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EX-3 - EXHIBIT 3 - WHITE MOUNTAINS INSURANCE GROUP LTDwtm10-q33117ex3.htm
EX-32.2 - EXHIBIT 32.2 - WHITE MOUNTAINS INSURANCE GROUP LTDwtm10-q33117ex322.htm
EX-32.1 - EXHIBIT 32.1 - WHITE MOUNTAINS INSURANCE GROUP LTDwtm10-q33117ex321.htm
EX-31.2 - EXHIBIT 31.2 - WHITE MOUNTAINS INSURANCE GROUP LTDwtm10-q33117ex312.htm
EX-31.1 - EXHIBIT 31.1 - WHITE MOUNTAINS INSURANCE GROUP LTDwtm10-q33117ex311.htm
EX-10.6 - EXHIBIT 10.6 - WHITE MOUNTAINS INSURANCE GROUP LTDwtm10-q33117ex106.htm
EX-10.5 - EXHIBIT 10.5 - WHITE MOUNTAINS INSURANCE GROUP LTDwtm10-q33117ex105.htm
EX-10.4 - EXHIBIT 10.4 - WHITE MOUNTAINS INSURANCE GROUP LTDwtm10-q33117ex104.htm
EX-10.3 - EXHIBIT 10.3 - WHITE MOUNTAINS INSURANCE GROUP LTDwtm10-q33117ex103.htm
EX-10.2 - EXHIBIT 10.2 - WHITE MOUNTAINS INSURANCE GROUP LTDwtm10-q33117ex102.htm
EX-10.1 - EXHIBIT 10.1 - WHITE MOUNTAINS INSURANCE GROUP LTDwtm10-q33117ex101.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the period ended March 31, 2017
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to         
 
Commission file number 1-8993

WHITE MOUNTAINS INSURANCE GROUP, LTD.
(Exact name of Registrant as specified in its charter)
Bermuda
 
94-2708455
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
80 South Main Street,
 
 
Hanover, New Hampshire
 
03755-2053
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (603) 640-2200
 
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes   ý   No   o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes   ý    No   o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  ý

As of April 28, 2017, 4,572,792 common shares with a par value of $1.00 per share were outstanding (which includes 60,139 restricted common shares that were not vested at such date).




WHITE MOUNTAINS INSURANCE GROUP, LTD.

Table of Contents
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets, March 31, 2017 and December 31, 2016
 
 
 
 
 
 
     Three Months Ended March 31, 2017 and 2016
 
 
 
 
Consolidated Statements of Changes in Equity, Three Months Ended March 31, 2017 and 2016
 
 
 
 
Consolidated Statements of Cash Flows, Three Months Ended March 31, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
Results of Operations for the Three Months Ended March 31, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Part I.FINANCIAL INFORMATION.
Item 1.
Financial Statements
WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(Millions, except share amounts)
 
March 31,
2017
 
December 31,
2016
Assets
 
Unaudited
 
 

Fixed maturity investments, at fair value
 
$
4,175.4

 
$
4,250.2

Short-term investments, at amortized cost (which approximates fair value)
 
230.9

 
287.0

Common equity securities, at fair value
 
601.0

 
474.3

Other long-term investments
 
331.7

 
323.3

Total investments
 
5,339.0

 
5,334.8

Cash
 
125.0

 
149.8

Reinsurance recoverable on unpaid losses
 
174.7

 
172.9

Reinsurance recoverable on paid losses
 
3.4

 
6.6

Insurance premiums receivable
 
227.5

 
229.9

Deferred acquisition costs
 
110.4

 
106.9

Deferred tax asset
 
125.5

 
126.7

Ceded unearned insurance premiums
 
52.4

 
44.2

Accrued investment income
 
27.2

 
26.1

Accounts receivable on unsettled investment sales
 
24.5

 
6.2

Goodwill and other intangible assets
 
53.0

 
55.9

Other assets
 
254.3

 
274.6

Assets held for sale
 

 
10.1

Total assets
 
$
6,516.9

 
$
6,544.7

Liabilities
 
 

 
 

Loss and loss adjustment expense reserves
 
$
1,368.8

 
$
1,365.6

Unearned insurance premiums
 
678.1

 
658.0

Debt
 
284.7

 
285.9

Accrued incentive compensation
 
83.2

 
140.0

Funds held under insurance contracts
 
148.7

 
153.0

Accounts payable on unsettled investment purchases
 
17.3

 

Other liabilities
 
178.5

 
199.9

Liabilities held for sale
 

 
5.1

Total liabilities
 
2,759.3

 
2,807.5

Equity
 
 

 
 

White Mountains’s common shareholders’ equity
 
 

 
 

White Mountains’s common shares at $1 par value per share - authorized 50,000,000 shares;
 
 

 
 

    issued and outstanding 4,572,792 and 4,563,814 shares
 
4.6

 
4.6

Paid-in surplus
 
802.5

 
806.1

Retained earnings
 
2,821.8

 
2,797.2

Accumulated other comprehensive loss, after tax:
 
 
 
 
Net unrealized foreign currency translation losses
 
(.6
)
 
