AIG 2013 Annual Report Download - page 259

Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3
in the tables above. As a result, the unrealized gains (losses) on instruments held at December 31, 2013 and 2012
may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates)
and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
We record transfers of assets and liabilities into or out of Level 3 at their fair values as of the end of each reporting
period, consistent with the date of the determination of fair value. As a result, the Net realized and unrealized gains
(losses) included in income or other comprehensive income and as shown in the table above excludes $15 million
and $143 million of net losses related to assets and liabilities transferred into Level 3 during 2013 and 2012,
respectively, and includes $44 million and $92 million of net gains related to assets and liabilities transferred out of
Level 3 during 2013 and 2012, respectively.
During the years ended December 31, 2013 and 2012, transfers into Level 3 assets primarily included certain
investments in private placement corporate debt, RMBS, CMBS, CDO, ABS, and investments in hedge funds and
private equity funds.
• The transfer of investments in RMBS, CMBS and CDO and certain ABS into Level 3 assets were due to
decreases in market transparency and liquidity for individual security types.
• Transfers of private placement corporate debt and certain ABS into Level 3 assets were primarily the result of
limited market pricing information that required us to determine fair value for these securities based on inputs that
are adjusted to better reflect our own assumptions regarding the characteristics of a specific security or associated
market liquidity.
• Certain investments in hedge funds were transferred into Level 3 as a result of limited market activity due to
fund-imposed redemption restrictions.
• Certain private equity fund investments were transferred into Level 3 due to these investments being carried at fair
value and no longer being accounted for using the equity method of accounting.
Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated
with market observable data. This may be due to a significant increase in market activity for the asset, a specific
event, one or more significant input(s) becoming observable or a long-term interest rate significant to a valuation
becoming short-term and thus observable. In addition, transfers out of Level 3 assets also occur when investments
are no longer carried at fair value as the result of a change in the applicable accounting methodology, given changes
in the nature and extent of our ownership interest.
During the years ended December 31, 2013 and 2012, transfers out of Level 3 assets primarily related to certain
investments in municipal securities, private placement corporate debt, RMBS, CMBS, CDO/ABS, and investments in
hedge funds and private equity funds.
• Transfers of certain investments in municipal securities, RMBS, CMBS, CDO and certain ABS out of Level 3
assets were based on consideration of market liquidity as well as related transparency of pricing and associated
observable inputs for these investments.
• Transfers of private placement corporate debt and certain ABS out of Level 3 assets were primarily the result of
using observable pricing information that reflects the fair value of those securities without the need for adjustment
based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the
market.
• The removal or easing of fund-imposed redemption restrictions, as well as certain fund investments becoming
subject to the equity method of accounting resulted in the transfer of certain hedge fund and private equity fund
investments out of Level 3 assets.
Transfers of Level 3 Assets and Liabilities
Transfers of Level 3 Assets
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AIG 2013 Form 10-K 241
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
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