CHUBB LTD, 10-Q filed on 5/2/2018
Quarterly Report
v3.8.0.1
Document and Entity Information - SFr / shares
3 Months Ended
Mar. 31, 2018
Apr. 19, 2018
Dec. 31, 2017
Entity Information [Line Items]      
Common Shares, par value SFr 24.15   SFr 24.15
Document Type 10-Q    
Amendment Flag false    
Document Period End Date Mar. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus Q1    
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    
Common Shares Outstanding   465,802,115  
v3.8.0.1
Consolidated Balance Sheets - USD ($)
$ in Millions
Mar. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Assets      
Fixed maturities available for sale, at fair value (amortized cost – $XX,XXX and $77,835)(includes hybrid financial instruments of $X and $5) $ 79,111 $ 78,939  
Fixed maturities held to maturity, at amortized cost (fair value – $14,122 and $14,474) 14,253 14,335  
Equity securities, at fair value (cost – $948 and $737) 948 937  
Short-term investments, at fair value and amortized cost 2,874 3,561  
Other investments (cost – $4,919 and $4,417) 4,919 4,672  
Total investments 102,105 102,444  
Cash 1,988 [1] 728 [2]  
Restricted Cash [1] 125 123  
Securities lending collateral 2,039 1,737  
Accrued investment income 895 909  
Insurance and reinsurance balances receivable 9,570 9,334  
Reinsurance Recoverable Losses And Loss Expenses 14,982 15,034  
Reinsurance recoverable on policy benefits 181 184  
Deferred policy acquisition costs 4,843 4,723  
Value of business acquired 321 326  
Goodwill 15,686 15,541  
Other intangible assets 6,437 6,513  
Prepaid reinsurance premiums 2,600 2,529  
Investments in partially-owned insurance companies 664 662  
Other assets 6,345 6,235  
Total assets 168,781 167,022  
Liabilities      
Unpaid losses and loss expenses 63,139 63,179 $ 60,540
Unearned premiums 15,495 15,216  
Future policy benefits 5,412 5,321  
Insurance and reinsurance balances payable 6,148 5,868  
Securities lending payable 2,039 1,737  
Accounts payable, accrued expenses, and other liabilities 8,618 9,545  
Deferred tax liabilities 468 699  
Repurchase agreements 1,412 1,408  
Short-term debt 1,669 1,013  
Long-term debt 12,786 11,556  
Trust preferred securities 308 308  
Total liabilities 117,494 115,850  
Commitments and contingencies  
Shareholders’ equity      
Common Shares (CHF 24.15 par value; 479,783,864 shares issued; 465,831,486 and 463,833,179 shares outstanding) 11,121 11,121  
Common Shares in treasury (13,952,378 and 15,950,685 shares) (1,727) (1,944)  
Additional Paid in Capital, Common Stock 13,430 13,978  
Retained earnings 28,965 27,474  
Accumulated other comprehensive income (loss) (AOCI) (502) 543  
Total shareholders’ equity 51,287 51,172  
Total liabilities and shareholders’ equity $ 168,781 $ 167,022  
[1] Chubb maintains two notional multicurrency cash pools (Pools) with a third-party bank. Various Chubb entities participate in one or the other of the Pools, pursuant to which credit and debit balances in individual Chubb accounts are translated daily into a single currency and pooled on a notional basis. Individual Chubb entities are permitted to overdraw on their individual accounts provided the overall Pool balances do not fall below zero. At March 31, 2018, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.
[2] Chubb maintains two notional multicurrency cash pools (Pools) with a third-party bank. Various Chubb entities participate in one or the other of the Pools, pursuant to which credit and debit balances in individual Chubb accounts are translated daily into a single currency and pooled on a notional basis. Individual Chubb entities are permitted to overdraw on their individual accounts provided the overall Pool balances do not fall below zero. At December 31, 2017, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.
v3.8.0.1
Consolidated Balance Sheets (Parenthetical)
$ in Millions
Mar. 31, 2018
USD ($)
shares
Dec. 31, 2017
USD ($)
shares
Statement of Financial Position [Abstract]    
Available for sale, at amortized cost $ 79,208 $ 77,835
Fixed maturities available for sale, hybrid financial instruments 7 5
Held to maturity, at Fair Value 14,122 14,474
Equity securities, at cost 948 737
Other investments, cost $ 4,919 $ 4,417
