INVESTMENTS IN AFFILIATES

12 Months Ended

Dec. 31, 2011

Investments in and Advances to Affiliates [Table Text Block]

6. Investments in Affiliates

          The Company’s investment portfolio includes certain investments over which the company is considered to have significant influence and which, therefore, are accounted for using the equity method. Significant influence is generally deemed to exist where the Company has an investment of 20% or more in the common stock of a corporation or an investment of 3% or more in closed end funds, limited partnerships, LLCs or similar investment vehicles. The Company generally records its alternative and private equity fund affiliates on a one month and three month lag, respectively, and its operating affiliates on a three month lag. See Note 7, “Other Investments” for investments in alternative and private equity funds in which the Company generally owns less than 3% and are accounted for as “Other Investments.”

          Investments in affiliates comprised the following at December 31, 2011 and 2010:

Year ended December 31, (U.S. dollars in thousands)	2011		2010
Investment fund affiliates	$	768,851	$	829,059
Operating affiliates		283,878		298,122
Total investment affiliates	$	1,052,729	$	1,127,181

(a) Investment Fund Affiliates

          The Company has invested in certain closed end funds, certain limited partnerships, LLCs and similar investment vehicles, including funds managed by certain of its investment manager affiliates. Collectively, these investments in funds, partnerships and other vehicles are classified as “investment fund affiliates.” The Company’s equity investment in investment fund 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, 2011: (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			Total Net Assets (Estimated) (2)
Alternative Funds (1):
Arbitrage		$	123,969	$	1,291			3.4	%	$	3,678,904
Directional			217,779		9,154			6.0	%		3,619,272
Event Driven			229,956		(60	)		3.1	%		7,472,680
Multi-Style			425		(9	)		17.6	%		2,410
Total alternative funds			572,129		10,376			3.9	%		14,773,266
Private equity funds (1)			196,722		15,877			5.1	%		3,820,497
		$	768,851	$	26,253			4.1	%	$	18,593,763

Year ended December 31, 2010: (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			Total Net Assets (Estimated) (2)
Alternative Funds (1):
Arbitrage	$	156,511	$	9,477		4.1	%	$	3,797,962
Directional		166,644		5,972		5.9	%		2,819,306
Event Driven		261,252		7,605		2.5	%		10,267,525
Multi-Style		787		30		8.1	%		9,688
Total alternative funds		585,194		23,084		3.5	%		16,894,481
Private equity funds (1)		243,865		28,018		5.5	%		4,408,189
	$	829,059	$	51,102		3.9	%	$	21,302,670

(1)	The Company generally records its alternative fund affiliates on a one month lag and its private equity fund affiliates on a one quarter lag.
(2)	Total estimated net assets are generally as at November 30 and September 30, respectively.

          Certain funds have a lock-up period. A lock-up period refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem. At the point at which funds provide for periodic redemptions, the funds may, depending on their governing documents, have the ability to deny or delay a redemption request, called a gate, or suspend redemptions as a whole. The fund may implement the gate restriction because the aggregate amount of redemption requests as of a particular date exceeds a specified level, generally ranging from 15% to 25% of the fund’s net assets. The gate is a method for executing an orderly redemption process that reduces the possibility of adversely affecting the remaining investors in the fund in the event of substantial redemption requests falling on a single redemption date. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash shortly after the redemption date.

          The carrying value of the Company’s holdings in funds that are subject to lockups and/or that have gate provisions in their governing documents as at December 31, 2011 and 2010 was $419.4 million and $428.6 million, respectively. The carrying value of the Company’s holdings in funds where a gate was imposed as at December 31, 2011 and 2010 was nil and $13.5 million, respectively.

