View:
Download DOC
Download PDF
Download XLS
Download XBRL
Document
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 September 30, 2016
 
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.  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
 
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 October 31, 2016, 4,565,240 common shares with a par value of $1.00 per share were outstanding (which includes 70,619 restricted common shares that were not vested at such date).



WHITE MOUNTAINS INSURANCE GROUP, LTD.

Table of Contents
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets, September 30, 2016 and December 31, 2015
 
 
 
 
 
 
     Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Changes in Equity, Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
Results of Operations for the Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Part I.FINANCIAL INFORMATION.
Item 1.
Financial Statements
WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(Millions, except share amounts)
 
September 30,
2016
 
December 31,
2015
Assets
 
Unaudited
 
 

Fixed maturity investments, at fair value
 
$
4,131.5

 
$
2,630.2

Short-term investments, at amortized cost (which approximates fair value)
 
305.6

 
211.2

Common equity securities, at fair value
 
425.0

 
1,113.9

Other long-term investments
 
351.4

 
315.8

Total investments
 
5,213.5

 
4,271.1

Cash (restricted: $0.0 and $5.8)
 
244.7

 
173.0

Reinsurance recoverable on unpaid losses
 
169.4

 
186.0

Reinsurance recoverable on paid losses
 
16.4

 
7.5

Insurance premiums receivable
 
264.6

 
220.3

Deferred acquisition costs
 
109.6

 
107.6

Deferred tax asset
 
119.5

 
112.8

Ceded unearned insurance premiums
 
35.1

 
29.5

Accrued investment income
 
18.9

 
13.9

Accounts receivable on unsettled investment sales
 
179.0

 
41.9

Goodwill and other intangible assets
 
59.3

 
55.4

Other assets
 
226.3

 
273.2

Assets held for sale
 
27.0

 
4,790.4

Total assets
 
$
6,683.3

 
$
10,282.6

Liabilities
 
 

 
 

Loss and loss adjustment expense reserves
 
$
1,362.0

 
$
1,389.8

Unearned insurance premiums
 
674.1

 
610.5

Debt
 
288.5

 
337.6

Accrued incentive compensation
 
124.2

 
140.7

Ceded reinsurance payable
 
28.2

 
29.9

Funds held under insurance contracts
 
156.2

 
137.8

Accounts payable on unsettled investment purchases
 
30.0

 
—

Other liabilities
 
210.9

 
220.9

Liabilities held for sale
 
7.8

 
3,047.4

Total liabilities
 
2,881.9

 
5,914.6

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 4,578,698 and 5,623,735 shares
 
4.6

 
5.6

Paid-in surplus
 
805.2

 
972.6

Retained earnings
 
2,846.7

 
3,084.9

Accumulated other comprehensive loss, after tax:
 
 
 
 
Net unrealized foreign currency translation losses
 
(.6
)
 
(145.6
)
Pension liability and other
 
(3.7
)
 
(4.3
)
Total White Mountains’s common shareholders’ equity
 
3,652.2

 
3,913.2

Non-controlling interests
 
149.2

 
454.8

Total equity
 
3,801.4

 
4,368.0

Total liabilities and equity
 
$
6,683.3

 
$
10,282.6

 See Notes to Consolidated Financial Statements

1

WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Unaudited 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(Millions, except per share amounts)
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 

 
 

Earned insurance premiums
 
$
281.3

 
$
284.9

 
$
838.1

 
$
896.0

Net investment income
 
22.5

 
16.8

 
59.6


42.6

Net realized and unrealized investment gains (losses)
 
26.4

 
(43.9
)
 
84.0


(33.9
)
Other revenue
 
34.8

 
38.3

 
110.8

 
114.4

Total revenues
 
365.0

 
296.1

 
1,092.5

 
1,019.1

Expenses:
 
 
 
 
 
 

 
 

Loss and loss adjustment expenses
 
165.0

 
170.0

 
508.1

 
534.1

Insurance acquisition expenses
 
56.4

 
55.3

 
159.2

 
166.1

Other underwriting expenses
 
49.6

 
56.5

 
156.0

 
165.5

General and administrative expenses
 
70.2

 
97.3

 
230.4

 
231.6

Interest expense
 
3.8

 
3.9

 
12.4

 
10.8

Total expenses
 
345.0

 
383.0

 
1,066.1

 
1,108.1

 
 
 
 
 
 
 
 
 
Pre-tax income (loss) from continuing operations
 
20.0

 
(86.9
)
 
26.4

 
(89.0
)
 
 
 
 
 
 
 
 
 
Income tax benefit (expense)
 
6.7

 
1.6

 
22.4

 
(.8
)
 
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
26.7

 
(85.3
)
 
48.8

 
(89.8
)
 
 
 
 
 
 
 
 
 
Gain from sale of Tranzact, net of tax
 
51.9

 
—

 
51.9

 
—

(Loss) gain from sale of Sirius Group, net of tax
 
(4.0
)
 
—

 
362.6

 
—

Gain from sale of other discontinued operations, net of tax
 
—

 
10.3

 
—

 
18.2

 
 
 
 
 
 
 
 
 
Net income (loss) from discontinued operations, net of tax
 
14.0

 
(3.8
)
 
7.1

 
59.1

 
 
 
 
 
 
 
 
 
Income (loss) before equity in earnings of unconsolidated affiliates
 
88.6

 
(78.8
)
 
470.4

 
(12.5
)
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated affiliates, net of tax
 
—

 
3.9

 
—

 
18.0

 
 
 
 
 
 
 
 
 
Net income (loss)
 
88.6

 
(74.9
)
 