Common Shares, shares issued | shares 479,783,864 479,783,864
Common Shares, shares outstanding | shares 465,831,486 463,833,179
Common Shares in treasury, shares | shares 13,952,378 15,950,685
v3.8.0.1
Consolidated Statements Of Operations and Comprehensive Income - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Revenues    
Net premiums written $ 7,104 $ 6,710
Change In Unearned Premium Net 77 (62)
Net premiums earned 7,027 6,772
Net investment income 806 745
Net Realized Gains Losses [Abstract]    
Other-than-temporary impairment (OTTI) losses gross (1) (19)
Portion of OTTI losses recognized in other comprehensive income (OCI) 0 0
Net OTTI losses recognized in income (1) (19)
Net realized gains (losses) excluding OTTI losses (1) 12
Total net realized gains (losses) (includes $(23) and $(8) reclassified from AOCI) (2) (7)
Total revenues 7,831 7,510
Expenses    
Losses and loss expenses 4,102 3,789
Policy benefits 151 168
Policy acquisition costs 1,464 1,397
Administrative expenses 692 676
Interest expense 157 154
Other (income) expense (47) (70)
Amortization of purchased intangibles 85 64
Chubb integration expenses 10 111
Total expenses 6,614 6,289
Income before income tax 1,217 1,221
Income tax expense (benefit) (includes $(3) and $(6) on reclassified unrealized losses) 135 128
Net income 1,082 1,093
Other comprehensive income (loss)    
Unrealized appreciation (depreciation) (1,234) 307
Reclassification adjustment for net realized losses included in net income 23 8
Unrealized appreciation (Depreciation) after reclassification adjustment (1,211) 315
Change in:    
Cumulative foreign currency translation adjustment 397 134
Postretirement benefit liability adjustment (23) (20)
Other comprehensive income (loss), before income tax (837) 429
Income tax (expense) benefit related to OCI items 208 (115)
Other comprehensive income (loss) (629) 314
Comprehensive income $ 453 $ 1,407
Earnings per share    
Basic earnings per share $ 2.32 $ 2.33
Diluted earnings per share $ 2.30 $ 2.31
v3.8.0.1
Consolidated Statements Of Operations and Comprehensive Income Consolidated Statements of Operations and Comprehensive Income (Parenthetical) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Total net realized gains (losses) reclassified from AOCI $ (23) $ (8)
Income tax expense on reclassified unrealized gains and loses $ (3) $ (6)
v3.8.0.1
Consolidated Statements Of Shareholders' Equity - USD ($)
$ in Millions
Total
Common Stock [Member]
Common shares in treasury [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Net Investment Gain (Loss) Attributable to Parent [Member]
Cumulative Foreign Currency Translation Adjustment [Member]
Postretirement Benefit Liability Adjustment [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest, Adjusted Balance         $ 23,613 $ 1,058      
Balance - beginning of period at Dec. 31, 2016   $ 11,121 $ (1,480) $ 15,335 23,613 1,058 $ (1,663) $ 291  
Common Shares repurchased     (140)            
Net shares redeemed under employee share-based compensation plans     222 (260)          
Exercise of stock options       (21)          
Share-based compensation expense       65          
Net income $ 1,093       1,093        
Funding of dividends declared to Retained earnings       (324)          
Funding of dividends declared from Additional paid-in capital         324        
Dividends declared on Common Shares         (324)        
Change in period, before reclassification from AOCI, net of income tax benefit (expense) of $226 and $(102)           205      
Amounts reclassified from AOCI, net of income tax expense of $(3) and $(6)           2      
Change in period, net of income tax benefit (expense) of $223 and $(108)           207      
Change in period, net of income tax expense of $(19) and $(3)             131    
Change in period, net of income tax benefit (expense) of $4 and $(4)               (24)  
Balance - end of period at Mar. 31, 2017 49,224 11,121 (1,398) 14,795 24,706 1,265 (1,532) 267 $ 0
Balance - beginning of period at Dec. 31, 2017 51,172 11,121 (1,944) 13,978 27,474 1,450 (1,187) 280  
Common Shares repurchased     0            
Net shares redeemed under employee share-based compensation plans     217 (262)          
Exercise of stock options       (16)          
