

Total investments
 
$
7,156.5

 
$
1,923.8

 
$
4,786.2

 
$
446.5

(1) Carrying value includes $203.9 that is classified as assets held for sale relating to discontinued operations.
(2) Excludes carrying value of $23.5 associated with other long-term investment limited partnerships accounted for using the equity method and $0.2 related to forward contracts.

 
 
December 31, 2013
Millions
 
Fair value
 
Level 1
 
Level 2
 
Level 3
Fixed maturity investments:
 
 

 
 

 
 

 
 

U.S. Government and agency obligations
 
$
362.5

 
$
295.8

 
$
66.7

 
$
—

 
 
 
 
 
 
 
 
 
Debt securities issued by corporations:
 
 

 
 

 
 

 
 

Consumer
 
754.4

 
—

 
754.4

 
—

Financials
 
434.4

 
—

 
434.4

 
—

Industrial
 
281.1

 
—

 
281.1

 
—

Communications
 
265.0

 
—

 
265.0

 
—

Utilities
 
173.6

 
—

 
173.6

 
—

Energy
 
159.7

 
—

 
159.7

 
—

Basic materials
 
149.1

 
—

 
149.1

 
—

Technology
 
91.2

 
—

 
91.2

 
—

Other
 
38.7

 
—

 
38.7

 
—

Total debt securities issued by corporations:
 
2,347.2

 
—

 
2,347.2

 
—

 
 
 
 
 
 
 
 
 
Mortgage-backed and asset-backed securities
 
2,014.5

 
—

 
1,992.5

 
22.0

Foreign government, agency and provincial obligations
 
439.9

 
44.5

 
395.4

 
—

Preferred stocks
 
84.8

 
—

 
13.8

 
71.0

Municipal obligations
 
17.9

 
—

 
17.9

 
—

Total fixed maturity investments (1)
 
5,266.8

 
340.3

 
4,833.5

 
93.0

 
 
 
 
 
 
 
 
 
Short-term investments
 
635.9

 
621.5

 
14.4

 
—

 
 
 
 
 
 
 
 
 
Common equity securities:
 
 

 
 

 
 

 
 

Financials
 
360.4

 
314.3

 
—

 
46.1

Consumer
 
308.2

 
308.2

 
—

 
—

Industrial
 
105.4

 
105.4

 
—

 
—

Energy
 
78.6

 
78.6

 
—

 
—

Technology
 
60.6

 
60.6

 
—

 
—

Communications
 
57.1

 
57.1

 
—

 
—

Basic materials
 
53.4

 
53.4

 
—

 
—

Utilities
 
34.3

 
34.3

 
—

 
—

Other
 
98.8

 
24.5

 
74.3

 
—

Total common equity securities
 
1,156.8

 
1,036.4

 
74.3

 
46.1

 
 
 
 
 
 
 
 
 
Convertible fixed maturity investments
 
80.5

 
—

 
74.4

 
6.1

Other long-term investments (2)
 
262.4

 
—

 
—

 
262.4

Total investments
 
$
7,402.4

 
$
1,998.2

 
$
4,996.6

 
$
407.6

(1) Carrying value includes $236.3 that is classified as assets held for sale relating to discontinued operations.
(2) Excludes carrying value of $26.6 associated with other long-term investment limited partnerships accounted for using the equity method and $(0.1) related to currency forward contracts.

Debt securities issued by corporations
The following table summarizes the ratings of the corporate debt securities held in White Mountains’s investment portfolio as of September 30, 2014 and December 31, 2013:
 
 
Fair Value at
Millions
 
September 30, 2014
 
December 31, 2013
AAA
 
$
—

 
$
—

AA
 
233.3

 
228.8

A
 
974.6

 
1,039.5

BBB
 
1,167.9

 
1,075.5

BB
 
—

 
—

Other
 
11.5

 
3.4

Debt securities issued by corporations(1)
 
