CHUBB LTD, 10-Q filed on 10/31/2019
Quarterly Report
v3.19.3
Document and Entity Information - SFr / shares
9 Months Ended
Sep. 30, 2019
Oct. 17, 2019
Dec. 31, 2018
Document And Entity Information [Abstract]      
Entity Registrant Name Chubb Ltd    
Entity Central Index Key 0000896159    
Document Type 10-Q    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus Q3    
Document Quarterly Report true    
Document Period End Date Sep. 30, 2019    
Entity File Number 1-11778    
Entity Incorporation, State or Country Code V8    
Entity Tax Identification Number 98-0091805    
Entity Address, Address Line One Baerengasse 32    
Entity Address, City or Town Zurich    
Entity Address, Country CH    
Entity Address, Postal Zip Code 8001    
Country Region 41    
City Area Code (0)43    
Local Phone Number 456 76 00    
Title of 12(b) Security Common Shares, par value CHF 24.15 per share    
Trading Symbol CB    
Security Exchange Name NYSE    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Common Shares, par value SFr 24.15   SFr 24.15
Entity Shell Company false    
Common Shares Outstanding   453,202,305  
Amendment Flag false    
Current Fiscal Year End Date --12-31    
Entity Small Business false    
Entity Emerging Growth Company false    
Document Transition Report false    
v3.19.3
Consolidated Balance Sheets - USD ($)
$ in Millions
Sep. 30, 2019
Dec. 31, 2018
Assets    
Fixed maturities available for sale, at fair value (amortized cost – $82,036 and $79,323) (includes hybrid financial instruments of $5 and $9) $ 85,044 $ 78,470
Fixed maturities held to maturity, at amortized cost (fair value – $13,096 and $13,259) 12,622 13,435
Equity securities, at fair value and cost 722 770
Short-term investments, at fair value (amortized cost – $2,838 and $3,016) 2,835 3,016
Other investments, at fair value and cost 5,955 5,277
Total investments 107,178 100,968
Cash 1,478 [1] 1,247 [2]
Restricted cash 111 93
Securities lending collateral 962 1,926
Accrued investment income 857 883
Insurance and reinsurance balances receivable 10,403 10,075
Reinsurance recoverable on losses and loss expenses 15,527 15,993
Reinsurance recoverable on policy benefits 199 202
Deferred policy acquisition costs 5,148 4,922
Value of business acquired 274 295
Goodwill 15,230 15,271
Other intangible assets 6,148 6,143
Prepaid reinsurance premiums 2,691 2,544
Investments in partially-owned insurance companies 1,064 678
Other assets 7,878 6,531
Total assets 175,148 167,771
Liabilities    
Unpaid losses and loss expenses 63,012 62,960
Unearned premiums 16,571 15,532
Future policy benefits 5,738 5,506
Insurance and reinsurance balances payable 6,341 6,437
Securities lending payable 962 1,926
Accounts payable, accrued expenses, and other liabilities 12,167 10,472
Deferred tax liabilities 766 304
Repurchase agreements 1,416 1,418
Short-term debt 10 509
Long-term debt 13,285 12,087
Trust preferred securities 308 308
Total liabilities 120,576 117,459
Commitments and contingencies
Shareholders’ equity    
Common Shares (CHF 24.15 par value; 479,783,864 shares issued; 453,533,642 and 459,203,378 shares outstanding) 11,121 11,121
Common Shares in treasury (26,250,222 and 20,580,486 shares) (3,504) (2,618)
Additional Paid in Capital, Common Stock 11,465 12,557
Retained earnings 34,969 31,700
Accumulated other comprehensive income (loss) (AOCI) 521 (2,448)
Total shareholders’ equity 54,572 50,312
Total liabilities and shareholders’ equity $ 175,148 $ 167,771
[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 September 30, 2019, 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, 2018, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.
v3.19.3
Consolidated Balance Sheets (Parenthetical)
$ in Millions
Sep. 30, 2019
USD ($)
shares
Dec. 31, 2018
USD ($)
shares
Statement of Financial Position [Abstract]    
Available for sale, at amortized cost $ 82,036 $ 79,323
Fixed maturities available for sale, hybrid financial instruments 5 9
Held to maturity, at Fair Value 13,096 13,259
short-term investments amortized cost $ 2,838 $ 3,016
Common Shares, shares issued | shares 479,783,864 479,783,864
Common Shares, shares outstanding | shares 453,533,642 459,203,378
