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Investment Securities
 3 Months Ended
Mar. 31, 2012
Investment Securities  
Investment Securities

Note 5.  Investment Securities

 

White Mountains’ invested assets consist of securities and other long-term investments held for general investment purposes.  The portfolio of investment securities includes fixed maturity investments, convertible fixed maturities and equity securities which are all classified as trading securities. Trading securities are reported at fair value as of the balance sheet date.  Realized and unrealized investment gains and losses on trading securities are reported pre-tax in revenues. White Mountains’ investments in debt securities, including mortgage-backed and asset-backed securities, are generally valued using industry standard pricing models. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds. Income on mortgage-backed and asset-backed securities is recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized prospectively over the remaining economic life.

 

Realized investment gains and losses resulting from sales of investment securities are accounted for using the specific identification method.  Premiums and discounts on all fixed maturity investments are amortized or accreted to income over the anticipated life of the investment.  Short-term investments consist of money market funds, certificates of deposit and other securities which, at the time of purchase, mature or become available for use within one year.  Short-term investments are carried at amortized or accreted cost, which approximated fair value as of March 31, 2012 and December 31, 2011.

 

Other long-term investments primarily comprise White Mountains’ investments in hedge funds and private equity funds.

 

Net Investment Income

 

Pre-tax net investment income for the three months ended March 31, 2012 and 2011 consisted of the following:

 

 

 

Three Months Ended
March 31,

 

Millions

 

2012

 

2011

 

Investment income:

 

 

 

 

 

Fixed maturity investments

 

$

36.7

 

$

46.0

 

Short-term investments

 

1.0

 

.7

 

Common equity securities

 

4.4

 

3.5

 

Convertible fixed maturity investments

 

1.9

 

1.4

 

Other long-term investments

 

.8

 

.8

 

Interest on funds held under reinsurance treaties

 

—

 

(.6

)

Total investment income

 

44.8

 

51.8

 

Less third-party investment expenses

 

(3.0

)

(2.3

)

Net investment income, pre-tax

 

$

41.8

 

$

49.5

 

 

Net Realized and Unrealized Investment Gains and Losses

 

 

 

Three Months Ended
March 31,

 

Millions

 

2012

 

2011

 

Net realized investment gains (losses), pre-tax

 

$

39.2

 

$

(1.2

)

Net unrealized investment gains (losses), pre-tax

 

19.4

 

(8.0

)

Net realized and unrealized investment gains (losses), pre-tax

 

58.6

 

(9.2

)

Income taxes attributable to realized and unrealized investment gains (losses)

 

(14.0

)

.9

 

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

 

$

44.6

 

$

(8.3

)

 

Net realized investment gains (losses)

 

Net realized investment gains (losses) for the three months ended March 31, 2012 and 2011 consisted of the following:

 

 

 

Three Months Ended
March 31,

 

Millions

 

2012

 

2011

 

Fixed maturity investments

 

$

31.5

 

$

(13.6

)

Short-term investments

 

(.3

)

(12.2

)

Common equity securities

 

4.2

 

2.3

 

Convertible fixed maturity investments

 

1.5

 

4.1

 

Other long-term investments

 

2.3

 

18.2

 

Net realized investment gains (losses), pre-tax

 

39.2

 

(1.2

)

Income taxes attributable to realized investment gains (losses)

 

(11.7

)

(5.0

)

Net realized investment gains (losses), after-tax

 

$

27.5

 

$

(6.2

)

 

Net unrealized investment gains (losses)

 

The following table summarizes changes in the carrying value of investments measured at fair value:

 

 

 

Three Months Ended
March 31, 2012

 

Three Months Ended
March 31, 2011

 

Millions

 

Net
unrealized
gains
(losses)

 

Net
foreign
exchange
gains
(losses)

 

Total
changes in
fair value
reflected in
earnings

 

Net
unrealized
gains
(losses)

 

Net
foreign
exchange
gains
(losses)

 

Total
changes in
fair value
reflected in
earnings

 

Fixed maturities

 

$

(2.9

)

$

(19.3

)

$

(22.2

)

$

(8.0

)

$

(15.3

)

$

(23.3

)

Short-term investments

 

—

 

—

 

—

 

—

 

(.6

)

(.6

)

Common equity securities

 

32.4

 

—

 

32.4

 

24.7

 

(.8

)

23.9

 

Convertible fixed maturity investments

 

4.7

 

—

 

4.7

 

(2.1

)

—

 

(2.1

)

Other long-term investments

 

7.8

 

(3.3

)

4.5

 

(.8

)

(5.1

)

(5.9

)

Net unrealized investment gains (losses), pre-tax

 

42.0

 

(22.6

)

19.4

 

13.8

 

(21.8

)

(8.0

)

Income taxes attributable to unrealized investment gains (losses)

 

(8.2

)

5.9

 

(2.3

)