          Certain funds may be allowed to invest a portion of their assets in illiquid securities, such as private equity or convertible 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 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’. As at December 31, 2011 and 2010, the carrying value of our funds held in side-pockets were $30.7 million and $31.9 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 investment and (re)insurance affiliates and investment management companies’ securities or other forms of ownership interests. 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, 2011: (U.S. dollars in thousands)	XL Investment					Combined Investee Summarized Financial Data (Estimated) (1)
	Carrying Value		Equity in Net Income (Loss) for the Year			Total Assets		Total Liabilities		Total Revenue (Loss)		Net Income (Loss)
(U.S. dollars in thousands)
Operating affiliates:
Financial operating affiliates	$	732	$	(1,018	)	$	11,957,534	$	11,931,662	$	12,564	$	1,115
Other strategic operating affiliates		153,955		20,891			1,295,921		967,264		348,831		48,641
Investment manager affiliates (2)		129,191		56,913			601,511		38,349		319,984		222,260
Total	$	283,878	$	76,786		$	13,854,966	$	12,937,275	$	681,379	$	272,016

Year ended December 31, 2010: (U.S. dollars in thousands)	XL Investment				Combined Investee Summarized Financial Data (Estimated) (1)
	Carrying Value		Equity in Net Income (Loss) for the Year		Total Assets		Total Liabilities		Total Revenue (Loss)			Net Income (Loss)
(U.S. dollars in thousands)
Operating affiliates:
Financial operating affiliates	$	1,750	$	53,031	$	6,212,583	$	6,179,978	$	(688	)	$	(15,641	)
Other strategic operating affiliates		122,266		28,161		1,075,578		772,572		274,786			48,792
Investment manager affiliates		174,106		40,180		654,229		70,816		375,384			348,615
Total	$	298,122	$	121,372	$	7,942,390	$	7,023,366	$	649,482		$	381,766

(1)	The Company generally records its operating affiliates on a one quarter lag. Estimated assets and liabilities are generally at September 30, 2011 and 2010, respectively.
(2)	During the year ended December 31, 201,1 the Company received distributions from its Investment Manager Affiliates of approximately $23.2 million, sold its interests in Finisterre for total proceeds of $35.0 million as explained below at “Investment Manager Affiliates,” and received $44.2 million as repayment of a note.

          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 17(c), “Commitments and Contingencies – Investments in Affiliates,” for further information regarding commitments related to investment in affiliates.

          Financial Operating Affiliates

          The Company had no significant financial operating affiliates during 2011 following the sale, during the fourth quarter of 2010, of approximately 76% of its investment in Primus Guaranty, Ltd. (“Primus”), reducing the Company’s ownership interest from 39.7% to 9.8% at December 31, 2010. This sale generated total proceeds of $51.6 million during the year ended December 31, 2010. Given management’s view of the risk exposure, expected losses and the uncertainty facing the entire financial guarantee industry in 2007, the Company had reduced the reported value of its investment in Primus to nil at December 31, 2007. The Company did not record any equity earnings during 2010, 2009 or 2008 in relation to Primus because of the significant losses and negative book value reported by Primus during these periods. Therefore, the sale in the fourth quarter of 2010 resulted in the recording of a gain of $51.6 million through “Income from operating affiliates.” Subsequent to the sale, the Company’s ownership of Primus shares is accounted for as an available for sale equity security.

          Other Strategic Operating Affiliates

          The Company’s strategic operating affiliates included an investment in ARX Holding Corporation of 45.7% at both December 31, 2011 and 2010. During the second quarter of 2010, the Company’s 49.9% investment in the Brazilian joint venture ITAU XL Seguros Corporativos S.A. (“ITAU”) was sold.

          Investment Manager Affiliates

          During the years ended December 31, 2011, 2010, and 2009, the Company’s larger investment manager affiliates included Highfields Capital, a global equity investment firm, Polar Capital, an investment firm offering traditional and alternative products and HighVista Strategies, a diversified wealth management firm. The Company recorded, through net income in affiliates, other-than-temporary declines in the values of certain investment manager affiliates totaling $0.6 million, $4.4 million and $6.9 million, for the years ended December 31, 2011, 2010 and 2009, respectively.

          During the third quarter of 2011, the Company sold its interests in Finisterre for total proceeds of $35.0 million resulting in a gain of $25.3 million. In addition, this transaction includes the potential for additional amounts to be paid to the Company during 2013 and 2014 subject to the investment manager meeting certain performance targets. These amounts, if any, will be recorded when known with certainty.