CHUBB LTD, 10-K filed on 2/23/2018
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Feb. 12, 2018
Jun. 30, 2017
Document Documentand Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
CB 
 
 
Entity Registrant Name
Chubb Ltd 
 
 
Entity Central Index Key
0000896159 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
464,091,254 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 67 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Assets
 
 
Fixed maturities available for sale, at fair value (amortized cost - $77,835 and $79,536) (includes hybrid financial instruments of $5 and $2)
$ 78,939 
$ 80,115 
Fixed maturities held to maturity, at amortized cost (fair value – $14,474 and $10,670)
14,335 
10,644 
Equity securities, at fair value (cost – $737 and $706)
937 
814 
Short-term investments, at fair value and amortized cost
3,561 
3,002 
Other investments (cost – $4,417 and $4,270)
4,672 
4,519 
Total investments
102,444 
99,094 
Cash
728 1 2
985 1 3 4
Securities lending collateral
1,737 
1,092 
Accrued investment income
909 
918 
Insurance and reinsurance balances receivable
9,334 
8,970 
Reinsurance recoverable on losses and loss expenses
15,034 
13,577 
Reinsurance recoverable on policy benefits
184 5
182 5
Deferred policy acquisition costs
4,723 
4,314 
Value of business acquired
326 
355 
Goodwill
15,541 
15,332 
Intangible Assets, Net (Excluding Goodwill)
6,513 
6,763 
Prepaid reinsurance premiums
2,529 
2,448 
Investments in partially-owned insurance companies
662 
666 
Other assets
6,358 
5,090 
Total assets
167,022 
159,786 
Liabilities
 
 
Unpaid losses and loss expenses
63,179 
60,540 
Unearned premiums
15,216 
14,779 
Future policy benefits
5,321 
5,036 
Insurance and reinsurance balances payable
5,868 
5,637 
Collateral held under securities lending agreements
1,737 
1,093 
Accounts payable, accrued expenses, and other liabilities
9,545 
8,617 
Deferred Income Tax Liabilities, Net
699 
988 
Repurchase agreements
1,408 
1,403 
Short-term debt
1,013 
500 
Long-term debt
11,556 
12,610 
Trust preferred securities
308 
308 
Total liabilities
115,850 
111,511 
Commitments and contingencies
   
   
Shareholders' equity
 
 
Common Shares (CHF 24.15 par value; 479,783,864 shares issued; 463,833,179 and 465,968,716 shares outstanding)
11,121 
11,121 
Common Shares in treasury (15,950,685 and 13,815,148 shares)
(1,944)
(1,480)
Additional Paid in Capital, Common Stock
13,978 
15,335 
Retained earnings
27,474 
23,613 
Accumulated other comprehensive income (loss) (AOCI)
543 
(314)
Total shareholders' equity
51,172 
48,275 
Total liabilities and shareholders’ equity
$ 167,022 
$ 159,786 
Consolidated Balance Sheets (Parenthetical)(USD ($))
In Millions, except Share data, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Statement of Financial Position [Abstract]
 
 
Fixed maturities available for sale, at amortized cost
$ 77,835 
$ 79,536 
Fixed maturities available for sale, hybrid financial instruments
Held-to-maturity Securities, Fair Value
14,474 
10,670 
Equity securities, at cost
737 
706 
Other investments, cost
$ 4,417 
$ 4,270 
Common Shares, shares issued
479,783,864 
479,783,864 
Common Shares, shares outstanding
463,833,179 
465,968,716 
Common Shares in treasury, shares
15,950,685 
13,815,148 
Consolidated Statements Of Operations and Comprehensive Income (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Revenues
 
 
 
Net premiums written
$ 29,244 
$ 28,145 
$ 17,713 
(Increase) decrease in unearned premiums
(210)
604 
(500)
Net premiums earned
29,034 
28,749 
17,213 
Net investment income
3,125 
2,865 
2,194 
Net realized gains (losses):
 
 
 
Other-than-temporary impairment (OTTI) losses gross
(46)
(111)
(151)
Portion of OTTI losses recognized in other comprehensive income (OCI)
39 
Net OTTI losses recognized in income
(45)
(103)
(112)
Net realized gains (losses) excluding OTTI losses
129 
(42)
(308)
Total Net realized gains (losses) including OTTI
84 
(145)
(420)
Total revenues
32,243 
31,469 
18,987 
Expenses
 
 
 
Losses and loss expenses
18,454 
16,052 
9,484 
Policy benefits
676 
588 
543 
Policy Acquisition Costs
5,781 
5,904 
2,941 
Administrative expenses
2,833 
3,081 
2,270 
Interest expense
607 
605 
300 
Other (income) expense
(400)
(222)
(51)
Amortization of Purchased Intangibles
260 
19 
171 
Chubb integration expenses
310 
492 
33 
Total expenses
28,521 
26,519 
15,691 
Income before income tax
3,722 
4,950 
3,296 
Income tax expense
(139)
815 
462 
Net income
3,861 
4,135 
2,834 
Other comprehensive income (loss)
 
 
 
Unrealized appreciation (depreciation)
618 
(35)
(1,280)
Reclassification adjustment for net realized (gains) losses included in net income
15 
119 
151 
Other comprehensive income (loss) after reclassification for net realized gains included in net income
633 
84 
(1,129)
Change in:
 
 
 
Cumulative foreign currency translation adjustment
471 
(154)
(958)
Postretirement benefit liability adjustment
(16)
545 
15 
Other comprehensive income (loss), before income tax
1,088 
475 
(2,072)
Income tax (expense) benefit related to OCI items
(231)
(54)
146 
Other comprehensive income (loss)
857 
421 
(1,926)
Comprehensive income
$ 4,718 
$ 4,556 
$ 908 
Earnings per share
 
 
 
Basic earnings per share
$ 8.26 
$ 8.94 
$ 8.71 
Diluted earnings per share
$ 8.19 
$ 8.87 
$ 8.62 
Consolidated Statements of Operations and Comprehensive Income (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income tax expense (benefit)
$ (13)
$ 28 
$ (2)
Reclassification out of Accumulated Other Comprehensive Income [Member] |
Net unrealized appreciation on investments
 
 
 
Net realized gains (losses)
(15)
(119)
(151)
Income tax expense (benefit)
$ (13)
$ 28 
$ (2)
Consolidated Statements Of Shareholders' Equity (USD $)
In Millions
Total
Common Shares
Common Shares in Treasury
Additional Paid-in Capital
Retained Earnings
Net unrealized appreciation on investments
Cumulative Translation Adjustment
Accumulated Defined Benefit Plans Adjustment [Member]
Accumulated Other Comprehensive Income
The Chubb Corporation [Member]
The Chubb Corporation [Member]
Common Shares
The Chubb Corporation [Member]
Additional Paid-in Capital
Balance – beginning of year at Dec. 31, 2014
 
$ 8,055 
$ (1,448)
$ 5,145 
$ 16,644 
$ 1,851 
$ (581)
$ (79)
 
 
 
 
Dividends declared on Common Shares – par value reduction
 
(222)
 
 
 
 
 
 
 
 
 
 
Common Shares repurchased
 
 
(734)
 
 
 
 
 
 
 
 
 
Shares issued for Chubb Corp acquisition
 
 
 
 
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
 
260 
(160)
 
 
 
 
 
 
 
 
Stock Issued During Period, Value, Stock Options Exercised
 
 
 
(61)
 
 
 
 
 
 
 
 
Share-based compensation expense and other
 
 
 
184 
 
 
 
 
 
 
 
 
Funding of dividends declared from Additional paid-in capital
 
 
 
(653)
653 
 
 
 
 
 
 
 
Tax benefit on share-based compensation expense
 
 
 
26 
 
 
 
 
 
 
 
 
Net income
2,834 
 
 
 
2,834 
 
 
 
 
 
 
 
Dividends declared on Common Shares
 
 
 
 
(653)
 
 
 
 
 
 
 
Change in year, before reclassification from AOCI, net of income tax benefit (expense) of $(228), $72, and $154
 
 
 
 
 
(1,126)
 
 
 
 
 
 
Amounts reclassified from AOCI, net of income tax benefit (expense) of $(13), $28, and $(2)
 
 
 
 
 
149 
 
 
 
 
 
 
Change in year, net of income tax benefit (expense) of $(241), $100, and $152
 
 
 
 
 
(977)
 
 
 
 
 
 
Change in year, net of income tax benefit of $5, $30, and nil
 
 
 
 
 
 
(958)
 
 
 
 
 
Change in year, net of income tax benefit (expense) of $5, $(184), and $(6)
 
 
 
 
 
 
 
 
 
 
 
Balance – Ending of year at Dec. 31, 2015
29,135 
7,833 
(1,922)
4,481 
19,478 
874 
(1,539)
(70)
(735)
 
 
 
Common Shares repurchased
 
 
 
 
 
 
 
 
 
 
 
Shares issued for Chubb Corp acquisition
 
 
 
 
 
 
 
 
 
 
3,288 
11,916 
Net shares redeemed under employee share-based compensation plans
 
 
442 
(382)
 
 
 
 
 
 
 
323 
Stock Issued During Period, Value, Stock Options Exercised
 
 
 
(64)
 
 
 
 
 
 
 
 
Share-based compensation expense and other
 
 
 
313 
 
 
 
 
 
 
 
 
Funding of dividends declared from Additional paid-in capital
 
 
 
(1,284)
1,284 
 
 
 
 
 
 
 
Tax benefit on share-based compensation expense
 
 
 
32 
 
 
 
 
 
 
 
 
Net income
4,135 
 
 
 
4,135 
 
 
 
 
 
 
 
Dividends declared on Common Shares
 
 
 
