CHUBB LTD, 10-Q filed on 5/4/2017
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2017
Apr. 21, 2017
Entity Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2017 
 
Document Fiscal Year Focus
2017 
 
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
 
466,925,420 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
Investments [Abstract]
 
 
Fixed maturities available for sale, at fair value (amortized cost - $79,957 and $79,536) (includes hybrid financial instruments of $2)
$ 80,806 
$ 80,115 
Fixed maturities held to maturity, at amortized cost (fair value – $10,604 and $10,670)
10,519 
10,644 
Equity securities, at fair value (cost – $699 and $706)
835 
814 
Short-term investments, at fair value and amortized cost
2,780 
3,002 
Other investments (cost – $4,271 and $4,270)
4,551 
4,519 
Total investments
99,491 
99,094 
Cash
1,063 1 2
985 1 3
Securities lending collateral
1,071 
1,092 
Accrued investment income
897 
918 
Insurance and reinsurance balances receivable
8,880 
8,970 
Reinsurance recoverable on losses and loss expenses
13,769 
13,577 
Reinsurance recoverable on policy benefits
187 
182 
Deferred policy acquisition costs
4,406 
4,314 
Value of business acquired
345 
355 
Goodwill
15,387 
15,332 
Other intangible assets
6,674 
6,763 
Prepaid reinsurance premiums
2,549 
2,448 
Investments in partially-owned insurance companies
666 
666 
Other assets
5,582 
5,090 
Total assets
160,967 
159,786 
Liabilities
 
 
Unpaid losses and loss expenses
60,579 
60,540 
Unearned premiums
14,857 
14,779 
Future policy benefits
5,086 
5,036 
Insurance and reinsurance balances payable
5,797 
5,637 
Securities lending payable
1,072 
1,093 
Accounts payable, accrued expenses, and other liabilities
9,073 
8,617 
Deferred tax liabilities
967 
988 
Repurchase agreements
1,404 
1,403 
Short-term debt
300 
500 
Long-term debt
12,300 
12,610 
Trust preferred securities
308 
308 
Total liabilities
111,743 
111,511 
Commitments and contingencies
   
   
Shareholders’ equity
 
 
Common Shares (CHF 24.15 par value; 479,783,864 shares issued; 467,223,019 and 465,968,716 shares outstanding)
11,121 
11,121 
Common Shares in treasury (12,560,845 and 13,815,148 shares)
(1,398)
(1,480)
Additional paid-in capital
14,795 
15,335 
Retained earnings
24,706 
23,613 
Accumulated other comprehensive income (loss) (AOCI)
(314)
Total shareholders’ equity
49,224 
48,275 
Total liabilities and shareholders’ equity
$ 160,967 
$ 159,786 
Consolidated Balance Sheets (Parenthetical)
In Millions, except Share data, unless otherwise specified
Mar. 31, 2017
USD ($)
Mar. 31, 2017
CHF
Dec. 31, 2016
USD ($)
Dec. 31, 2016
CHF
Statement of Financial Position [Abstract]
 
 
 
 
Available for sale, at amortized cost
$ 79,957 
 
$ 79,536 
 
Fixed maturities available for sale, hybrid financial instruments
 
 
Held to maturity, at Fair Value
10,604 
 
10,670 
 
Equity securities, at cost
699 
 
706 
 
Other investments, cost
$ 4,271 
 
$ 4,270 
 
Common Shares, par value
 
 24.15 
 
 24.15 
Common Shares, shares issued
479,783,864 
479,783,864 
479,783,864 
479,783,864 
Common Shares, shares outstanding
467,223,019 
467,223,019 
465,968,716 
465,968,716 
Common Shares in treasury, shares
12,560,845 
12,560,845 
13,815,148 
13,815,148 
Consolidated Statements Of Operations and Comprehensive Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Revenues
 
 
Net premiums written
$ 6,710 
$ 5,995 
Decrease in unearned premiums
62 
602 
Net premiums earned
6,772 
6,597 
Net investment income
745 
674 
Net Realized Gains Losses [Abstract]
 
