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, 2012 and 2011:

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 (shown as “Combined Funds”) are included below:

		XL Group Investment						Combined
				Equity in		Weighted		Funds
				Net Income		Average XL		Total Net
Year Ended December 31, 2012		Carrying		(Loss) for		Percentage		Assets
(U.S. dollars in thousands, except percentages)		Value		the Year		Ownership		(Estimated) (2)
Alternative Funds (1):
	Arbitrage	$	131,037	$	7,149		3.7%	$	3,517,404
	Directional		297,535		14,791		5.9%		5,057,381
	Event Driven (3)		198,282		13,125		2.4%		8,272,227
	Multi-Style		326		(99)		13.5%		2,410
	Total alternative funds	$	627,180	$	34,966		3.7%	$	16,849,422
Private Investment Funds (1):			218,017		23,538		17.1%		1,275,543
	Total Investment Fund Affiliates	$	845,197	$	58,504		4.7%	$	18,124,965

Year Ended December 31, 2011
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 Investment Funds (1):			196,722		15,877		5.1%		3,820,497
	Total Investment Fund Affiliates	$	768,851	$	26,253		4.1%	$	18,593,763

(1) The Company generally records its alternative fund affiliates on a one-month lag and its private investment fund affiliates on a three-month lag.

(2) Total estimated net assets are generally as at November 30 and September 30, respectively.

(3) The Company accounts for its investment in certain funds where the ownership percentage is less than three percent using the equity method, where the Company has significant influence over the related investment management company.

Certain 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 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, 2012 and 2011 was $302.4 million and $419.4 million, respectively. The carrying value of the Company's holdings in funds where a gate was imposed at December 31, 2012 and 2011 was $1.4 million and nil, 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 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, 2012 and 2011, the carrying value of our funds held in side-pockets was $39.7 million and $30.7 million, respectively. The underlying assets within these positions are generally expected to be liquidated over a period of approximately two to four years.

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:

					Combined Investee
	XL Group Investment				Summarized Financial Data (Estimated) (1)
			Equity in
			Net Income						Total		Net
Year ended December 31, 2012	Carrying		(Loss) for		Total		Total		Revenue		Income
(U.S. dollars in thousands)	Value		the Year		Assets		Liabilities		(Loss)		(Loss)
Financial operating affiliates	$	732	$	-	$	12,711,762	$	12,678,810	$	20,467	$	6,183
Other strategic operating affiliates		192,792		27,033		2,094,539		1,512,551		698,665		51,702
Investment manager affiliates		88,154		28,777		610,940		37,699		364,551		274,312
Total operating affiliates	$	281,678	$	55,810	$	15,417,241	$	14,229,060	$	1,083,683	$	332,197

Year ended December 31, 2011
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 operating affiliates	$	283,878	$	76,786	$	13,854,966	$	12,937,275	$	681,379	$	272,016

(1) The Company generally records its operating affiliates on a three month lag. Estimated assets and liabilities are generally at September 30, 2012 and 2011, respectively.

(2) During the year ended December 31, 2012 and 2011 the Company received distributions from its Investment Manager Affiliates of approximately $58.3 million and $23.2 million respectively. During 2011 the Company sold its interests in Finisterre for total proceeds of $35.0 million as explained below at “Investment Manager Affiliates.”

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.

The Company had no significant financial operating affiliates during 2012 or 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 was accounted for as an available for sale equity security.

The Company's strategic operating affiliates included an investment in ARX Holding Corporation of 39.7% and 45.7% at December 31, 2012 and 2011, respectively. During 2012, the Company purchased interests in two additional strategic operating affiliates for $20.9 million. 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.

During the years ended December 31, 2012, 2011 and 2010, 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 nil, $0.6 million and $4.4 million, for the years ended December 31, 2012, 2011 and 2010, 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.

During May 2012, the Company invested $25.0 million to obtain an approximately 94% interest in Five Oaks Investment Corp. (“Five Oaks”), a newly formed private investment company. Five Oaks is a mortgage real estate investment trust that is focused on investing in, financing and managing a leveraged portfolio of agency and non-agency residential mortgage-backed securities, residential mortgage loans and other mortgage-related investments. At December 31, 2012, the Company has consolidated Five Oaks resulting in the recording within its balance sheet of: RMBS securities at their fair value of $81.0 million (amortized cost: $77.3 million) within Fixed maturities, $8.4 million of Derivatives, $6.0 million of Cash and cash equivalents, $63.4 million of liabilities related to obligations under repurchase agreements within Other liabilities, and $1.8 million of Non-controlling interest in equity of consolidated subsidiaries. $66.3 million of securities held by Five Oaks and consolidated by the Company are pledged as collateral under the repurchase agreements. The repurchase agreements do not provide the counterparties any recourse to assets of the Company aside from its investment in Five Oaks. Amounts recorded within the Company's consolidated statement of income related to Five Oaks were immaterial during the year ended December 31, 2012. In addition, during March 2012, the Company purchased an equity interest in Oak Circle Capital Partners (“Oak Circle”), the investment management company that provides portfolio management and other administrative services to Five Oaks. The Company's investment in Oak Circle is included in investment manager affiliates.