470.4

 
5.5

Net loss (income) attributable to non-controlling interests
 
3.1

 
16.0

 
(24.6
)
 
24.2

 
 
 
 
 
 
 
 
 
Net income (loss) attributable to White Mountains’s common shareholders
 
91.7

 
(58.9
)
 
445.8

 
29.7

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 

 
 

Change in equity in net unrealized gains (losses) from investments in Symetra common shares, net of tax
 
—

 
3.5

 
—

 
(29.4
)
Change in foreign currency translation, pension liability and other, net of tax
 
.2

 
.1

 
.3

 
.3

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

 
(18.5
)
 
32.0

 
(62.1
)
Recognition of foreign currency translation and other from sale of Sirius Group, net of tax
 
—

 
—

 
113.3

 
—

 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
91.9

 
(73.8
)
 
591.4

 
(61.5
)
Other comprehensive income (loss) attributable to non-controlling interests
 
.1

 
(.1
)
 
.1

 
(.1
)
Comprehensive income (loss) attributable to White Mountains’s common shareholders
 
$
92.0

 
$
(73.9
)
 
$
591.5

 
$
(61.6
)
 
 
 
 
 
 
 
 
 
Income (loss) per share attributable to White Mountains’s common shareholders
 
 
 
 
 
 

 
 

Basic income (loss) per share
 
 
 
 
 
 
 
 
Continuing operations
 
$
6.12

 
$
(11.10
)
 
$
4.67

 
$
(8.01
)
Discontinued operations
 
12.72

 
1.09

 
81.60

 
12.98

Total consolidated operations
 
$
18.84

 
$
(10.01
)
 
$
86.27

 
$
4.97

 
 
 
 
 
 
 
 
 
Diluted income (loss) per share
 
 
 
 
 
 

 
 

Continuing operations
 
$
6.11

 
$
(11.10
)
 
$
4.66

 
$
(8.01
)
Discontinued operations
 
12.69

 
1.09

 
81.47

 
12.98

Total consolidated operations
 
$
18.80

 
$
(10.01
)
 
$
86.13

 
$
4.97

 
 
 
 
 
 
 
 
 
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, 2016
 
$
978.2

 
$
3,084.9

 
$
(149.9
)
 
$
3,913.2

 
$
454.8

 
$
4,368.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
—

 
445.8

 
—

 
445.8

 
24.6

 
470.4

Net change in foreign currency translation
 
—

 
—

 
32.0

 
32.0

 
—

 
32.0

Net change in pension liability and other
   accumulated comprehensive items
 
—

 
—

 
.3

 
.3

 
.1

 
.4

Recognition of foreign currency translation and
   other accumulated comprehensive items from
   the sale of Sirius Group
 
—

 
—

 
113.3

 
113.3

 
—

 
113.3

Total comprehensive income
 
—

 
445.8

 
145.6

 
591.4

 
24.7

 
616.1

Dividends declared on common shares
 
—

 
(5.4
)
 
—

 
(5.4
)
 
—

 
(5.4
)
Dividends to non-controlling interests
 
—

 
—

 
—

 
—

 
(17.4
)
 
(17.4
)
Repurchases and retirements of common shares
 
(188.1
)
 
(678.6
)
 
—

 
(866.7
)
 
—

 
(866.7
)
Issuances of common shares
 
9.1

 
—

 
—

 
9.1

 
—

 
9.1

Deconsolidation of non-controlling interests
   associated with the sale of Sirius Group
 
—

 
—

 
—

 
—

 
(250.0
)
 
(250.0
)
Deconsolidation of non-controlling interests
associated with the sale of Tranzact
 
—

 
—

 
—

 
—

 
(78.4
)
 
(78.4
)
Acquisition of subsidiary
 
—

 
—

 
—

 
—

 
3.4

 
3.4

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

 
—

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

 
—

 
—

 
—

 
.3

 
.3

Net contributions from non-controlling interests
 
—

 
—

 
—

 
—

 
20.1

 
20.1

Amortization of restricted share awards
 
13.3

 
—

 
—

 
13.3

 
.5

 
13.8

Balance at September 30, 2016
 
$
809.8

 
$
2,846.7

 
$
(4.3
)
 
$
3,652.2

 
$
149.2

 
$
3,801.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2015
 
$
1,034.7

 
$
3,010.5

 
$
(49.5
)
 
$
3,995.7

 
$
542.7

 
$
4,538.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
—

 
29.7

 
—

 
29.7

 
(24.2
)
 
5.5

Net change in unrealized losses from
   investments in unconsolidated affiliates
 
—

 
—

 
(29.4
)
 
(29.4
)
 
—

 
(29.4
)
Net change in foreign currency translation
 
—

 
—

 
(62.6
)
 
(62.6
)
 
—

 
(62.6
)
Net change in pension liability and other
   accumulated comprehensive items
 
—

 
—

 
.7

 
.7

 
.1

 
.8

Total comprehensive income (loss)
 
—

 
29.7

 
(91.3
)
 
(61.6
)
 
(24.1
)
 
(85.7
)
Dividends declared on common shares
 
—

 
(6.0
)
 
—

 
(6.0
)
 
—

 
(6.0
)
Dividends to non-controlling interests
 
—

 
—

 
—

 
—

 
(35.4
)
 
(35.4
)
Repurchases and retirements of common shares
 
(46.0
)
 
(145.9
)
 
—

 
(191.9
)
 
—

 
(191.9
)
Issuances of common shares
 
.9

 
—

 
—

 
.9

 
—

 
.9

Redemption of Prospector Offshore Fund
 
—

 
—

 
—

 
—

 
(31.5
)
 
