Investments in Affiliates

Investments in affiliates comprised the following at December 31, 2017 and 2016:



(U.S. dollars in thousands)	2017		2016
Investment affiliates	$	1,484,408	$	1,674,925
Operating affiliates	427,588		502,720
Total investment affiliates	$	1,911,996	$	2,177,645

See Note 1(c), "Significant Accounting Policies - Investments - Investments in Affiliates," for a description of our accounting policy for these assets

(a) Investment Affiliates

The Company has invested in certain hedge funds, including funds managed by certain of its investment manager affiliates, and in certain private equity investments and private credit funds (collectively, "private investments") that are accounted for under the equity method due to our ownership percentages in the limited partnerships, LLCs or other similar investment vehicles that form the funds. Collectively, these investments in hedge funds and private investments are classified as "investment affiliates." At December 31, 2017 and 2016, the hedge fund portfolio, accounted for as hedge fund affiliates, employed four strategies: arbitrage, directional, event driven and multi-style.

The Company's equity investment in investment affiliates and equity in net income (loss) from such affiliates as well as certain summarized financial information of the investee on a combined basis (shown as "Combined Funds") are included below:



(U.S. dollars in thousands, except percentages)	XL Group Investment						Combined Funds
	Carrying Value		Equity in Net Income (Loss) for the Year		Weighted Average XL Percentage Ownership		Combined Funds
	Carrying Value		Equity in Net Income (Loss) for the Year		Weighted Average XL Percentage Ownership		Total Net Assets (Estimated) (1)
Year Ended December 31, 2017
Hedge funds (2)	$	1,119,747	$	104,169	4.0	%	$	27,785,552
Private investments	364,661		34,877		10.2	%	3,657,119
Total Investment Affiliates	$	1,484,408	$	139,046	5.1	%	$	31,442,671
Year Ended December 31, 2016
Hedge funds (2)	$	1,317,375	$	41,670	4.8	%	$	27,281,980
Private investments	357,550		29,088		10.8	%	3,318,073
Total Investment Affiliates	$	1,674,925	$	70,758	5.5	%	$	30,600,053

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(1)	Total estimated net assets are generally as at November 30 for hedge fund affiliates and September 30 for private investment affiliates.


(2)	The Company accounts for its investment in certain funds using the equity method where the Company has significant influence over the related investment management company.

In general, the hedge funds in which the Company is invested require at least 30 days notice of redemption, and may be redeemed on a monthly, quarterly, semi-annual, annual or longer basis, depending upon the specific terms of each fund. Certain hedge funds have a lock-up period and/or may also have the ability to impose a redemption gate. A lock-up period refers to the initial amount of time an investor is contractually required to remain invested before having the ability to redeem. Typically, the imposition of a gate delays a portion of the requested redemption, with only the portion that is not gated settled in cash shortly after the redemption date.

The carrying value of the Company's holdings in hedge fund affiliates that are subject to lockups and/or that have redemption gate provisions in their governing documents at December 31, 2017 and 2016 was $222.7 million and $553.2 million, respectively.

Certain hedge funds may be allowed to invest a portion of their assets in illiquid securities, such as private equity or private debt. In such cases, a common mechanism used is a side-pocket, whereby the illiquid security is assigned to a separate memorandum capital account or other designated account. Typically, the investor loses its redemption rights in the designated account. Only when the illiquid securities in the side-pocket are sold, or otherwise deemed liquid by the fund, may investors redeem that portion of their interest that has been "side-pocketed." At December 31, 2017 and 2016, the carrying value of our hedge fund affiliates held in side-pockets was $20.1 million and $23.5 million, respectively. The underlying assets within these positions are generally expected to be liquidated over a period of approximately two to four years.

(b) Operating Affiliates

The Company has invested in securities or other forms of direct ownership interests across the capital structure of strategic (re)insurance affiliates, investment management company affiliates, and other strategic and operating affiliates. Collectively, these investments are classified as "operating affiliates."

The Company's equity investment in operating affiliates and equity in net income (loss) from such affiliates as well as certain summarized financial information of the investee as a whole are included below:



Year ended December 31, 2017 (U.S. dollars in thousands)	XL Group Investment				Combined Investee Summarized Financial Data (Estimated)
Year ended December 31, 2017 (U.S. dollars in thousands)	Carrying Value		Equity in Net Income (Loss) for the Year		Total Assets		Total Liabilities		Total Revenue (Loss)		Net Income (Loss)
Insurance affiliates	$	272,801	$	1,780	$	2,884,286	$	2,099,982	$	1,228,091	$	14,149
Strategic and other operating affiliates	109,382		21,144		3,045,335		2,628,467		275,677		11,195
Investment manager affiliates (1)	45,405		40,721		412,071		49,028		65,569		29,835
Total operating affiliates	$	427,588	$	63,645	$	6,341,692	$	4,777,477	$	1,569,337	$	55,179

Year ended December 31, 2016
Insurance affiliates	242,844		10,558		2,350,967		1,549,900		914,221		52,169
Strategic and other operating affiliates	203,851		2,064		3,002,938		2,241,400		116,638		(21,745		)
Investment manager affiliates (1)	56,025		31,775		752,336		72,114		337,782		257,004
Total operating affiliates	$	502,720	$	44,397	$	6,106,241	$	3,863,414	$	1,368,641	$	287,428

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(1)	During the years ended December 31, 2017 and 2016, the Company received distributions from its Investment Manager Affiliates of approximately $32.1 million and $35.9 million, respectively.

In certain investments, the carrying value is different from the share of the investee's underlying net assets. The differences represent goodwill on acquisition, OTTI recorded with respect to the investment, or differences in the retained capital accounts of the various equity holders (including the Company).

See Note 18(c), "Commitments and Contingencies - Investments in Affiliates," for further information regarding commitments related to investments in affiliates.

The Company's most significant operating affiliate at December 31, 2017 is an investment of $124.2 million in Privilege Underwriters, Inc. and its affiliates ("PURE Group"), an insurance provider specializing in products for high net worth individuals. The PURE Group investments consist of: (i) a $77.5 million purchase of 9.9% of the ordinary common units and preferred units of Privilege Group Holdings LP, and 9.9% of the units of Privilege Group Holdings GP, LLC; and (ii) a total of $50.0 million of purchases, at par value, of ten year surplus notes issued by Privilege Underwriters Reciprocal Exchange. Under the terms of an agreement between the parties, effective January 18, 2018, the PURE Group has exercised its option to require the Company to purchase a remaining $25.0 million of ten year surplus notes, at par.

At December 31, 2017, the Company's most significant investment manager affiliate is Highfields Capital, a global equity investment firm.

The Company also has an investment of $40.0 million, representing a 20.0% ownership interest in Mahindra Insurance Brokers Limited.

On April 1, 2015, the Company completed the sale of its interests in one of its largest strategic and other operating affiliates, ARX, to Progressive. For further information, see Note 2(g), "Acquisitions and Disposals - Sale of Operating Affiliate."