Share-based compensation expense       62          
Net income 1,082       1,082        
Funding of dividends declared to Retained earnings       (332)          
Funding of dividends declared from Additional paid-in capital         332        
Dividends declared on Common Shares         (332)        
Change in period, before reclassification from AOCI, net of income tax benefit (expense) of $226 and $(102)           (1,008)      
Amounts reclassified from AOCI, net of income tax expense of $(3) and $(6)           20      
Change in period, net of income tax benefit (expense) of $223 and $(108)           (988)      
Change in period, net of income tax expense of $(19) and $(3)             378    
Change in period, net of income tax benefit (expense) of $4 and $(4)               (19)  
Balance - end of period at Mar. 31, 2018 $ 51,287 $ 11,121 $ (1,727) $ 13,430 $ 28,965 $ 46 $ (809) $ 261 $ (502)
v3.8.0.1
Consolidated Statements Of Shareholders' Equity (Parenthetical) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Statement Consolidated Statements Of Shareholders Equity [Abstract]    
Change in year, before reclassification from AOCI, net of income tax benefit(expense) $ 226 $ (102)
Income tax benefit (expense) from reclassification of unrealized gains (3) (6)
Net unrealized appreciation on investments, Change in period, income tax (expense) benefit 223 (108)
Cumulative translation adjustment, Change in period, income tax(expense) benefit (19) (3)
Net income 1,082 1,093
Pension liability adjustment, Change in period, income tax (expense) benefit $ 4 $ (4)
v3.8.0.1
Consolidated Statements Of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Cash flows from operating activities    
Net income $ 1,082 $ 1,093
Adjustments to reconcile net income to net cash flows from operating activities    
Net realized (gains) losses 2 7
Amortization of premiums/discounts on fixed maturities 155 184
Amortization of UPR related to the Chubb Corp acquisition and other intangibles 85 64
Deferred income taxes (2) (127)
Unpaid losses and loss expenses (420) (154)
Unearned premiums 111 17
Future policy benefits 58 40
Insurance and reinsurance balances payable 250 252
Accounts payable, accrued expenses, and other liabilities (724) (491)
Income taxes payable 88 191
Insurance and reinsurance balances receivable (174) 30
Reinsurance recoverable on losses and loss expenses 138 (122)
Reinsurance recoverable on policy benefits 3 (5)
Deferred policy acquisition costs (75) (59)
Prepaid reinsurance premiums (42) (81)
Other 16 174
Net cash flows from operating activities 551 1,013
Cash flows from investing activities    
Purchases of fixed maturities available for sale (5,972) (6,250)
Purchases of fixed maturities held to maturity (162) (157)
Purchases of equity securities (55) (37)
Sales of fixed maturities available for sale 2,562 3,395
Sales of equity securities 40 46
Maturities and redemptions of fixed maturities available for sale 1,865 2,543
Maturities and redemptions of fixed maturities held to maturity 255 240
Net change in short-term investments 731 232
Net derivative instruments settlements 39 (89)
Private equity contribution (353) (198)
Private equity distribution 201 315
Other (32) (106)
Net cash flows used for investing activities (881) (66)
Cash flows from financing activities    
Dividends paid on Common Shares (330) (324)
Common Shares repurchased (29) (128)
Proceeds from issuance of long-term debt (300) (500)
Proceeds from issuance of repurchase agreements 408 753
Proceeds from Issuance of Long-term Debt 2,175 0
Repayment of repurchase agreements (404) (752)
Proceeds from share-based compensation plans 34 42
Policyholder contract deposits 118 109
Policyholder contract withdrawals (105) (58)
Net cash flows from (used for) financing activities 1,567 (858)
Effect of foreign currency rate changes on cash and restricted cash 25 (17)
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Period Increase (Decrease), Excluding Exchange Rate Effect 1,262 72
Cash and Restricted Cash - Beginning of year 851 1,088
Cash and Restricted Cash - end of Year 2,113 1,160
Supplemental cash flow information    
Taxes paid 93 54
Interest paid $ 82 $ 75
v3.8.0.1
General
3 Months Ended
Mar. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
General
General

