AIG 2014 Annual Report Download - page 262

ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
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Policyholder contract deposits
Embedded derivatives within Policyholder contract deposits relate to guaranteed minimum withdrawal benefits (GMWB) within
variable annuity products and certain enhancements to interest crediting rates based on market indices within index annuities
and guaranteed investment contracts (GICs). GMWB represents our largest exposure of these embedded derivatives,
although the carrying amount of the liability fluctuates based on the performance of the equity markets and therefore, at a point
in time, can be low relative to the exposure. The principal unobservable input used for GMWBs and embedded derivatives in
index annuities measured at fair value is equity implied volatility. For GMWBs, other significant unobservable inputs include
base and dynamic lapse rates, mortality rates, and utilization rates. Lapse, mortality, and utilization rates may vary significantly
depending upon age groups and duration. In general, increases in volatility and utilization rates will increase the fair value of
the liability associated with GMWB, while increases in lapse rates and mortality rates will decrease the fair value of the liability.
Significant unobservable inputs used in valuing embedded derivatives within GICs include long-term forward interest rates and
foreign exchange rates. Generally, the embedded derivative liability for GICs will increase as interest rates decrease or if the
U.S. dollar weakens compared to the euro.
Derivative liabilities – credit contracts
The significant unobservable inputs used for Derivatives liabilities – credit contracts are recovery rates, diversity scores, and
the weighted average life of the portfolio. AIG non-performance risk is also considered in the measurement of the liability.
An increase in recovery rates and diversity score will decrease the fair value of the liability. An increase in the weighted
average life will increase the fair value measurement of the liability.
Investments in Certain Entities Carried at Fair Value Using Net Asset Value per Share
The following table includes information related to our investments in certain other invested assets, including private
equity funds, hedge funds and other alternative investments that calculate net asset value per share (or its
equivalent). For these investments, which are measured at fair value on a recurring basis, we use the net asset value
per share as a practical expedient to measure fair value.
December 31, 2014 December 31, 2013
Fair Value
Using Net
Asset Value
Per Share (or
its equivalent)
Fair Value
Using Net
Asset Value
Per Share (or
its equivalent)
Unfunded Unfunded
(in millions) Investment Category Includes Commitments Commitments
Investment Category
Private equity funds:
Leveraged buyout Debt and/or equity investments made as part of a
transaction in which assets of mature companies are
acquired from the current shareholders, typically with the
use of financial leverage $2,275 $450 $ 2,544 $578
Real Estate /
Infrastructure
Investments in real estate properties and infrastructure
positions, including power plants and other energy
generating facilities 384 227 346 86
Venture capital Early-stage, high-potential, growth companies expected to
generate a return through an eventual realization event,
such as an initial public offering or sale of the company 121 26 140 13
Distressed Securities of companies that are in default, under
bankruptcy protection, or troubled 164 43 183 34
Other Includes multi-strategy, mezzanine, and other strategies 216 234 134 238
Total private equity funds 3,160 980 3,347 949
Hedge funds:
Event-driven Securities of companies undergoing material structural
changes, including mergers, acquisitions and other 1,109 - 976 2