 
Other-than-temporary impairment (OTTI) losses gross
(19)
(71)
Portion of OTTI losses recognized in other comprehensive income (OCI)
Net OTTI losses recognized in income
(19)
(63)
Net realized gains (losses) excluding OTTI losses
12 
(331)
Total net realized gains (losses) (includes $(8) and $(152) reclassified from AOCI)
(7)
(394)
Total revenues
7,510 
6,877 
Expenses
 
 
Losses and loss expenses
3,789 
3,674 
Policy benefits
168 
126 
Policy acquisition costs
1,397 
1,413 
Administrative expenses
676 
772 
Interest expense
154 
146 
Other (income) expense
(70)
28 
Amortization of purchased intangibles
64 
Chubb integration expenses
111 
148 
Total expenses
6,289 
6,314 
Income before income tax
1,221 
563 
Income tax (benefit) expense (includes $(6) and $(1) on reclassified unrealized losses)
128 
124 
Net income
1,093 
439 
Other comprehensive income
 
 
Unrealized appreciation
307 
905 
Reclassification adjustment for net realized losses included in net income
152 
Unrealized appreciation (Depreciation) after reclassification adjustment
315 
1,057 
Change in:
 
 
Cumulative foreign currency translation adjustment
134 
312 
Postretirement benefit liability adjustment
(20)
Other comprehensive income, before income tax
429 
1,371 
Income tax expense related to OCI items
(115)
(269)
Other comprehensive income
314 
1,102 
Comprehensive income
$ 1,407 
$ 1,541 
Earnings per share
 
 
Basic earnings per share
$ 2.33 
$ 0.98 
Diluted earnings per share
$ 2.31 
$ 0.97 
Consolidated Statements Of Operations and Comprehensive Income Consolidated Statements of Operations and Comprehensive Income (Parenthetical) (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Total net realized gains (losses) reclassified from AOCI
$ (8)
$ (152)
Income tax expense on reclassified unrealized gains and loses
$ (6)
$ (1)
Consolidated Statements Of Shareholders' Equity (USD $)
In Millions
Total
Common Stock [Member]
Common Stock [Member]
The Chubb Corporation [Member]
Common shares in treasury [Member]
Additional Paid-in Capital [Member]
Additional Paid-in Capital [Member]
The Chubb Corporation [Member]
Retained Earnings [Member]
Accumulated Net Unrealized Investment Gain (Loss) [Member]
Cumulative Foreign Currency Translation Adjustment [Member]
Postretirement Benefit Liability Adjustment [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Balance - beginning of period at Dec. 31, 2015
 
$ 7,833 
 
$ (1,922)
$ 4,481 
 
$ 19,478 
$ 874 
$ (1,539)
$ (70)
 
Shares Issued for Chubb Corp Acquisition
 
 
3,288 
 
 
11,916 
 
 
 
 
 
Common Shares repurchased
 
 
 
 
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
 
 
274 
(310)
323 
 
 
 
 
 
Exercise of stock options
 
 
 
 
(21)
 
 
 
 
 
 
Share-based compensation expense and other
 
 
 
 
65 
 
 
 
 
 
 
Funding of dividends declared to Retained earnings
 
 
 
 
(314)
 
 
 
 
 
 
Net income
439 
 
 
 
 
 
439 
 
 
 
 
Funding of dividends declared from Additional paid-in capital
 
 
 
 
 
 
314 
 
 
 
 
Dividends declared on Common Shares
 
 
 
 
 
 
(314)
 
 
 
 
Change in period, before reclassification from AOCI, net of income tax expense of $(102) and $(232)
 
 
 
 
 
 
 
673 
 
 
 
Amounts reclassified from AOCI, net of income tax expense of $(6) and $(1)
 
 
 
 
 
 
 
151 
 
 
 
Change in period, net of income tax expense of $(108) and $(233)
 
 
 
 
 
 
 
824 
 
 
 
Change in period, net of income tax expense of $(3) and $(35)
 
 
 
 
 
 
 
 
277 
 
 
Change in period, net of income tax expense of $(4) and $(1)
 