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. Chubb operates 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 10 for additional information.

The interim unaudited 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 results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2017 Form 10-K.

b) Restricted cash
Effective January 1, 2018, we retrospectively adopted guidance on "Restricted Cash" that clarified the presentation of restricted cash on the consolidated statement of cash flows. As a result, we revised the statement of cash flows for the three months ended March 31, 2017 to include restricted cash in the beginning and ending cash balances. In addition, we reclassified $123 million of Restricted cash from Other assets to a separate line in the balance sheet as of December 31, 2017.

Restricted cash in the consolidated balance sheets represents amounts held for the benefit of third parties and is legally or contractually restricted as to withdrawal or usage. Amounts include deposits with U.S. and non-U.S. regulatory authorities, trust funds set up for the benefit of ceding companies, and amounts pledged as collateral to meet financing arrangements.

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that total to the amounts shown in the consolidated statements of cash flows:

 
March 31

 
December 31

(in millions of U.S. dollars)
2018

 
2017

Cash
$
1,988

 
$
728

Restricted cash
125

 
123

Total cash and restricted cash shown in the consolidated statements of cash flows
$
2,113

 
$
851



c) Goodwill
During the three months ended March 31, 2018, Goodwill increased $145 million, primarily reflecting the impact of foreign exchange.

d) Accounting guidance 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
Effective January 2018, we adopted new accounting guidance on "Recognition and Measurement of Financial Assets and Financial Liabilities" on a modified-retrospective basis. The guidance requires equity investments, other than those accounted for under the equity method of accounting, to be measured at fair value with changes in fair value recognized through net income. The guidance impacts our public equities and cost-method private equities. As a result, we recorded a cumulative-effect adjustment to increase beginning Retained earnings by $416 million after tax ($454 million pre-tax), representing the unrealized appreciation on our equity investments with an offsetting adjustment to decrease Accumulated other comprehensive income. All subsequent changes in fair value of our equity investments are recognized within realized gains (losses) on the consolidated statement of operations. Prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance.
 
Income Taxes
Effective January 2018, we adopted new accounting guidance on “Intra-Entity Transfers of Assets Other Than Inventory” on a modified-retrospective basis. Under the new guidance, we will no longer defer taxes on intra-company asset transfers and will recognize income tax expense (benefit) immediately through the income statement. As a result, we recorded a cumulative-effect adjustment to decrease beginning Retained earnings by $7 million representing the removal of the deferred tax asset for previous intra-company asset transfer transactions not yet recognized through earnings.

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. 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.

In December 2017, we recorded a $450 million income tax transition benefit on a provisional basis under SAB 118. There were no changes to this estimate for the current period as we continue to analyze the impact of the 2017 Tax Act.
 
Refer to the 2017 Form 10-K for information on other accounting guidance not yet adopted.
v3.8.0.1
Investments
3 Months Ended
Mar. 31, 2018
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments

a) Fixed maturities
 
March 31, 2018
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
$
3,893

 
$
22

 
$
(77
)
 
$
3,838

 
$

Foreign
21,705

 
513

 
(187
)
 
22,031

 

Corporate securities
23,509

 
332

 
(274
)
 
23,567

 
(4
)
Mortgage-backed securities
16,116

 
53

 
(349
)
 
15,820

 
(1
)
States, municipalities, and political subdivisions
13,985

 
61

 
(191
)
 
13,855

 

 
$
79,208

 
$
981

 
$
(1,078
)
 
$
79,111

 
$
(5
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
1,037

 
$
9

 
$
(14
)
 
$
1,032

 
$

Foreign
1,754

 
17

 
(20
)
 
1,751

 

Corporate securities
3,026

 
26

 
(55
)
 
2,997

 

Mortgage-backed securities
2,681

 
11

 
(45
)
 
2,647

 

States, municipalities, and political subdivisions
5,755

 
18

 
(78
)
 
5,695

 

 
$
14,253

 
$
81

 
$
(212
)
 
$
14,122

 
$


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

 
$



As discussed in Note 2 b), 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 three months ended March 31, 2018 and 2017, $4 million and nil, respectively, of net unrealized depreciation related to such securities is included in OCI. At March 31, 2018 and December 31, 2017, AOCI included cumulative net unrealized appreciation of $3 million and $7 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-backed securities (TBAs) held (refer to Note 6 c) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 82 percent and 83 percent of the total mortgage-backed securities at March 31, 2018 and December 31, 2017, 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:
 
 
 
March 31

 
 
 
December 31

 
 
 
2018

 
 
 
2017

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

 
Fair Value

 
Amortized Cost

 
Fair Value

Available for sale
 
 
 
 
 
 
 
Due in 1 year or less
$
3,735

 
$
3,746

 
$
3,164

 
$
3,182

Due after 1 year through 5 years
25,140

 
25,251

 
24,749

 
25,068

Due after 5 years through 10 years
25,243

 
25,097

 
25,388

 
25,704

Due after 10 years
8,974

 
9,197

 
9,255

 
9,695

 
63,092

 
63,291

 
62,556

 
63,649

Mortgage-backed securities
16,116

 
15,820

 
15,279

 
15,290

 
$
79,208

 
$
79,111

 
$
77,835

 
$
78,939

Held to maturity
 
 
 
