OTHER INVESTMENTS

12 Months Ended

Dec. 31, 2011

Disclosure Of Other Investments [Text Block]

7. Other Investments

          Contained within this asset class are equity interests in investment funds, limited partnerships and unrated tranches of collateralized debt obligations for which the Company does not have sufficient rights or ownership interests to follow the equity method of accounting. The Company accounts for such equity securities at estimated fair value with changes in fair value recorded through AOCI as it has no significant influence over these entities. Also included within other investments are structured transactions which are carried at amortized cost.

          Other investments comprised the following at December 31, 2011 and 2010:

Year ended December 31, (U.S. dollars in thousands)	2011		2010
Alternative Investment Funds:
Arbitrage	$	132,847	$	73,010
Directional		228,544		177,785
Multi-Style		93,664		97,506
Total alternative funds		455,055		348,301
Private investment funds		87,491		79,662
Overseas deposits		91,425		80,006
Structured transactions		323,705		330,185
Other		27,586		55,416
Total other investments	$	985,262	$	893,570

(a) Alternative and Private Equity Funds

          At December 31, 2011, the alternative fund portfolio, accounted for as other investments, employed three strategies invested in 13 underlying funds, respectively. The Company is able to redeem the hedge funds on the same terms that the underlying funds can be redeemed. In general, the 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 on the fund.

          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 fair value of the Company’s holdings in funds that may be subject to lockups and/or that have gate provisions in their governing documents as at December 31, 2011 and 2010 was $240.0 million and $155.1 million, respectively. The Company did not have any holdings in funds where a gate was imposed as at December 31, 2011 or 2010.

          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 fair value of our funds held in side-pockets were $28.4 million and $38.8 million, respectively. The underlying assets within these positions are generally expected to be liquidated over a period of approximately two to four years.

          An increase in market volatility and an increase in volatility of hedge funds in general, as well as a decrease in market liquidity, could lead to a higher risk of a large decline in value of the hedge funds in any given time period.

          The following represents an analysis of the net realized gains and the net unrealized gains on the Company’s alternative investment funds and private equity funds:

	Net Unrealized Gains (Losses)				Net Realized Gains (Losses)
December 31, 2011 (U.S. dollars in thousands)	2011		2010		2011		2010		2009
Alternative Investment Funds	$	96,873	$	86,053	$	10,120	$	526	$	21,809
Private Investment Funds		33,725		18,098		3,585		3,049		—
Total	$	130,598	$	104,151	$	13,705	$	3,575	$	21,809

(b) Overseas Deposits

          Overseas deposits include investments in private funds related to Lloyd’s syndicates in which the underlying instruments are primarily government and government-related/supported and corporate fixed income securities. The funds themselves do not trade on an exchange and therefore are not included within available for sale securities. Also included in overseas deposits are restricted cash and cash equivalent balances held by Lloyd’s syndicates for solvency purposes. Given the restricted nature of these cash balances, they are not included within the cash and cash equivalents category in the balance sheet.

(c) Structured Transactions

          Project Finance Loans

          The Company historically participated in structured transactions in project finance related areas under which the Company provided a cash loan supporting trade finance transactions. These transactions are accounted for in accordance with guidance governing accounting by certain entities (including entities with trade receivables) that lend to or finance the activities of others under which the loans are considered held for investment as the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff. Accordingly, these funded loan participations are reported in the balance sheet at outstanding principal adjusted for any allowance for loan losses as considered necessary by management.

          The following table shows a summary of the structured project finance loans:

Year ended December 31, (U.S. dollars in thousands except term to maturity)	2011			2010
Project Finance Loans:
Aggregate carrying value	$	49,650		$	52,182
Allowance for loan losses		(9,167	)		(9,900	)
Amounts charged off		—			—
Aggregate net carrying value	$	40,483		$	42,282
Number of individual loan participations		Six			Six
Number of individual loan participations relating to the allowance for loan losses		Two			Two
Weighted average contractual term to maturity		2.13 years			3.25 years
Weighted average credit rating		BB-			BB
Range of individual credit ratings		BB+ to CCC			BB+ to B+

          Surveillance procedures are conducted over each structured project finance loan on an ongoing basis with current expectations of future collections of contractual interest and principal used to determine whether any allowance for loan losses may be required at each period end. If it is determined that a future credit loss on a specific contract is reasonably possible and an amount can be estimated, an allowance is recorded. The contractual receivable is only charged off when the final outcome is known and the Company has exhausted all commercial efforts to try and collect any outstanding balances.