(1.4
)
Pension liability
 
(3.1
)
 
(3.2
)
Total White Mountains’s common shareholders’ equity
 
3,625.2

 
3,603.3

Non-controlling interests
 
132.4

 
133.9

Total equity
 
3,757.6

 
3,737.2

Total liabilities and equity
 
$
6,516.9

 
$
6,544.7

 See Notes to Consolidated Financial Statements

1


WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Unaudited
 
 
Three Months Ended
 
 
March 31,
(Millions, except per share amounts)
 
2017
 
2016
Revenues:
 
 
 
 
Earned insurance premiums
 
$
264.8

 
$
282.1

Net investment income
 
26.1

 
17.9

Net realized and unrealized investment gains
 
51.3

 
29.5

Other revenue
 
43.7

 
39.8

Total revenues
 
385.9

 
369.3

Expenses:
 
 
 
 
Loss and loss adjustment expenses
 
151.7

 
161.1

Insurance acquisition expenses
 
46.6

 
52.7

Other underwriting expenses
 
51.8

 
55.4

General and administrative expenses
 
94.2

 
87.1

Interest expense
 
3.7

 
4.5

Total expenses
 
348.0

 
360.8

 
 
 
 
 
Pre-tax income from continuing operations
 
37.9

 
8.5

 
 
 
 
 
Income tax (expense) benefit
 
(3.9
)
 
9.7

 
 
 
 
 
Net income from continuing operations
 
34.0

 
18.2

 
 
 
 
 
Loss from sale of discontinued operations, net of tax
 
(1.0
)
 

 
 
 
 
 
Net income from discontinued operations, net of tax
 

 
1.1

 
 
 
 
 
Net income
 
33.0

 
19.3

Net loss (income) attributable to non-controlling interests
 
1.3

 
(6.3
)
 
 
 
 
 
Net income attributable to White Mountains’s common shareholders
 
34.3

 
13.0

 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
Change in foreign currency translation, pension liability and other, net of tax
 
.9

 
.1

Change in foreign currency translation and other from discontinued operations, net of tax
 

 
37.2

 
 
 
 
 
Comprehensive income attributable to White Mountains’s common shareholders
 
$
35.2

 
$
50.3

 
 
 
 
 
Income per share attributable to White Mountains’s common shareholders
 
 
 
 
Basic income (loss) per share
 
 
 
 
Continuing operations
 
$
7.72

 
$
2.14

Discontinued operations
 
(.22
)
 
.20

Total consolidated operations
 
$
7.50

 
$
2.34

 
 
 
 
 
Diluted income (loss) per share
 
 
 
 
Continuing operations
 
$
7.72

 
$
2.14

Discontinued operations
 
(.22
)
 
.20

Total consolidated operations
 
$
7.50

 
$
2.34

Dividends declared per White Mountains’s common share
 
$
1.00

 
$
1.00

 
See Notes to Consolidated Financial Statements

2


WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Unaudited
 
 
White Mountains’s Common Shareholders’ Equity
 
 
 
 
(Millions)
 
Common shares and paid-in surplus
 
Retained earnings
 
AOCI, after tax
 
Total
 
Non-controlling interest
 
Total Equity
Balance at January 1, 2017
 
$
810.7

 
$
2,797.2

 
$
(4.6
)
 
$
3,603.3

 
$
133.9

 
$
3,737.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 
34.3

 

 
34.3

 
(1.3
)
 
33.0

Net change in foreign currency translation and pension liability
 

 

 
.9

 
.9

 

 
.9

Total comprehensive income
 

 
34.3

 
.9

 
35.2

 
(1.3
)
 
33.9

Dividends declared on common shares
 

 
(4.6
)
 

 
(4.6
)
 

 
(4.6
)
Dividends to non-controlling interests
 

 

 

 

 
(6.6
)
 
(6.6
)
Repurchases and retirements of common shares
 
(1.4
)
 
(5.1
)
 

 
(6.5
)
 
(1.1
)
 
(7.6
)
Deconsolidation of non-controlling interests
   associated with the sale of Star & Shield
 

 

 

 

 
(4.4
)
 
(4.4
)
Issuance of shares to non-controlling interests
 
(4.8
)
 

 

 
(4.8
)
 
4.8

 

Net contributions from non-controlling interests
 

 

 

 

 
6.9

 
6.9

Amortization of restricted share awards
 
2.6

 

 

 
2.6

 
.2

 
2.8

Balance at March 31, 2017
 
$
807.1

 
$
2,821.8

 
$
(3.7
)
 
$
3,625.2

 
$
132.4

 
$
3,757.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
White Mountains’s Common Shareholders’ Equity
 
 
 
 
(Millions)
 
Common shares and paid-in surplus
 
Retained earnings
 
AOCI, after tax
 
Total
 
Non-controlling interest
 
Total Equity
Balance at January 1, 2016
 
$
978.2

 
$
3,084.9

 
$
(149.9
)
 
$
3,913.2

 
$
454.8

 
$
4,368.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 
13.0

 