.2

 

5.7

 

5.9

 

Net unrealized investment gains (losses), after-tax

 

$

33.8

 

$

(16.7

)

$

17.1

 

$

14.0

 

$

(16.1

)

$

(2.1

)

 

The following table summarizes the amount of total pre-tax gains (losses) included in earnings attributable to unrealized investment gains (losses) for Level 3 investments for the three months ended March 31, 2012 and 2011:

 

 

 

Three Months Ended
March 31,

 

Millions

 

2012

 

2011

 

Fixed maturities

 

$

7.8

 

$

1.9

 

Common equity securities

 

.5

 

(1.8

)

Convertible fixed maturities

 

—

 

—

 

Other long-term investments

 

7.2

 

(7.7

)

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

 

$

15.5

 

$

(7.6

)

 

Investment Holdings

 

The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and losses and carrying values of White Mountains’ fixed maturity investments as of March 31, 2012 and December 31, 2011, were as follows:

 

 

 

March 31, 2012

 

Millions

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains (losses)

 

Carrying
value

 

U.S. Government and agency obligations

 

$

265.1

 

$

1.8

 

$

—

 

$

—

 

$

266.9

 

Debt securities issued by corporations

 

2,269.8

 

79.5

 

(4.5

)

(12.4

)

2,332.4

 

Municipal obligations

 

2.7

 

—

 

—

 

—

 

2.7

 

Mortgage-backed and asset-backed securities

 

2,138.4

 

15.3

 

(3.5

)

1.0

 

2,151.2

 

Foreign government, agency and provincial obligations

 

569.4

 

7.5

 

(1.5

)

(3.8

)

571.6

 

Preferred stocks

 

82.4

 

4.5

 

(.3

)

(.1

)

86.5

 

Total fixed maturity investments

 

$

5,327.8

 

$

108.6

 

$

(9.8

)

$

(15.3

)

$

5,411.3

 

 

 

 

December 31, 2011

 

Millions

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains (losses)

 

Carrying
value

 

U.S. Government and agency obligations

 

$

299.4

 

$

5.3

 

$

(.1

)

$

.4

 

$

305.0

 

Debt securities issued by corporations

 

2,072.1

 

73.7

 

(7.8

)

(2.9

)

2,135.1

 

Municipal obligations

 

2.7

 

—

 

—

 

—

 

2.7

 

Mortgage-backed and asset-backed securities

 

3,190.5

 

25.9

 

(3.9

)

10.4

 

3,222.9

 

Foreign government, agency and provincial obligations

 

581.2

 

11.0

 

(.1

)

(2.9

)

589.2

 

Preferred stocks

 

82.3

 

3.2

 

(6.7

)

—

 

78.8

 

Total fixed maturity investments including assets held for sale

 

$

6,228.2

 

$

119.1

 

$

(18.6

)

$

5.0

 

$

6,333.7

 

Fixed maturity investments reclassified to assets held for sale related to AutoOne

 

 

 

 

 

 

 

 

 

(111.8

)

Total fixed maturity investments

 

 

 

 

 

 

 

 

 

$

6,221.9

 

 

The cost or amortized cost, gross unrealized investment gains and losses, net foreign currency gains and losses and carrying values of White Mountains’ common equity securities, convertible fixed maturities and other long-term investments as of March 31, 2012 and December 31, 2011, were as follows:

 

 

 

March 31, 2012

 

Millions

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains (losses)

 

Carrying
value

 

Common equity securities

 

$

773.0

 

$

108.6

 

$

(12.9

)

$

—

 

$

868.7

 

Convertible fixed maturity investments

 

$

143.4

 

$

9.8

 

$

(.4

)

$

—

 

$

152.8

 

Other long-term investments

 

$

275.3

 

$

58.6

 

$

(20.5

)

$

(6.7

)

$

306.7

 

 

 

 

December 31, 2011

 

Millions

 

Cost or
amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Net foreign
currency
gains (losses)

 

Carrying
value

 

Common equity securities

 

$

691.7

 

$

72.0

 

$

(8.7

)

$

—

 

$

755.0

 

Convertible fixed maturity investments

 

$

139.2

 

$

6.2

 

$

(1.6

)

$

—

 

$

143.8

 

Other long-term investments

 

$

274.4

 

$

55.5

 

$

(25.2

)

$

(3.4

)

$

301.3

 

 

Other long-term investments

 

White Mountains holds investments in hedge funds and private equity funds, which are included in other long-term investments. The fair value of these investments has been estimated using the net asset value of the funds. At March 31, 2012, White Mountains held investments in 17 hedge funds and 32 private equity funds.  The largest investment in a single fund was $24.4 million at March 31, 2012. The following table summarizes investments in hedge funds and private equity interests by investment objective and sector at March 31, 2012 and December 31, 2011:

 

 

 

March 31, 2012

 

December 31, 2011

 