$
2,387.3

 
$
2,347.2

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

Mortgage-backed, Asset-backed Securities
White Mountains purchases commercial and residential mortgage-backed securities with the goal of maximizing risk adjusted returns in the context of a diversified portfolio. White Mountains’s non-agency commercial mortgage-backed portfolio (“CMBS”) is generally short-term and structurally subordinate. 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 September 30, 2014, on average less than 1% of the underlying loans were reported as non-performing for all non-agency CMBS held by White Mountains. White Mountains is not an originator of residential mortgage loans. White Mountains’s investments in hedge funds and private equity funds contain negligible amounts of sub-prime mortgage-backed securities at September 30, 2014. White Mountains considers sub-prime mortgage-backed securities as those that have underlying loan pools that exhibit weak credit characteristics, or those that are issued from dedicated sub-prime shelves or dedicated second-lien shelf registrations (i.e., White Mountains considers investments backed primarily by second-liens to be sub-prime risks regardless of credit scores or other metrics).
White Mountains categorizes mortgage-backed securities as “non-prime” (also called “Alt A” or “A-”) if they are backed by collateral that has overall credit quality between prime and sub-prime based on White Mountains’s review of the characteristics of their underlying mortgage loan pools, such as credit scores and financial ratios. White Mountains’s non-agency residential mortgage-backed portfolio is generally moderate-term and structurally senior. White Mountains does not own any collateralized loan obligations. White Mountains does not own any collateralized debt obligations, with the exception of $49.8 million of non-agency residential mortgage resecuritization tranches, each a senior tranche in its own right and each collateralized by a single earlier vintage Super Senior or Senior non-agency residential mortgage backed security.
The following table summarizes mortgage and asset-backed securities as of September 30, 2014 and December 31, 2013:
 
 
September 30, 2014
 
December 31, 2013
Millions
 
Fair Value
 
Level 2
 
Level 3
 
Fair Value
 
Level 2
 
Level 3
Mortgage-backed securities:
 
 

 
 

 
 

 
 

 
 

 
 

Agency:
 
 

 
 

 
 

 
 

 
 

 
 

GNMA
 
$
429.6

 
$
429.6

 
$
—

 
$
512.3

 
$
512.3

 
$
—

FNMA
 
56.6

 
56.6

 
—

 
81.2

 
81.2

 
—

FHLMC
 
45.0

 
45.0

 
—

 
91.3

 
91.3

 
—

Total Agency(1)
 
531.2

 
531.2

 
—

 
684.8

 
684.8

 
—

Non-agency:
 
 

 
 

 
 

 
 

 
 

 
 

Residential
 
196.6

 
196.6

 
—

 
125.7

 
125.7

 
—

Commercial
 
256.2

 
256.2

 
—

 
282.3

 
282.3

 
—

Total Non-agency
 
452.8

 
452.8

 
—

 
408.0

 
408.0

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Total mortgage-backed securities
 
984.0

 
984.0

 
—

 
1,092.8

 
1,092.8

 
—

Other asset-backed securities:
 
 

 
 
 
 
 
 

 
 
 
 
Credit card receivables
 
385.7

 
363.7

 
22.0

 
311.4

 
289.4

 
22.0

Vehicle receivables
 
305.9

 
305.9

 
—

 
365.0

 
365.0

 
—

Other
 
189.3

 
189.3

 
—

 
245.3

 
245.3

 
—

Total other asset-backed securities
 
880.9

 
858.9

 
22.0

 
921.7

 
899.7

 
22.0

Total mortgage and asset-backed securities
 
$
1,864.9

 
$
1,842.9

 
$
22.0

 
$
2,014.5

 
$
1,992.5

 
$
22.0

(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 residential mortgage-backed securities ("RMBS") and non-agency CMBS securities as of September 30, 2014 are as follows:
 
 
 
 
 
 
Security Issuance Year
 
 
 