 
 
 
 
 
 
 
 
 
Balance - end of period at Mar. 31, 2016
45,897 
11,121 
 
(1,648)
16,140 
 
19,917 
1,698 
(1,262)
(69)
367 
Balance - beginning of period at Dec. 31, 2016
48,275 
11,121 
 
(1,480)
15,335 
 
23,613 
1,058 
(1,663)
291 
 
Shares Issued for Chubb Corp Acquisition
 
 
 
 
 
 
 
 
 
Common Shares repurchased
 
 
 
(140)
 
 
 
 
 
 
 
Net shares redeemed under employee share-based compensation plans
 
 
 
222 
(260)
 
 
 
 
 
Exercise of stock options
 
 
 
 
(21)
 
 
 
 
 
 
Share-based compensation expense and other
 
 
 
 
65 
 
 
 
 
 
 
Funding of dividends declared to Retained earnings
 
 
 
 
(324)
 
 
 
 
 
 
Net income
1,093 
 
 
 
 
 
1,093 
 
 
 
 
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 expense of $(102) and $(232)
 
 
 
 
 
 
 
205 
 
 
 
Amounts reclassified from AOCI, net of income tax expense of $(6) and $(1)
 
 
 
 
 
 
 
 
 
 
Change in period, net of income tax expense of $(108) and $(233)
 
 
 
 
 
 
 
207 
 
 
 
Change in period, net of income tax expense of $(3) and $(35)
 
 
 
 
 
 
 
 
131 
 
 
Change in period, net of income tax expense of $(4) and $(1)
 
 
 
 
 
 
 
 
 
(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 
Consolidated Statements Of Shareholders' Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Statement Consolidated Statements Of Shareholders Equity [Abstract]
 
 
Change in year, before reclassification from AOCI, net of income tax benefit(expense)
$ (102)
$ (232)
Income tax benefit (expense) from reclassification of unrealized gains
(6)
(1)
Net unrealized appreciation on investments, Change in period, income tax (expense) benefit
(108)
(233)
Cumulative translation adjustment, Change in period, income tax(expense) benefit
(3)
(35)
Net income
1,093 
439 
Pension liability adjustment, Change in period, income tax (expense) benefit
$ (4)
$ (1)
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Cash flows from operating activities
 
 
Net income
$ 1,093 
$ 439 
Adjustments to reconcile net income to net cash flows from operating activities
 
 
Net realized (gains) losses
394 
Amortization of premiums/discounts on fixed maturities
184 
174 
Amortization of UPR related to the Chubb Corp acquisition
570 
Deferred income taxes
(127)
(42)
Unpaid losses and loss expenses
(154)
(72)
Unearned premiums
17 
(616)
Future policy benefits
40 
28 
Insurance and reinsurance balances payable
252 
(15)
Accounts payable, accrued expenses, and other liabilities
(491)
(34)
Income taxes payable
191 
143 
Insurance and reinsurance balances receivable
30 
601 
Reinsurance recoverable on losses and loss expenses
(122)
194 
Reinsurance recoverable on policy benefits
(5)
Deferred policy acquisition costs
(59)
(480)
Prepaid reinsurance premiums
(81)
14 
Other
238 
(281)
Net cash flows from operating activities
1,013 
1,020 
Cash flows from investing activities
 
 
Purchases of fixed maturities available for sale
(6,250)
(8,104)
Purchases of fixed maturities held to maturity
(157)
(77)
Purchases of equity securities
(37)
(33)
Sales of fixed maturities available for sale
3,395 
6,329 
Sales of equity securities
46 
761 
Maturities and redemptions of fixed maturities available for sale
2,543 
1,553 
Maturities and redemptions of fixed maturities held to maturity
240 
249 
Net change in short-term investments
232 
11,932 
Net derivative instruments settlements
(89)
(22)
Acquisition of subsidiaries (net of cash acquired of nil and $57)
(14,262)
Other
17 
59 
Net cash flows used for investing activities
(60)
(1,615)
Cash flows from financing activities
 