 
(1,284)
 
 
 
 
 
 
 
Change in year, before reclassification from AOCI, net of income tax benefit (expense) of $(228), $72, and $154
 
 
 
 
 
37 
 
 
 
 
 
 
Amounts reclassified from AOCI, net of income tax benefit (expense) of $(13), $28, and $(2)
 
 
 
 
 
147 
 
 
 
 
 
 
Change in year, net of income tax benefit (expense) of $(241), $100, and $152
 
 
 
 
 
184 
 
 
 
 
 
 
Change in year, net of income tax benefit of $5, $30, and nil
 
 
 
 
 
 
(124)
 
 
 
 
 
Change in year, net of income tax benefit (expense) of $5, $(184), and $(6)
 
 
 
 
 
 
 
361 
 
 
 
 
Balance – Ending of year at Dec. 31, 2016
48,275 
11,121 
(1,480)
15,335 
23,613 
1,058 
(1,663)
291 
(314)
 
 
 
Common Shares repurchased
 
 
(830)
 
 
 
 
 
 
 
 
 
Shares issued for Chubb Corp acquisition
 
 
 
 
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
 
366 
(313)
 
 
 
 
 
 
 
 
Stock Issued During Period, Value, Stock Options Exercised
 
 
 
(58)
 
 
 
 
 
 
 
 
Share-based compensation expense and other
 
 
 
331 
 
 
 
 
 
 
 
 
Funding of dividends declared from Additional paid-in capital
 
 
 
(1,317)
1,317 
 
 
 
 
 
 
 
Net income
3,861 
 
 
 
3,861 
 
 
 
 
 
 
 
Dividends declared on Common Shares
 
 
 
 
(1,317)
 
 
 
 
 
 
 
Change in year, before reclassification from AOCI, net of income tax benefit (expense) of $(228), $72, and $154
 
 
 
 
 
390 
 
 
 
 
 
 
Amounts reclassified from AOCI, net of income tax benefit (expense) of $(13), $28, and $(2)
 
 
 
 
 
 
 
 
 
 
 
Change in year, net of income tax benefit (expense) of $(241), $100, and $152
 
 
 
 
 
392 
 
 
 
 
 
 
Change in year, net of income tax benefit of $5, $30, and nil
 
 
 
 
 
 
476 
 
 
 
 
 
Change in year, net of income tax benefit (expense) of $5, $(184), and $(6)
 
 
 
 
 
 
 
(11)
 
 
 
 
Balance – Ending of year at Dec. 31, 2017
$ 51,172 
$ 11,121 
$ (1,944)
$ 13,978 
$ 27,474 
$ 1,450 
$ (1,187)
$ 280 
$ 543 
 
 
 
Consolidated Statements Of Shareholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Other Comprehensive Income (Loss), Available-for-sale Securities, before Reclassification Adjustments, Tax
$ (228)
$ 72 
$ 154 
Other Comprehensive Income (Loss), Reclassification Adjustment from AOCI for Sale of Securities, Tax
(13)
28 
(2)
Net unrealized appreciation on investments, Change in year, income tax (expense) benefit
(241)
100 
152 
Cumulative translation adjustment, Change in year, income tax(expense) benefit
30 
Pension liability adjustment, Change in year, income tax (expense) benefit
$ 5 
$ (184)
$ (6)
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities
 
 
 
Net income
$ 3,861 
$ 4,135 
$ 2,834 
Adjustments to reconcile net income to net cash flows from operating activities
 
 
 
Net realized (gains) losses
(84)
145 
420 
Amortization of premiums/discounts on fixed maturities
694 
737 
158 
Amortization of UPR related to the Chubb Corp acquisition and other intangibles
260 
1,578 
171 
Deferred income taxes
(527)
96 
113 
Unpaid losses and loss expenses
2,137 
332 
(375)
Unearned premiums
264 
(680)
335 
Future policy benefits
217 
188 
216 
Insurance and reinsurance balances payable
271 
848 
268 
Accounts payable, accrued expenses, and other liabilities
(517)
(97)
179 
Income taxes payable
(365)
147 
(148)
Insurance and reinsurance balances receivable
(243)
(616)
(53)
Reinsurance recoverable on losses and loss expenses
(1,248)
(365)
218 
Reinsurance recoverable on policy benefits
 
33 
Deferred policy acquisition costs
(317)
(1,449)
(435)
Prepaid reinsurance premiums
(82)
18 
(212)
Other
182 
268 
142 
Net cash flows from operating activities
4,503 
5,292 
3,864 
Cash flows from investing activities
 
 
 
Purchases of fixed maturities available for sale
(25,720)
(30,759)
(16,040)
Purchases of to be announced mortgage-backed securities
(27)
(56)
(31)
Purchases of fixed maturities held to maturity
(352)
(282)
(62)
Purchases of equity securities
(173)
(146)
(158)
Sales of fixed maturities available for sale
13,228 
16,621 
10,783 
Sales of to be announced mortgage-backed securities
27 
56 
31 
Sales of equity securities
187 
1,000 
183 
Maturities and redemptions of fixed maturities available for sale
10,425 
9,349 
6,567 
Maturities and redemptions of fixed maturities held to maturity
879 
958 
669 
Net change in short-term investments
(537)
12,350 
(8,216)
Net derivative instruments settlements
(265)
(168)
(21)
Acquisition of subsidiaries (net of cash acquired of $nil, $71, and $629)
 
(14,248)
264 
Other
(114)
10 
(263)
Net Cash Provided by (Used in) Investing Activities, Continuing Operations
(2,442)
(5,315)
(6,294)
Cash flows from financing activities
 
 
 
Dividends paid on Common Shares
(1,308)
(1,173)
(862)
Common Shares repurchased
(801)
 
(758)
Proceeds from issuance of long-term debt
 
 
6,090 
Proceeds from issuance of repurchase agreements
2,353 
2,310 
2,029 
Repayment of repurchase agreements
(2,348)
(2,311)
(2,027)
Repayments of Long-term Debt
(501)
(1,150)
Proceeds from share-based compensation plans
151 
167 
131 
Policyholder contract deposits
442 
522 
503 
Policyholder contract withdrawals
(307)
(253)
(221)
Other
(4)
(40)
Net Cash Provided by (Used in) Financing Activities, Continuing Operations
(2,319)
(742)
3,695 
Effect of foreign currency rate changes on cash and cash equivalents
(25)
(145)
Net increase (decrease) in cash
(257)
(790)
1,120 
Cash – beginning of year
985 1 2 3
1,775 1 4
655 4
Cash – end of year
728 1 5
985 1 2 3
1,775 1 4
Supplemental cash flow information
 
 
 
Taxes paid
736 
662 
469 
Interest paid
$ 644 
$ 642 
$ 259 
Consolidated Statements Of Cash Flows (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Cash Flows [Abstract]
 
 
 
Acquisition of subsidiaries, cash acquired
$ 0 
$ 71 
$ 629 
Summary of significant accounting policies
Summary of significant accounting policies
Summary of significant accounting policies

a) Basis of presentation

Chubb Limited is a holding company incorporated in Zurich, Switzerland. Chubb Limited, through its subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. Our results are reported through the following business segments: North America Commercial P&C Insurance, North America Personal P&C Insurance, North America Agricultural Insurance, Overseas General Insurance, Global Reinsurance, and Life Insurance. Refer to Note 15 for additional information.

The accompanying consolidated financial statements, which include the accounts of Chubb Limited and its subsidiaries (collectively, Chubb, we, us, or our), have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of the results and financial position for such periods. All significant intercompany accounts and transactions, including internal reinsurance transactions, have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Amounts included in the Consolidated financial statements reflect our best estimates and assumptions; actual amounts could differ materially from these estimates. Chubb's principal estimates include:
unpaid loss and loss expense reserves, including long-tail asbestos and environmental (A&E) reserves;
future policy benefits reserves;
the valuation of value of business acquired (VOBA) and amortization of deferred policy acquisition costs and VOBA;
reinsurance recoverable, including a provision for uncollectible reinsurance;
the assessment of risk transfer for certain structured insurance and reinsurance contracts;
the valuation of the investment portfolio and assessment of OTTI;
the valuation of deferred tax assets;
the valuation of derivative instruments related to guaranteed living benefits (GLB);
the valuation and amortization of purchased intangibles; and
the assessment of goodwill for impairment.
 
b) Premiums
Premiums are generally recorded as written upon inception of the policy. For multi-year policies for which premiums written are payable in annual installments, only the current annual premium is included as written at policy inception due to the ability of the insured/reinsured to commute or cancel coverage within the policy term. The remaining annual premiums are recorded as written at each successive anniversary date within the multi-year term.

For P&C insurance and reinsurance products, premiums written are primarily earned on a pro-rata basis over the policy terms to which they relate. Unearned premiums represent the portion of premiums written applicable to the unexpired portion of the policies in force. For retrospectively-rated policies, written premiums are adjusted to reflect expected ultimate premiums consistent with changes to incurred losses, or other measures of exposure as stated in the policy, and earned over the policy coverage period. For retrospectively-rated multi-year policies, premiums recognized in the current period are computed using a with-and-without method as the difference between the ceding enterprise's total contract costs before and after the experience under the contract at the reporting date. Accordingly, for retrospectively-rated multi-year policies, additional premiums are generally written and earned when losses are incurred.

Mandatory reinstatement premiums assessed on reinsurance policies are earned in the period of the loss event that gave rise to the reinstatement premiums. All remaining unearned premiums are recognized over the remaining coverage period. 

Premiums from long-duration contracts such as certain traditional term life, whole life, endowment, and long-duration personal accident and health (A&H) policies are generally recognized as revenue when due from policyholders. Traditional life policies include those contracts with fixed and guaranteed premiums and benefits. Benefits and expenses are matched with income to result in the recognition of profit over the life of the contracts.