 
 
 
 
Due in 1 year or less
$
838

 
$
840

 
$
743

 
$
746

Due after 1 year through 5 years
2,684

 
2,678

 
2,669

 
2,688

Due after 5 years through 10 years
4,713

 
4,635

 
4,744

 
4,756

Due after 10 years
3,337

 
3,322

 
3,455

 
3,542

 
11,572

 
11,475

 
11,611

 
11,732

Mortgage-backed securities
2,681

 
2,647

 
2,724

 
2,742

 
$
14,253

 
$
14,122

 
$
14,335

 
$
14,474



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. 

b) 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 and securities lending collateral are reviewed to identify impaired securities to be specifically evaluated for a potential OTTI. Refer to the 2017 Form 10-K for information on our evaluation of OTTI for all non-fixed maturities prior to our adoption of new accounting guidance on financial instruments, effective January 1, 2018.

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.

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.

For the three months ended March 31, 2018 and 2017, credit losses recognized in Net income for corporate securities were nil and $1 million, 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.

For the three months ended March 31, 2018 and 2017, there were no credit losses recognized in Net income for mortgage-backed securities.
The following table presents the components of Net realized gains (losses):
 
Three Months Ended
 
 
March 31
 
(in millions of U.S. dollars)
2018

 
2017

Fixed maturities:
 
 
 
OTTI on fixed maturities, gross
$
(1
)
 
$
(6
)
OTTI on fixed maturities recognized in OCI (pre-tax)

 

OTTI on fixed maturities, net
(1
)
 
(6
)
Gross realized gains excluding OTTI
66

 
34

Gross realized losses excluding OTTI
(88
)
 
(40
)
Total fixed maturities
(23
)
 
(12
)
Equity securities:
 
 
 
OTTI on equity securities

 
(5
)
Gross realized gains excluding OTTI
10

 
9

Gross realized losses excluding OTTI
(21
)
 

Total equity securities
(11
)
 
4

OTTI on other investments

 
(8
)
Other investments
29

 

Foreign exchange losses
(77
)
 
(19
)
Investment and embedded derivative instruments
17

 
6

Fair value adjustments on insurance derivative
38

 
93

S&P put options and futures
22

 
(74
)
Other derivative instruments
2

 
2

Other
1

 
1

Net realized gains (losses)
$
(2
)
 
$
(7
)



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: 
 
Three Months Ended
 
 
March 31
 
(in millions of U.S. dollars)
2018

 
2017

Balance of credit losses related to securities still held – beginning of period
$
22

 
$
35

Additions where no OTTI was previously recorded

 

Additions where an OTTI was previously recorded

 
1

Reductions for securities sold during the period
(7
)
 
(4
)
Balance of credit losses related to securities still held – end of period
$
15

 
$
32



c) Equity securities and Other investments
Effective January 1, 2018, we adopted new accounting guidance that requires any changes in fair value of equity securities and other investments that are accounted for under the cost-method to be recognized immediately in realized gains and losses in net income. As a result, beginning on January 1, 2018, realized gains and losses from these investments include both sales of securities and unrealized gains and losses as follows:

 
Three Months Ended
 
 
March 31, 2018
 
(in millions of U.S. dollars)
Equity Securities

 
Other Investments

Net gains (losses) recognized during the period
$
(11
)
 
$
29

Less: Net gains (losses) recognized from sales of securities
10

 

Unrealized gains (losses) recognized for securities still held at reporting date
$
(21
)
 
$
29



At December 31, 2017, the cost, gross unrealized appreciation, gross unrealized depreciation, and fair value of equity securities was $737 million, $212 million, $12 million, and $937 million, respectively. At December 31, 2017, the net unrealized appreciation (depreciation) was recorded within accumulated other comprehensive income on the balance sheet.

d) Gross unrealized loss
At March 31, 2018, there were 15,699 fixed maturities out of a total of 31,179 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $10 million. Fixed maturities in an unrealized loss position at March 31, 2018, 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
 
March 31, 2018
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

(in millions of U.S. dollars)
 
 
 
 
 
U.S. Treasury and agency
$
2,869

 
$
(55
)
 
$
1,314

 
$
(36
)
 