 
13.0

 
6.3

 
19.3

Net change in foreign currency translation and pension liability
 

 

 
37.3

 
37.3

 

 
37.3

Total comprehensive income
 

 
13.0

 
37.3

 
50.3

 
6.3

 
56.6

Dividends declared on common shares
 

 
(5.4
)
 

 
(5.4
)
 

 
(5.4
)
Dividends to non-controlling interests
 

 

 

 

 
(6.2
)
 
(6.2
)
Repurchases and retirements of common shares
 
(39.8
)
 
(132.9
)
 

 
(172.7
)
 

 
(172.7
)
Acquisition from non-controlling interests -
   OneBeacon
 
(2.7
)
 

 

 
(2.7
)
 
(8.8
)
 
(11.5
)
Issuances of shares to non-controlling interests
 

 

 

 

 
.3

 
.3

Net contributions from non-controlling interests
 

 

 

 

 
4.8

 
4.8

Amortization of restricted share awards
 
3.2

 

 

 
3.2

 
.2

 
3.4

Balance at March 31, 2016
 
$
938.9

 
$
2,959.6

 
$
(112.6
)
 
$
3,785.9

 
$
451.4

 
$
4,237.3

See Notes to Consolidated Financial Statements

3


WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Three Months Ended March 31,
(Millions)
 
2017
 
2016
Cash flows from operations:
 
Unaudited
 
Unaudited
Net income
 
$
33.0

 
$
19.3

Charges (credits) to reconcile net income to net cash used for operations:
 
 

 
 

Net realized and unrealized investment (gains) losses
 
(51.3
)
 
(29.5
)
Deferred income tax (benefit) expense
 
(1.1
)
 
5.0

Net income from discontinued operations
 

 
(1.1
)
Net loss on sale of discontinued operations
 
1.0

 

Amortization and depreciation
 
14.6

 
11.4

Other operating items:
 
 
 
 

Net change in loss and loss adjustment expense reserves
 
2.9

 
(46.2
)
Net change in reinsurance recoverable on paid and unpaid losses
 
1.4

 
26.5

Net change in unearned insurance premiums
 
20.7

 
13.9

Net change in deferred acquisition costs
 
(3.5
)
 
(2.2
)
Net change in ceded unearned premiums
 
(8.2
)
 
(6.8
)
Net change in funds held under insurance treaties
 
(4.3
)
 
(2.8
)
Net change in insurance premiums receivable
 
2.7

 
(11.0
)
Net change in restricted cash
 

 
(2.6
)
Net change in other assets and liabilities, net
 
(64.0
)
 
(19.8
)
Net cash used for operations - continuing operations
 
(56.1
)
 
(45.9
)
Net cash used for operations - discontinued operations
 

 
(40.7
)
Net cash used for operations
 
(56.1
)
 
(86.6
)
Cash flows from investing activities:
 
 

 
 

Net change in short-term investments
 
55.6

 
(50.4
)
Sales of fixed maturity and convertible investments
 
868.5

 
202.3

Maturities, calls and paydowns of fixed maturity and convertible investments
 
175.8

 
155.9

Sales of common equity securities
 
17.7

 
767.5

Distributions and redemptions of other long-term investments
 
16.5

 
3.0

Net settlement of investment cash flows and contributions with discontinued operations
 

 
(559.8
)
Purchases of other long-term investments
 
(22.4
)
 
(10.9
)
Purchases of common equity securities
 
(113.4
)
 
(86.1
)
Purchases of fixed maturity and convertible investments
 
(957.6
)
 
(315.2
)
Purchases of unconsolidated affiliates and consolidated subsidiaries, net of cash acquired
 

 
(8.1
)
Net change in unsettled investment purchases and sales
 
(1.0
)
 
44.3

Net acquisitions of property and equipment
 
(.4
)
 
(1.3
)
Net cash provided from investing activities - continuing operations
 
39.3

 
141.2

Net cash provided from investing activities - discontinued operations
 

 
33.6

Net cash provided from investing activities
 
39.3

 
174.8

Cash flows from financing activities:
 
 

 
 

Draw down of debt and revolving line of credit
 

 
102.5

Repayment of debt and revolving line of credit
 
(1.2
)
 

Cash dividends paid to the Company’s common shareholders
 
(4.6
)
 
(5.4
)
Common shares repurchased
 

 
(166.8
)
OneBeacon Ltd. common shares repurchased and retired
 

 
(10.6
)
Distribution to non-controlling interest shareholders
 
(5.1
)
 
(4.7
)
Contributions to discontinued operations
 

 
(3.0
)
Payments of contingent consideration related to purchases of consolidated subsidiaries
 

 
(7.8
)
Capital contributions from BAM members
 
9.6

 
6.7

Other financing activities, net
 
(7.6
)
 
(7.2
)
Net cash used for financing activities - continuing operations
 
(8.9
)
 
(96.3
)
Net cash used for financing activities - discontinued operations
 

 
(8.3
)
Net cash used for financing activities
 
(8.9
)
 
(104.6
)
Effect of exchange rate changes on cash (excludes $0.0 and $4.2 related to discontinued operations)
 