(31.5
)
Acquisition from non-controlling interests - Other
 
(2.2
)
 
—

 
—

 
(2.2
)
 
(2.7
)
 
(4.9
)
Net contributions from non-controlling interests
 
—

 
—

 
—

 
—

 
12.1

 
12.1

Amortization of restricted share awards
 
10.6

 
—

 
—

 
10.6

 
(.3
)
 
10.3

Balance at September 30, 2015
 
$
998.0

 
$
2,888.3

 
$
(140.8
)
 
$
3,745.5

 
$
460.8

 
$
4,206.3

See Notes to Consolidated Financial Statements

3

WHITE MOUNTAINS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended September 30,
(Millions)
 
2016
 
2015
Cash flows from operations:
 
Unaudited
 
Unaudited
Net income
 
$
470.4

 
$
5.5

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

 
 

Net realized and unrealized investment (gains) losses
 
(84.0
)
 
33.9

Deferred income tax expense (benefit)
 
12.5

 
(20.2
)
Net income from discontinued operations
 
(7.1
)
 
(59.1
)
Net gain on sale of discontinued operations
 
(414.5
)
 
(18.2
)
Net gain on sale of unconsolidated affiliates and consolidated subsidiaries
 
(.5
)
 
(16.1
)
Amortization and depreciation
 
34.7

 
31.8

Undistributed equity in earnings from unconsolidated affiliates, net of tax
 
—

 
(18.0
)
Other operating items:
 
 
 
 

Net change in loss and loss adjustment expense reserves
 
(27.8
)
 
83.3

Net change in reinsurance recoverable on paid and unpaid losses
 
7.6

 
(63.3
)
Net change in unearned insurance premiums
 
63.0

 
54.6

Net change in deferred acquisition costs
 
(2.0
)
 
(3.6
)
Net change in funds held by ceding entities
 
—

 
32.5

Net change in ceded unearned premiums
 
(5.6
)
 
(23.5
)
Net change in funds held under insurance treaties
 
18.4

 
19.3

Net change in insurance premiums receivable
 
(43.3
)
 
(32.0
)
Net change in ceded reinsurance payable
 
(2.8
)
 
12.4

Net change in restricted cash
 
5.8

 
6.9

Net change in other assets and liabilities, net
 
(150.9
)
 
38.4

Net cash (used for) provided from operations - continuing operations
 
(126.1
)
 
64.6

Net cash (used for) provided from operations - discontinued operations
 
(16.2
)
 
22.7

Net cash (used for) provided from operations
 
(142.3
)
 
87.3

Cash flows from investing activities:
 
 

 
 

Net change in short-term investments
 
(88.7
)
 
26.6

Sales of fixed maturity and convertible investments
 
2,433.4

 
865.0

Maturities, calls and paydowns of fixed maturity and convertible investments
 
530.3

 
249.5

Sales of common equity securities
 
961.1

 
370.6

Distributions and redemptions of other long-term investments
 
19.8

 
56.6

Sales of unconsolidated affiliates and consolidated subsidiaries, net of cash sold
 
2,657.2

 
24.0

Proceeds paid to non-controlling common shareholders from the sale of consolidated subsidiaries
 
(141.6
)
 
—

Net settlement of investment cash flows and contributions with discontinued operations
 
(396.6
)
 
17.5

Purchases of other long-term investments
 
(37.3
)
 
(30.5
)
Purchases of common equity securities
 
(249.7
)
 
(329.4
)
Purchases of fixed maturity and convertible investments
 
(4,435.0
)
 
(1,300.2
)
Purchases of unconsolidated affiliates and consolidated subsidiaries, net of cash acquired
 
(13.7
)
 
(2.4
)
Net change in unsettled investment purchases and sales
 
(107.1
)
 
73.8

Net acquisitions of property and equipment
 
(3.2
)
 
37.0

Net cash provided from investing activities - continuing operations
 
1,128.9

 
58.1

Net cash provided from investing activities - discontinued operations
 
213.3

 
2.8

Net cash provided from investing activities
 
1,342.2

 
60.9

Cash flows from financing activities:
 
 

 
 

Draw down of debt and revolving line of credit
 
352.5

 
98.5

Repayment of debt and revolving line of credit
 
(401.8
)
 
(84.5
)
Proceeds from issuances of common shares
 
3.7

 
—

Payments on capital lease obligation
 
(1.4
)
 
(3.5
)
Cash dividends paid to the Company’s common shareholders
 
(5.4
)
 
(6.0
)
Cash dividends paid to OneBeacon Ltd.’s non-controlling common shareholders
 
(14.2
)
 
(14.8
)
Common shares repurchased
 
(861.0
)
 
(168.6
)
OneBeacon Ltd. common shares repurchased and retired
 
(11.5
)
 
(1.7
)
Distribution to non-controlling interest shareholders
 
(1.0
)
 
(9.1
)
Contributions to discontinued operations
 
(3.0
)
 
(4.1
)
Acquisition of additional shares from non-controlling interest
 
—

 
(9.1
)
Payments of contingent consideration related to purchases of consolidated subsidiaries
 
(7.8
)
 
—

Capital contributions from BAM members
 
28.2

 
20.3

Net cash used for financing activities - continuing operations
 
(922.7
)
 
(182.6
)
Net cash (used for) provided from financing activities - discontinued operations
 
(.2
)
 
19.6

Net cash used for financing activities
 
(922.9
)
 
(163.0
)
Effect of exchange rate changes on cash (excludes $0.0 and ($4.1) related to discontinued operations)
 