Millions

 

Fair Value

 

Unfunded
Commitments

 

Fair Value

 

Unfunded
Commitments

 

Hedge funds

 

 

 

 

 

 

 

 

 

Long/short equity

 

$

52.8

 

$

—

 

$

48.8

 

$

—

 

Long/short credit & distressed

 

33.6

 

—

 

32.3

 

—

 

Long diversified strategies

 

16.9

 

—

 

16.9

 

—

 

Long/short equity REIT

 

14.2

 

—

 

14.5

 

—

 

Long/short equity activist

 

13.5

 

—

 

12.3

 

—

 

Long bank loan

 

.4

 

—

 

.5

 

—

 

Total hedge funds

 

131.4

 

—

 

125.3

 

—

 

 

 

 

 

 

 

 

 

 

 

Private equity funds

 

 

 

 

 

 

 

 

 

Multi-sector

 

28.3

 

7.7

 

26.9

 

8.2

 

Energy infrastructure & services

 

26.4

 

9.4

 

28.0

 

9.9

 

Distressed residential real estate

 

24.4

 

—

 

27.4

 

—

 

Real estate

 

12.2

 

3.3

 

9.5

 

3.3

 

Private equity secondaries

 

10.9

 

3.6

 

11.3

 

4.0

 

International multi-sector, Europe

 

6.5

 

4.9

 

7.8

 

4.7

 

Manufacturing/Industrial

 

6.5

 

—

 

6.2

 

—

 

Healthcare

 

3.5

 

6.4

 

2.3

 

7.0

 

International multi-sector, Asia

 

3.3

 

2.7

 

3.6

 

2.6

 

Insurance

 

3.3

 

41.3

 

3.5

 

41.3

 

Venture capital

 

2.6

 

.5

 

2.4

 

.5

 

Total private equity funds

 

127.9

 

79.8

 

128.9

 

81.5

 

 

 

 

 

 

 

 

 

 

 

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

 

$

259.3

 

$

79.8

 

$

254.2

 

$

81.5

 

 

Redemption of investments in certain hedge funds is subject to restrictions including lock-up periods where no redemptions or withdrawals are allowed, restrictions on redemption frequency and advance notice periods for redemptions.  Amounts requested for redemptions remain subject to market fluctuations until the redemption effective date, which generally falls at the end of the defined redemption period. The following summarizes the March 31, 2012 fair value of hedge funds subject to restrictions on redemption frequency and advance notice period requirements for investments in active hedge funds:

 

 

 

Notice Period

 

Millions
Redemption frequency

 

30-59 days
notice

 

60-89 days
notice

 

90-119 days
notice

 

120+ days
notice

 

Total

 

Monthly

 

$

—

 

$

—

 

$

—

 

$

6.6

 

$

6.6

 

Quarterly

 

27.6

 

31.8

 

20.4

 

—

 

79.8

 

Semi-annual

 

—

 

5.4

 

—

 

14.2

 

19.6

 

Annual

 

16.9

 

—

 

8.1

 

.4

 

25.4

 

Total

 

$

44.5

 

$

37.2

 

$

28.5

 

$

21.2

 

$

131.4

 

 

Certain of the hedge fund investments in which White Mountains is invested are no longer active and are in process of disposing of their underlying investments. Distributions from such funds are remitted to investors as the fund’s underlying investments are liquidated.  At March 31, 2012, distributions of $3.2 million were outstanding from these investments. The actual amount of the final distribution remittances remain subject to market fluctuations. The date at which such remittances will be received is not determinable at March 31, 2012.

 

White Mountains has also submitted redemption requests for certain of its investments in active hedge funds.  At March 31, 2012, redemptions of $2.5 million are outstanding and are subject to market fluctuations. The date at which such remittances will be received is not determinable at March 31, 2012.  Redemptions are recorded as receivables when approved by the hedge funds and no longer subject to market fluctuations.

 

Investments in private equity funds are generally subject to a “lock-up” period during which investors may not request a redemption. Distributions prior to the expected termination date of the fund may be limited to dividends or proceeds arising from the liquidation of the fund’s underlying investments. In addition, certain private equity funds provide an option to extend the lock-up period at either the sole discretion of the fund manager or upon agreement between the fund and the investors. At March 31, 2012, 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

 

$

38.2

 

$

15.4

 

$

67.8

 

$

6.5

 

$

127.9

 

 

Fair value measurements at March 31, 2012

 

White Mountains’ invested assets measured at fair value include fixed maturity securities, common and preferred equity securities, convertible fixed maturity securities and other long-term investments which primarily consist of hedge funds and private equity funds. Fair value measurements reflect management’s best estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements fall into a hierarchy with three levels based on the nature of the inputs. Fair value measurements based on quoted prices in active markets for identical assets are at the top of the hierarchy (“Level 1”), followed by fair value measurements based on observable inputs that do not meet the criteria for Level 1, including quoted prices in inactive markets and quoted prices in active markets for similar, but not identical instruments (“Level 2”). Measurements based on unobservable inputs, including a reporting entity’s estimates of the assumptions that market participants would use are at the bottom of the hierarchy (“Level 3”).