 

Net change in cash during the period - continuing operations
 
(25.7
)
 
(1.0
)
Cash balances at beginning of period (excludes restricted cash balances of $0.0 and $5.8 and discontinued operations cash balances of $0.0 and $150.2)
 
149.8

 
167.2

Add: cash held for sale at the beginning of period
 
.9

 
1.2

Less: cash held for sale at the end of period
 

 
2.1

Cash balances at end of period (excludes restricted cash balances of $0.0 and $8.4 and discontinued operations cash balances of $0.0 and $139.9)
 
$
125.0

 
$
165.3

Supplemental cash flows information:
 
 

 


Interest paid
 
$
(.2
)
 
$
(.2
)
Net income tax refund from national governments
 
$

 
$
13.5

See Notes to Consolidated Financial Statements

4


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Summary of Significant Accounting Policies
 
Basis of Presentation
These interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of White Mountains Insurance Group, Ltd. (the “Company” or the “Registrant”), its subsidiaries (collectively, with the Company, “White Mountains”) and other entities required to be consolidated under GAAP. The Company is an exempted Bermuda limited liability company whose principal businesses are conducted through its insurance subsidiaries and other affiliates. The Company’s headquarters is located at 26 Reid Street, Hamilton, Bermuda HM 11, its principal executive office is located at 80 South Main Street, Hanover, New Hampshire 03755-2053 and its registered office is located at Clarendon House, 2 Church Street, Hamilton, Bermuda HM 11. White Mountains’s reportable segments are OneBeacon, HG Global/BAM and Other Operations. 
As discussed further in the Company’s consolidated financial statements in Note 2 — “Significant Transactions”, on April 18, 2016, White Mountains completed its sale of Sirius International Insurance Group, Ltd., and its subsidiaries (collectively, “Sirius Group”) to CM International Holding PTE Ltd. (“CMI”), the Singapore-based investment arm of China Minsheng Investment Corp., Ltd. Also, on July 21, 2016, White Mountains completed its sale of Tranzact Holdings, LLC (“Tranzact”) to an affiliate of Clayton, Dubilier & Rice, LLC. For the three months ended March 31, 2016, Sirius Group and Tranzact have been presented as discontinued operations in the statement of operations and comprehensive income. See Note 17 — “Held for Sale and Discontinued Operations”.
The OneBeacon segment consists of OneBeacon Insurance Group, Ltd. (“OneBeacon Ltd.”), an exempted Bermuda limited liability company that owns a family of property and casualty insurance companies (collectively, “OneBeacon”). OneBeacon is a specialty property and casualty insurance writer that offers a wide range of insurance products in the United States through independent agencies, regional and national brokers, wholesalers and managing general agencies. As of March 31, 2017 and December 31, 2016, White Mountains owned 75.7% and 76.1% of OneBeacon Ltd.’s outstanding common shares.
The HG Global/BAM segment consists of HG Global Ltd. (“HG Global”) and the consolidated results of Build America Mutual Assurance Company (“BAM”). BAM is the first and only mutual bond insurance company in the United States. By insuring the timely payment of principal and interest, BAM provides market access to, and lowers interest expense for, issuers of municipal bonds used to finance essential public purposes such as schools, utilities and transportation facilities. BAM is owned by and operated for the benefit of its members, the municipalities that purchase BAM's insurance for their debt issuances. HG Global was established to fund the startup of BAM and, through its wholly-owned subsidiary, HG Re Ltd. (“HG Re”), to provide 15%-of-par, first loss reinsurance protection for policies underwritten by BAM. HG Global, together with its subsidiaries, provided the initial capitalization of BAM through the purchase of $503.0 million of surplus notes issued by BAM (the “BAM Surplus Notes”). As of March 31, 2017 and December 31, 2016, White Mountains owned 96.9% of HG Global’s preferred equity and 88.4% of its common equity. White Mountains does not have an ownership interest in BAM. However, GAAP requires White Mountains to consolidate BAM’s results in its financial statements. BAM’s results are attributed to non-controlling interests.
White Mountains’s Other Operations segment consists of the Company and its intermediate holding companies, its wholly-owned investment management subsidiary, White Mountains Advisors LLC (“WM Advisors”) and certain consolidated and unconsolidated private capital investments. The consolidated private capital investments consist of QL Holdings LLC (“MediaAlpha”), Wobi Insurance Agency Ltd. (“Wobi”) and Removal Stars Ltd. (“Buzzmove”). White Mountains’s Other Operations segment also includes its variable annuity reinsurance business, White Mountains Life Reinsurance (Bermuda) Ltd. (“Life Re Bermuda”), which completed its runoff with all of its contracts maturing by June 30, 2016, and its U.S.-based service provider, White Mountains Financial Services LLC (collectively, “WM Life Re”) and Star & Shield Services LLC, Star & Shield Risk Management LLC, and Star & Shield Claims Services LLC (collectively “Star & Shield”). Star & Shield provides management services for a fee to Star & Shield Insurance Exchange (“SSIE”), a reciprocal that is owned by its members, who are policyholders. White Mountains was required to consolidate SSIE in its GAAP financial statements until White Mountains completed the sale of Star & Shield and its investment in SSIE Surplus Notes to K2 Insurance Services, LLC on March 7, 2017. White Mountains has presented Star & Shield’s and SSIE’s assets and liabilities as held for sale as of December 31, 2016. See Note 17 — “Held for Sale and Discontinued Operations”.
All significant intercompany transactions have been eliminated in consolidation. Certain amounts in the prior period financial statements have been reclassified to conform to the current presentation. These interim financial statements include all adjustments considered necessary by management to fairly state the financial position, results of operations and cash flows of White Mountains. These interim financial statements may not be indicative of financial results for the full year and should be read in conjunction with the Company’s 2016 Annual Report on Form 10-K.