—

 
—

Net change in cash during the period - continuing operations
 
80.1

 
(59.9
)
Cash balances at beginning of period (excludes restricted cash balances of $5.8 and $23.7 and discontinued operations cash balances of $150.1 and $116.6)
 
167.2

 
232.9

Add: cash held for sale at the beginning of period
 
1.2

 
2.1

Less: cash held for sale at the end of period
 
3.8

 
2.1

Cash balances at end of period (excludes restricted cash balances of $0.0 and $16.8 and discontinued operations cash balances of $0.0 and $157.6)
 
$
244.7

 
$
173.0

Supplemental cash flows information:
 
 

 


Interest paid
 
$
(7.0
)
 
$
(6.3
)
Net income tax refund from national governments
 
$
13.5

 
$
8.0

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 and reinsurance subsidiaries and 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 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. (See Note 2 - “Significant Transactions”). On June 9, 2016, White Mountains entered into an agreement to sell Tranzact Holdings, LLC (“Tranzact”) to an affiliate of Clayton, Dubilier & Rice, LLC, which was completed on July 21, 2016. For the three and nine months ended September 30, 2016, Sirius Group and Tranzact have been presented as discontinued operations in the statement of operations and comprehensive income. Prior year amounts have been reclassified to conform to the current period’s presentation. The assets and liabilities of Sirius Group and Tranzact are classified as held for sale in the balance sheet as of December 31, 2015. (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 September 30, 2016 and December 31, 2015, White Mountains owned 76.1% and 75.5% 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 a municipal bond insurer domiciled in New York that was established in 2012 to provide insurance on bonds issued to support essential U.S. public purposes such as schools, utilities, core governmental functions and existing transportation facilities. 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”). HG Global, through its wholly-owned subsidiary, HG Re Ltd. (“HG Re”), also provides 15%-of-par, first loss reinsurance protection for policies underwritten by BAM. As of September 30, 2016 and December 31, 2015, 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, which is a mutual insurance company owned by its members. 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”), White Mountains’s 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 White Mountains’s ownership positions in QL Holdings, LLC (“MediaAlpha”) and Wobi Insurance Agency Ltd. (“Wobi”). On August 4, 2016, White Mountains acquired a 70.9% ownership share in Removal Stars Ltd (“Buzzmove”) for a purchase price of GBP 6.0 million (approximately $8.0 million based upon the foreign exchange spot rate at the date of acquisition), which is included in the Other Operations segment at September 30, 2016. The Other Operations segment also includes Abiaka Holdings, LLC, Star & Shield Services LLC, Star & Shield Risk Management LLC (“SSRM”), 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 holds surplus notes issued by SSIE (the “SSIE Surplus Notes”) but does not have an ownership interest in SSIE. However, because SSRM’s role as the attorney-in-fact to SSIE gives it the power to direct the significant economic activities of SSIE, White Mountains is required to consolidate SSIE in its GAAP financial statements. SSIE’s results do not affect White Mountains’s common shareholders’ equity as they are attributable to non-controlling interests. On August 19, 2016, White Mountains reached an agreement to sell Star & Shield and its investment in SSIE surplus notes to National General Holdings Corp. As a result, White Mountains has presented Star & Shield's and SSIE's assets and liabilities as held for sale as of September 30, 2016 and December 31, 2015.

5

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 2015 Annual Report on Form 10-K.
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 2015 Annual Report on Form 10-K for a complete discussion regarding White Mountains’s significant accounting policies.

Recently Adopted Changes in Accounting Principles
 
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 September 30, 2016 and accordingly, there was no effect to White Mountains’s financial statements upon adoption.

Fair Value Measurements
On January 1, 2016, White Mountains adopted ASU 2015-07, Fair Value Measurement - Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent) (ASC 820), which eliminates the requirement to disclose the fair value hierarchy level for investments for which fair value is measured at net asset value using the practical expedient in ASC 820. White Mountains measures the fair value of its investments in hedge funds and private equity funds using this practical expedient. Upon adoption, these fair value measurements are no longer classified within the fair value hierarchy. Prior year amounts have been modified to conform to the current year’s disclosures.

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.

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 September 30, 2016, the unamortized debt issuance costs included in debt is $1.9 million.


6

Recently Issued Accounting Pronouncements

Short-Duration Contracts
In May 2015, the FASB issued ASU 2015-09, Disclosures about Short Duration Contracts (ASC 944), which requires expanded footnote disclosures about loss and loss adjustment expense (“LAE”) reserves. Under the new guidance, some disclosures currently presented outside of White Mountains’s financial statements, such as loss development tables and a reconciliation of loss development data to the loss and LAE reserves reflected on the balance sheet, will become part of the financial statement footnotes. In addition, the loss development tables required to be presented under the new ASU must be presented on a disaggregated basis by accident year rather than by reporting year as currently presented. Some of the expanded disclosures are new requirements, such as the disclosure of reserves for losses incurred but not reported (“IBNR”) plus expected development on reported claims, which must be presented by accident year on a disaggregated basis. The new guidance also requires new disclosures about claim frequency data together with descriptions of the approach used to measure that data. Qualitative descriptions of methodologies and assumptions used to develop IBNR estimates must be presented together with the amounts of IBNR to which they relate, along with a discussion of any significant changes in methodology and assumptions and the related effect upon the loss reserves. The new guidance will be effective for annual periods beginning after December 15, 2015 and interim periods within annual periods beginning after December 15, 2016 with retrospective restatement of prior periods required. White Mountains will modify its financial statement footnote disclosures to conform to the requirements of ASU 2015-09 upon adoption, including revisions to prior year’s disclosures.

