AIG 2012 Annual Report Download - page 266

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Private equity fund investments included above are not redeemable, as distributions from the funds will be received
when underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10-year
lives at their inception, but these lives may be extended at the fund manager’s discretion, typically in one or two-year
increments. At December 31, 2012, assuming average original expected lives of 10 years for the funds, 41 percent of
the total fair value using net asset value or its equivalent above would have expected remaining lives of less than
three years, 56 percent between three and seven years and 3 percent between seven and 10 years.
At December 31, 2012, hedge fund investments included above are redeemable monthly (15 percent), quarterly
(34 percent), semi-annually (28 percent) and annually (23 percent), with redemption notices ranging from one day to
180 days. More than 69 percent of these hedge fund investments require redemption notices of less than 90 days.
Investments representing approximately 74 percent of the value of the hedge fund investments cannot be redeemed,
either in whole or in part, because the investments include various restrictions. The majority of these restrictions have
pre-defined end dates and are generally expected to be lifted by the end of 2015. The restrictions that do not have
stated end dates were primarily put in place prior to 2009. The partial restrictions relate to certain hedge funds that
hold at least one investment that the fund manager deems to be illiquid.
Fair Value Option
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Under the fair value option, we may elect to measure at fair value financial assets and financial liabilities that are not
otherwise required to be carried at fair value. Subsequent changes in fair value for designated items are reported in
earnings. We elect the fair value option for certain hybrid securities given the complexity of bifurcating the economic
components associated with the embedded derivatives. Refer to Note 12 for additional information related to
embedded derivatives.
Additionally, beginning in the third quarter of 2012 we elected the fair value option for investments in certain private
equity funds, hedge funds and other alternative investments when such investments are eligible for this election. We
believe this measurement basis is consistent with the applicable accounting guidance used by the respective
investment company funds themselves. Refer to Note 7 herein for additional information.
The following table presents the gains or losses recorded related to the eligible instruments for which we
elected the fair value option:
Assets:
Mortgage and other loans receivable $ 11 $ 53
Bonds and equity securities 1,273 2,060
Trading – ML II interest 42 513
Trading – ML III interest (646) 1,792
Retained interest in AIA 1,289 (638)
Other, including Short-term investments 35 (39)
Liabilities:
Policyholder contract deposits – (320)
Long-term debt(a) (966) (1,595)
Other liabilities (67) (8)
Total gain(b) $ 971 $ 1,818
(a) Includes GIAs, notes, bonds, loans and mortgages payable.
(b) Excludes discontinued operation gains or losses on instruments that were required to be carried at fair value. For instruments required to be
carried at fair value, we recognized gains of $586 million, $1.3 billion and $4.9 billion for the years ended 2012, 2011 and 2010, respectively, that
were primarily due to changes in the fair value of derivatives, trading securities and certain other invested assets for which the fair value option was
not elected.
Interest income and dividend income on assets elected under the fair value option are recognized and included in
Net Investment Income in the Consolidated Statement of Operations with the exception of DIB-related activity, which
is included in Other income. Interest on liabilities for which we elected the fair value option is recognized in interest
expense in the Consolidated Statement of Operations. See Note 7 herein for additional information about our policies
for recognition, measurement, and disclosure of interest and dividend income and interest expense.
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AIG 2012 Form 10-K 249
Gain (Loss)
Years Ended December 31,
(in millions) 2012 2011 2010
$47
2,339
246
2,888
2,069
56
–
(681)
(33)
$ 6,931
ITEM 8 / NOTE 6. FAIR VALUE MEASUREMENTS