 

White Mountains uses quoted market prices or other observable inputs to estimate fair value for the vast majority of its investment portfolio. Investments valued using Level 1 inputs include fixed maturities, primarily investments in U.S. Treasuries, common equities and short-term investments, which include U.S. Treasury Bills. Investments valued using Level 2 inputs consist of fixed maturities including corporate debt, state and other governmental debt, convertible fixed maturity securities and mortgage and asset-backed securities. Fair value estimates for investments that trade infrequently and have few or no observable market prices are classified as Level 3 measurements. Level 3 fair value estimates based upon unobservable inputs include White Mountains’ investments in hedge funds and private equity funds, as well as investments in certain debt securities where quoted market prices are unavailable. White Mountains uses brokers and outside pricing services to assist in determining fair values. For investments in active markets, White Mountains uses the quoted market prices provided by outside pricing services to determine fair value. The outside pricing services used by White Mountains have indicated that if no observable inputs are available for a security, they will not provide a price. In those circumstances, White Mountains estimates the fair value using industry standard pricing models and observable inputs such as benchmark interest rates, matrix pricing, market comparables, broker quotes, issuer spreads, bids, offers, credit rating, prepayment speeds and other relevant inputs. White Mountains performs procedures to validate the market prices obtained from the outside pricing sources. Such procedures, which cover substantially all of its fixed maturity investments include, but are not limited to, evaluation of model pricing methodologies and review of the pricing services’ quality control processes and procedures on at least an annual basis, comparison of market prices to prices obtained from different independent pricing vendors on at least a semi-annual basis, monthly analytical reviews of certain prices, and review of assumptions utilized by the pricing service for selected measurements on an ad hoc basis throughout the year. White Mountains also performs back-testing of selected sales activity to determine whether there are any significant differences between the market price used to value the security prior to sale and the actual sale price on an ad-hoc basis throughout the year. Prices provided by the pricing services that vary by more than 5% and $1 million from the expected price based on these procedures are considered outliers. In circumstances where the results of White Mountains’ review process do not appear to support the market price provided by the pricing services, White Mountains challenges the price. If White Mountains cannot gain satisfactory evidence to support the challenged price, it relies upon its own pricing methodologies to estimate the fair value of the security in question. The fair values of such securities are considered to be Level 3 measurements.

 

White Mountains’ investments in debt securities are generally valued using matrix and other pricing models. Key inputs include benchmark yields, benchmark securities, reported trades, issuer spreads, bids, offers, credit ratings and prepayment speeds.  Income on mortgage-backed and asset-backed securities is recognized using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from anticipated prepayments, the estimated economic life is recalculated and the remaining unamortized premium or discount is amortized or accreted prospectively over the remaining economic life.

 

White Mountains employs a number of procedures to assess the reasonableness of the fair value measurements for its other long-term investments, including obtaining and reviewing the audited annual financial statements of each hedge fund and private equity fund and periodically discussing each fund’s pricing with the fund manager. However, since the fund managers do not provide sufficient information to evaluate the pricing inputs and methods for each underlying investment, the inputs are considered to be unobservable. Accordingly, the fair values of White Mountains’ investments in hedge funds and private equity funds have been classified as Level 3 measurements. The fair value of White Mountains’ investments in hedge funds and private equity funds has been determined using net asset value.

 

In addition to the investments described above, White Mountains has $75.5 million and $68.1 million of investment-related liabilities recorded at fair value and included in other liabilities as of March 31, 2012 and December 31, 2011.  These liabilities relate to securities that have been sold short by limited partnerships in which White Mountains has investments and is required to consolidate under GAAP.  All of the liabilities included have a Level 1 designation.

 

Fair Value Measurements by Level

 

The following tables summarize White Mountains’ fair value measurements for investments at March 31, 2012 and December 31, 2011, by level.  The fair value measurements for derivative assets associated with White Mountains’ variable annuity reinsurance business are presented in Note 8.