 
Dividends paid on Common Shares
(324)
(218)
Common Shares repurchased
(128)
Repayment of long-term debt
(500)
Proceeds from issuance of repurchase agreements
753 
853 
Repayment of repurchase agreements
(752)
(853)
Proceeds from share-based compensation plans
42 
51 
Policyholder contract deposits
109 
118 
Policyholder contract withdrawals
(58)
(49)
Other
(4)
Net cash flows used for financing activities
(858)
(102)
Effect of foreign currency rate changes on cash and cash equivalents
(17)
13 
Net (decrease) increase in cash
78 
(684)
Cash – beginning of period
985 1 2
1,775 3
Cash – end of period
1,063 2 4
1,091 3
Supplemental cash flow information
 
 
Taxes paid
54 
106 
Interest paid
$ 75 
$ 71 
Consolidated Statements of Cash Flows (Parentheticals) (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Statement of Cash Flows [Abstract]
 
 
Cash Acquired from Acquisition
$ 0 
$ 57 
General
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 2016 Form 10-K.

b) Goodwill
During the three months ended March 31, 2017, Goodwill increased $55 million, reflecting the impact of foreign exchange.

c) Debt
In February 2017, Chubb INA Holdings Inc.’s $500 million of 5.7 percent senior notes matured and were fully paid. In March 2017, we reclassified $300 million of 5.8 percent senior notes, due to mature in March 2018, from Long-term debt to Short-term debt in the Consolidated balance sheets. Effective April 15, 2017, the interest rate on our $1.0 billion of unsecured junior subordinated capital securities converted to a floating rate, equal to the three-month LIBOR plus 2.25 percentage points, or approximately 3.41 percent on the conversion date. Previously, these capital securities carried interest at a rate of 6.375 percent. The scheduled maturity date for these securities is April 15, 2037.

d) Accounting guidance adopted in 2017

Stock Compensation
Effective January 2017, we prospectively adopted new guidance on stock compensation which requires recognition of the excess tax benefits or deficiencies of share-based compensation awards to employees through net income rather than through additional paid in capital. The calculation of the excess tax benefits or deficiencies is based on the difference between the market value of a stock award at the date of vesting, or at the time of exercise for a stock option, compared to the grant date fair value recognized as compensation expense in the Consolidated statements of operations. For the three months ended March 31, 2017, the excess tax benefit recorded to Income tax expense on the Consolidated statement of operations was $25 million. Additionally, the guidance allows for an election to account for forfeitures related to share-based payments either as they occur or through an estimation method. We elected to retain our current accounting for compensation expense using a forfeiture estimation process.
e) Accounting guidance not yet adopted

Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (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. The standard is effective for us in the first quarter of 2018 with early adoption permitted. The adoption of this guidance is not expected to have a material impact on our financial condition or results of operations given that the majority of our business is outside the scope of this guidance.

Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued guidance that affects the recognition, measurement, presentation, and disclosure of financial instruments. The guidance requires equity investments to be measured at fair value with changes in fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee) and an assessment of a valuation allowance on deferred tax assets related to unrealized losses of available for sale (AFS) debt securities in combination with other deferred tax assets. The standard will be effective for us in the first quarter of 2018. We are in the process of evaluating the effect the updated guidance will have on our financial condition and results of operations.

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

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

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

Statement of Cash Flows
In August 2016, the FASB issued guidance clarifying the classification of certain cash receipts and cash payments within the statement of cash flows, including distributions received from equity method investments. The guidance requires entities to make an accounting policy election to present cash flows received either in operating cash flows or investing cash flows based on cumulative equity-method earnings or on the nature of the distributions. The updated guidance will be effective for us in the first quarter of 2018 with early adoption permitted. The updated guidance should be applied retrospectively, unless it is impracticable to do so, at which point the guidance should be applied prospectively. We are in the process of evaluating the effect the updated guidance will have on our statements of cash flows.