5


The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Refer to the Company’s 2016 Annual Report on Form 10-K for a complete discussion regarding White Mountains’s significant accounting policies.
Recently Adopted Changes in Accounting Principles
 
Stock Compensation
Effective January 1, 2017, White Mountains adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASC 718) which simplifies certain aspects of the accounting for share-based compensation. The new guidance provides an accounting policy election to account for forfeitures by either applying an assumption, as required under existing guidance, or by recognizing forfeitures when they actually occur. At adoption, White Mountains did not change its accounting policy for forfeitures, which is to apply an assumed forfeiture rate. The new guidance has also changed the threshold for partial cash settlement to settle statutory withholding requirements for equity classified awards, increasing the threshold up to the maximum statutory tax rate. As a result of adoption White Mountains reported $6.5 million and $5.8 million of statutory withholding tax payments made in connection with the settlement of restricted shares as financing cash flows for the three-month periods ended March 31, 2017 and 2016. Such payments were classified as operating cash flows prior to adoption.
In addition, the new guidance changed the treatment for excess tax benefits which arise from the difference between the deduction for tax purposes and the compensation costs recognized for financial reporting. Under the new guidance, a reporting entity will recognize excess tax benefits or expense in current period earnings, regardless of whether it is in a taxes payable position.

Short-Duration Contracts
Effective December 31, 2016, White Mountains adopted ASU 2015-09, Disclosures about Short Duration Contracts (ASC 944), which requires expanded footnote disclosures about loss and loss adjustment expense (“LAE”) reserves. Upon adoption, White Mountains modified its footnote disclosures to include loss development tables on a disaggregated basis by accident year and a reconciliation of loss development data to the loss and LAE reserves reflected on the balance sheet. The footnotes disclosures have also been expanded to include information about claim frequency data, including a description of how the claims frequency data is measured. Prior year disclosures have been modified to conform to the new disclosures. See Note 3 — “Reserves for Unpaid Losses and Loss Adjustment Expenses”.

Business Combinations - Measurement Period Adjustments
Effective January 1, 2016, White Mountains adopted ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which requires adjustments to provisional amounts recorded in connection with a business combination that are identified during the measurement period to be recorded in the reporting period in which the adjustment amounts are determined, rather than as retroactive adjustments to prior periods. White Mountains has not recognized any adjustments to estimated purchase accounting amounts for the year to date period ended March 31, 2016 and accordingly, there was no effect to White Mountains’s financial statements upon adoption.

Amendments to Consolidation Analysis
On January 1, 2016, White Mountains adopted ASU 2015-02, Amendments to the Consolidation Analysis (ASC 810) which amends the guidance for determining whether an entity is a variable interest entity (“VIE”). ASU 2015-02 eliminates the separate consolidation guidance for limited partnerships and, with it, the presumption that a general partner should consolidate a limited partnership. In addition, ASU 2015-02 changes the guidance for determining if fee arrangements qualify as variable interests and the effect fee arrangements have on the determination of the primary beneficiary. Adoption of ASU 2015-02 did not affect the consolidation analysis for any of White Mountains’s investments.

Share-Based Compensation Awards
On January 1, 2016, White Mountains adopted ASU 2014-12, Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASC 718). The new guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. Compensation cost is to be recognized in the period when it becomes probable the performance target will be achieved in an amount equal to the compensation cost attributable to the periods for which service has been rendered. Adoption did not have a significant effect on White Mountains’s financial position, results of operations, cash flows, presentation or disclosures.


6


Debt Issuance Costs
On January 1, 2016, White Mountains adopted ASU 2015-03, Imputation of Interest (ASC 835), which requires debt issuance costs to be presented as a deduction from the carrying amount of the related debt, consistent with the treatment required for debt discounts. The new guidance requires amortization of debt issuance costs to be classified within interest expense and also requires disclosure to the debt’s effective interest rate. White Mountains has applied the guidance retrospectively and as a result has reclassified $1.9 million of unamortized debt issuance costs from other assets to debt as of December 31, 2015, reflecting these amounts as a reduction from the related debt, and has modified its disclosures to include the required effective interest rate on its debt. As of March 31, 2017, the unamortized debt issuance costs included in debt is $1.8 million.