 

 

 

March 31, 2012

 

Millions

 

Fair value

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

US Government and agency obligations

 

$

266.9

 

$

259.9

 

$

7.0

 

$

—

 

 

 

 

 

 

 

 

 

 

 

Debt securities issued by corporations:

 

 

 

 

 

 

 

 

 

Consumer

 

746.6

 

—

 

725.6

 

21.0

 

Industrial

 

436.8

 

—

 

436.8

 

—

 

Financials

 

315.2

 

3.1

 

312.1

 

—

 

Communications

 

262.7

 

—

 

262.7

 

—

 

Energy

 

193.1

 

—

 

193.1

 

—

 

Basic materials

 

183.3

 

—

 

183.3

 

—

 

Utilities

 

165.9

 

—

 

165.9

 

—

 

Technology

 

25.1

 

—

 

25.1

 

—

 

Diversified

 

3.7

 

—

 

3.7

 

—

 

Total debt securities issued by corporations:

 

2,332.4

 

3.1

 

2,308.3

 

21.0

 

 

 

 

 

 

 

 

 

 

 

Municipal obligations

 

2.7

 

—

 

2.7

 

—

 

Mortgage-backed and asset-backed securities

 

2,151.2

 

—

 

2,062.9

 

88.3

 

Foreign government, agency and provincial obligations

 

571.6

 

65.6

 

506.0

 

—

 

Preferred stocks

 

86.5

 

—

 

16.7

 

69.8

 

Total fixed maturity investments

 

5,411.3

 

328.6

 

4,903.6

 

179.1

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

877.5

 

877.5

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Common equity securities:

 

 

 

 

 

 

 

 

 

Financials

 

296.0

 

261.9

 

1.2

 

32.9

 

Consumer

 

197.5

 

197.1

 

.4

 

—

 

Basic materials

 

123.4

 

122.2

 

1.2

 

—

 

Energy

 

80.1

 

80.1

 

—

 

—

 

Utilities

 

44.0

 

43.8

 

.2

 

—

 

Technology

 

29.5

 

29.5

 

—

 

—

 

Other

 

98.2

 

42.6

 

55.6

 

—

 

Total common equity securities

 

868.7

 

777.2

 

58.6

 

32.9

 

 

 

 

 

 

 

 

 

 

 

Convertible fixed maturity investments

 

152.8

 

—

 

152.8

 

—

 

Other long-term investments(1) 

 

273.5

 

—

 

—

 

273.5

 

Total investments

 

$

7,583.8

 

$

1,983.3

 

$

5,115.0

 

$

485.5

 

 

(1)     Excludes carrying value of $33.2 associated with other long-term investment limited partnerships accounted for using the equity method.

 

 

 

December 31, 2011

 

Millions

 

Fair value

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity investments:

 

 

 

 

 

 

 

 

 

US Government and agency obligations

 

$

305.0

 

$

296.2

 

$

8.8

 

$

—

 

 

 

 

 

 

 

 

 

 

 

Debt securities issued by corporations:

 

 

 

 

 

 

 

 

 

Consumer

 

790.7

 

—

 

790.7

 

—

 

Industrial

 

359.4

 

—

 

359.4

 

—

 

Financials

 

239.6

 

3.8

 

235.8

 

—

 

Communications

 

225.8

 

—

 

225.8

 

—

 

Basic materials

 

195.7

 

—

 

195.7

 

—

 

Utilities

 

140.1

 

—

 

140.1

 

—

 

Energy

 

155.8

 

—

 

155.8

 

—

 

Technology

 

24.5

 

—

 

24.5

 

—

 

Diversified

 

3.5

 

—

 

3.5

 

—

 

Total debt securities issued by corporations:

 

2,135.1

 

3.8

 

2,131.3

 

—

 

 

 

 

 

 

 

 

 

 

 

Municipal obligations

 

2.7

 

—

 

2.7

 

—

 

Mortgage-backed and asset-backed securities

 

3,222.9

 

—

 

3,207.8

 

15.1

 

Foreign government, agency and provincial obligations

 

589.2

 

65.7

 

523.5

 

—

 

Preferred stocks

 

78.8

 

—

 

15.0

 

63.8

 

Total fixed maturity investments(1)

 

6,333.7

 

365.7

 

5,889.1

 

78.9

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

846.0

 

846.0

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Common equity securities:

 

 

 

 

 

 

 

 

 

Financials

 

219.2

 

185.8

 

1.5

 

31.9

 

Consumer

 

188.8

 

188.5

 

.3

 

—

 

Basic materials

 

121.0

 

119.9

 

1.1

 

—

 

Energy

 

72.6

 

72.6

 

—

 

—

 

Utilities

 

42.0

 

41.8

 

.2

 

—

 

Technology

 

25.8

 

25.8

 

—

 

—

 

Other

 

85.6

 

33.0

 

52.2

 

.4

 

Total common equity securities

 

755.0

 

667.4

 

55.3

 

32.3

 

 

 

 

 

 

 

 

 

 

 

Convertible fixed maturity investments

 

143.8

 

—

 

143.8

 

—

 

Other long-term investments(2) 

 

268.3

 

—

 

—

 

268.3

 

Total investments

 

$

8,346.8

 

$

1,879.1

 

$

6,088.2

 

$

379.5

 

 

(1)      Carrying value includes $111.8 that is classified as assets held for sale relating to AutoOne discontinued operations.

(2)      Excludes carrying value of $33.0 associated with other long-term investments accounted for using the equity method.