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). The new guidance 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. The updated guidance is 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, including reinsurance receivables, 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. 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.

Stock Compensation
In March 2016, the Board issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASC 718) which is intended to simplify 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. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods with early adoption permitted. White Mountains does not expect a significant effect upon adoption.

7

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 guidance requires all equity securities with readily determinable fair values 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 investments without readily determinable fair values to identify impairment, and for impaired equity security investments 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 has taken the fair value election for its portfolio of equity security investments and, accordingly, does not expect the adoption of ASU 2016-01 to have a significant impact on its financial statements.

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. The scope of the new ASU excludes insurance contracts but is applicable to certain fee arrangements, such as third party investment management fees charged by White Mountains Advisors as well as commissions and other non-insurance revenues. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (ASC 606), which delayed the effective date of ASU 2014-09 to annual and interim reporting periods beginning after December 15, 2017. White Mountains is in the process of evaluating the new guidance and has not yet determined the potential effect of adoption on its financial position, results of operations, or cash flows.

Note 2. Significant Transactions

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. In the second quarter of 2016, White Mountains recorded $366.6 million of gain from sale of Sirius Group in discontinued operations and $113.3 million in other comprehensive income from discontinued operations. In the third quarter of 2016, White Mountains recorded a $4.0 million reduction to the gain from sale of Sirius Group in discontinued operations as a result of the final true-up of Sirius Group's closing date tangible common shareholder's equity.
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. Assets held for sale do not include White Mountains’s investment in OneBeacon and certain other investments that were held in the Sirius Group legal entities as of December 31, 2015. The value of these investments, net of related tax effects, was approximately $686.2 million, of which $528.6 million was Symetra common shares, as of December 31, 2015.
As part of the sale of Sirius Group, White Mountains purchased Ashmere Insurance Company (“Ashmere”), a subsidiary formerly owned by Sirius Group. Ashmere was under an agreement to be sold as of September 30, 2016 and the sale was completed on October 12, 2016. As of September 30, 2016, Ashmere's assets and liabilities are presented as held for sale.
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 with discontinued operations.



8

Symetra
On February 1, 2016, White Mountains sold its investment in Symetra Financial Corporation (“Symetra”) for proceeds of $658.0 million, or $32.00 per share. (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.

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.
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


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.

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 newly-issued convertible preferred shares of Wobi.  Wobi is the only price comparison/aggregation business in Israel, with an insurance carrier panel that represents 80% of the premiums written in the Israeli insurance market. Wobi sells four insurance lines of business, primarily personal auto, and operates as an agency, charging upfront commissions on all insurance policy sales. Wobi also offers a pension products comparison service for Israeli customers and is paid transaction fees when customers use the service to connect to companies that sell those pension products.
During the three months ended September 30, 2016, White Mountains purchased NIS 11.5 million (approximately $3.1 million based upon the foreign exchange spot rate at the dates of acquisition) of convertible preferred shares of Wobi. During the nine months ended September 30, 2016, White Mountains purchased NIS 27.9 million (approximately $7.5 million based upon the foreign exchange spot rates at the dates of acquisitions) of convertible preferred shares of Wobi, increasing its ownership share to 96.7% on a fully converted basis.
During 2015, Wobi acquired Tnuva Finansit Ltd. (“Cashboard”) in two transactions for a total of NIS 35.9 million (approximately $8.9 million based upon the foreign exchange spot rate at the dates of acquisition). 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.


9

Star & Shield
On January 31, 2014, White Mountains acquired certain assets and liabilities of Star & Shield Holdings LLC, including SSRM, the attorney-in-fact for SSIE, for a purchase price of $1.8 million. SSIE is a Florida-domiciled reciprocal insurance exchange providing private passenger auto insurance to the public safety community and their families. White Mountains invested $21.0 million of surplus notes issued by SSIE. Principal and interest on the surplus notes are payable to White Mountains only with approval from the Florida Office of Insurance Regulation. SSIE is a variable interest entity (“VIE”). As a result of SSRM’s role as the attorney-in-fact to SSIE and the investment in SSIE’s Surplus Notes, White Mountains is required to consolidate SSIE.
In response to the significant increases in both frequency and severity of accidents in the private passenger automobile insurance market in the State of Florida, SSIE voluntarily ceased writing new policies effective July 1, 2016 and will voluntarily cease renewing policies at a future date, subject to regulatory approval. On August 19, 2016, White Mountains reached an agreement to sell Star & Shield and its investment in SSIE surplus notes to National General Holdings Corp.
As a result, during the first nine months of 2016, White Mountains wrote off its investment in SSIE surplus notes. White Mountains consolidates the issuer of the surplus notes, Star & Shield Insurance Exchange and, accordingly the impact of the write down is eliminated in pre-tax income. However, the write down resulted in a $21.0 million total decrease to net income attributable to White Mountains's common shareholders and a corresponding increase to net income attributable to non-controlling interests.
At September 30, 2016 and December 31, 2015, consolidated amounts included total assets of $11.4 million and $14.2 million and total liabilities of $7.2 million and $30.3 million, respectively, of SSIE. For the three months ended September 30, 2016 and 2015, SSIE had pre-tax income of $0.4 million and pre-tax loss of $0.8 million that were recorded in net gain (loss) attributable to non-controlling interests. For the nine months ended September 30, 2016 and 2015, SSIE had pre-tax income of $20.3 million and pre-tax loss of $0.9 million that were recorded in net gain (loss) attributable to non-controlling interests. The decrease in total liabilities and increase in pre-tax income in the current year is due to the $21.0 million write down of the surplus notes at SSIE.