Retroactive loss portfolio transfer (LPT) contracts in which the insured loss events occurred prior to contract inception are evaluated to determine whether they meet criteria for reinsurance accounting. If reinsurance accounting is appropriate, written premiums are fully earned and corresponding losses and loss expenses recognized at contract inception. These contracts can cause significant variances in gross premiums written, net premiums written, net premiums earned, and net incurred losses in the years in which they are written. Reinsurance contracts sold not meeting criteria for reinsurance accounting are recorded using the deposit method as described below in Note 1 k).

Reinsurance premiums assumed are based on information provided by ceding companies supplemented by our own estimates of premium when we have not received ceding company reports. Estimates are reviewed and adjustments are recorded in the period in which they are determined. Premiums are earned over the coverage terms of the related reinsurance contracts and range from one to three years.

c) Deferred policy acquisition costs and value of business acquired
Policy acquisition costs consist of commissions (direct and ceded), premium taxes, and certain underwriting costs related directly to the successful acquisition of new or renewal insurance contracts. A VOBA intangible asset is established upon the acquisition of blocks of long-duration contracts in a business combination and represents the present value of estimated net cash flows for the contracts in force at the acquisition date. Acquisition costs and VOBA, collectively policy acquisition costs, are deferred and amortized. Amortization is recorded in Policy acquisition costs in the Consolidated statements of operations. Policy acquisition costs on P&C contracts are generally amortized ratably over the period in which premiums are earned. Policy acquisition costs on traditional long-duration contracts are amortized over the estimated life of the contracts, generally in proportion to premium revenue recognized based upon the same assumptions used in estimating the liability for future policy benefits. For non-traditional long-duration contracts, we amortize policy acquisition costs over the expected life of the contracts in proportion to expected gross profits. The effect of changes in estimates of expected gross profits is reflected in the period the estimates are revised. Policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income. Unrecoverable policy acquisition costs are expensed in the period identified.

Advertising costs are expensed as incurred except for direct-response campaigns that qualify for cost deferral, principally related to long-duration A&H business produced by the Overseas General Insurance segment, which are deferred and recognized as a component of Policy acquisition costs. For individual direct-response marketing campaigns that we can demonstrate have specifically resulted in incremental sales to customers and such sales have probable future economic benefits, incremental costs directly related to the marketing campaigns are capitalized as Deferred policy acquisition costs. Deferred policy acquisition costs, including deferred marketing costs, are reviewed regularly for recoverability from future income, including investment income, and amortized in proportion to premium revenue recognized, primarily over a ten-year period, the expected economic future benefit period based upon the same assumptions used in estimating the liability for future policy benefits. The expected future benefit period is evaluated periodically based on historical results and adjusted prospectively. The amount of deferred marketing costs reported in Deferred policy acquisition costs in the Consolidated balance sheets was $271 million and $256 million at December 31, 2017 and 2016, respectively. Amortization expense for deferred marketing costs was $116 million, $92 million, and $78 million for the years ended December 31, 2017, 2016, and 2015, respectively.

d) Reinsurance
Chubb assumes and cedes reinsurance with other insurance companies to provide greater diversification of business and minimize the net loss potential arising from large risks. Ceded reinsurance contracts do not relieve Chubb of its primary obligation to policyholders.

For both ceded and assumed reinsurance, risk transfer requirements must be met in order to account for a contract as reinsurance, principally resulting in the recognition of cash flows under the contract as premiums and losses. To meet risk transfer requirements, a reinsurance contract must include insurance risk, consisting of both underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. To assess risk transfer for certain contracts, Chubb generally develops expected discounted cash flow analyses at contract inception. Deposit accounting is used for contracts that do not meet risk transfer requirements. Deposit accounting requires that consideration received or paid be recorded in the balance sheet as opposed to recording premiums written or losses incurred in the statement of operations. Non-refundable fees on deposit contracts are earned based on the terms of the contract described below in Note 1 k).

Reinsurance recoverable includes balances due from reinsurance companies for paid and unpaid losses and loss expenses and future policy benefits that will be recovered from reinsurers, based on contracts in force. The method for determining the reinsurance recoverable on unpaid losses and loss expenses incurred but not reported (IBNR) involves actuarial estimates consistent with those used to establish the associated liability for unpaid losses and loss expenses as well as a determination of Chubb's ability to cede unpaid losses and loss expenses under the terms of the reinsurance agreement.

Reinsurance recoverable is presented net of a provision for uncollectible reinsurance determined based upon a review of the financial condition of reinsurers and other factors. The provision for uncollectible reinsurance is based on an estimate of the reinsurance recoverable balance that will ultimately be unrecoverable due to reinsurer insolvency, a contractual dispute, or any other reason. The valuation of this provision includes several judgments including certain aspects of the allocation of reinsurance recoverable on IBNR claims by reinsurer and a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer, net of collateral, and default factors used to determine the portion of a reinsurer's balance deemed uncollectible. The definition of collateral for this purpose requires some judgment and is generally limited to assets held in a Chubb-only beneficiary trust, letters of credit, and liabilities held with the same legal entity for which Chubb believes there is a contractual right of offset. The determination of the default factor is principally based on the financial strength rating of the reinsurer. Default factors require considerable judgment and are determined using the current financial strength rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions. The more significant considerations include, but are not necessarily limited to, the following:
For reinsurers that maintain a financial strength rating from a major rating agency, and for which recoverable balances are considered representative of the larger population (i.e., default probabilities are consistent with similarly rated reinsurers and payment durations conform to averages), the financial rating is based on a published source and the default factor is based on published default statistics of a major rating agency applicable to the reinsurer's particular rating class. When a recoverable is expected to be paid in a brief period of time by a highly rated reinsurer, such as certain property catastrophe claims, a default factor may not be applied;
For balances recoverable from reinsurers that are both unrated by a major rating agency and for which management is unable to determine a credible rating equivalent based on a parent, affiliate, or peer company, we determine a rating equivalent based on an analysis of the reinsurer that considers an assessment of the creditworthiness of the particular entity, industry benchmarks, or other factors as considered appropriate. We then apply the applicable default factor for that rating class. For balances recoverable from unrated reinsurers for which the ceded reserve is below a certain threshold, we generally apply a default factor of 34 percent, consistent with published statistics of a major rating agency;
For balances recoverable from reinsurers that are either insolvent or under regulatory supervision, we establish a default factor and resulting provision for uncollectible reinsurance based on reinsurer-specific facts and circumstances. Upon initial notification of an insolvency, we generally recognize an expense for a substantial portion of all balances outstanding, net of collateral, through a combination of write-offs of recoverable balances and increases to the provision for uncollectible reinsurance. When regulatory action is taken on a reinsurer, we generally recognize a default factor by estimating an expected recovery on all balances outstanding, net of collateral. When sufficient credible information becomes available, we adjust the provision for uncollectible reinsurance by establishing a default factor pursuant to information received; and
For other recoverables, management determines the provision for uncollectible reinsurance based on the specific facts and circumstances.

The methods used to determine the reinsurance recoverable balance and related provision for uncollectible reinsurance are regularly reviewed and updated, and any resulting adjustments are reflected in earnings in the period identified.

Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers applicable to the unexpired coverage terms of the reinsurance contracts in-force.

The value of reinsurance business assumed of $18 million and $20 million at December 31, 2017 and 2016, respectively, included in Other assets in the accompanying Consolidated balance sheets, represents the excess of estimated ultimate value of the liabilities assumed under retroactive reinsurance contracts over consideration received. The value of reinsurance business assumed is amortized and recorded to Losses and loss expenses based on the payment pattern of the losses assumed and ranges between 9 and 40 years. The unamortized value is reviewed regularly to determine if it is recoverable based upon the terms of the contract, estimated losses and loss expenses, and anticipated investment income. Unrecoverable amounts are expensed in the period identified.

e) Investments
Fixed maturities are classified as either available for sale or held to maturity. The available for sale portfolio is reported at fair value. The held to maturity portfolio includes securities for which we have the ability and intent to hold to maturity or redemption and is reported at amortized cost. Equity securities are classified as available for sale and are recorded at fair value. Short-term investments comprise securities due to mature within one year of the date of purchase and are recorded at fair value which typically approximates cost. Short-term investments include certain cash and cash equivalents, which are part of investment portfolios under the management of external investment managers.

Other investments principally comprise life insurance policies, policy loans, trading securities, other direct equity investments, investment funds, and limited partnerships.
Life insurance policies are carried at policy cash surrender value and income is recorded in Other income (expense).
Policy loans are carried at outstanding balance and interest income is recorded to Net investment income.
Trading securities are recorded on a trade date basis and carried at fair value. Unrealized gains and losses on trading securities are reflected in Other (income) expense.
Other investments over which Chubb can exercise significant influence are accounted for using the equity method and income is recorded in Other (income) expense.
All other investments over which Chubb cannot exercise significant influence are carried at fair value with changes in fair value recognized through OCI. For these investments, investment income is recognized in Net investment income and realized gains are recognized as related distributions are received.
Partially-owned investment companies comprise entities in which we hold an ownership interest in excess of three percent. These investments as well as Chubb's investments in investment funds where our ownership interest is in excess of three percent are accounted for under the equity method because Chubb exerts significant influence. These investments apply investment company accounting to determine operating results, and Chubb retains the investment company accounting in applying the equity method. This means that investment income, realized gains or losses, and unrealized gains or losses are included in the portion of equity earnings reflected in Other (income) expense. As a result of the timing of the receipt of valuation data from the investment managers, these investments are generally reported on a three month lag.