 

Debt securities issued by corporations

 

The following table summarizes the ratings of the corporate debt securities held in White Mountains’ investment portfolio as of March 31, 2012 and December 31, 2011:

 

Millions

 

March 31, 2012

 

December 31, 2011

 

AAA

 

$

—

 

$

—

 

AA

 

210.6

 

206.8

 

A

 

842.4

 

802.8

 

BBB

 

1,262.5

 

1,110.8

 

BB

 

7.4

 

6.2

 

Other

 

9.5

 

8.5

 

Debt securities issued by corporations

 

$

2,332.4

 

$

2,135.1

 

 

Mortgage-backed, Asset-backed Securities

 

White Mountains purchases commercial and residential mortgage-backed securities with the goal of maximizing risk adjusted returns in the context of a diversified portfolio. White Mountains’ non-agency commercial mortgage-backed portfolio (“CMBS”) is generally short tenor and structurally senior, with more than 20 points of subordination on average for fixed rate CMBS and more than 45 points of subordination on average for floating rate CMBS as of March 31, 2012.  In general, subordination represents the percentage principal loss on the underlying collateral that would be absorbed by other securities lower in the capital structure before the more senior security incurs a loss. White Mountains believes these levels of protection will mitigate the risk of loss tied to the refinancing challenges facing the commercial real estate market.  As of March 31, 2012, on average less than 1% of the underlying loans were reported as non-performing for all non-agency CMBS held by White Mountains. White Mountains is not an originator of residential mortgage loans and did not hold any residential mortgage-backed securities (“RMBS”) categorized as sub-prime as of March 31, 2012. White Mountains’ investments in hedge funds and private equities contain negligible amounts of sub-prime mortgage-backed securities at March 31, 2012. White Mountains considers sub-prime mortgage-backed securities as those that have underlying loan pools that exhibit weak credit characteristics, or those that are issued from dedicated sub-prime shelves or dedicated second-lien shelf registrations (i.e., White Mountains considers investments backed primarily by second-liens to be sub-prime risks regardless of credit scores or other metrics).

 

White Mountains categorizes mortgage-backed securities as “non-prime” (also called “Alt A” or “A-”) if they are backed by collateral that has overall credit quality between prime and sub-prime based on White Mountains’ review of the characteristics of their underlying mortgage loan pools, such as credit scores and financial ratios. White Mountains’ non-agency residential mortgage-backed portfolio is generally of moderate average life and structurally senior. White Mountains does not own any collateralized debt obligations, including residential mortgage-backed collateralized debt obligations.

 

 

 

March 31, 2012

 

December 31, 2011

 

Millions

 

Fair Value

 

Level 2

 

Level 3

 

Fair Value

 

Level 2

 

Level 3

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency:

 

 

 

 

 

 

 

 

 

 

 

 

 

GNMA

 

$

1,200.3

 

$

1,200.3

 

$

—

 

$

1,365.8

 

$

1,365.8

 

$

—

 

FNMA

 

308.2

 

308.2

 

—

 

712.6

 

712.6

 

—

 

FHLMC

 

106.4

 

33.2

 

73.2

 

35.9

 

35.9

 

—

 

Total Agency(1)

 

1,614.9

 

1,541.7

 

73.2

 

2,114.3

 

2,114.3

 

—

 

Non-agency:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

81.5

 

66.4

 

15.1

 

83.1

 

68.0

 

15.1

 

Commercial

 

299.1

 

299.1

 

—

 

276.7

 

276.7

 

—

 

Total Non-agency

 

380.6

 

365.5

 

15.1

 

359.8

 

344.7

 

15.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage-backed securities

 

1,995.5

 

1,907.2

 

88.3

 

2,474.1

 

2,459.0

 

15.1

 

Other asset-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit card receivables

 

81.5

 

81.5

 

—

 

380.6

 

380.6

 

—

 

Vehicle receivables

 

43.0

 

43.0

 

—

 

345.6

 

345.6

 

—

 

Other

 

31.2

 

31.2

 

—

 

22.6

 

22.6

 

—

 

Total other asset-backed securities

 

155.7

 

155.7

 

—

 

748.8

 

748.8

 

—

 

Total mortgage and asset-backed securities

 

$

2,151.2

 

$

2,062.9

 

$

88.3

 

$

3,222.9

 

$

3,207.8

 

$

15.1

 

 

(1)        Represents publicly traded mortgage-backed securities which carry the full faith and credit guaranty of the U.S. government (i.e., GNMA) or are guaranteed by a government sponsored entity (i.e., FNMA, FHLMC).

