I have come across some examples where FME 'appears' to change the names of levels which are read in from a dgn file. When viewed in Microstation and Bentley View (v8) features will be on a level called 'UT-UT-CAT_Survey_Underground_Unknown' but FME says these features come from a level called 'AR-AR-CEILING FINISH-Z'.
What is FME reading to get this alternative level name?
Well... today is Talk Like A Pirate Day so that could explain the AR-AR... ;)
All kidding aside, could you check (in FME) what the igds_level_name and igds_level_comment attribute values are?
When you created the reader, have you set the Group Elements on Level Names (default) or Schema - Level Names?
As far as the reader is concerned I have tried of those options in the Group Elements section and the result is the same.
In FME the igds_level_name and igds_level_comment attribute are consistent with how FME is displaying the level, not what is being displayed in Microstation.
The elements that you see in microstation on the level 'UT-UT-CAT_Survey_Underground_Unknown' - are they grouped with items on a different level?
As far as I can tell there is no grouping, it looks to be a 'clean' dgn file