Investments in partially-owned insurance companies primarily represent direct investments in which Chubb has significant influence and, as such, meet the requirements for equity accounting. We report our share of the net income or loss of the partially-owned insurance companies in Other (income) expense.

Realized gains or losses on sales of investments are determined on a first-in, first-out basis. Unrealized appreciation (depreciation) on investments is included as a separate component of AOCI in Shareholders' equity. We regularly review our investments for OTTI. Refer to Note 3 for additional information.

With respect to securities where the decline in value is determined to be temporary and the security's value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are the result of changing or unforeseen facts and circumstances (i.e., arising from a large insured loss such as a catastrophe), deterioration of the creditworthiness of the issuer or its industry, or changes in regulatory requirements. We believe that subsequent decisions to sell such securities are consistent with the classification of the majority of the portfolio as available for sale.

We use derivative instruments including futures, options, swaps, and foreign currency forward contracts for the purpose of managing certain investment portfolio risks and exposures. Refer to Note 10 for additional information. Derivatives are reported at fair value and are recorded in the accompanying Consolidated balance sheets in either Accounts payable, accrued expenses, and other liabilities or Other assets with changes in fair value included in Net realized gains (losses) in the Consolidated statements of operations. Collateral held by brokers equal to a percentage of the total value of open futures contracts is included in the investment portfolio.

Net investment income includes interest and dividend income and amortization of fixed maturity market premiums and discounts and is net of investment management and custody fees. In addition, net investment income includes the amortization of the fair value adjustment related to the acquired invested assets of Chubb Corp. An adjustment of $1,652 million related to the fair value of Chubb Corp’s fixed maturities securities was recorded (fair value adjustment) at the date of acquisition. At December 31, 2017, the remaining balance of this fair value adjustment was $858 million which is expected to amortize over the next four years; however, the estimate could vary materially based on current market conditions, bond calls, and the duration of the acquired investment portfolio. In addition, sales of these acquired fixed maturities would also reduce the fair value adjustment balance. For mortgage-backed securities, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change in effective yields and maturities are recognized prospectively. Prepayment fees or call premiums that are only payable when a security is called prior to its maturity are earned when received and reflected in Net investment income. 

Chubb participates in a securities lending program operated by a third-party banking institution whereby certain assets are loaned to qualified borrowers and from which we earn an incremental return. Borrowers provide collateral, in the form of either cash or approved securities, of 102 percent of the fair value of the loaned securities. Each security loan is deemed to be an overnight transaction. Cash collateral is invested in a collateral pool which is managed by the banking institution. The collateral pool is subject to written investment guidelines with key objectives which include the safeguard of principal and adequate liquidity to meet anticipated redemptions. The fair value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the fair value of the loaned securities changes. The collateral is held by the third-party banking institution, and the collateral can only be accessed in the event that the institution borrowing the securities is in default under the lending agreement. As a result of these restrictions, we consider our securities lending activities to be non-cash investing and financing activities. An indemnification agreement with the lending agent protects us in the event a borrower becomes insolvent or fails to return any of the securities on loan. The fair value of the securities on loan is included in fixed maturities and equity securities. The securities lending collateral is reported as a separate line in the Consolidated balance sheets with a related liability reflecting our obligation to return the collateral plus interest.

Similar to securities lending arrangements, securities sold under repurchase agreements, whereby Chubb sells securities and repurchases them at a future date for a predetermined price, are accounted for as collateralized investments and borrowings and are recorded at the contractual repurchase amounts plus accrued interest. Assets to be repurchased are the same, or substantially the same, as the assets transferred and the transferor, through right of substitution, maintains the right and ability to redeem the collateral on short notice. The fair value of the underlying securities is included in fixed maturities and equity securities. In contrast to securities lending programs, the use of cash received is not restricted. We report the obligation to return the cash as Repurchase agreements in the Consolidated balance sheets.

Refer to Note 4 for a discussion on the determination of fair value for Chubb's various investment securities.

f) Cash
Cash includes cash on hand and deposits with an original maturity of three months or less at time of purchase. Cash held by external money managers is included in Short-term investments.

We have agreements with a third-party bank provider which implemented two international multi-currency notional cash pooling programs. In each program, participating Chubb entities establish deposit accounts in different currencies with the bank provider and each day the credit or debit balances in every account are notionally translated into a single currency (U.S. dollars) and then notionally pooled. The bank extends overdraft credit to any participating Chubb entity as needed, provided that the overall notionally-pooled balance of all accounts in each pool at the end of each day is at least zero. Actual cash balances are not physically converted and are not commingled between legal entities. Any overdraft balances incurred under this program by a Chubb entity would be guaranteed by Chubb Limited (up to $300 million in the aggregate). Our syndicated letter of credit facility allows for same day drawings to fund a net pool overdraft should participating Chubb entities overdraw contributed funds from the pool.

g) Goodwill and Other intangible assets
Goodwill represents the excess of the cost of acquisitions over the fair value of net assets acquired and is not amortized. Goodwill is assigned at acquisition to the applicable reporting unit of the acquired entities giving rise to the goodwill. Goodwill impairment tests are performed annually or more frequently if circumstances indicate a possible impairment. For goodwill impairment testing, we use a qualitative assessment to determine whether it is more likely than not (i.e., more than a 50 percent probability) that the fair value of a reporting unit is greater than its carrying amount. If our assessment indicates less than a 50 percent probability that fair value exceeds carrying value, we quantitatively estimate a reporting unit's fair value. Goodwill recorded in connection with investments in partially-owned insurance companies is recorded in Investments in partially-owned insurance companies and is also measured for impairment annually.

Indefinite lived intangible assets are not subject to amortization. Finite lived intangible assets are amortized over their useful lives, generally ranging from 1 to 30 years. Intangible assets are regularly reviewed for indicators of impairment. Impairment is recognized if the carrying amount is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value.

h) Unpaid losses and loss expenses
A liability is established for the estimated unpaid losses and loss expenses under the terms of, and with respect to, Chubb's policies and agreements. Similar to premiums that are recognized as revenues over the coverage period of the policy, a liability for unpaid losses and loss expenses is recognized as expense when insured events occur over the coverage period of the policy. This liability includes a provision for both reported claims (case reserves) and incurred but not reported claims (IBNR reserves). IBNR reserve estimates are generally calculated by first projecting the ultimate cost of all losses that have occurred (expected losses), and then subtracting paid losses, case reserves, and loss expenses. The methods of determining such estimates and establishing the resulting liability are reviewed regularly and any adjustments are reflected in operations in the period in which they become known. Future developments may result in losses and loss expenses materially greater or less than recorded amounts.

Except for net loss and loss expense reserves of $36 million net of discount, held at December 31, 2017, representing certain structured settlements for which the timing and amount of future claim payments are reliably determinable and $41 million, net of discount, of certain reserves for unsettled claims that are discounted in statutory filings, Chubb does not discount its P&C loss reserves. This compares with reserves of $38 million for certain structured settlements and $50 million of certain reserves for unsettled claims at December 31, 2016. Structured settlements represent contracts purchased from life insurance companies primarily to settle workers' compensation claims, where payments to the claimant by the life insurance company are expected to be made in the form of an annuity. Chubb retains the liability to the claimant in the event that the life insurance company fails to pay. At December 31, 2017, the liability due to claimants was $586 million, net of discount, and reinsurance recoverables due from the life insurance companies was $550 million, net of discount. For structured settlement contracts where payments are guaranteed regardless of claimant life expectancy, the amounts recoverable from the life insurance companies at December 31, 2017 are included in Other assets in the Consolidated balance sheets, as they do not meet the requirements for reinsurance accounting.

Included in Unpaid losses and loss expenses are liabilities for asbestos and environmental (A&E) claims and expenses. These unpaid losses and loss expenses are principally related to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to asbestos products and environmental hazards. The estimation of these liabilities is particularly sensitive to changes in the legal environment including specific settlements that may be used as precedents to settle future claims. However, Chubb does not anticipate future changes in laws and regulations in setting its A&E reserve levels.

Also included in Unpaid losses and loss expenses is a fair value adjustment of $309 million at December 31, 2017 related to Chubb Corp’s historical unpaid losses and loss expenses. The estimated fair value consists of the present value of the expected net unpaid loss and loss adjustment expense payments adjusted for an estimated risk margin. The estimated cash flows are discounted at a risk free rate. The estimated risk margin varies based on the inherent risks associated with each type of reserve. The fair value is amortized through Amortization of purchased intangibles on the consolidated statements of operations over a range of 5 to 17 years, based on the estimated payout patterns of unpaid loss and loss expenses at the acquisition date.

Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves first reported in previous calendar years and excludes the effect of losses from the development of earned premiums from previous accident years.

For purposes of analysis and disclosure, management views prior period development to be changes in the nominal value of loss estimates from period to period, net of premium and profit commission adjustments on loss sensitive contracts. Prior period development generally excludes changes in loss estimates that do not arise from the emergence of claims, such as those related to uncollectible reinsurance, interest, unallocated loss adjustment expenses, or foreign currency. Accordingly, specific items excluded from prior period development include the following: gains/losses related to foreign currency remeasurement; losses recognized from the early termination or commutation of reinsurance agreements that principally relate to the time value of money; changes in the value of reinsurance business assumed reflected in losses incurred but principally related to the time value of money; and losses that arise from changes in estimates of earned premiums from prior accident years. Except for foreign currency remeasurement, which is included in Net realized gains (losses), these items are included in current year losses.

i) Future policy benefits
The valuation of long-duration contract reserves requires management to make estimates and assumptions regarding expenses, mortality, persistency, and investment yields. Estimates are primarily based on historical experience and information provided by ceding companies and include a margin for adverse deviation. Interest rates used in calculating reserves range from less than 1.0 percent to 8.0 percent at both December 31, 2017 and 2016. Actual results could differ materially from these estimates. Management monitors actual experience and where circumstances warrant, will revise assumptions and the related reserve estimates. Revisions are recorded in the period they are determined.