 
Millions
 
Fair Value
 
2004
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Non-agency
   RMBS
 
$
196.6

 
$
9.5

 
$
16.1

 
$
10.6

 
$
—

 
$
17.2

 
$
—

 
$
16.3

 
$
23.5

 
$
6.2

 
$
42.6

 
$
54.6

Non-agency
   CMBS
 
256.2

 
—

 
—

 
8.5

 
2.8

 
—

 
—

 
12.0

 
—

 
20.6

 
94.5

 
117.8

Total
 
$
452.8

 
$
9.5

 
$
16.1

 
$
19.1

 
$
2.8

 
$
17.2

 
$
—

 
$
28.3

 
$
23.5

 
$
26.8

 
$
137.1

 
$
172.4


 
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 September 30, 2014:
Millions
 
Fair Value
 
Super Senior (1)
 
Senior (2)
 
Subordinate (3)
Prime
 
$
180.3

 
$
71.7

 
$
108.6

 
$
—

Non-prime
 
12.1

 
—

 
12.1

 
—

Sub-prime
 
4.2

 
4.2

 
—

 
—

Total
 
$
196.6

 
$
75.9

 
$
120.7

 
$
—

(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 Ratings ("Fitch") and were senior to other "AAA" or "Aaa" securities.
(2) At issuance, Senior, or in the case of resecuritization, the underlying securities, were rated "AAA" by Standard & Poor’s, "Aaa" by Moody’s or "AAA" by Fitch and were senior to non-"AAA" or non-"Aaa" securities.
(3) At issuance, Subordinate were not rated "AAA" by Standard & Poor’s, "Aaa" by Moody’s or "AAA" by Fitch and were junior to "AAA" or "Aaa" securities. 

Non-agency Commercial Mortgage-backed Securities
 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 September 30, 2014:
Millions
 
Fair Value
 
Super Senior (1)
 
Senior (2)
 
Subordinate (3)
Fixed rate CMBS
 
$
149.3

 
$
55.4

 
$
52.3

 
$
41.6

Floating rate CMBS
 
106.9

 
2.8

 
—

 
104.1

Total
 
$
256.2

 
$
58.2

 
$
52.3

 
$
145.7

(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" securities.
(2) At issuance, Senior, or in the case of resecuritization, the underlying securities, were rated "AAA" by Standard & Poor’s, "Aaa" by Moody’s or "AAA" by Fitch and were senior to non-"AAA" or non-"Aaa" securities.
(3) At issuance, Subordinate were not rated "AAA" by Standard & Poor’s, "Aaa" by Moody’s or "AAA" by Fitch and were junior to "AAA" or "Aaa" securities. 

Rollforward of Fair Value Measurements by Level
 White Mountains uses quoted market prices where available as the inputs to estimate fair value for its investments in active markets. Such measurements are considered to be either Level 1 or Level 2 measurements, depending on whether the quoted market price inputs are for identical securities (Level 1) or similar securities (Level 2). Level 3 measurements for fixed maturity investments, common equity securities, convertible fixed maturity investments and other long-term investments at September 30, 2014 and 2013 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 nine months ended September 30, 2014 and 2013:
 
 
 
Level 3 Investments
 
 
 
Millions
Level 1 investments
Level 2 
investments
Fixed
maturity investments
Common
equity
securities
Convertible
fixed
maturity investments
Other long-term
investments
 
Total
 
Balance at January 1, 2014
$
1,376.7

$
4,982.2

$
93.0

$
46.1

$
6.1

$
262.4

 
$
6,766.5

(1)(2)(3) 
Total realized and
   unrealized gains
57.5

115.0

3.1

3.7

3.3

15.6

 
198.2

(4) 
Foreign currency losses
   through OCI
(16.8
)
(142.1
)
(.9
)
—

—

(3.5
)
 
(163.3
)
  
Amortization/Accretion
(.4
)
(33.2
)
(.1
)
—

—

—

 
(33.7
)
 
Purchases
1,261.6

2,595.3

80.0

—

1.5

47.1

 
3,985.5

 
Sales
(1,585.8
)
(2,815.2
)
—

(10.9
)
—

(24.4
)
 