Common Shares in treasury, shares | shares 26,250,222 20,580,486
v3.19.3
Consolidated Statements Of Operations and Comprehensive Income - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Revenues        
Net premiums written $ 8,622 $ 8,110 $ 24,278 $ 23,229
Increase in unearned premiums (295) (202) (923) (630)
Net premiums earned 8,327 7,908 23,355 22,599
Net investment income 873 823 2,568 2,457
Net realized gains (losses):        
Other-than-temporary impairment (OTTI) losses gross (54) (14) (81) (19)
Portion of OTTI losses recognized in other comprehensive income (OCI) 30 3 31 3
Net OTTI losses recognized in income (24) (11) (50) (16)
Net realized gains (losses) excluding OTTI losses (131) 30 (425) 51
Net Realized Gains Losses (155) 19 (475) 35
Total revenues 9,045 8,750 25,448 25,091
Expenses        
Losses and loss expenses 5,052 4,868 13,865 13,457
Policy benefits 158 127 515 428
Policy acquisition costs 1,603 1,504 4,611 4,432
Administrative expenses 752 719 2,220 2,158
Interest expense 138 164 418 488
Other (income) expense (57) (145) (326) (307)
Amortization of purchased intangibles 76 83 229 253
Chubb integration expenses 2 16 9 39
Total expenses 7,724 7,336 21,541 20,948
Income before income tax 1,321 1,414 3,907 4,143
Income tax expense (benefit) (includes nil, $(4), $(2) and $(19) on reclassified unrealized gains and losses) 230 183 626 536
Net income 1,091 1,231 3,281 3,607
Other comprehensive income (loss)        
Unrealized appreciation (depreciation) 694 (251) 3,791 (2,063)
Reclassification adjustment for net realized (gains) losses included in net income 11 38 43 142
Unrealized appreciation (Depreciation) after reclassification adjustment 705 (213) 3,834 (1,921)
Change in:        
Cumulative foreign currency translation adjustment (193) (482) (143) (659)
Postretirement benefit liability adjustment (17) (21) (62) (61)
Other comprehensive income (loss), before income tax 495 (716) 3,629 (2,641)
Income tax (expense) benefit related to OCI items (113) 77 (660) 356
Other comprehensive income (loss) 382 (639) 2,969 (2,285)
Comprehensive income $ 1,473 $ 592 $ 6,250 $ 1,322
Earnings per share        
Basic earnings per share $ 2.40 $ 2.66 $ 7.18 $ 7.76
Diluted earnings per share $ 2.38 $ 2.64 $ 7.13 $ 7.71
v3.19.3
Consolidated Statements of Operations and Comprehensive Income (Parenthetical) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Total net realized gains (losses) reclassified from AOCI $ (11) $ (38) $ (43) $ (142)
Income tax expense on reclassified unrealized gains and loses $ 0 $ (4) $ (2) $ (19)
v3.19.3
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]
AOCI, Accumulated Gain (Loss), Debt Securities, Available-for-sale, Parent [Member]
Cumulative Foreign Currency Translation Adjustment [Member]
Postretirement Benefit Liability Adjustment [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Cumulative effect of adoption of accounting guidance         $ 410 $ (417)      
Balance - beginning of period at Dec. 31, 2017   $ 11,121 $ (1,944) $ 13,978 27,884 1,033 $ (1,187) $ 280  
Balance - beginning of period (Previous Accounting Guidance [Member]) at Dec. 31, 2017         27,474 1,450      
Common Shares repurchased     (703)            
Net shares redeemed under employee share-based compensation plans     275 (261)          
Exercise of stock options       (42)          
Share-based compensation expense       186          
Adjustments to Additional Paid in Capital, Dividends in Excess of Retained Earnings       (1,008)          
Net income (loss) $ 3,607       3,607        
Funding of dividends declared from Additional paid-in capital         1,008        
Dividends declared on Common Shares         (1,008)        
Change in period, before reclassification from AOCI, net of income tax benefit (expense) of $(125), $58, $(674) and $358           (1,705)      
Amounts reclassified from AOCI, net of income tax benefit (expense) of nil, $(4), $(2) and $(19)           123      
Change in period, net of income tax benefit (expense) of $(125), $54, $(676) and $339           (1,582)      
Change in period, net of income tax benefit of $8, $20, $3 and $5             (654)    