Goodwill Impairment
In January 2017, the FASB issued updated guidance on goodwill impairment testing that eliminates Step 2 of the goodwill impairment test requiring entities to calculate the implied fair value of goodwill through a hypothetical purchase price allocation. Under the updated guidance, impairment will now be recognized as the amount by which a reporting unit’s carrying value exceeds its fair value. The standard will be effective for us in the first quarter of 2020 on a prospective basis with early adoption permitted. We do not expect the adoption of this guidance to have a material effect on our financial condition and results of operations.
Acquisitions
Acquisitions
Acquisition

The Chubb Corporation (Chubb Corp)
On January 14, 2016, we completed the acquisition of Chubb Corp, a leading provider of middle-market commercial, specialty, surety, and personal insurance for $29.5 billion, comprising $14.3 billion in cash and $15.2 billion in newly-issued stock. In addition, we assumed outstanding equity awards to employees and directors with an attributed value of $323 million. The total consideration, including the assumption of equity awards, was $29.8 billion. We recognized goodwill of $10.5 billion, attributable to expected growth and profitability, none of which is expected to be deductible for income tax purposes. Refer to the 2016 Form 10-K for additional information on this acquisition.

The consolidated financial statements include the results of Chubb Corp from the acquisition date.

The following table summarizes the results of the acquired Chubb Corp operations from January 14, 2016 to March 31, 2016 included within our 2016 Consolidated statement of operations:
(in millions of U.S. dollars)
January 14, 2016 to March 31, 2016

Total revenues
$
2,487

Net income
$
255



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

Total revenues
$
7,322

Net income
$
534

Earnings per share
 
Basic earnings per share
$
1.14

Diluted earnings per share
$
1.14

Investments
Investments
Investments

a) Fixed maturities
 
March 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
$
2,900

 
$
34

 
$
(35
)
 
$
2,899

 
$

Foreign
20,795

 
651

 
(79
)
 
21,367

 
(3
)
Corporate securities
24,372

 
603

 
(133
)
 
24,842

 
(8
)
Mortgage-backed securities
14,217

 
127

 
(198
)
 
14,146

 
(1
)
States, municipalities, and political subdivisions
17,673

 
81

 
(202
)
 
17,552

 

 
$
79,957

 
$
1,496

 
$
(647
)
 
$
80,806

 
$
(12
)
Held to maturity
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency
$
601

 
$
10

 
$
(3
)
 
$
608

 
$

Foreign
625

 
27

 
(1
)
 
651

 

Corporate securities
2,710

 
50

 
(20
)
 
2,740

 

Mortgage-backed securities
1,319

 
35

 

 
1,354

 

States, municipalities, and political subdivisions
5,264

 
37

 
(50
)
 
5,251

 

 
$
10,519

 
$
159

 
$
(74
)
 
$
10,604

 
$


December 31, 2016
Amortized
Cost

 
Gross
Unrealized
Appreciation

 
Gross
Unrealized
Depreciation

 
Fair
Value

 
OTTI Recognized
in AOCI

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

 
$
32

 
$
(45
)
 
$
2,870

 
$

Foreign
20,929

 
636

 
(125
)
 
21,440

 
(5
)
Corporate securities
23,736

 
580

 
(167
)
 
24,149

 
(8
)
Mortgage-backed securities
14,066

 
135

 
(194
)
 
14,007

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

 
72

 
(345
)
 
17,649

 

 
$
79,536

 
$
1,455

 
$
(876
)
 
$
80,115

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

 
$
9

 
$
(3
)
 
$
661

 
$

Foreign
640

 
28

 
(1
)
 
667

 

Corporate securities
2,771

 
50

 
(26
)
 
2,795

 

Mortgage-backed securities
1,393

 
35

 

 
1,428

 

States, municipalities, and political subdivisions
5,185

 
26

 
(92
)
 
5,119

 

 
$
10,644

 
$
148

 
$
(122
)
 
$
10,670

 
$



As discussed in Note 3 c), 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 statement of shareholders’ equity. For the three months ended March 31, 2017 and 2016, nil and $23 million, respectively, of net unrealized appreciation related to such securities is included in OCI. At both March 31, 2017 and December 31, 2016, AOCI included cumulative net unrealized appreciation of $10 million 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 81 percent of the total mortgage-backed securities at March 31, 2017 and December 31, 2016, respectively, are represented by investments in U.S. government agency bonds. The remainder of the mortgage exposure consists of collateralized mortgage obligations and non-government mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a rating of AAA by the major credit rating agencies.