 

Non-agency Mortgage-backed Securities

 

The security issuance years of White Mountains’ investments in non-agency RMBS and non-agency CMBS securities as of March 31, 2012 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security Issuance Year

 

Millions

 

Fair Value

 

2003

 

2006

 

2007

 

2009

 

2010

 

2011

 

2012

 

Non-agency RMBS

 

$

81.5

 

$

2.9

 

$

22.7

 

$

25.4

 

$

—

 

$

10.5

 

$

20.0

 

$

—

 

Non-agency CMBS

 

299.1

 

—

 

—

 

17.7

 

11.3

 

6.3

 

246.6

 

17.2

 

Total

 

$

380.6

 

$

2.9

 

$

22.7

 

$

43.1

 

$

11.3

 

$

16.8

 

$

266.6

 

$

17.2

 

 

Non-agency Residential Mortgage-backed Securities

 

The classification of the underlying collateral quality and the tranche levels of White Mountains’ non-agency RMBS securities are as follows as of March 31, 2012:

 

Millions

 

Fair Value

 

Super Senior (1)

 

Senior (2)

 

Subordinate(3)

 

Prime

 

$

65.7

 

$

18.3

 

$

47.4

 

$

—

 

Non-prime

 

15.8

 

15.1

 

.7

 

—

 

Sub-prime

 

—

 

—

 

—

 

—

 

Total

 

$

81.5

 

$

33.4

 

$

48.1

 

$

—

 

 

(1)        At issuance, Super Senior were rated AAA by Standard & Poor’s, Aaa by Moody’s or AAA by Fitch and were senior to other AAA or Aaa bonds.

(2)        At issuance, Senior were rated AAA by Standard & Poor’s or Aaa by Moody’s and were senior to non-AAA or non-Aaa bonds.

(3)        At issuance, Subordinate were not rated AAA by Standard & Poor’s or Aaa by Moody’s and were junior to AAA or Aaa bonds.

 

Non-agency Commercial Mortgage-backed Securities

 

The amount of fixed and floating rate securities and their tranche levels of White Mountains’ non-agency CMBS securities are as follows as of March 31, 2012:

 

Millions

 

Fair Value

 

Super Senior (1)

 

Senior(2)

 

Subordinate(3)

 

Fixed rate CMBS

 

$

271.5

 

$

62.8

 

$

208.7

 

$

—

 

Floating rate CMBS

 

27.6

 

17.7

 

9.9

 

—

 

Total

 

$

299.1

 

$

80.5

 

$

218.6

 

$

—

 

 

(1)        At issuance, Super Senior were rated AAA by Standard & Poor’s, Aaa by Moody’s or AAA by Fitch and were senior to other AAA or Aaa bonds.

(2)        At issuance, Senior were rated AAA by Standard & Poor’s or Aaa by Moody’s and were senior to non-AAA or non-Aaa bonds.

(3)        At issuance, Subordinate were not rated AAA by Standard & Poor’s or Aaa by Moody’s and were junior to AAA or Aaa bonds.

 

Rollforward of Fair Value Measurements by Level

 

White Mountains uses quoted market prices where available as the inputs to estimate fair value for its investments in active markets. Such measurements are considered to be either Level 1 or Level 2 measurements, depending on whether the quoted market price inputs are for identical securities (Level 1) or similar securities (Level 2). Level 3 measurements for fixed maturities, common equity securities, convertible fixed maturities and other long-term investments at March 31, 2012 and 2011 consist of securities for which the estimated fair value has not been determined based upon quoted market price inputs for identical or similar securities.

 

The following tables summarize the changes in White Mountains’ fair value measurements by level for the three months ended March 31, 2012 and 2011:

 

 

 

 

 

 

 

Level 3 Investments

 

 

 

Millions

 

Level 1 
Investments

 

Level 2 
Investments

 

Fixed
Maturities

 

Common
equity
securities

 

Convertible
fixed
maturities

 

Other long-term
investments

 

Total

 

Balance at January 1, 2012

 

$

1,879.1

 

$

6,088.2

 

$

78.9

 

$

32.3

 

$

—

 

$

268.3

(1)

$

8,346.8

(1)(2)

Total realized and unrealized gains (losses)

 

33.5

 

10.1

 

7.1

 

.5

 

—

 

6.5

 

57.7

 

Foreign currency gains (losses) through OCI

 

6.9

 

50.4

 

.7

 

—

 

—

 

2.7

 

60.7

 

Amortization/Accretion

 

(.3

)

(12.5

)

(1.1

)

—

 

—

 

 

 

(13.9

)

Purchases

 

3,094.4

 

1,708.2

 

97.7

 

—

 

—

 

5.7

 

4,906.0

 

Sales

 

(3,030.3

)

(2,729.4

)

(4.1

)

—

 

—

 

(9.7

)

(5,773.5

)

Transfers in

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Transfers out

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Balance at March 31, 2012

 

$

1,983.3

 

$

5,115.0

 

$

179.2

 

$

32.8

 

$

—

 

$

273.5

(1)

$

7,583.8

(1)

 

(1)        Excludes carrying value of $33.0 and $33.2 at January 1, 2012 and March 31, 2012 associated with other long-term investments accounted for using the equity method.