Change in period, net of income tax benefit of $4, $3, $13 and $12               (49)  
Balance - end of period at Sep. 30, 2018 50,934 11,121 (2,372) 12,853 31,491 (549) (1,841) 231 $ (2,159)
Cumulative effect of adoption of accounting guidance         0 0      
Balance - beginning of period at Jun. 30, 2018   11,121 (2,040) 13,150 30,260 (390) (1,379) 249  
Balance - beginning of period (Previous Accounting Guidance [Member]) at Jun. 30, 2018         30,260 (390)      
Common Shares repurchased     (379)            
Net shares redeemed under employee share-based compensation plans     47 0          
Exercise of stock options       (23)          
Share-based compensation expense       63          
Adjustments to Additional Paid in Capital, Dividends in Excess of Retained Earnings       (337)          
Net income (loss) 1,231       1,231        
Funding of dividends declared from Additional paid-in capital         337        
Dividends declared on Common Shares         (337)        
Change in period, before reclassification from AOCI, net of income tax benefit (expense) of $(125), $58, $(674) and $358           (193)      
Amounts reclassified from AOCI, net of income tax benefit (expense) of nil, $(4), $(2) and $(19)           34      
Change in period, net of income tax benefit (expense) of $(125), $54, $(676) and $339           (159)      
Change in period, net of income tax benefit of $8, $20, $3 and $5             (462)    
Change in period, net of income tax benefit of $4, $3, $13 and $12               (18)  
Balance - end of period at Sep. 30, 2018 50,934 11,121 (2,372) 12,853 31,491 (549) (1,841) 231 (2,159)
Cumulative effect of adoption of accounting guidance           0      
Cumulative effect of adoption of accounting guidance | Accounting Standards Update 2017-08 [Member]         (12)        
Balance - beginning of period at Dec. 31, 2018 50,312 11,121 (2,618) 12,557 31,688 (545) (1,976) 73  
Balance - beginning of period (Previous Accounting Guidance [Member]) at Dec. 31, 2018         31,700 (545)      
Common Shares repurchased     (1,221)            
Net shares redeemed under employee share-based compensation plans     335 (184)          
Exercise of stock options       (65)          
Share-based compensation expense       177          
Adjustments to Additional Paid in Capital, Dividends in Excess of Retained Earnings       (1,020)          
Net income (loss) 3,281       3,281        
Funding of dividends declared from Additional paid-in capital         1,020        
Dividends declared on Common Shares         (1,020)        
Change in period, before reclassification from AOCI, net of income tax benefit (expense) of $(125), $58, $(674) and $358           3,117      
Amounts reclassified from AOCI, net of income tax benefit (expense) of nil, $(4), $(2) and $(19)           41      
Change in period, net of income tax benefit (expense) of $(125), $54, $(676) and $339           3,158      
Change in period, net of income tax benefit of $8, $20, $3 and $5             (140)    
Change in period, net of income tax benefit of $4, $3, $13 and $12               (49)  
Balance - end of period at Sep. 30, 2019 54,572 11,121 (3,504) 11,465 34,969 2,613 (2,116) 24 521
Cumulative effect of adoption of accounting guidance           0      
Cumulative effect of adoption of accounting guidance | Accounting Standards Update 2017-08 [Member]         0        
Balance - beginning of period at Jun. 30, 2019   11,121 (3,093) 11,757 33,878 2,033 (1,931) 37  
Balance - beginning of period (Previous Accounting Guidance [Member]) at Jun. 30, 2019         33,878 2,033      
Common Shares repurchased     (478)            
Net shares redeemed under employee share-based compensation plans     67 6          
Exercise of stock options       (17)          
Share-based compensation expense       60          
Adjustments to Additional Paid in Capital, Dividends in Excess of Retained Earnings       (341)          
Net income (loss) 1,091       1,091        
Funding of dividends declared from Additional paid-in capital         341        
Dividends declared on Common Shares         (341)        
Change in period, before reclassification from AOCI, net of income tax benefit (expense) of $(125), $58, $(674) and $358           569      