$
4,183

 
$
(91
)
Foreign
8,715

 
(155
)
 
1,643

 
(52
)
 
10,358

 
(207
)
Corporate securities
12,355

 
(260
)
 
1,501

 
(69
)
 
13,856

 
(329
)
Mortgage-backed securities
12,313

 
(257
)
 
3,033

 
(137
)
 
15,346

 
(394
)
States, municipalities, and political subdivisions
15,030

 
(218
)
 
1,343

 
(51
)
 
16,373

 
(269
)
Total fixed maturities
$
51,282

 
$
(945
)
 
$
8,834

 
$
(345
)
 
$
60,116

 
$
(1,290
)
 
0 – 12 Months
 
 
Over 12 Months
 
 
Total
 
December 31, 2017
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

 
Fair Value

 
Gross
Unrealized
Loss

(in millions of U.S. dollars)
 
 
 
 
 
U.S. Treasury and agency
$
2,172

 
$
(14
)
 
$
1,249

 
$
(26
)
 
$
3,421

 
$
(40
)
Foreign
5,657

 
(65
)
 
1,693

 
(49
)
 
7,350

 
(114
)
Corporate securities
5,210

 
(56
)
 
1,332

 
(46
)
 
6,542

 
(102
)
Mortgage-backed securities
6,194

 
(31
)
 
3,209

 
(74
)
 
9,403

 
(105
)
States, municipalities, and political subdivisions
9,259

 
(71
)
 
1,402

 
(32
)
 
10,661

 
(103
)
Total fixed maturities
28,492

 
(237
)
 
8,885

 
(227
)
 
37,377

 
(464
)
Equity securities
115

 
(12
)
 

 

 
115

 
(12
)
Other investments
78

 
(8
)
 

 

 
78

 
(8
)
Total
$
28,685

 
$
(257
)
 
$
8,885

 
$
(227
)
 
$
37,570

 
$
(484
)


e) Restricted assets
Chubb is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. Chubb is also required to restrict assets pledged under repurchase agreements, which represent Chubb's agreement to sell securities and repurchase them at a future date for a predetermined price. We also use trust funds in certain large reinsurance transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit (LOC) requirements. We also have investments in segregated portfolios primarily to provide collateral or guarantees for LOC and derivative transactions. Included in restricted assets at March 31, 2018 and December 31, 2017 are investments, primarily fixed maturities, totaling $23.6 billion and $23.3 billion, respectively, and cash of $125 million and $123 million, respectively.
The following table presents the components of restricted assets:
 
March 31

 
December 31

(in millions of U.S. dollars)
2018

 
2017

Trust funds
$
17,029

 
$
17,011

Deposits with U.S. regulatory authorities
2,463

 
2,345

Deposits with non-U.S. regulatory authorities
2,290

 
2,250

Assets pledged under repurchase agreements
1,460

 
1,434

Other pledged assets
433

 
414

 
$
23,675

 
$
23,454

v3.8.0.1
Fair value measurements
3 Months Ended
Mar. 31, 2018
Fair Value Disclosures [Abstract]  
Fair value measurements
Fair value measurements

a) Fair value hierarchy
Fair value of financial assets and financial liabilities is estimated based on the framework established in the fair value accounting guidance. The guidance defines fair value as the price to sell an asset or transfer a liability (an exit price) in an orderly transaction between market participants and establishes a three-level valuation hierarchy based on the reliability of the inputs. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data.

The three levels of the hierarchy are as follows:

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2 – Includes, among other items, inputs other than quoted prices that are observable for the asset or liability such as
interest rates and yield curves, quoted prices for similar assets and liabilities in active markets, and quoted prices for identical or similar assets and liabilities in markets that are not active; and
Level 3 – Inputs that are unobservable and reflect management’s judgments about assumptions that market participants
would use in pricing an asset or liability.

We categorize financial instruments within the valuation hierarchy at the balance sheet date based upon the lowest level of inputs that are significant to the fair value measurement. Accordingly, transfers between levels within the valuation hierarchy occur when there are significant changes to the inputs, such as increases or decreases in market activity, changes to the availability of current prices, changes to the transparency to underlying inputs, and whether there are significant variances in quoted prices. Transfers in and/or out of any level are assumed to occur at the end of the period.