(2)        Carrying value includes $111.8 that is classified as assets held for sale relating to AutoOne discontinued operations.

 

 

 

 

 

 

 

Level 3 Investments

 

Millions

 

Level 1
Investments

 

Level 2
Investments

 

Fixed
Maturities

 

Common
equity
securities

 

Convertible
fixed
maturities

 

Other long-term
investments

 

Total

 

Balance at January 1, 2011

 

$

1,894.4

 

$

5,477.4

 

$

128.4

 

$

71.2

 

$

—

 

$

330.2

(1)

$

7,901.6

(1)

Total realized and unrealized gains (losses)

 

24.2

 

(44.1

)

1.9

 

(1.8

)

—

 

10.2

 

(9.6

)

Foreign currency gains (losses) through OCI

 

10.4

 

106.6

 

—

 

1.0

 

—

 

6.6

 

124.6

 

Amortization/Accretion

 

1.0

 

(14.2

)

—

 

—

 

—

 

 

 

(13.2

)

Purchases

 

1,975.7

 

1,523.8

 

.4

 

3.9

 

—

 

4.7

 

3,508.5

 

Sales

 

(2,079.7

)

(1,597.4

)

—

 

(.1

)

—

 

(49.9

)

(3,727.1

)

Transfers in

 

—

 

47.4

 

1.0

 

—

 

—

 

—

 

48.4

 

Transfers out

 

—

 

(1.0

)

(47.4

)

—

 

—

 

—

 

(48.4

)

Balance at March 31, 2011

 

$

1,826.0

 

$

5,498.5

 

$

84.3

 

$

74.2

 

$

—

 

$

301.8

(1)

$

7,784.8

(1)

 

(1)   Excludes carrying value of $37.5 and $41.9 at March 31, 2011 and January 1, 2011 associated with other long-term investment limited partnerships accounted for using the equity method.

 

Fair Value Measurements — transfers between levels - Three-month period ended March 31, 2012 and 2011

 

During the first three months of 2012, no securities classified as Level 3 measurements in the prior period were recategorized as Level 2 measurements.

 

During the first three months of 2011, two securities which had been classified as Level 3 measurements at January 1, 2011 were recategorized as Level 2 measurements because quoted market prices for similar securities that were considered reliable and could be validated against an alternative source were available at March 31, 2011. These measurements comprise “Transfers out” of Level 3 and “Transfers in” to Level 2 of $56.2 million in fixed maturities for the period ended March 31, 2011.  One security that was classified as a Level 2 investment at January 1, 2011 was priced with unobservable inputs during the current period and represents the “Transfers in” of $1.0 million in Level 3 investments.  The fair value of this security was estimated using industry standard pricing models, in which management selected inputs using its best judgment.  The pricing models used by White Mountains use the same valuation methodology for all Level 3 measurements for fixed maturities. The security is considered to be Level 3 because the measurements are not directly observable. At March 31, 2011, the estimated fair value for this security determined using the industry standard pricing models was $0.6 million more than the estimated fair value based upon quoted prices provided by a third party.

 

Significant Unobservable Inputs

 

The following summarizes significant unobservable inputs used in estimating the fair value of investment securities classified within Level 3 at March 31, 2012:

 

($ in Millions)

 

March 31, 2012

 

Description

 

Fair Value

 

Rating

 

Valuation Technique(s)

 

Unobservable Input

 

Range(1)

 

Agency RMBS

 

$

73.2

 

AA+

 

Discounted cash flow

 

Prepayment Rate

Discount Yield

 

15 CPR(2)

2.1%

 

Non-agency RMBS

 

$

15.1

 

CCC

 

Discounted cash flow

 

Prepayment rate

Probability of default

Loss severity

Discount yield

 

10 CPR

CDR Vector(3)

40%

8.0%

 

Preferred Stock

 

$

69.8

 

NR

 

Discounted cash flow

 

Discount yield

 

8.8%

 

Corporate Bonds

 

$

21.0

 

BBB+

 

Broker pricing

 

Broker quote

 

$21.0 million

 

 

(1)          For the three month period ended March 31, 2012, each asset type consists of one security.

(2)          CPR refers to “Constant Prepayment Rate”.

(3)          CDR refers to “Constant Default Rate”.

 

The assumed prepayment rate is a significant unobservable input used to estimate the fair value of investments in agency RMBS. Generally for bonds priced at a premium, increases in prepayment speeds will result in a lower fair value, while decreases in prepayment speeds may result in a higher fair value. Unobservable inputs used to estimate the fair value of investments in non-agency RMBS are the assumed prepayment rate, probability of default and loss severity. These three items can have material, yet varying impacts (either positive or negative) on the value of non-agency RMBS, the direction and severity of which are dependent on the deal structure and collateral performance.