Amounts reclassified from AOCI, net of income tax benefit (expense) of nil, $(4), $(2) and $(19)           11      
Change in period, net of income tax benefit (expense) of $(125), $54, $(676) and $339           580      
Change in period, net of income tax benefit of $8, $20, $3 and $5             (185)    
Change in period, net of income tax benefit of $4, $3, $13 and $12               (13)  
Balance - end of period at Sep. 30, 2019 $ 54,572 $ 11,121 $ (3,504) $ 11,465 $ 34,969 $ 2,613 $ (2,116) $ 24 $ 521
v3.19.3
Consolidated Statements Of Shareholders' Equity (Parenthetical) - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Statement of Stockholders' Equity [Abstract]        
Other Comprehensive Income (Loss), Available-for-sale Securities, before Reclassification Adjustments, Tax $ (125) $ 58 $ (674) $ 358
Other Comprehensive Income (Loss), Reclassification Adjustment from AOCI for Sale of Securities, Tax 0 (4) (2) (19)
Net unrealized appreciation on investments, Change in period, income tax (expense) benefit (125) 54 (676) 339
Cumulative translation adjustment, Change in period, income tax(expense) benefit 8 20 3 5
Pension liability adjustment, Change in period, income tax (expense) benefit $ 4 $ 3 $ 13 $ 12
v3.19.3
Consolidated Statements Of Cash Flows - USD ($)
$ in Millions
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Cash flows from operating activities    
Net income $ 3,281 $ 3,607
Adjustments to reconcile net income to net cash flows from operating activities    
Net realized (gains) losses 475 (35)
Amortization of premiums/discounts on fixed maturities 294 454
Amortization of purchased intangibles 229 253
Deferred income taxes (178) 46
Unpaid losses and loss expenses 277 436
Unearned premiums 1,061 779
Future policy benefits 148 170
Insurance and reinsurance balances payable (114) 574
Accounts payable, accrued expenses, and other liabilities (6) (172)
Income taxes payable 83 182
Insurance and reinsurance balances receivable (371) (1,074)
Reinsurance recoverable 426 (219)
Deferred policy acquisition costs (266) (270)
Other (426) (834)
Net cash flows from operating activities 4,913 3,897
Cash flows from investing activities    
Purchases of fixed maturities available for sale (19,778) (16,788)
Purchases of fixed maturities held to maturity (143) (380)
Purchases of equity securities (466) (148)
Sales of fixed maturities available for sale 10,430 9,041
Sales of to be announced mortgage-backed securities 6 0
Sales of equity securities 577 247
Maturities and redemptions of fixed maturities available for sale 6,390 5,482
Maturities and redemptions of fixed maturities held to maturity 814 1,001
Net change in short-term investments 202 64
Net derivative instruments settlements (647) (46)
Private equity contribution (1,093) (1,112)
Private equity distribution 973 743
Other (826) (231)
Net cash flows used for investing activities (3,561) (2,127)
Cash flows from financing activities    
Dividends paid on Common Shares (1,014) (1,001)
Common Shares repurchased (1,203) (732)
Proceeds from issuance of long-term debt 1,286 2,171
Repayment of long-term debt (501) (2,001)
Proceeds from issuance of repurchase agreements 2,394 1,572
Repayment of repurchase agreements (2,396) (1,566)
Proceeds from share-based compensation plans 155 86
Policyholder contract deposits 376 269
Policyholder contract withdrawals (221) (222)
Net cash flows used for financing activities (1,124) (1,424)
Effect of foreign currency rate changes on cash and restricted cash 21 (40)
Net increase (decrease) in cash and restricted cash 249 306
Cash and restricted cash - beginning of period 1,340 [1] 851 [2]
Cash and restricted cash - end of period 1,589 [1] 1,157 [2]
Supplemental cash flow information    
Taxes paid 733 313
Interest paid $ 327 $ 403
[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 September 30, 2019 and December 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 September 30, 2018 and December 31, 2017, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.
v3.19.3
General
9 Months Ended
Sep. 30, 2019
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 2018 Form 10-K.