Certain of our long-duration contracts are supported by assets that do not qualify for separate account reporting under GAAP. These assets are classified as trading securities and reported in Other investments and the offsetting liabilities are reported in Future policy benefits in the Consolidated balance sheets. Changes in the fair value of separate account assets that do not qualify for separate account reporting under GAAP are reported in Other income (expense) and the offsetting movements in the liabilities are included in Policy benefits in the Consolidated statements of operations.

j) Assumed reinsurance programs involving minimum benefit guarantees under variable annuity contracts
Chubb reinsures various death and living benefit guarantees associated with variable annuities issued primarily in the United States and Japan. We generally receive a monthly premium during the accumulation phase of the covered annuities (in-force) based on a percentage of either the underlying accumulated account values or the underlying accumulated guaranteed values. Depending on an annuitant's age, the accumulation phase can last many years. To limit our exposure under these programs, all reinsurance treaties include annual or aggregate claim limits and many include an aggregate deductible.

The guarantees which are payable on death, referred to as guaranteed minimum death benefits (GMDB), principally cover shortfalls between accumulated account value at the time of an annuitant's death and either i) an annuitant's total deposits; ii) an annuitant's total deposits plus a minimum annual return; or iii) the highest accumulated account value attained at any policy anniversary date. In addition, a death benefit may be based on a formula specified in the variable annuity contract that uses a percentage of the growth of the underlying contract value. Liabilities for GMDBs are based on cumulative assessments or premiums to date multiplied by a benefit ratio that is determined by estimating the present value of benefit payments and related adjustment expenses divided by the present value of cumulative assessment or expected premiums during the contract period.  

Under reinsurance programs covering GLBs, we assume the risk of guaranteed minimum income benefits (GMIB) and guaranteed minimum accumulation benefits (GMAB) associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The GMAB risk is triggered if, at contract maturity, the contract holder's account value is less than a guaranteed minimum value. Our GLB reinsurance products meet the definition of a derivative for accounting purposes and are carried at fair value with changes in fair value recognized in income. Refer to Notes 5 c) and 10 a) for additional information.

k) Deposit assets and liabilities
Deposit assets arise from ceded reinsurance contracts purchased that do not transfer significant underwriting or timing risk. Deposit liabilities include reinsurance deposit liabilities and contract holder deposit funds. The reinsurance deposit liabilities arise from contracts sold for which there is not a significant transfer of risk. Contract holder deposit funds represent a liability for investment contracts sold that do not meet the definition of an insurance contract, and certain of these contracts are sold with a guaranteed rate of return. Under deposit accounting, consideration received or paid is recorded as a deposit asset or liability in the balance sheet as opposed to recording premiums and losses in the statement of operations.

Interest income on deposit assets, representing the consideration received or to be received in excess of cash payments related to the deposit contract, is earned based on an effective yield calculation. The calculation of the effective yield is based on the amount and timing of actual cash flows at the balance sheet date and the estimated amount and timing of future cash flows. The effective yield is recalculated periodically to reflect revised estimates of cash flows. When a change in the actual or estimated cash flows occurs, the resulting change to the carrying amount of the deposit asset is reported as income or expense. Deposit assets of $89 million and $93 million at December 31, 2017 and 2016, respectively, are reflected in Other assets in the Consolidated balance sheets and the accretion of deposit assets related to interest pursuant to the effective yield calculation is reflected in Net investment income in the Consolidated statements of operations.

Deposit liabilities include reinsurance deposit liabilities of $100 million and $108 million and contract holder deposit funds of $1.8 billion and $1.5 billion at December 31, 2017 and 2016, respectively. Deposit liabilities are reflected in Accounts payable, accrued expenses, and other liabilities in the Consolidated balance sheets. At contract inception, the deposit liability equals net cash received. An accretion rate is established based on actuarial estimates whereby the deposit liability is increased to the estimated amount payable over the contract term. The deposit accretion rate is the rate of return required to fund expected future payment obligations. We periodically reassess the estimated ultimate liability and related expected rate of return. Changes to the deposit liability are generally reflected through Interest expense to reflect the cumulative effect of the period the contract has been in force, and by an adjustment to the future accretion rate of the liability over the remaining estimated contract term.

The liability for contract holder deposit funds equals accumulated policy account values, which consist of the deposit payments plus credited interest less withdrawals and amounts assessed through the end of the period.

l) Property and Equipment
Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal use, are capitalized and carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Property and equipment are included in Other assets in the Consolidated balance sheets and totaled $1.3 billion and $1.2 billion at December 31, 2017 and 2016, respectively.

m) Foreign currency remeasurement and translation
The functional currency for each of our foreign operations is generally the currency of the local operating environment. Transactions in currencies other than a foreign operation's functional currency are remeasured into the functional currency and the resulting foreign exchange gains and losses are reflected in Net realized gains (losses) in the Consolidated statements of operations. Functional currency assets and liabilities are translated into the reporting currency, U.S. dollars, using period end exchange rates and the related translation adjustments are recorded as a separate component of AOCI. Functional statement of operations amounts expressed in functional currencies are translated using average exchange rates.

n) Administrative expenses
Administrative expenses generally include all operating costs other than policy acquisition costs. The North America Commercial P&C Insurance segment manages and uses an in-house third-party claims administrator, ESIS Inc. (ESIS). ESIS performs claims management and risk control services for domestic and international organizations that self-insure P&C exposures as well as internal P&C exposures. The net operating results of ESIS are included within Administrative expenses in the Consolidated statements of operations and were $38 million, $32 million, and $30 million for the years ended December 31, 2017, 2016, and 2015, respectively.

o) Income taxes
Income taxes have been recorded related to those operations subject to income taxes. Deferred tax assets and liabilities result from temporary differences between the amounts recorded in the Consolidated financial statements and the tax basis of our assets and liabilities. The effect on deferred tax assets and liabilities of a change in tax law or rates is recognized in income in the period that includes the enactment date. For example, we recorded a net reduction in our deferred tax balances reflecting the impact of the Tax Cuts and Jobs Act (2017 Tax Act) in the fourth quarter of 2017, the period when the legislation was enacted. Refer to Note 8 for additional information. A valuation allowance against deferred tax assets is recorded if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized. The valuation allowance assessment considers tax planning strategies, where applicable.

We recognize uncertain tax positions deemed more likely than not of being sustained upon examination. Recognized income tax positions are measured at the largest amount that has a greater than 50 percent likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

p) Earnings per share
Basic earnings per share is calculated using the weighted-average shares outstanding including participating securities with non-forfeitable rights to dividends such as unvested restricted stock. All potentially dilutive securities including stock options are excluded from the basic earnings per share calculation. In calculating diluted earnings per share, the weighted-average shares outstanding is increased to include all potentially dilutive securities. Basic and diluted earnings per share are calculated by dividing net income by the applicable weighted-average number of shares outstanding during the year.

q) Cash flow information
Premiums received and losses paid associated with the GLB reinsurance products, which as discussed previously meet the definition of a derivative instrument for accounting purposes, are included within Cash flows from operating activities. Cash flows, such as settlements and collateral requirements, associated with GLB and all other derivative instruments are included on a net basis within Cash flows from investing activities. Purchases, sales, and maturities of short-term investments are recorded on a net basis within Cash flows from investing activities.

r) Derivatives
Chubb recognizes all derivatives at fair value in the Consolidated balance sheets and participates in derivative instruments in two principal ways:

(i) To sell protection to customers as an insurance or reinsurance contract that meets the definition of a derivative for accounting purposes. For 2017 and 2016, the reinsurance of GLBs was our primary product falling into this category; and
(ii) To mitigate financial risks, principally arising from investment holdings, products sold, or assets and liabilities held in foreign currencies. For these instruments, changes in assets or liabilities measured at fair value are recorded as realized gains or losses in the Consolidated statements of operations.

We did not designate any derivatives as accounting hedges during 2017, 2016, or 2015.

s) Share-based compensation
Chubb measures and records compensation cost for all share-based payment awards at grant-date fair value. Compensation costs are recognized for share-based payment awards with only service conditions that have graded vesting schedules on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award were, in substance, multiple awards. Refer to Note 12 for additional information.

t) Chubb integration expenses
Direct costs related to the Chubb Corp acquisition were expensed as incurred. Chubb integration expenses were $310 million and $492 million for the years ended December 31, 2017 and 2016, respectively, and include all internal and external costs directly related to the integration activities of the Chubb Corp acquisition, consisting primarily of personnel-related expenses, including severance and employee retention and relocation; lease termination costs; and consulting fees. Chubb integration expenses were $33 million for the year ended December 31, 2015, consisting primarily of personnel-related expenses; consulting fees; and advisor fees.

u) New accounting pronouncements
Adopted in 2017
Stock Compensation
Effective January 2017, we prospectively adopted new guidance on stock compensation which requires recognition of the excess tax benefits or deficiencies of share-based compensation awards to employees through net income rather than through additional paid in capital. The calculation of the excess tax benefits or deficiencies is based on the difference between the market value of a stock award at the date of vesting, or at the time of exercise for a stock option, compared to the grant date fair value recognized as compensation expense in the Consolidated statements of operations. For the year ended December 31, 2017, the excess tax benefit recorded to Income tax expense in the Consolidated statement of operations was $48 million. Additionally, the guidance allowed for an election to account for forfeitures related to share-based payments either as they occur or through an estimation method. We elected to retain our current accounting for compensation expense using a forfeiture estimation process.