Recently Issued Accounting Pronouncements

Cash Flow Statement
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (ASC 230), which addresses the classification and presentation of certain items, including debt prepayment and extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investees, for which there was diversity in practice.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (ASC 230). Under current guidance, restricted amounts of cash or cash equivalents are excluded from the cash flow statement. The new guidance requires restricted cash and restricted cash equivalents to be included in the reconciliation of beginning and end-of-period amounts presented on the statement of cash flows. In addition, the new guidance requires a description of the nature of the changes in restricted cash and cash equivalents during the periods presented.
The updated guidance in ASU 2016-15 and ASU 2016-18 are both effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. White Mountains is evaluating the expected impact of this new guidance.

Credit Losses
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (ASC 326), which establishes new guidance for the recognition of credit losses for financial assets measured at amortized cost. The new ASU, which applies to financial assets that have the contractual right to receive cash requires reporting entities to estimate the credit losses expected over the life of a credit exposure using historical information, current information and reasonable and supportable forecasts that affect the collectability of the financial asset. The types of assets included in the scope of the new guidance includes premium receivables, reinsurance recoverables and loans. ASU 2016-13 is effective for annual periods beginning after January 1, 2020, including interim periods. White Mountains is evaluating the expected impact of this new guidance.

Leases
In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). The new guidance requires lessees to recognize lease assets and liabilities on the balance sheet for both operating and financing leases, with the exception of leases with an original term of 12 months or less. Under existing guidance recognition of lease assets and liabilities is not required for operating leases. The lease assets and liabilities to be recognized are both measured initially based on the present value of the lease payments. Under the new guidance, a sale-leaseback transaction must meet the recognition criteria under ASC 606, Revenues in order to be accounted for as sale. The new guidance is effective for White Mountains for years beginning after December 15, 2018, including interim periods therein. White Mountains is evaluating the expected impact of this new guidance and available adoption methods.

Financial Instruments - Recognition and Measurement
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 825-10). The new ASU modifies the guidance for financial instruments, including investments in equity securities. Under the new guidance, all equity securities with readily determinable fair values are required to be measured at fair value with changes therein recognized through current period earnings. In addition, the new ASU requires a qualitative assessment for equity securities without readily determinable fair values to identify impairment, and for impaired equity securities to be measured at fair value. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. White Mountains measures its portfolio of investment securities at fair value with changes therein recognized through current period earnings accordingly, does not expect the adoption of ASU 2016-01 to have a significant impact on its financial statements.


7


Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), which modifies the guidance for revenue recognition. Under ASU 2014-09, revenue is to be recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for goods or services transferred to customers. The new guidance sets forth the steps to be followed to recognize revenue: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Subsequently, the FASB issued additional ASUs clarifying the guidance in and providing implementation guidance for ASU 2014-09. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, which delays the effective date of ASU 2014-09 and all related ASUs to annual and interim reporting periods beginning after December 15, 2017. Most of White Mountains’s revenue from customers relates to insurance contracts, which are excluded from the scope of ASU 2014-09, as are investment income and investments gains and losses. However, the new guidance is applicable to some of White Mountains’s revenue streams, including certain fee arrangements as well as commissions and other non-insurance revenues. White Mountains is evaluating the new guidance, but does not expect ASU 2014-09 to have a significant effect on recognition of White Mountains’s non-insurance revenues from customers.

Note 2. Significant Transactions

Sale of Star and Shield
On March 7, 2017, White Mountains completed its sale of Star & Shield and its investment in SSIE Surplus Notes to K2 Insurances LLC. White Mountains did not recognize any gain or loss on the sale. Through December 31, 2016, Star & Shield’s assets and liabilities are reported as held for sale within White Mountains's GAAP financial statements. See Note 17 — “Held for Sale and Discontinued Operations”.

Buzzmove
On August 4, 2016, White Mountains acquired a 70.9% ownership share in Buzzmove for a purchase price of GBP 6.1 million (approximately $8.1 million based upon the foreign exchange spot rate at the date of acquisition). White Mountains recognized total assets acquired related to Buzzmove of $11.5 million, including $7.6 million of goodwill and $1.1 million of intangible assets, and total liabilities assumed of $0.1 million, reflecting acquisition date fair values.

Sale of Tranzact
On July 21, 2016, White Mountains completed the sale of Tranzact to Clayton, Dubilier & Rice, LLC and received net proceeds of $221.3 million. In connection with the sale of Tranzact, the purchaser directly repaid $56.3 million for the portion of Tranzact's debt attributable to White Mountains's common shareholders. On October 5, 2016, White Mountains received additional proceeds of $1.2 million following the release of the post-closing purchase price adjustment escrow.
White Mountains recorded a $51.9 million gain from the sale of Tranzact in discontinued operations, which included a $30.2 million tax expense for the reversal of a tax valuation allowance that is offset by a tax benefit recorded in continuing operations. See Note 8 — “Income Taxes”. The increase to White Mountains’s book value from the sale of Tranzact was $82.1 million. A reconciliation of the gain reported in discontinued operations to the impact to White Mountains's book value is as follows:
Gain from sale of Tranzact reported in discontinued operations
 
$
51.9

Add back reclassification from continuing operations for the release of a tax valuation allowance
 
30.2

Increase to White Mountains book value from sale of Tranzact
 
$
82.1


In the first quarter of 2017, White Mountains recorded a $1.0 million reduction to the gain from sale of Tranzact in discontinued operations as a result of 2016 tax payments.
Through July 21, 2016, Tranzact’s results of operations are reported as discontinued operations and assets and liabilities held for sale within White Mountains’s GAAP financial statements. See Note 17 — “Held for Sale and Discontinued Operations”.