b) Restricted cash
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:
 
September 30

 
December 31

(in millions of U.S. dollars)
2019

 
2018

Cash
$
1,478

 
$
1,247

Restricted cash
111

 
93

Total cash and restricted cash shown in the Consolidated statements of cash flows
$
1,589

 
$
1,340



c) Goodwill
During the nine months ended September 30, 2019, Goodwill decreased $41 million, primarily reflecting the impact of foreign exchange.

d) Accounting guidance adopted in 2019
Premium Amortization on Purchased Callable Debt Securities
Effective January 1, 2019, we adopted new accounting guidance on "Premium Amortization on Purchased Callable Debt Securities" for bonds held at a premium on a modified retrospective basis. The guidance requires the premium to be amortized to the earliest call date. As a result, we recorded a cumulative effect adjustment to decrease beginning retained earnings by $12 million after-tax ($15 million pre-tax). Securities held at a discount did not require an accounting change.

Lease Accounting
Effective for the quarter ended March 31, 2019, we adopted new lease accounting guidance and elected to utilize a modified retrospective approach which allowed us to initially apply the new lease standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings for 2019, with no adjustment to prior periods presented. The cumulative effect adjustment to the opening balance of retained earnings was zero. Our leases consist principally of real estate operating leases that are amortized on a straight-line basis over the term of the lease. The adoption of the updated guidance resulted in recognizing a right-of-use asset, which was recorded within Other assets, and a lease liability, which was recorded within Accounts payable, accrued expenses, and other liabilities on the Consolidated balance sheet as well as de-recognizing the liability for deferred rent that was required under the previous guidance. The adoption of the new guidance did not have a material effect on our results of operations, financial condition or liquidity. Refer to Note 6 h) for additional information on leases.

Refer to the 2018 Form 10-K for information on accounting guidance not yet adopted.
v3.19.3
Investments
9 Months Ended
Sep. 30, 2019
Investments, Debt and Equity Securities [Abstract]  
Investments Investments

a) Fixed maturities
 
September 30, 2019
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
$
3,438

 
$
133

 
$
(1
)
 
$
3,570

 
$

Foreign
21,974

 
1,171

 
(68
)
 
23,077

 
(27
)
Corporate securities
30,344

 
1,131

 
(108
)
 
31,367

 
(5
)
Mortgage-backed securities
18,457

 
570

 
(13
)
 
19,014

 

States, municipalities, and political subdivisions
7,823

 
205

 
(12
)
 
8,016

 

 
$
82,036

 
$
3,210

 
$
(202
)
 
$
85,044

 
$
(32
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
1,234

 
$
36

 
$

 
$
1,270

 
$

Foreign
1,401

 
85

 
(1
)
 
1,485

 

Corporate securities
2,391

 
127

 
(4
)
 
2,514

 

Mortgage-backed securities
2,391

 
83

 

 
2,474

 

States, municipalities, and political subdivisions
5,205

 
149

 
(1
)
 