Income Tax Accounting Implications of the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (2017 Tax Act) was signed into legislation in December 2017. Among other things, the 2017 Tax Act reduces the U.S. federal income tax rate to 21 percent from 35 percent effective in 2018, institutes a dividends received deduction for foreign earnings with a related tax for the deemed repatriation of unremitted foreign earnings and creates a new base erosion anti-abuse tax (BEAT) which is a new U.S. minimum tax.

The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which provides guidance for the application of the 2017 Tax Act. The income tax guidance allows for the transition impact of the 2017 Tax Act to be recorded as 1) complete with all accounting implications identified, 2) provisional based on a reasonable estimate, or 3) not recorded as no reasonable estimate was determinable.

We recorded a $450 million income tax transition benefit in the fourth quarter of 2017 on a provisional basis. This income tax benefit principally reflects our best estimate of the impact of the reduced U.S. corporate tax rate and other provisions of the 2017 Tax Act. Refer to Note 8 for additional information.

Adopted in 2018
Revenue from Contracts with Customers
In May 2014, the FASB issued an accounting standard that supersedes most existing revenue recognition guidance. The standard excludes from its scope the accounting for insurance contracts, leases, financial instruments, and certain other agreements that are governed under other GAAP guidance, but could affect the revenue recognition for certain of our claims management and risk control services. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. This guidance was effective for us on January 1, 2018. The adoption of this guidance did not have a material impact on our financial condition or results of operations given that the majority of our business is outside the scope of this guidance.

Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued guidance that affects the recognition, measurement, presentation, and disclosure of financial instruments. The guidance requires equity investments to be measured at fair value with changes in fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The standard was effective for us in the first quarter of 2018 and required recognition of a cumulative effect adjustment at adoption to beginning retained earnings. As a result, in the first quarter of 2018, we reduced other comprehensive income by $455 million, representing the unrealized appreciation on our equity investments, other than those accounted for under the equity method, with an offsetting increase in retained earnings. All subsequent changes in fair value will be recognized within realized gains (losses) on the consolidated statement of operations.

Statement of Cash Flows
In August 2016, the FASB issued guidance clarifying the classification of certain cash receipts and cash payments within the statement of cash flows, including distributions received from equity method investments. The guidance requires entities to make an accounting policy election to present cash flows received either in operating cash flows or investing cash flows based on cumulative equity-method earnings or on the nature of the distributions. We adopted this guidance effective January 1, 2018 and elected to retain our current presentation of cash receipts and cash payments based on the nature of the distributions.

Goodwill Impairment
In January 2017, the FASB issued updated guidance on goodwill impairment testing that eliminates Step 2 of the goodwill impairment test requiring entities to calculate the implied fair value of goodwill through a hypothetical purchase price allocation. Under the updated guidance, impairment will now be recognized as the amount by which a reporting unit’s carrying value exceeds its fair value. Although the standard would have been effective for us in the first quarter of 2020 on a prospective basis, we adopted this guidance early effective January 1, 2018, as permitted. The adoption of this guidance did not have an impact on our financial condition or results of operations.

Accounting guidance not yet adopted
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued guidance that allows the reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from the newly enacted corporate tax rate. Because the adjustment of deferred taxes due to the reduction of the corporate tax rate is required to be included in net income, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects) do not reflect the appropriate tax rates. The amount of the reclassification will be the difference between the 35 percent historical U.S. corporate tax rate and the newly enacted 21 percent U.S. corporate tax rate. This guidance is effective for us in the first quarter of 2019 with early adoption permitted.

Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued guidance on the amortization period for purchased callable debt securities held at a premium. The guidance requires the premium to be amortized to the earliest call date. Under current guidance, premiums generally are amortized over the contracted life of the security. This guidance is effective for us in the first quarter of 2019 on a modified retrospective basis through a cumulative effect adjustment to beginning retained earnings. Early adoption is permitted. Securities held at a discount do not require an accounting change. Based on our best estimate at the time of this filing, the cumulative effect adjustment at the time of adoption would be approximately $30 million pre-tax.

Lease Accounting
In February 2016, the FASB issued accounting guidance requiring leases with lease terms of more than 12 months to recognize a right of use asset and a corresponding lease liability on the balance sheets. This accounting guidance is effective for us in the first quarter of 2019 on a modified retrospective basis with early adoption permitted. In January 2018, the FASB issued a proposed update that provides an alternative transition method of adoption, permitting the recognition of a cumulative-effect adjustment to retained earnings on the date of adoption. The adoption of the guidance is not expected to have a material impact on our financial condition or results of operations. We expect that the most significant impact will be the recognition of a right of use asset and a corresponding lease liability for our real estate leases.

Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance on the accounting for credit losses of financial instruments that are measured at amortized cost, including held to maturity securities and reinsurance recoverables, by applying an approach based on the current expected credit losses (CECL). The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset in order to present the net carrying value at the amount expected to be collected on the financial asset on the Consolidated balance sheet.

The guidance also amends the current debt security other-than-temporary impairment model by requiring an estimate of the expected credit loss (ECL) only when the fair value is below the amortized cost of the asset. The length of time the fair value of an AFS debt security has been below the amortized cost will no longer impact the determination of whether a potential credit loss exists. The AFS debt security model will also require the use of a valuation allowance as compared to the current practice of writing down the asset.

The standard is effective for us in the first quarter of 2020 with early adoption permitted in the first quarter of 2019. We will be able to assess the effect of adopting this guidance on our financial condition and results of operations closer to the date of adoption.
Acquisitions
Acquisitions
Acquisitions

The Chubb Corporation (Chubb Corp)
On January 14, 2016, we completed the acquisition of Chubb Corp, a leading provider of middle-market commercial, specialty, surety, and personal insurance for $29.5 billion, comprising $14.3 billion in cash and $15.2 billion in newly-issued stock. In addition, we assumed outstanding equity awards to employees and directors with an attributed value of $323 million. The total consideration, including the assumption of equity awards, was $29.8 billion. We recognized goodwill of $10.5 billion, attributable to expected growth and profitability, none of which is expected to be deductible for income tax purposes. We financed the cash portion of the transaction through a combination of $9.0 billion sourced from various Chubb Limited and Chubb Corp companies plus $5.3 billion of senior notes, which were issued in November 2015. Refer to Note 9 for additional information on the senior notes.

Upon completion of the merger, each Chubb Corp common share (other than shares held by certain legacy Chubb Corp employee benefit plans) was canceled and converted, in accordance with the procedures set forth in the merger agreement, into the right to receive (i) 0.6019 of a Chubb Limited common share and (ii) $62.93 in cash. In addition, replacement equity awards were issued by Chubb Limited to the holders of Chubb Corp's outstanding equity awards (stock options, restricted stock units, deferred stock units, deferred unit obligations, and performance units).

We believe the Chubb Corp acquisition is highly complementary to our existing business lines, distribution channels, customer segments, and underwriting skills. Chubb Corp has a substantial presence in the U.S. with a broad variety of coverages serving large corporate and upper middle market accounts, middle market and small commercial accounts, and personal lines. Together we are one of the largest commercial insurers in the U.S. Internationally, where legacy ACE is a truly global insurer with extensive presence in 54 countries and territories, Chubb Corp's operations in 25 markets added to our presence and capabilities and positioned us to better pursue important market opportunities globally. The combined company is a leader in a number of global specialty and traditional products such as professional lines, risk management, workers' compensation, accident and health (A&H), and other property and general casualty lines.
The table below details the purchase consideration and allocation of assets acquired and liabilities assumed:
 
 
(in millions of U.S. dollars, except per share data)
 
Purchase consideration
 
Chubb Limited common shares
 
Chubb Corp common shares outstanding
228

Per share exchange ratio
0.6019

Common shares issued by Chubb Limited
137

Common share price of Chubb Limited at January 14, 2016
$
111.02

Fair value of common shares issued by Chubb Limited to common shareholders of Chubb Corp
$
15,204

Cash consideration
 
Chubb Corp common shares outstanding
228

Agreed cash price per share paid to common shareholders of Chubb Corp
$
62.93

Cash consideration paid by Chubb Limited to common shareholders of Chubb Corp
$
14,319

Stock-based awards
 
Fair value of equity awards issued (1)
$
323

Fair value of purchase consideration
$
29,846

Assets acquired and (liabilities) assumed
 
Cash
$
71

Investments
42,967

Accrued investment income
359

Insurance and reinsurance balances receivable
3,095

Reinsurance recoverable on losses and loss expenses
1,676

Indefinite lived intangible assets
2,860

Finite lived intangible assets
4,795

Prepaid reinsurance premiums
280

Other assets
853

Unpaid losses and loss expenses
(22,923
)
Unearned premiums
(7,011
)
Insurance and reinsurance balances payable
(603
)
Accounts payable, accrued expenses, and other liabilities
(2,030
)
Deferred tax liabilities
(1,292
)
Long-term debt
(3,765
)
Total identifiable net assets acquired
19,332

Goodwill
10,514

Purchase price
$
29,846

(1) The fair value of the replacement equity awards was $525 million, of which $323 million was attributed to service periods prior to the acquisition and was included in the purchase consideration. Refer to Note 12 for further information on these replacement equity awards.

The purchase price allocation to intangible assets recorded in connection with the Chubb Corp acquisition and their related useful lives are as follows:
(in millions of U.S. dollars)
Purchase price Allocation at
January 14, 2016

Estimated useful life
Definite life
 
 
Unearned premium reserves (UPR) intangible asset
$
1,550

1 year
Agency distribution relationships and renewal rights
3,150

24 years
Internally developed technology
95

3 years
Indefinite life
 
 
Trademarks
2,800

Indefinite
Licenses
50

Indefinite
Syndicate capacity
10

Indefinite
Total identified intangible assets
$
7,655

 


Refer to Note 6 for additional information on goodwill and intangible assets acquired.