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 and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2016
 
2015
 
2016
 
2015
Gross beginning balance
 
$
1,376.6

 
$
1,350.8

 
$
1,389.8

 
$
1,342.2

Less beginning reinsurance recoverable on unpaid losses
 
(162.8
)
 
(147.1
)
 
(186.0
)
 
(161.6
)
Net loss and LAE reserves
 
1,213.8

 
1,203.7

 
1,203.8

 
1,180.6

 
 
 
 
 
 
 
 
 
SSIE reserves held for sale at beginning of the period (1)
 
5.3

 
6.1

 
5.5

 
7.7

 
 
 
 
 
 
 
 
 
Loss and LAE incurred relating to:
 
 
 
 
 
 

 
 

Current year losses
 
164.9

 
170.4

 
492.8

 
536.7

Prior year losses
 
0.1

 
(.4
)
 
15.3

 
(2.6
)
Total incurred losses and LAE
 
165.0

 
170.0

 
508.1

 
534.1

 
 
 
 
 
 
 
 
 
Loss and LAE paid relating to:
 
 
 
 
 
 

 
 

Current year losses
 
(55.0
)
 
(53.0
)
 
(116.2
)
 
(120.2
)
Prior year losses
 
(131.1
)
 
(108.1
)
 
(403.2
)
 
(383.5
)
Total loss and LAE payments
 
(186.1
)
 
(161.1
)
 
(519.4
)
 
(503.7
)
 
 
 
 
 
 
 
 
 
SSIE reserves held for sale at end of the period (1)
 
(5.4
)
 
(5.5
)
 
(5.4
)
 
(5.5
)
 
 
 
 
 
 
 
 
 
Net ending balance
 
1,192.6

 
1,213.2

 
1,192.6

 
1,213.2

Plus ending reinsurance recoverable on unpaid losses
 
169.4

 
214.2

 
169.4

 
214.2

Gross ending balance
 
$
1,362.0

 
$
1,427.4

 
$
1,362.0

 
$
1,427.4

(1) See Note 17 - “Held for Sale and Discontinued Operations”.


10

Loss and LAE incurred relating to prior year losses for the three and nine months ended September 30, 2016
For the three and nine months ended September 30, 2016, White Mountains experienced net unfavorable loss reserve development of $0.1 million and $15.3 million.
During the three months ended September 30, 2016, OneBeacon did not experience any net loss reserve development. During the nine months ended September 30, 2016, OneBeacon experienced $15.4 million of net unfavorable loss reserve development, primarily related to OneBeacon's Healthcare business described below as well as Other Professional Lines and Programs businesses, partially offset by favorable loss reserve development in its Technology, Accident and Financial Services businesses.
During the second quarter of 2016, OneBeacon recognized $20.0 million of unfavorable loss reserve development and also increased the current accident year provision related to its Healthcare business. Paid and incurred activity in the second quarter for extended care facilities coverage within OneBeacon's Healthcare business increased above expectations and above what was experienced in the first quarter of 2016. Extended care facilities coverage provides liability insurance for assisted living, memory care and continuing care facilities, among others. In addition, there were two large claims from the managed care errors and omissions coverage within OneBeacon's Healthcare business that contributed to the adverse loss reserve development.
For the three months ended September 30, 2016, SSIE had net unfavorable loss reserve development of $0.1 million. For the nine months ended September 30, 2016, SSIE had net favorable loss reserve development of $0.1 million.

Loss and LAE incurred relating to prior year losses for the three and nine months ended September 30, 2015
For the three and nine months ended September 30, 2015, White Mountains experienced net favorable loss reserve development of $0.4 million and $2.6 million.
During the three months ended September 30, 2015, OneBeacon experienced no net loss reserve development on prior accident year reserves. For the nine months ended September 30, 2015, OneBeacon had net favorable loss reserve development of $1.8 million. For the three and nine months ended September 30, 2015, SSIE had net favorable loss reserve development of $0.4 million and $0.8 million.

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 September 30, 2016, OneBeacon had $16.4 million and $169.4 million of reinsurance recoverables on paid and unpaid losses. At December 31, 2015, OneBeacon had $7.5 million and $186.0 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.
In the first quarter of 2016, OneBeacon entered into a 50% quota share reinsurance agreement related to its Financial Institutions business.
Effective May 1, 2016, OneBeacon renewed its property catastrophe reinsurance program through April 30, 2017. 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.


11

Note 5.  Investments

White Mountains’s invested assets consist of investment securities and other long-term investments held for general investment purposes.  The portfolio of investment securities includes fixed maturity investments, short-term investments, common equity securities, and other-long term investments which are all classified as trading securities. Trading securities are reported at fair value as of the balance sheet date.  Realized and unrealized investment gains and losses on trading securities are reported in pre-tax revenues.
White Mountains’s fixed maturity investments are generally valued using industry standard pricing methodologies. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. Income on mortgage-backed and asset-backed securities is recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized prospectively over the remaining economic life.
Realized investment gains and losses resulting from sales of investment securities are accounted for using the specific identification method.  Premiums and discounts on all fixed maturity investments are amortized or accreted to income over the anticipated life of the investment.  Short-term investments consist of 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 September 30, 2016 and December 31, 2015.
Other long-term investments consist primarily of hedge funds, private equity funds, direct investments in privately held common and convertible securities and the OneBeacon surplus notes.