5,353

 

 
$
12,622

 
$
480

 
$
(6
)
 
$
13,096

 
$


December 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
$
4,158

 
$
30

 
$
(43
)
 
$
4,145

 
$

Foreign
21,370

 
395

 
(349
)
 
21,416

 

Corporate securities
27,183

 
150

 
(750
)
 
26,583

 
(6
)
Mortgage-backed securities
15,758

 
66

 
(284
)
 
15,540

 
(1
)
States, municipalities, and political subdivisions
10,854

 
49

 
(117
)
 
10,786

 

 
$
79,323

 
$
690

 
$
(1,543
)
 
$
78,470

 
$
(7
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
1,185

 
$
8

 
$
(11
)
 
$
1,182

 
$

Foreign
1,549

 
11

 
(18
)
 
1,542

 

Corporate securities
2,601

 
11

 
(104
)
 
2,508

 

Mortgage-backed securities
2,524

 
5

 
(43
)
 
2,486

 

States, municipalities, and political subdivisions
5,576

 
16

 
(51
)
 
5,541

 

 
$
13,435

 
$
51

 
$
(227
)
 
$
13,259

 
$



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 and nine months ended September 30, 2019, $21 million and $5 million, respectively, of net unrealized depreciation related to such securities are included in OCI. For the three and nine months ended September 30, 2018,
$2 million and $6 million, respectively, of net unrealized depreciation related to such securities is included in OCI. At September 30, 2019 and December 31, 2018, AOCI included cumulative net unrealized depreciation of $26 million and net unrealized appreciation of $1 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 b) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 83 percent and 81 percent of the total mortgage-backed securities at September 30, 2019 and December 31, 2018, 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:
 
 
 
September 30

 
 
 
December 31

 
 
 
2019

 
 
 
2018

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

 
Fair Value

 
Amortized Cost

 
Fair Value

Available for sale
 
 
 
 
 
 
 
Due in 1 year or less
$
3,869

 
$
3,889

 
$
3,569

 
$
3,568

Due after 1 year through 5 years
27,168

 
27,728

 
27,134

 
27,005

Due after 5 years through 10 years
23,368

 
24,309

 
24,095

 
23,543

Due after 10 years
9,174

 
10,104

 
8,767

 
8,814

 
63,579

 
66,030

 
63,565

 
62,930

Mortgage-backed securities
18,457

 
19,014

 
15,758

 
15,540

 
$
82,036

 
$
85,044

 
$
79,323

 
$
78,470

Held to maturity
 
 
 
 
 
 
 
Due in 1 year or less
$
487

 
$
490

 
$
536

 
$
537

Due after 1 year through 5 years
3,567

 
3,629

 
3,122

 
3,106

Due after 5 years through 10 years
3,822

 
3,959

 
4,468

 
4,407

Due after 10 years
2,355

 
2,544

 
2,785

 
2,723

 
10,231

 
10,622

 
10,911

 
10,773

Mortgage-backed securities
2,391

 
2,474

 
2,524

 
2,486

 
$
12,622

 
$
13,096

 
$
13,435

 
$
13,259



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.

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 and foreign securities
Projected cash flows for corporate and foreign 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 and foreign 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 and nine months ended September 30, 2019, credit losses recognized in Net income for corporate and foreign securities were $18 million and $32 million, respectively. For the three and nine months ended September 30, 2018, credit losses recognized in Net income for corporate and foreign securities were $8 million and $9 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 and nine months ended September 30, 2019 and 2018, 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
 
 
Nine Months Ended
 
 
September 30
 
 
September 30
 
(in millions of U.S. dollars)
2019

 
2018

 
2019

 
2018

Fixed maturities:
 
 
 
 
 
 
 
OTTI on fixed maturities, gross
$
(54
)
 
$
(14
)
 
$
(81
)
 
$
(19
)
OTTI on fixed maturities recognized in OCI (pre-tax)
30

 
3

 
31

 
3

OTTI on fixed maturities, net
(24
)
 