We use pricing services to obtain fair value measurements for the majority of our investment securities. Based on management’s understanding of the methodologies used, these pricing services only produce an estimate of fair value if there is observable market information that would allow them to make a fair value estimate. Based on our understanding of the market inputs used by the pricing services, all applicable investments have been valued in accordance with GAAP. We do not adjust prices obtained from pricing services. The following is a description of the valuation techniques and inputs used to determine fair values for financial instruments carried at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.

Fixed maturities
We use pricing services to estimate fair value measurements for the majority of our fixed maturities. The pricing services use market quotations for fixed maturities that have quoted prices in active markets; such securities are classified within Level 1. For fixed maturities other than U.S. Treasury securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additional valuation factors that can be taken into account are nominal spreads, dollar basis, and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs used in the pricing evaluation, listed in the approximate order of priority include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each input is dependent on the asset class and the market conditions. Given the asset class, the priority of the use of inputs may change, or some market inputs may not be relevant. Additionally, fixed maturities valuation is more subjective when markets are less liquid due to the lack of market based inputs (i.e., stale pricing), which may increase the potential that an investment's estimated fair value is not reflective of the price at which an actual transaction would occur. The overwhelming majority of fixed maturities are classified within Level 2 because the most significant inputs used in the pricing techniques are observable. For a small number of fixed maturities, we obtain a single broker quote (typically from a market maker). Due to the disclaimers on the quotes that indicate that the price is indicative only, we include these fair value estimates in Level 3. 

Equity securities
Equity securities with active markets are classified within Level 1 as fair values are based on quoted market prices. For equity securities in markets which are less active, fair values are based on market valuations and are classified within Level 2. Equity securities for which pricing is unobservable are classified within Level 3.

Short-term investments
Short-term investments, which comprise securities due to mature within one year of the date of purchase that are traded in active markets, are classified within Level 1 as fair values are based on quoted market prices. Securities such as commercial paper and discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value. Short-term investments for which pricing is unobservable are classified within Level 3.

Other investments
Fair values for the majority of Other investments including investments in partially-owned investment companies, investment funds, and limited partnerships are based on their respective net asset values or equivalent (NAV) and are excluded from the fair value hierarchy table below. Certain of our long-duration contracts are supported by assets that do not qualify for separate account reporting under GAAP. These assets comprise mutual funds classified within Level 1 in the valuation hierarchy on the same basis as other equity securities traded in active markets. Other investments also include equity securities classified within Level 1, and fixed maturities, classified within Level 2, held in rabbi trusts maintained by Chubb for deferred compensation plans and are classified within the valuation hierarchy on the same basis as other equity securities and fixed maturities. Other investments for which pricing is unobservable are classified within Level 3.

Securities lending collateral
The underlying assets included in Securities lending collateral in the Consolidated balance sheets are fixed maturities which are classified in the valuation hierarchy on the same basis as other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to Chubb’s obligation to return the collateral plus interest as it is reported at contract value and not fair value in the Consolidated balance sheets.

Investment derivative instruments
Actively traded investment derivative instruments, including futures, options, and forward contracts are classified within Level 1 as fair values are based on quoted market prices. The fair value of cross-currency swaps is based on market valuations and is classified within Level 2. Investment derivative instruments are recorded in either Other assets or Accounts payable, accrued expenses, and other liabilities in the Consolidated balance sheets.

Other derivative instruments
We generally maintain positions in other derivative instruments including exchange-traded equity futures contracts and option contracts designed to limit exposure to a severe equity market decline, which would cause an increase in expected claims and, therefore, an increase in reserves for our guaranteed minimum death benefits (GMDB) and guaranteed living benefits (GLB) reinsurance business. Our position in exchange-traded equity futures contracts is classified within Level 1. The fair value of the majority of the remaining positions in other derivative instruments is based on significant observable inputs including equity security and interest rate indices. Accordingly, these are classified within Level 2. Other derivative instruments based on unobservable inputs are classified within Level 3. Other derivative instruments are recorded in either Other assets or Accounts payable, accrued expenses, and other liabilities in the Consolidated balance sheets.

Separate account assets
Separate account assets represent segregated funds where investment risks are borne by the customers, except to the extent of certain guarantees made by Chubb. Separate account assets comprise mutual funds classified within Level 1 in the valuation hierarchy on the same basis as other equity securities traded in active markets. Separate account assets also include fixed maturities classified within Level 2 because the most significant inputs used in the pricing techniques are observable. Excluded from the valuation hierarchy are the corresponding liabilities as they are reported at contract value and not fair value in the Consolidated balance sheets. Separate account assets are recorded in Other assets in the Consolidated balance sheets.