Net Investment Income
White Mountains’s net investment income is comprised primarily of interest income associated with White Mountains’s fixed maturity investments, dividend income from its equity investments and interest income from its short-term investments.
Pre-tax net investment income for the three and nine months ended September 30, 2016 and 2015 consisted of the following:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2016
 
2015
 
2016
 
2015
Investment income:
 
 
 
 
 
 
 
 
Fixed maturity investments
 
$
21.3

 
$
13.7

 
$
53.7

 
$
38.5

Short-term investments
 
.2

 
—

 
.8

 
.1

Common equity securities
 
1.3

 
1.4

 
3.4

 
5.7

Other long-term investments
 
.1

 
2.0

 
3.5

 
2.9

Total investment income
 
22.9

 
17.1

 
61.4

 
47.2

Third-party investment expenses
 
(.4
)
 
(.3
)
 
(1.8
)
 
(4.6
)
Net investment income, pre-tax
 
$
22.5

 
$
16.8

 
$
59.6

 
$
42.6


Net Realized and Unrealized Investment Gains (Losses)
Net realized and unrealized investment gains (losses) consisted of the following:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2016
 
2015
 
2016
 
2015
Net realized investment gains (losses), pre-tax
 
$
8.0

 
$
(7.4
)
 
$
267.5

 
$
49.7

Net unrealized investment gains (losses), pre-tax
 
18.4

 
(36.5
)
 
(183.5
)
 
(83.6
)
Net realized and unrealized investment gains (losses), pre-tax
 
26.4

 
(43.9
)
 
84.0

 
(33.9
)
Income tax (expense) benefit attributable to net realized and
     unrealized investment gains (losses)
 
(5.4
)
 
9.4

 
(23.8
)
 
6.9

Net realized and unrealized investment gains (losses), after tax
 
$
21.0

 
$
(34.5
)
 
$
60.2

 
$
(27.0
)


12

Net realized investment gains (losses)
Net realized investment gains (losses) for the three and nine months ended September 30, 2016 and 2015 consisted of the following:
 
 
Three Months Ended
 
Three Months Ended
 
 
September 30, 2016
 
September 30, 2015
Millions
 
Net
realized
gains (losses)
 
Net
foreign
currency gains (losses)
 
Total net realized
gains (losses)
reflected in
earnings
 
Net
realized
losses
 
Net
foreign
currency gains (losses)
 
Total net realized
losses reflected in
earnings
Fixed maturity investments
 
$
2.8

 
$
—

 
$
2.8

 
$
(.1
)
 
$
—

 
$
(.1
)
Short-term investments
 
.2

 
—

 
.2

 
—

 
—

 
—

Common equity securities
 
6.4

 
—

 
6.4

 
(5.9
)
 
—

 
(5.9
)
Other long-term investments
 
(1.4
)
 
—

 
(1.4
)
 
(1.4
)
 
—

 
(1.4
)
Net realized investment gains (losses), pre-tax
 
8.0

 
—

 
8.0

 
(7.4
)
 
—

 
(7.4
)
Income tax (expense) benefit
   attributable to net realized
   investment gains (losses)
 
(2.7
)
 
—

 
(2.7
)
 
1.5

 
—

 
1.5

Net realized investment
   gains (losses), after tax
 
$
5.3

 
$
—

 
$
5.3

 
$
(5.9
)
 
$
—

 
$
(5.9
)
 
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2016
 
September 30, 2015
Millions
 
Net
realized
gains (losses)
 
Net
foreign
currency gains (losses)
 
Total net realized
gains (losses)
reflected in
earnings
 
Net
realized
gains
 
Net
foreign
currency gains
 
Total net realized
gains reflected in
earnings
Fixed maturity investments
 
$
3.5

 
$
—

 
$
3.5

 
$
2.0

 
$
—

 
$
2.0

Short-term investments
 
.4

 
—

 
.4

 
—

 
—

 
—

Common equity securities
 
267.7

 
—

 
267.7

 
41.6

 
.4

 
42.0

Other long-term investments
 
(4.1
)
 
—

 
(4.1
)
 
5.7

 
—

 
5.7

Net realized investment gains, pre-tax
 
267.5

 
—

 
267.5

 
49.3

 
.4

 
49.7

Income tax expense
   attributable to net realized
   investment gains
 
(46.0
)
 
—

 
(46.0
)
 
(15.7
)
 
—

 
(15.7
)
Net realized investment
   gains, after tax
 
$
221.5

 
$
—

 
$
221.5

 
$
33.6

 
$
.4

 
$
34.0



13

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
 
 
September 30, 2016
 
September 30, 2015
Millions
 
Net
unrealized
(losses) gains
 
Net
foreign
currency
gains
 
Total net unrealized
 (losses) gains
reflected in
earnings
 
Net
unrealized gains (losses)
 
Net
foreign
currency losses
 
Total net unrealized
gains (losses)
reflected in
earnings
Fixed maturity investments
 
$
(4.4
)
 
$
—

 
$
(4.4
)
 
$
3.3

 
$
—

 
$
3.3

Common equity securities
 
12.5

 
.2

 
12.7

 
(30.6
)
 
(.2
)
 
(30.8
)
Other long-term investments
 
10.0

 
.1

 
10.1

 
(9.0
)
 
—

 
(9.0
)
Net unrealized investment gains (losses), pre-tax
 
18.1

 
.3

 
18.4

 
(36.3
)
 
(.2
)
 
(36.5
)
Income tax (expense) benefit
attributable to net unrealized
investment gains (losses)
 
(2.7
)
 
—

 
(2.7
)
 
7.9

 
—

 
7.9

Net unrealized investment
gains (losses), after tax
 
$
15.4

 
$
.3

 
$
15.7

 
$
(28.4
)
 
$
(.2
)
 