(11
)
 
(50
)
 
(16
)
Gross realized gains excluding OTTI
70

 
64

 
153

 
229

Gross realized losses excluding OTTI
(57
)
 
(91
)
 
(146
)
 
(355
)
Total fixed maturities
(11
)
 
(38
)
 
(43
)
 
(142
)
Equity securities
3

 
35

 
66

 
22

Other investments
(4
)
 
5

 
(18
)
 
23

Foreign exchange gains
84

 
39

 
86

 
102

Investment and embedded derivative instruments
(97
)
 
37

 
(408
)
 
78

Fair value adjustments on insurance derivative
(106
)
 
54

 
(57
)
 
133

S&P futures
(6
)
 
(100
)
 
(89
)
 
(122
)
Other derivative instruments
(14
)
 
(8
)
 
(8
)
 
2

Other
(4
)
 
(5
)
 
(4
)
 
(61
)
Net realized gains (losses) (pre-tax)
$
(155
)
 
$
19

 
$
(475
)
 
$
35



Other net realized gains (losses) for the nine months ended September 30, 2018 included a $36 million loss from the extinguishment of debt related to the redemption of the $1.0 billion 6.375 percent unsecured junior subordinated capital securities and a $22 million loss related to lease impairments.

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
 
 
Nine Months Ended
 
 
September 30
 
 
September 30
 
(in millions of U.S. dollars)
2019

 
2018

 
2019

 
2018

Balance of credit losses related to securities still held – beginning of period
$
30

 
$
16

 
$
34

 
$
22

Additions where no OTTI was previously recorded
17

 
6

 
28

 
7

Additions where an OTTI was previously recorded
1

 
2

 
4

 
2

Reductions for securities sold during the period
(8
)
 
(3
)
 
(26
)
 
(10
)
Balance of credit losses related to securities still held – end of period
$
40

 
$
21

 
$
40

 
$
21



c) Equity securities and Other investments
The following table presents realized gains and losses from equity securities and other investments, including both sales of securities and unrealized gains and losses from changes in fair value:
 
 
 
Three Months Ended
 
 
 
 
September 30
 
 
2019
 
 
2018
 
(in millions of U.S. dollars)
Equity Securities

 
Other Investments

 
Total

 
Equity Securities

 
Other Investments

 
Total

Net gains (losses) recognized during the period
$
3

 
$
(4
)
 
$
(1
)
 
$
35

 
$
5

 
$
40

Less: Net gains (losses) recognized from sales of securities
24

 
(2
)
 
22

 
48

 

 
48

Unrealized gains (losses) recognized for securities still held at reporting date
$
(21
)
 
$
(2
)
 
$
(23
)
 
$
(13
)
 
$
5

 
$
(8
)


 
 
 
Nine Months Ended
 
 
 
 
September 30
 
 
2019
 
 
2018
 
(in millions of U.S. dollars)
Equity Securities

 
Other Investments

 
Total

 
Equity Securities

 
Other Investments

 
Total

Net gains (losses) recognized during the period
$
66

 
$
(18
)
 
$
48

 
$
22

 
$
23

 
$
45

Less: Net gains (losses) recognized from sales of securities
57

 
(4
)
 
53

 
63

 

 
63

Unrealized gains (losses) recognized for securities still held at reporting date
$
9

 
$
(14
)
 
$
(5
)
 
$
(41
)
 
$
23

 
$
(18
)


d) Gross unrealized loss
At September 30, 2019, there were 4,231 fixed maturities out of a total of 31,075 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $7 million. Fixed maturities in an unrealized loss position at September 30, 2019, 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
 
September 30, 2019
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
$
144

 
$

 
$
531

 
$
(1
)
 
$
675

 
$
(1
)
Foreign
1,077

 
(23
)
 
1,014

 
(46
)
 
2,091

 
(69
)
Corporate securities
2,600

 
(62
)
 
1,095

 
(50
)
 
3,695

 
(112
)
Mortgage-backed securities
640

 
(2
)
 