The following table summarizes the results of the acquired Chubb Corp operations since the acquisition date that have been included within our Consolidated statement of operations:
(in millions of U.S. dollars)
January 14, 2016 to December 31, 2016

Total revenues
$
12,376

Net income
$
1,756


The following table provides supplemental unaudited pro forma consolidated information for the years ended December 31, 2016 and 2015, as if Chubb Corp had been acquired as of January 1, 2015. The unaudited pro forma consolidated financial statements are presented solely for informational purposes and are not necessarily indicative of the consolidated results of operations that might have been achieved had the transaction been completed as of the date indicated, nor are they meant to be indicative of any anticipated consolidated future results of operations that the combined company will experience after the transaction.
 
Year Ended December 31
 
(in millions of U.S. dollars, except per share data)
2016

 
2015

Total revenues
$
31,937

 
$
32,622

Net income
$
4,183

 
$
4,478

Earnings per share
 
 
 
Basic earnings per share
$
8.95

 
$
9.61

Diluted earnings per share
$
8.88

 
$
9.52


Total revenues and net income were lower for the year ended December 31, 2016, compared to the prior year, primarily reflecting merger-related actions in 2016, which lowered net premiums earned.

Fireman's Fund Insurance Company High Net Worth Personal Lines Insurance Business in the U.S. (Fireman's Fund)
On April 1, 2015, we acquired the Fireman's Fund Insurance Company high net worth personal lines insurance business in the U.S., which included the renewal rights for new and existing business and reinsurance of all existing reserves for $365 million in cash. We acquired assets with a fair value of $753 million, consisting primarily of cash of $629 million and insurance and reinsurance balances receivable of $124 million. We assumed liabilities with a fair value of $863 million, consisting primarily of unpaid losses and loss expenses of $417 million and unearned premiums of $428 million. This acquisition generated $196 million of goodwill, attributable to expected growth and profitability, all of which is expected to be deductible for income tax purposes, and other intangible assets of $278 million, primarily related to renewal rights, based on Chubb’s purchase price allocation. The acquisition expanded our position in the high net worth personal lines insurers in the U.S. The Fireman’s Fund business was integrated into our existing high net worth personal lines business, offering a broad range of coverage including homeowners, automobile, umbrella and excess liability, collectibles, and yachts. Goodwill and other intangible assets arising from this acquisition are included in our North America Personal P&C Insurance segment.

The Consolidated financial statements include results of acquired businesses from the acquisition dates.
Investments
Investments
Investments

a) Transfers of securities
During December 2017, we transferred securities, considered essential holdings in a diversified portfolio, with a total fair value of $4.3 billion from Fixed maturities available for sale to Fixed maturities held to maturity. These securities, which we have the intent and ability to hold to maturity, were transferred given the growth in our investment portfolio over the last several years, as well as continued efforts to manage the diversification of our global portfolio. The net unrealized appreciation at the date of the transfer continues to be reported in the carrying value of the transferred investments and is amortized through OCI over the remaining life of the securities using the effective interest method in a manner consistent with the amortization of any premium or discount. This transfer represents a non-cash transaction and does not impact the Consolidated statements of cash flows.

b) Fixed maturities
December 31, 2017
Amortized
Cost

 
Gross
Unrealized
Appreciation

 
Gross
Unrealized
Depreciation

 
Fair
Value

 
OTTI Recognized
in AOCI

(in millions of U.S. dollars)
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
3,701

 
$
32

 
$
(35
)
 
$
3,698

 
$

Foreign
20,514

 
622

 
(106
)
 
21,030

 
(1
)
Corporate securities
23,453

 
638

 
(95
)
 
23,996

 
(4
)
Mortgage-backed securities
15,279

 
111

 
(100
)
 
15,290

 
(1
)
States, municipalities, and political subdivisions
14,888

 
125

 
(88
)
 
14,925

 

 
$
77,835

 
$
1,528

 
$
(424
)
 
$
78,939

 
$
(6
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
908

 
$
12

 
$
(5
)
 
$
915

 
$

Foreign
1,738

 
27

 
(8
)
 
1,757

 

Corporate securities
3,159

 
67

 
(7
)
 
3,219

 

Mortgage-backed securities
2,724

 
23

 
(5
)
 
2,742

 

States, municipalities, and political subdivisions
5,806

 
50

 
(15
)
 
5,841

 

 
$
14,335

 
$
179

 
$
(40
)
 
$
14,474

 
$



December 31, 2016
Amortized
Cost

 
Gross
Unrealized
Appreciation

 
Gross
Unrealized
Depreciation

 
Fair
Value

 
OTTI Recognized
in AOCI

(in millions of U.S. dollars)
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
2,883

 
$
32

 
$
(45
)
 
$
2,870

 
$

Foreign
20,929

 
636

 
(125
)
 
21,440

 
(5
)
Corporate securities
23,736

 
580

 
(167
)
 
24,149

 
(8
)
Mortgage-backed securities
14,066

 
135

 
(194
)
 
14,007

 
(1
)
States, municipalities, and political subdivisions
17,922

 
72

 
(345
)
 
17,649

 

 
$
79,536

 
$
1,455

 
$
(876
)
 
$
80,115

 
$
(14
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
655

 
$
9

 
$
(3
)
 
$
661

 
$

Foreign
640

 
28

 
(1
)
 
667

 

Corporate securities
2,771

 
50

 
(26
)
 
2,795

 

Mortgage-backed securities
1,393

 
35

 

 
1,428

 

States, municipalities, and political subdivisions
5,185

 
26

 
(92
)
 
5,119

 

 
$
10,644

 
$
148

 
$
(122
)
 
$
10,670

 
$



As discussed in Note 3 d), if a credit loss is incurred on an impaired fixed maturity, an OTTI is considered to have occurred and the portion of the impairment not related to credit losses (non-credit OTTI) is recognized in OCI. Included in the “OTTI Recognized in AOCI” columns above are the cumulative amounts of non-credit OTTI recognized in OCI adjusted for subsequent sales, maturities, and redemptions. OTTI recognized in AOCI does not include the impact of subsequent changes in fair value of the related securities. In periods subsequent to a recognition of OTTI in OCI, changes in the fair value of the related fixed maturities are reflected in Net unrealized appreciation on investments in the Consolidated statements of shareholders' equity. For the years ended December 31, 2017 and 2016, $2 million of net unrealized depreciation and $62 million of net unrealized appreciation, respectively, related to such securities is included in OCI. At December 31, 2017 and 2016, AOCI included cumulative net unrealized appreciation of $7 million and $10 million, respectively, related to securities remaining in the investment portfolio for which a non-credit OTTI was recognized.

Mortgage-backed securities (MBS) issued by U.S. government agencies are combined with all other to be announced mortgage derivatives held (refer to Note 10 c) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 83 percent and 81 percent of the total mortgage-backed securities at December 31, 2017 and 2016, respectively, are represented by investments in U.S. government agency bonds. The remainder of the mortgage exposure consists of collateralized mortgage obligations and non-government mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a rating of AAA by the major credit rating agencies.

The following table presents fixed maturities by contractual maturity:
 
December 31
 
 
December 31
 
 
 
 
2017

 
 
 
2016

(in millions of U.S. dollars)
Amortized Cost

 
Fair Value

 
Amortized Cost

 
Fair Value

Available for sale
 
 
 
 
 
 
 
Due in 1 year or less
$
3,164

 
$
3,182

 
$
3,892

 
$
3,913

Due after 1 year through 5 years
24,749

 
25,068

 
24,027

 
24,429

Due after 5 years through 10 years
25,388

 
25,704

 
27,262

 
27,379

Due after 10 years
9,255

 
9,695

 
10,289

 
10,387

 
62,556

 
63,649

 
65,470

 
66,108

Mortgage-backed securities
15,279

 
15,290

 
14,066

 
14,007

 
$
77,835

 
$
78,939

 
$
79,536

 
$
80,115

Held to maturity
 
 
 
 
 
 
 
Due in 1 year or less
$
743

 
$
746

 
$
430

 
$
435

Due after 1 year through 5 years
2,669

 
2,688

 
2,646

 
2,691

Due after 5 years through 10 years
4,744

 
4,756

 
2,969

 
2,944

Due after 10 years
3,455

 
3,542

 
3,206

 
3,172

 
11,611

 
11,732

 
9,251

 
9,242

Mortgage-backed securities
2,724

 
2,742

 
1,393

 
1,428

 
$
14,335

 
$
14,474

 
$
10,644

 
$
10,670


Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties. 

c) Equity securities
 
December 31


December 31

(in millions of U.S. dollars)
2017


2016

Cost
$
737

 
$
706

Gross unrealized appreciation
212

 
129

Gross unrealized depreciation
(12
)
 
(21
)
Fair value
$
937

 
$
814


d) Net realized gains (losses)
In accordance with guidance related to the recognition and presentation of OTTI, when an impairment related to a fixed maturity has occurred, OTTI is required to be recorded in Net income if management has the intent to sell the security or it is more likely than not that we will be required to sell the security before the recovery of its amortized cost. Further, in cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, we must evaluate the security to determine the portion of the impairment, if any, related to credit losses. If a credit loss is incurred, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in Net income, while the portion of OTTI related to all other factors is recognized in OCI. For fixed maturities held to maturity, OTTI recognized in OCI is accreted from AOCI to the amortized cost of the fixed maturity prospectively over the remaining term of the securities.