$
(28.6
)
 
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2016
 
September 30, 2015
Millions
 
Net
unrealized
gains (losses)
 
Net
foreign
currency
gains
 
Total net unrealized
gains (losses)
reflected in
earnings
 
Net
unrealized
gains (losses)
 
Net
foreign
currency losses
 
Total net unrealized
gains (losses)
reflected in
earnings
Fixed maturity investments
 
$
38.0

 
$
—

 
$
38.0

 
$
1.3

 
$
—

 
$
1.3

Common equity securities
 
(247.9
)
 
2.6

 
(245.3
)
 
(56.0
)
 
(2.5
)
 
(58.5
)
Other long-term investments
 
23.5

 
.3

 
23.8

 
(25.6
)
 
(.8
)
 
(26.4
)
Net unrealized investment (losses) gains, pre-tax
 
(186.4
)
 
2.9

 
(183.5
)
 
(80.3
)
 
(3.3
)
 
(83.6
)
Income tax benefit attributable to net unrealized investment (losses)
 
22.2

 
—

 
22.2

 
22.6

 
—

 
22.6

Net unrealized investment
(losses) gains, after tax
 
$
(164.2
)
 
$
2.9

 
$
(161.3
)
 
$
(57.7
)
 
$
(3.3
)
 
$
(61.0
)

The following table summarizes the amount of total gains (losses) included in earnings attributable to unrealized investment gains (losses) for Level 3 investments for the three and nine months ended September 30, 2016 and 2015:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Millions
 
2016
 
2015
 
2016
 
2015
Fixed maturity investments
 
$
.3

 
$
(1.0
)
 
$
1.6

 
$
(.9
)
Common equity securities
 
—

 
1.1

 
—

 
4.0

Other long-term investments
 
7.8

 
(6.8
)
 
20.7

 
(6.6
)
Total unrealized investment gains (losses), pre-tax - Level 3 investments
 
$
8.1

 
$
(6.7
)
 
$
22.3

 
$
(3.5
)


14

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 September 30, 2016 and December 31, 2015 were as follows: 
 
 
September 30, 2016
Millions
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
gains (losses)
 
Carrying
value
U.S. Government and agency obligations
 
$
96.6

 
$
.4

 
$
—

 
$
—

 
$
97.0

Debt securities issued by corporations
 
1,212.2

 
18.7

 
(1.5
)
 
—

 
1,229.4

Municipal obligations
 
306.3

 
6.2

 
(.2
)
 
—

 
312.3

Mortgage and asset-backed securities
 
2,406.6

 
9.6

 
(1.7
)
 
—

 
2,414.5

Foreign government, agency and provincial obligations
 
1.0

 
.2

 
—

 
—

 
1.2

Preferred stocks
 
78.3

 
7.1

 
—

 
—

 
85.4

   Total fixed maturity investments
 
$
4,101.0

 
$
42.2

 
$
(3.4
)
 
$
—

 
$
4,139.8

Less: fixed maturity investments reclassified to assets
    held for sale related to SSIE
 
 
 
 
 
 
 
 
 
8.3

Total fixed maturity investments
 
 
 
 
 
 
 
 
 
$
4,131.5


 
 
December 31, 2015
Millions
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
gains (losses)
 
Carrying
value
U.S. Government and agency obligations
 
$
160.4

 
$
—

 
$
(.4
)
 
$
—

 
$
160.0

Debt securities issued by corporations
 
1,001.0

 
4.3

 
(5.3
)
 
—

 
1,000.0

Municipal obligations
 
227.8

 
2.2

 
(1.2
)
 
—

 
228.8

Mortgage and asset-backed securities
 
1,170.6

 
2.0

 
(5.6
)
 
—

 
1,167.0

Foreign government, agency and provincial obligations
 
1.0

 
.2

 
—

 
—

 
1.2

Preferred stocks
 
78.3

 
4.4

 
—

 
—

 
82.7

Total fixed maturity investments
 
$
2,639.1

 
$
13.1

 
$
(12.5
)
 
$
—

 
$
2,639.7

Less: fixed maturity investments reclassified to assets
    held for sale related to SSIE
 
 
 
 
 
 
 
 
 
9.5

Total fixed maturity investments
 
 
 
 
 
 
 
 
 
$
2,630.2


The cost or amortized cost, gross unrealized investment gains (losses), net foreign currency gains (losses), and carrying values of White Mountains’s common equity securities and other long-term investments as of September 30, 2016 and December 31, 2015 were as follows:
 
 
September 30, 2016
Millions
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
(losses)
 
Carrying
value
Common equity securities
 
$
378.9

 
$
50.7

 
$
(4.6
)
 
$
—

 
$
425.0

Other long-term investments
 
$
317.1

 
$
42.7

 
$
(6.4
)
 
$
(2.0
)
 
$
351.4

 
 
December 31, 2015
Millions
 
Cost or
amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Net foreign
currency
(losses)
 
Carrying
value
Common equity securities
 
$
822.5

 
$
302.8

 
$
(11.4
)
 
$
—

 
$
1,113.9

Other long-term investments
 
$
304.5

 
$
32.0

 
$
(18.4
)
 
$
(2.3
)
 
$
315.8



15

Other Long-term Investments
Other long-term investments consist of the following as of September 30, 2016 and December 31, 2015:
 
 
Carrying Value at
Millions
 
September 30, 2016
 
December 31, 2015
Hedge funds and private equity funds, at fair value(1)
 
$
143.0

 
$
127.8

Private equity securities and limited liability companies, at fair value(1)
 
84.6

 
82.1

Surplus note investments, at fair value(1)