1,228

 
(11
)
 
1,868

 
(13
)
States, municipalities, and political subdivisions
650

 
(1
)
 
371

 
(12
)
 
1,021

 
(13
)
Total fixed maturities
$
5,111

 
$
(88
)
 
$
4,239

 
$
(120
)
 
$
9,350

 
$
(208
)
 
0 – 12 Months
 
 
Over 12 Months
 
 
Total
 
December 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
$
523

 
$
(4
)
 
$
2,859

 
$
(50
)
 
$
3,382

 
$
(54
)
Foreign
6,764

 
(208
)
 
5,349

 
(159
)
 
12,113

 
(367
)
Corporate securities
16,538

 
(599
)
 
4,873

 
(255
)
 
21,411

 
(854
)
Mortgage-backed securities
6,103

 
(98
)
 
6,913

 
(229
)
 
13,016

 
(327
)
States, municipalities, and political subdivisions
5,024

 
(44
)
 
7,768

 
(124
)
 
12,792

 
(168
)
Total fixed maturities
$
34,952

 
$
(953
)
 
$
27,762

 
$
(817
)
 
$
62,714

 
$
(1,770
)


e) Investments in partially-owned insurance companies
On May 31, 2019, we completed the purchase of an additional ownership in Huatai Insurance Group Company Limited ("Huatai Group") of approximately 6.2 percent for $329 million. We increased our aggregate ownership interest in Huatai Group to approximately 26.2 percent. We continue to apply the equity method of accounting to our investment in Huatai Group by recording our share of net income or loss in Other (income) expense in the Consolidated statements of operations. With our increased ownership interest, Huatai Group becomes the first domestic Chinese financial services holding company to convert to a Sino-foreign equity joint venture.

f) 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 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 have investments in segregated portfolios primarily to provide collateral or guarantees for LOC and derivative transactions. Included in restricted assets at September 30, 2019 and December 31, 2018 are investments, primarily fixed maturities, totaling $21.3 billion and $21.0 billion, respectively, and cash of $111 million and $93 million, respectively.
The following table presents the components of restricted assets:
 
September 30

 
December 31

(in millions of U.S. dollars)
2019

 
2018

Trust funds
$
14,325

 
$
13,988

Deposits with U.S. regulatory authorities
2,476

 
2,405

Deposits with non-U.S. regulatory authorities
2,706

 
2,531

Assets pledged under repurchase agreements
1,474

 
1,468

Other pledged assets
447

 
692

Total
$
21,428

 
$
21,084


v3.19.3
Fair value measurements
9 Months Ended
Sep. 30, 2019
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.

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 supplemental retirement 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 and interest rate 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 maintain positions in exchange-traded equity futures 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 positions in exchange-traded equity futures contracts are 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) 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 and nine months ended September 30, 2019 and 2018, no material technical refinements were made to the model. For detailed information on our lapse and annuitization rate assumptions, refer to Note 3 to the Consolidated Financial Statements of our 2018 Form 10-K.

Financial instruments measured at fair value on a recurring basis, by valuation hierarchy
September 30, 2019
Level 1

 
Level 2

 
Level 3

 
Total

(in millions of U.S. dollars)
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturities available for sale
 
 
 
 
 
 
 
U.S. Treasury and agency
$
2,893

 
$
677

 
$

 
$
3,570

Foreign

 
22,684

 
393

 
23,077

Corporate securities

 
29,917

 
1,450

 
31,367

Mortgage-backed securities

 
18,937

 
77

 
19,014

States, municipalities, and political subdivisions

 
8,016

 

 
8,016

 
2,893

 
80,231

 
1,920

 
85,044

Equity securities
662

 
4

 
56

 
722

Short-term investments
1,483

 
1,346

 
6

 
2,835

Other investments (1)
392

 
353

 
10

 
755

Securities lending collateral

 
962

 

 
962

Investment derivative instruments
22

 

 

 
22

Other derivative instruments
7