(4,436.3
)
 
Net change in investments
   related to (sales) purchases
   of consolidated affiliates
(2.7
)
7.4

—

—

—

—

 
4.7

 
Transfers in
—

75.8

—

—

—

—

 
75.8

  
Transfers out
(.2
)
—

(75.6
)
—

—

—

 
(75.8
)
  
Balance at
   September 30, 2014
$
1,089.9

$
4,785.2

$
99.5

$
38.9

$
10.9

$
297.2

 
$
6,321.6

(1)(2)(3) 
(1)  Excludes carrying value of $26.6 and $23.5 at January 1, 2014 and September 30, 2014 associated with other long-term investments accounted for using the equity method and $(0.1) and $0.2 at January 1, 2014 and September 30, 2014 related to forward contracts.
(2)  Carrying value includes $236.3 and $203.9 at January 1, 2014 and September 30, 2014 that is classified as assets held for sale relating to discontinued operations.
(3)  Excludes carrying value of $635.9 and $834.9 at January 1, 2014 and September 30, 2014 associated with short-term investments.
(4) Excludes $0.6 realized and unrealized gains associated with the Prospector Funds consolidation of investment-related liabilities.
 
 
 
Level 3 Investments
 
 
 
Millions
Level 1 investments
Level 2 
investments
Fixed
maturity investments
Common
equity
securities
Convertible
fixed
maturity investments
Other long-term
investments
 
Total
 
Balance at January 1, 2013
$
1,355.1

$
5,206.1

$
92.9

$
37.3

$
—

$
259.3

 
$
6,950.7

(1)(2)(3) 
Total realized and
   unrealized gains (losses)
140.6

(70.7
)
(3.3
)
—

—

14.0

 
80.6

(4) 
Foreign currency gains
   through OCI
1.4

17.5

.5

—

—

(.8
)
 
18.6

 
Amortization/Accretion
(.9
)
(39.7
)
—

—

—

—

 
(40.6
)
 
Purchases
735.9

3,014.7

32.4

.5

—

91.8

 
3,875.3

 
Sales
(877.9
)
(3,309.7
)
(.7
)
—

—

(91.1
)
 
(4,279.4
)
 
Net change in investments
related to purchases of
   consolidated affiliates
14.5

2.7

—

—

—

—

 
17.2

 
Transfers in
1.8

32.1

90.3

—

—

—

 
124.2

 
Transfers out
—

(91.1
)
(32.1
)
(1.0
)
—

—

 
(124.2
)
 
Balance at
   September 30, 2013
$
1,370.5

$
4,761.9

$
180.0

$
36.8

$
—

$
273.2

 
$
6,622.4

(1)(2)(3) 
(1) Excludes carrying value of $35.0 and $26.9 at January 1, 2013 and September 30, 2013 associated with other long-term investment limited partnerships accounted for using the equity method and $(0.1) and $(0.1) at January 1, 2013 and September 30, 2013 related to forward contracts.
(2)  Carrying value includes $338.1 and 239.7 at January 1, 2013 and September 30, 2013 that is classified as assets held for sale relating to discontinued operations.
(3) Excludes carrying value of $630.6 and $648.0 at January 1, 2013 and September 30, 2013 and realized and unrealized loss for the period of $0.2 associated with short-term investments.
(4) Excludes $14.1 realized and unrealized losses associated with the Prospector Funds consolidation of investment-related liabilities.