The following table presents fixed maturities by contractual maturity:
 
 
 
March 31

 
 
 
December 31

 
 
 
2017

 
 
 
2016

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

 
Fair Value

 
Amortized Cost

 
Fair Value

Available for sale
 
 
 
 
 
 
 
Due in 1 year or less
$
3,828

 
$
3,851

 
$
3,892

 
$
3,913

Due after 1 year through 5 years
23,950

 
24,413

 
24,027

 
24,429

Due after 5 years through 10 years
27,693

 
27,955

 
27,262

 
27,379

Due after 10 years
10,269

 
10,441

 
10,289

 
10,387

 
65,740

 
66,660

 
65,470

 
66,108

Mortgage-backed securities
14,217

 
14,146

 
14,066

 
14,007

 
$
79,957

 
$
80,806

 
$
79,536

 
$
80,115

Held to maturity
 
 
 
 
 
 
 
Due in 1 year or less
$
481

 
$
486

 
$
430

 
$
435

Due after 1 year through 5 years
2,648

 
2,695

 
2,646

 
2,691

Due after 5 years through 10 years
2,973

 
2,980

 
2,969

 
2,944

Due after 10 years
3,098

 
3,089

 
3,206

 
3,172

 
9,200

 
9,250

 
9,251

 
9,242

Mortgage-backed securities
1,319

 
1,354

 
1,393

 
1,428

 
$
10,519

 
$
10,604

 
$
10,644

 
$
10,670



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

b) Equity securities

March 31


December 31

(in millions of U.S. dollars)
2017


2016

Cost
$
699

 
$
706

Gross unrealized appreciation
144

 
129

Gross unrealized depreciation
(8
)
 
(21
)
Fair value
$
835

 
$
814



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

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

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

the amount of time a security has been in a loss position and the magnitude of the loss position;
the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and
our ability and intent to hold the security to the expected recovery period.

As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are other than temporarily impaired. For mutual funds included in equity securities in our Consolidated balance sheets, we employ analysis similar to fixed maturities, when applicable.

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

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

For the three months ended March 31, 2017 and 2016, credit losses recognized in Net income for corporate securities were $1 million and $17 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 both the three months ended March 31, 2017 and 2016, there were no credit losses recognized in Net income for mortgage-backed securities.
The following table presents the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused us to conclude the decline in fair value of certain investments was “other-than-temporary”:
 
Three Months Ended
 
 
March 31
 
(in millions of U.S. dollars)
2017

 
2016

Fixed maturities:
 
 
 
OTTI on fixed maturities, gross
$
(6
)
 
$
(67
)
OTTI on fixed maturities recognized in OCI (pre-tax)

 
8

OTTI on fixed maturities, net
(6
)
 
(59
)
Gross realized gains excluding OTTI
34

 
65

Gross realized losses excluding OTTI
(40
)
 
(196
)
Total fixed maturities
(12
)
 
(190
)
Equity securities:
 
 
 
OTTI on equity securities
(5
)
 
(1
)
Gross realized gains excluding OTTI
9

 
40

Gross realized losses excluding OTTI

 
(1
)
Total equity securities
4

 
38

OTTI on other investments
(8
)
 
(3
)
Foreign exchange gains (losses)
(19
)
 
39

Investment and embedded derivative instruments
6

 
(39
)
Fair value adjustments on insurance derivative
93

 
(228
)
S&P put options and futures
(74
)
 
(15
)
Other derivative instruments
2

 
(2
)
Other
1

 
6

Net realized gains (losses)
$
(7
)
 
$
(394
)

 
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)
2017

 
2016

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

 
$
53

Additions where no OTTI was previously recorded

 
11

Additions where an OTTI was previously recorded
1

 
6

Reductions for securities sold during the period
(4
)
 
(13
)
Balance of credit losses related to securities still held – end of period
$
32

 
$
57



d) Gross unrealized loss
At March 31, 2017, there were 9,408 fixed maturities out of a total of 31,098 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $6 million. There were 70 equity securities out of a total of 325 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $1 million. Fixed maturities in an unrealized loss position at March 31, 2017, comprised both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase.