Each quarter, securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, are reviewed to identify impaired securities to be specifically evaluated for a potential OTTI.

For all non-fixed maturities, OTTI is evaluated based on the following:

the amount of time a security has been in a loss position and the magnitude of the loss position;
the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and
our ability and intent to hold the security to the expected recovery period.
As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are other than temporarily impaired. For mutual funds included in equity securities in our Consolidated balance sheets, we employ analysis similar to fixed maturities, when applicable.

Evaluation of potential credit losses related to fixed maturities
We review each fixed maturity in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, we consider credit rating, market price, and issuer-specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities, for which we determine that credit loss is likely, are subjected to further analysis to estimate the credit loss recognized in Net income, if any. In general, credit loss recognized in Net income equals the difference between the security’s amortized cost and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.

U.S. Treasury and agency obligations (including agency mortgage-backed securities); foreign government obligations; and states, municipalities, and political subdivisions obligations
U.S. Treasury and agency obligations (including agency mortgage-backed securities); foreign government obligations; and states, municipalities, and political subdivisions obligations represent $311 million of gross unrealized loss at December 31, 2017. These securities were evaluated for credit loss primarily using qualitative assessments of the likelihood of credit loss considering credit rating of the issuers and level of credit enhancement, if any. We concluded that the high level of creditworthiness of the issuers coupled with credit enhancement, where applicable, supports recognizing no credit loss in Net income.

Corporate securities
Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. Chubb developed projected cash flows for corporate securities using market observable data, issuer-specific information, and credit ratings. We use historical default data by Moody’s Investors Service (Moody’s) rating category to calculate a 1-in-100 year probability of default, which results in a default assumption in excess of the historical mean default rate. Consistent with management's approach, Chubb assumed a 32 percent recovery rate (the par value of a defaulted security that will be recovered) across all rating categories, rather than using Moody's historical mean recovery rate of 42 percent. We believe that use of a default assumption, in excess of the historical mean, is conservative in light of current market conditions.

The following table presents default assumptions by Moody's rating category (historical mean default rate provided for comparison):
Moody's Rating Category
1-in-100 Year Default Rate

 
Historical Mean Default Rate

Investment Grade:
 
 
 
Aaa-Baa
0.0-1.3%

 
0.0-0.3%

Below Investment Grade:
 
 
 
Ba
4.8
%
 
1.0
%
B
12.1
%
 
3.2
%
Caa-C
36.8
%
 
10.5
%


Application of the methodology and assumptions described above resulted in credit losses recognized in Net income for corporate securities of $5 million, $30 million, and $50 million for the years ended December 31, 2017, 2016, and 2015, respectively.

Mortgage-backed securities
For mortgage-backed securities, credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates, and loss severity rates (the par value of a defaulted security that will not be recovered) on foreclosed properties.

We develop specific assumptions using market data, where available, and include internal estimates as well as estimates published by rating agencies and other third-party sources. We project default rates by mortgage sector considering current underlying mortgage loan performance, generally assuming lower loss severity for Prime sector bonds versus ALT-A and Sub-prime bonds.

These estimates are extrapolated along a default timing curve to estimate the total lifetime pool default rate. Other assumptions used contemplate the actual collateral attributes, including geographic concentrations, rating agency loss projections, rating actions, and current market prices. If cash flow projections indicate that losses will exceed the credit enhancement for a given tranche, then we do not expect to recover our amortized cost basis, and we recognize an estimated credit loss in Net income.

For the years ended December 31, 2017 and 2015, there were no credit losses recognized in Net income for mortgage-backed securities. For the year ended December 31, 2016, there was $1 million of credit losses recognized in Net income for mortgage-backed securities.
The following table presents the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused us to conclude the decline in fair value of certain investments was “other-than-temporary” and the change in net unrealized appreciation (depreciation) of investments: 
 
Year Ended December 31
 
(in millions of U.S. dollars)
2017

 
2016

 
2015

Fixed maturities:
 
 
 
 
 
OTTI on fixed maturities, gross
$
(24
)
 
$
(89
)
 
$
(142
)
OTTI on fixed maturities recognized in OCI (pre-tax)
1

 
8

 
39

OTTI on fixed maturities, net
(23
)
 
(81
)
 
(103
)
Gross realized gains excluding OTTI
149

 
183

 
158

Gross realized losses excluding OTTI
(157
)
 
(265
)
 
(235
)
Total fixed maturities
(31
)
 
(163
)
 
(180
)
Equity securities:
 
 
 
 
 
OTTI on equity securities
(10
)
 
(8
)
 
(7
)
Gross realized gains excluding OTTI
28

 
65

 
47

Gross realized losses excluding OTTI
(2
)
 
(13
)
 
(11
)
Total equity securities
16

 
44

 
29

OTTI on other investments
(12
)
 
(14
)
 
(2
)
Foreign exchange gains (losses)
36

 
118

 
(80
)
Investment and embedded derivative instruments
(11
)
 
(33
)
 
32

Fair value adjustments on insurance derivative
364

 
53

 
(203
)
S&P put options and futures
(261
)
 
(136
)
 
(10
)
Other derivative instruments
(5
)
 
(10
)
 
(12
)
Other
(12
)
 
(4
)
 
6

Net realized gains (losses)
84

 
(145
)
 
(420
)
Change in net unrealized appreciation (depreciation) on investments:
 
 
 
 
 
Fixed maturities available for sale
519

 
142

 
(1,119
)
Fixed maturities held to maturity
18

 
(59
)
 
43

Equity securities
88

 
52

 
(17
)
Other
8

 
(51
)
 
(36
)
Income tax (expense) benefit
(241
)
 
100

 
152

Change in net unrealized appreciation (depreciation) on investments
392

 
184

 
(977
)
Total net realized gains (losses) and change in net unrealized appreciation (depreciation) on investments
$
476

 
$
39

 
$
(1,397
)

 
The following table presents a roll-forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recognized in OCI: 
 
Year Ended December 31
 
(in millions of U.S. dollars)
2017

 
2016

 
2015

Balance of credit losses related to securities still held – beginning of year
$
35

 
$
53

 
$
28

Additions where no OTTI was previously recorded
4

 
17

 
41

Additions where an OTTI was previously recorded
2

 
14

 
9

Reductions for securities sold during the period
(19
)
 
(49
)
 
(25
)
Balance of credit losses related to securities still held – end of year
$
22

 
$
35

 
$
53


e) Other investments
 
 
 
December 31

 
 
 
December 31

 
 
 
2017

 
 
 
2016

(in millions of U.S. dollars)
Fair Value

 
Cost

 
Fair Value

 
Cost

Investment funds
$
270

 
$
123

 
$
251

 
$
126

Limited partnerships
549

 
441

 
730

 
607

Partially-owned investment companies
2,803

 
2,803

 
2,645

 
2,645

Life insurance policies
305

 
305

 
248

 
248

Policy loans
244

 
244

 
209

 
209

Trading securities
333

 
333

 
296

 
295

Other
168

 
168

 
140

 
140

Total
$
4,672

 
$
4,417

 
$
4,519

 
$
4,270



Investment funds include one highly diversified fund investment as well as several direct funds that employ a variety of investment styles such as long/short equity and arbitrage/distressed. Included in limited partnerships and partially-owned investment companies are 138 individual limited partnerships covering a broad range of investment strategies including large cap buyouts, specialist buyouts, growth capital, distressed, mezzanine, real estate, and co-investments. The underlying portfolio consists of various public and private debt and equity securities of publicly traded and privately held companies and real estate assets. The underlying investments across various partnerships, geographies, industries, asset types, and investment strategies provide risk diversification within the limited partnership portfolio and the overall investment portfolio. Trading securities comprise $333 million of mutual funds supported by assets that do not qualify for separate account reporting under GAAP at December 31, 2017 compared with $271 million at December 31, 2016. There were no trading securities held in rabbi trusts at December 31, 2017, compared with $14 million of equity securities and $11 million of fixed maturities at December 31, 2016.

f) Investments in partially-owned insurance companies
The following table presents Investments in partially-owned insurance companies:
 
December 31, 2017
 
 
December 31, 2016
 
 
 
(in millions of U.S. dollars, except for percentages)
Carrying Value

 
Issued
 Share
Capital

 
Ownership Percentage

 
Carrying Value

 
Issued Share Capital

 
Ownership Percentage

 
Domicile
Huatai Group
$
438

 
$
616

 
20
%
 
$
447

 
$
624

 
20
%
 
China
Huatai Life Insurance Company
105

 
495

 
20
%
 
99

 
428

 
20
%
 
China
Freisenbruch-Meyer
9

 

 
40
%
 
8

 
5

 
40
%
 
Bermuda
Chubb Arabia Cooperative Insurance Company
15

 
27

 
30
%
 
13

 
27

 
30
%
 
Saudi Arabia
Russian Reinsurance Company
2

 
4

 
23
%
 
2

 
4

 
23
%
 
Russia
ABR Reinsurance Ltd.
93

 
800

 
11
%
 
97

 
800

 
11
%
 
Bermuda
Total
$
662

 
$
1,942

 
 
 
$
666

 
$
1,888

 
 
 
 

Huatai Group and Huatai Life Insurance Company provide a range of P&C, life, and investment products.

g) Gross unrealized loss
At December 31, 2017, there were 9,828 fixed maturities out of a total of 30,932 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $7 million. There were 82 equity securities out of a total of 328 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $3 million. Fixed maturities in an unrealized loss position at December 31, 2017, comprised both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase.

The following tables present, for all securities in an unrealized loss position (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
0 – 12 Months
 
 
Over 12 Months
 
 
Total
 
December 31, 2017
Fair Value

 
Gross
Unrealized Loss

 
Fair Value

 
Gross