Fair Value Measurements — transfers between levels - Nine-month period ended September 30, 2014 and 2013
During the first nine months of 2014, four fixed maturity investments classified as Level 3 measurements in the prior
period were recategorized as Level 2 measurements because quoted market prices for similar securities that were considered reliable and could be validated against an alternative source were available at September 30, 2014. These measurements comprise “Transfers out” of Level 3 and “Transfers in” to Level 2 of $75.6 million for the period ended September 30, 2014.
During the first nine months of 2013, two fixed maturity investments classified as Level 3 measurements in the prior period were recategorized as Level 2 measurements because quoted market prices for similar securities that were considered reliable and could be validated against an alternative source were available at September 30, 2013. These measurements comprise “Transfers out” of Level 3 and “Transfers in” to Level 2 of $32.1 million for the period ended September 30, 2013.
During the first nine months of 2014, no fixed maturity investment which had been classified as a Level 2 measurements in the prior period were recategorized as Level 3 measurements.
During the first nine months of 2013, one fixed maturity investment, which had been classified as a Level 2 measurement at June 30, 2013 was recategorized as a Level 3 measurement at September 30, 2013. The security was priced with unobservable inputs and represents "Transfers out" of Level 2 and “Transfers in” to Level 3 of $90.3 million for the period ended September 30, 2013. The fair value of this security was estimated using industry standard pricing methodology, in which
management selected inputs using its best judgment. The security is considered to be Level 3 because the measurements are
not directly observable. At September 30, 2013, the estimated fair value for this security determined using the industry
standard pricing models was $1.3 million less than the estimated fair value based upon quoted prices provided by a third party
pricing vendor.

Significant Unobservable Inputs
The following summarizes significant unobservable inputs used in estimating the fair value of investment securities classified within Level 3 other than hedge funds and private equity funds as of September 30, 2014 and December 31, 2013. The fair value of investments in hedge funds and private equity funds, which are classified within Level 3, are estimated using the net asset value of the funds.
($ in Millions)
 
September 30, 2014
Description
 
Fair Value
 
Rating (2)
 
Valuation Technique(s)
 
Unobservable Input
Debt securities issued
   by corporations(1)(3)
 
$6.0
 
NR
 
Exchange Transaction
 

 

 
Asset-backed securities(1)
 
$22.0
 
AA+
 
Broker pricing
 
Broker quote
 
 
 
Preferred stock(1)
 
$71.5
 
NR
 
Discounted cash flow
 
Discount yield
 
6.6%
 
Private equity security(1)
 
$38.4
 
NR
 
Multiple of GAAP book value
 
Book value multiple
 
1.0
 
Private equity security(1)
 
$15.7
 
NR
 
Share price of recent transaction
 
Share price
 
$1.10
 
Convertible fixed
maturity investment (1)
 
$6.4
 
NR
 
Multiple of EBITDA
 
EBITDA multiple
 
6X
 
Convertible fixed
   maturity investment (1)
 
$4.5
 
NR
 
Share price of recent transaction
 
Share price
 
$0.71
 
Private equity security(1)
 
$11.7
 
NR
 
Share price of recent transaction
 
Share price
 
$290.96
 
(1) As of September 30, 2014, consists of one security.
(2) Credit ratings are assigned based on the following hierarchy: 1) Standard and Poor's and 2) Moody’s.
(3) Derived from the exchange of a convertible fixed maturity investment, where the valuation of the debt security issued by a corporation represents a portion
of the total exchange price after taking into consideration the cash and value of the common equity security that was also received in the exchange transaction.
($ in Millions)
 
December 31, 2013
Description
 
Fair Value
 
Rating (2)
 
Valuation Technique(s)
 
Unobservable Input
Asset-backed securities(1)
 
$22.0
 
AA+
 
Broker pricing
 
Broker quote
 
 
 
Preferred stock(1)
 
$71.0
 
NR
 
Discounted cash flow
 
Discount yield
 
7.4%
 
Private equity security(1)
 
$35.6
 
NR
 
Multiple of GAAP book value
 
Book value multiple
 
1.0
 
Private equity security(1)
 
$10.5
 
NR
 
Share price of recent transaction
 
Share price
 
$1.10
 
Convertible fixed
   maturity investments
 
$6.1
 
NR
 
Share price of recent transaction
 
Recent market transaction
 
$6.1
 

(1) As of December 31, 2013, consists of one security.
(2) Credit ratings are assigned based on the following hierarchy: 1) Standard and Poor's and 2) Moody’s.