8


Sale of Sirius Group
On April 18, 2016, White Mountains completed the sale of Sirius Group to CMI for approximately $2.6 billion. $161.8 million of this amount was used to purchase certain assets to be retained by White Mountains out of Sirius Group, including shares of OneBeacon. The amount paid at closing was based on an estimate of Sirius Group’s closing date tangible common shareholder’s equity. During the third quarter of 2016, there was a final true-up to Sirius Group’s tangible common shareholder’s equity that resulted in a $4.0 million reduction to the gain. During 2016, White Mountains recorded $363.2 million of gain from sale of Sirius Group in discontinued operations and $113.3 million in other comprehensive income from discontinued operations.
Through April 18, 2016, Sirius Group’s results are reported as discontinued operations and assets and liabilities held for sale within White Mountains’s GAAP financial statements.
The transactions to purchase the investments in OneBeacon and the other investments held by Sirius Group prior to the closing are presented in the statement of cash flows as net settlement of investment cash flows within discontinued operations. See Note 17 — “Held for Sale and Discontinued Operations”.

Symetra
On February 1, 2016, Symetra closed its merger agreement with Sumitomo Life Insurance Company (“Sumitomo Life”) and White Mountains received proceeds of $658.0 million, or $32.00 per common share. White Mountains also received a special dividend of $0.50 per share as part of the transaction that was paid in the third quarter of 2015. See Note 14 — “Investments in Unconsolidated Affiliates”

OneBeacon Crop Business
On July 31, 2015, OneBeacon exited its multiple peril crop insurance (“MPCI”) and its related crop-hail business (collectively, “Crop Business”) as its exclusive managing general agency, Climate Crop Insurance Agency (“CCIA”), exited the business through a sale of the agency to an affiliate of AmTrust. As a result of the transaction, OneBeacon and CCIA agreed to an early termination of the existing five-year agreement. In connection with the termination of the agreement, OneBeacon received a payment of $3.0 million. Also related to the transaction, OneBeacon withdrew its 2016 Plan of Operations, which previously authorized it to write MPCI for the 2016 Reinsurance Year, and affiliates of AmTrust agreed to reinsure the Company’s remaining net Crop Business exposure for the 2015 Reinsurance Year under a related 100% quota share reinsurance agreement which, coupled with other transfer and assignment agreements as well as communications with policyholders and agents, had the effect of assumption reinsurance. As a result of this transaction, the Company has no material net exposure related to the Crop Business.

MediaAlpha
On March 14, 2014, White Mountains acquired 60.0% of the outstanding Class A common units of MediaAlpha. White Mountains paid an initial purchase price of $28.1 million. The purchase price was subject to adjustment equal to 62.5% of the 2015 gross profit in excess of the 2013 gross profit. On February 26, 2016, White Mountains paid $7.8 million in
settlement of the final purchase adjustment. After adjustment for the estimated contingent purchase price adjustment, White Mountains recognized total assets acquired related to MediaAlpha of $70.1 million, including $18.3 million of goodwill and $38.5 million of other intangible assets, and total liabilities assumed of $10.0 million, reflecting acquisition date fair values.
On January 15, 2016, MediaAlpha acquired certain assets from Oversee.net for a purchase price of $3.9 million. The majority of assets acquired, which are included in other intangible assets, consists of customer relationships, a customer contract, a non-compete agreement from the seller, domain names and technology.

Wobi
On February 19, 2014, White Mountains acquired 54% of the outstanding common shares of Wobi for NIS 14.4 million (approximately $4.1 million based upon the foreign exchange spot rate at the date of acquisition).  During 2014, in addition to the common shares, White Mountains also purchased NIS 31.5 million (approximately $9.0 million based upon the foreign exchange spot rate at the dates of acquisition) of convertible preferred shares of Wobi.  As of the acquisition date, White Mountains recognized total assets acquired related to Wobi of $13.4 million, including $5.5 million of goodwill and $2.9 million of other intangible assets; and total liabilities assumed of $0.7 million at their estimated acquisition date fair values.
During 2015, White Mountains purchased NIS 79.6 million (approximately $20.7 million based upon the foreign exchange spot rate at the dates of acquisition) of convertible preferred shares of Wobi. In addition, during 2015 White Mountains also purchased NIS 11.8 million (approximately $3.1 million based upon the foreign exchange spot rate at the date of acquisition) of common shares of Wobi.