          During the year ended December 31, 2011 and 2010, management conducted separate reviews of each loan participation and determined loss allowance estimates, as shown in the table above, using a recovery value concept. Management considers recovery value to be the percentage of all future contractual interest and principal that the Company expects to receive from the borrower through any combination of regular debt service, other payments, salvage and recovery. The allowances for loan losses are made when it is probable that a loss will be incurred based upon current information received from the borrower.

          At December 31, 2011, one of the loan participations was being restructured by the borrower and participating lenders. Management determined the expected recovery value for this participation based on multiple risk factors, including but not limited to a difficult trading environment where margins are compressed below the historical mean, a working capital shortage that has interrupted production and prompted lawsuits from suppliers, earnings on the project are well below plan, and local bankruptcy law is untested and may make it difficult to exercise the existing security package. A second loan participation has credit risk to the operations of a borrower that is experiencing a difficult trading environment. Management determined the expected recovery value for this participation based on multiple risk factors, including but not limited to increased raw material costs adversely impacting margins, the borrower is currently operating at a net loss and has high leverage, construction risk remains as the project is behind schedule, and exposure to natural hazards that have caused a long shut down of operations.

          National Indemnity Endorsement

          On June 9, 2009, XL Specialty Insurance Company (“XL Specialty”), a wholly-owned subsidiary of XL Capital Ltd, entered into an agreement with National Indemnity Company, an insurance company subsidiary of Berkshire Hathaway Inc. (“National Indemnity”). Under the agreement, and a related reinsurance agreement, National Indemnity would issue endorsements (“Endorsements”) to certain directors and officers liability insurance policies known as “Side A” coverage policies underwritten by XL Specialty (the “Facility”).

          The Endorsements entitle policyholders to present claims under such D&O policies directly to National Indemnity in the event that XL Specialty is unable to meet its obligations due to an order of insolvency, liquidation or an injunction that prohibits XL Specialty from paying claims. Under the terms of the Facility, National Indemnity would issue Endorsements with aggregate premiums of up to $140 million. The Endorsements will terminate on the tenth anniversary of their issuance. The Facility provided that National Indemnity was obligated to issue Endorsements on D&O policies issued during an eighteen month period that commenced on June 8, 2009.

          In connection with the Facility, XL Insurance (Bermuda) Ltd (“XLIB”) purchased a payment obligation (the “Obligation”) in an aggregate principal amount of $150 million from National Indemnity. In addition, XL Specialty established a trust to hold the premiums (net of commissions) on the D&O policies endorsed by National Indemnity. XL Specialty also arranged to provide National Indemnity with a letter of credit in the event the assets in the trust are insufficient to meet XL Specialty’s obligations under the Facility (the “Letter of Credit”). The trust, the Letter of Credit and the payment obligations collateralize XL Specialty’s indemnity obligations under the Facility to National Indemnity for any payments National Indemnity is required to make under the Endorsements.

          The outstanding Obligation was recorded in Other Investments at an estimated fair value of $128.1 million, pays a coupon of 3.5%, and is being accreted to $150 million over the 11.5 year term of the payment obligation. The difference between the estimated fair value of the Obligation and the cost of that Obligation at the time of the transaction was approximately $21.9 million and was recorded in Other Assets. This difference, together with fees of $2.5 million, was amortized in relation to the earning of the underlying policies written. During the years ended December 31, 2011, 2010 and 2009, amortization of $9.4 million, $9.5 million and $5.5 million, respectively, was recorded.

          Other Structured Transactions

          On July 17, 2009, XLIB, a wholly-owned subsidiary of the Company, purchased notes with an aggregate face amount of $155 million. The carrying value of these notes at December 31, 2011 and 2010 was $147.5 million and $147.3 million, respectively. The issuer of the notes is a structured credit vehicle that holds underlying assets including corporate debt and preferred equity securities, including some securities issued by European financial institutions, as well as project finance debt securities. The notes, which are callable under certain criteria, have a final maturity of July 22, 2039.

          These structured transactions are not considered to be fair value measurements under U.S. GAAP and accordingly they have been excluded from the fair value measurement disclosures. See Note 3, “Fair Value Measurements” for details surrounding the estimated fair value of these investments.

(d) Other

          The Company regularly reviews the performance of these other investments. The Company recorded losses of $0.7 million, $7.8 million and $0.9 million in the years ended December 31, 2011, 2010 and 2009, respectively, due to other than temporary declines in values of these other investments.

          See Note 17(b), “Commitments and Contingencies – Other Investments,” for further information regarding commitments related to other investments.