Guaranteed living benefits
The GLB arises from life reinsurance programs covering living benefit guarantees whereby we assume the risk of guaranteed minimum income benefits (GMIB) and guaranteed minimum accumulation benefits (GMAB) associated with variable annuity contracts. GLB’s are recorded in Accounts payable, accrued expenses, and other liabilities and Future policy benefits in the Consolidated balance sheets. For GLB reinsurance, Chubb estimates fair value using an internal valuation model which includes current market information and estimates of policyholder behavior. All of the treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of factors, including interest rates, equity markets, credit risk, current account value, market volatility, expected annuitization rates and other policyholder behavior, and changes in policyholder mortality.

The most significant policyholder behavior assumptions include lapse rates and the GMIB annuitization rates. Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty, but the underlying methodologies to determine rates applied to each treaty are comparable.

A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease.

The GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits.

The effect of changes in key market factors on assumed lapse and annuitization rates reflect emerging trends using data available from cedants. For treaties with limited experience, rates are established in line with data received from other ceding companies adjusted, as appropriate, with industry estimates. The model and related assumptions are regularly re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of updated information such as market conditions, market participant assumptions, and demographics of in-force annuities. Because of the significant use of unobservable inputs including policyholder behavior, GLB reinsurance is classified within Level 3. For the three months ended March 31, 2018 and 2017, no material technical refinements were made to the model. For detailed information on our lapse and annuitization rate assumptions, refer to Note 4 to the Consolidated Financial Statements of our 2017 Form 10-K.


Financial instruments measured at fair value on a recurring basis, by valuation hierarchy
March 31, 2018
Level 1

 
Level 2

 
Level 3

 
Total

(in millions of U.S. dollars)
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturities available for sale
 
 
 
 
 
 
 
U.S. Treasury and agency
$
3,094

 
$
744

 
$

 
$
3,838

Foreign

 
21,855

 
176

 
22,031

Corporate securities

 
22,494

 
1,073

 
23,567

Mortgage-backed securities

 
15,737

 
83

 
15,820

States, municipalities, and political subdivisions

 
13,855

 

 
13,855

 
3,094

 
74,685

 
1,332

 
79,111

Equity securities
884

 

 
64

 
948

Short-term investments
1,735

 
1,127

 
12

 
2,874

Other investments (1)
451

 
318

 
270

 
1,039

Securities lending collateral

 
2,039

 

 
2,039

Investment derivative instruments
25

 

 

 
25

Other derivative instruments
78

 

 

 
78

Separate account assets
2,774

 
100

 

 
2,874

Total assets measured at fair value (1)
$
9,041

 
$
78,269

 
$
1,678

 
$
88,988

Liabilities:
 
 
 
 
 
 
 
Investment derivative instruments
$
29

 
$

 
$

 
$
29

Other derivative instruments

 

 
2

 
2

GLB (2)

 

 
167

 
167

Total liabilities measured at fair value
$
29

 
$

 
$
169

 
$
198

(1) 
Excluded from the table above are partially-owned investments, investment funds, and limited partnerships of $3,866 million and other investments of $14 million at March 31, 2018 measured using NAV as a practical expedient.
(2) 
Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the Consolidated balance sheets.
 
December 31, 2017
Level 1

 
Level 2

 
Level 3

 
Total

(in millions of U.S. dollars)
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturities available for sale
 
 
 
 
 
 
 
U.S. Treasury and agency
$
3,129

 
$
569

 
$

 
$
3,698

Foreign

 
20,937

 
93

 
21,030

Corporate securities

 
22,959

 
1,037

 
23,996

Mortgage-backed securities

 
15,212

 
78

 
15,290

States, municipalities, and political subdivisions

 
14,925

 

 
14,925

 
3,129

 
74,602

 
1,208

 
78,939

Equity securities
893

 

 
44

 
937

Short-term investments
2,309

 
1,252

 

 
3,561

Other investments (1)
466

 
305

 
263

 
1,034

Securities lending collateral

 
1,737

 

 
1,737

Investment derivative instruments
18

 

 

 
18

Other derivative instruments
1

 

 

 
1

Separate account assets
2,635

 
99

 

 
2,734

Total assets measured at fair value (1)
$
9,451

 
$
77,995

 
$
1,515

 
$
88,961

Liabilities:
 
 
 
 
 
 
 
Investment derivative instruments
$
30

 
$

 
$