9


On February 23, 2015, Wobi acquired 56.2% of the outstanding share capital of Tnuva Finansit Ltd. (“Cashboard”) for NIS 9.5 million (approximately $2.4 million). The acquisition of Cashboard accelerated Wobi’s development of its pension products comparison service. As of the acquisition date, Wobi recognized total assets acquired of $5.5 million, including $0.3 million of goodwill and $2.8 million of other intangible assets; and total liabilities assumed of $1.2 million at their estimated acquisition date fair values. During 2015, Wobi purchased the remaining share capital of Cashboard for NIS 26.4 million (approximately $6.5 million).
During 2016, White Mountains purchased NIS 35.9 million (approximately $9.6 million based upon the foreign exchange spot rates at the dates of acquisitions) of convertible preferred shares of Wobi. As of both March 31, 2017 and December 31, 2016, White Mountains’s ownership share was 95.0% .

Note 3.  Loss and Loss Adjustment Expense Reserves
 
The following table summarizes the loss and loss adjustment expense (“LAE”) reserve activities of White Mountains’s insurance and reinsurance subsidiaries for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended
 
 
March 31,
Millions
 
2017
 
2016
Gross beginning balance
 
$
1,365.6

 
$
1,389.8

Less beginning reinsurance recoverable on unpaid losses
 
(172.9
)
 
(186.0
)
Net loss and LAE reserves
 
1,192.7

 
1,203.8

 
 
 
 
 
Add: SSIE reserves held for sale at beginning of the period (1)
 
4.7

 
5.5

 
 
 
 
 
Loss and LAE incurred relating to:
 
 
 
 
Current year losses
 
151.7

 
161.2

Prior year losses
 

 
(.1
)
Total incurred losses and LAE
 
151.7

 
161.1

 
 
 
 
 
Loss and LAE paid relating to:
 
 
 
 
Current year losses
 
(21.5
)
 
(23.1
)
Prior year losses
 
(129.1
)
 
(148.6
)
Total loss and LAE payments
 
(150.6
)
 
(171.7
)
 
 
 
 
 
Less: Deconsolidation of SSIE (1)
 
4.4

 

 
 
 
 
 
Less: SSIE reserves held for sale at end of the period (1)
 

 
5.3

 
 
 
 
 
Net ending balance
 
1,194.1

 
1,193.4

Plus ending reinsurance recoverable on unpaid losses
 
174.7

 
150.4

Gross ending balance
 
$
1,368.8

 
$
1,343.8

(1) Resulting from the sale of Star & Shield in the first quarter of 2017, SSIE is no longer consolidated. See Note 17 — “Held for Sale and Discontinued Operations”.

Loss and LAE incurred relating to prior year losses for the three months ended March 31, 2017
For the three months ended March 31, 2017, White Mountains did not experience any net loss reserve development on prior accident year reserves, as unfavorable reserve development at OneBeacon, primarily in Healthcare due to an adverse settlement on a single claim was offset by favorable reserve development driven by Technology, Accident & Health and
Entertainment resulting from favorable loss experience.

Loss and LAE incurred relating to prior year losses for the three months ended March 31, 2016
For the three months ended March 31, 2016, White Mountains experienced net favorable loss reserve development of $0.1 million. For the three months ended March 31, 2016, OneBeacon did not experience any net loss reserve development on prior accident year reserves, as favorable development from several businesses, including Technology and Accident, was offset by unfavorable development primarily in Healthcare. For the three months ended March 31, 2016, SSIE had net favorable loss reserve development of $0.1 million.


10


Note 4. Third Party Reinsurance
 
In the normal course of business, White Mountains’s insurance subsidiaries may seek to limit losses that may arise from catastrophes or other events by reinsuring with third party reinsurers. White Mountains remains liable for risks reinsured in the event that the reinsurer does not honor its obligations under reinsurance contracts.
 
OneBeacon
At March 31, 2017, OneBeacon had $3.4 million and $174.7 million of reinsurance recoverables on paid and unpaid losses. At December 31, 2016, OneBeacon had $6.6 million and $172.9 million of reinsurance recoverables on paid and unpaid losses. Reinsurance contracts do not relieve OneBeacon of its obligation to its policyholders. OneBeacon is selective with its reinsurers, placing reinsurance with only those reinsurers having a strong financial condition. OneBeacon monitors the financial strength and ratings of its reinsurers on an ongoing basis. Uncollectible amounts related to the ongoing specialty business historically have not been significant.
Effective May 1, 2017, OneBeacon renewed its property catastrophe reinsurance program through April 30, 2018. The program provides coverage for OneBeacon's property business as well as certain acts of terrorism. Under the program, the first $20.0 million of losses resulting from any single catastrophe are retained, with 100.0% of the next $110.0 million of losses resulting from the catastrophe being reinsured. Any part of a catastrophe loss in excess of $130.0 million would be retained in full. In the event of a catastrophe, OneBeacon's property catastrophe reinsurance program is reinstated for the remainder of the original contract term by paying a reinstatement premium that is based on the percentage of coverage reinstated and the original property catastrophe coverage premium.

Note 5.  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.


11


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



12


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



13


 
 
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.



14


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.

15


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
 
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.

16


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.

17


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.


18


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