The following tables present, for all securities in an unrealized loss position (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
0 – 12 Months
 
 
Over 12 Months
 
 
Total
 
March 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
$
2,011

 
$
(38
)
 
$

 
$

 
$
2,011

 
$
(38
)
Foreign
4,428

 
(59
)
 
684

 
(21
)
 
5,112

 
(80
)
Corporate securities
6,139

 
(121
)
 
491

 
(32
)
 
6,630

 
(153
)
Mortgage-backed securities
8,735

 
(195
)
 
131

 
(3
)
 
8,866

 
(198
)
States, municipalities, and political subdivisions
16,731

 
(248
)
 
123

 
(4
)
 
16,854

 
(252
)
Total fixed maturities
38,044

 
(661
)
 
1,429

 
(60
)
 
39,473

 
(721
)
Equity securities
150

 
(8
)
 

 

 
150

 
(8
)
Other investments
84

 
(9
)
 

 

 
84

 
(9
)
Total
$
38,278

 
$
(678
)
 
$
1,429

 
$
(60
)
 
$
39,707

 
$
(738
)
 
0 – 12 Months
 
 
Over 12 Months
 
 
Total
 
December 31, 2016
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
$
2,216

 
$
(48
)
 
$

 
$

 
$
2,216

 
$
(48
)
Foreign
5,918

 
(99
)
 
386

 
(27
)
 
6,304

 
(126
)
Corporate securities
7,021

 
(149
)
 
641

 
(44
)
 
7,662

 
(193
)
Mortgage-backed securities
8,638

 
(189
)
 
234

 
(5
)
 
8,872

 
(194
)
States, municipalities, and political subdivisions
19,448

 
(435
)
 
49

 
(2
)
 
19,497

 
(437
)
Total fixed maturities
43,241

 
(920
)
 
1,310

 
(78
)
 
44,551

 
(998
)
Equity securities
199

 
(21
)
 

 

 
199

 
(21
)
Other investments
201

 
(18
)
 

 

 
201

 
(18
)
Total
$
43,641

 
$
(959
)
 
$
1,310

 
$
(78
)
 
$
44,951

 
$
(1,037
)


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, 2017 and December 31, 2016 are investments, primarily fixed maturities, totaling $20.6 billion and $20.1 billion, respectively, and cash of $97 million and $103 million, respectively.
The following table presents the components of restricted assets:
 
March 31

 
December 31

(in millions of U.S. dollars)
2017

 
2016

Trust funds
$
14,359

 
$
13,880

Deposits with U.S. regulatory authorities
2,356

 
2,203

Deposits with non-U.S. regulatory authorities
2,192

 
2,191

Assets pledged under repurchase agreements
1,453

 
1,461

Other pledged assets
366

 
435

 
$
20,726

 
$
20,170

Fair value measurements
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 are based on market valuations and are 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 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, 2017 and 2016, 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 2016 Form 10-K.

Financial instruments measured at fair value on a recurring basis, by valuation hierarchy
March 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
$
2,222

 
$
677

 
$

 
$
2,899

Foreign

 
21,287

 
80

 
21,367

Corporate securities

 
24,105

 
737

 
24,842

Mortgage-backed securities

 
14,101

 
45

 
14,146

States, municipalities, and political subdivisions

 
17,552

 

 
17,552

 
2,222

 
77,722

 
862

 
80,806

Equity securities
794

 

 
41

 
835

Short-term investments
1,548

 
1,211

 
21

 
2,780

Other investments (1)
425

 
280

 
232

 
937

Securities lending collateral

 
1,071

 

 
1,071

Investment derivative instruments
15

 

 

 
15

Other derivative instruments
8

 

 

 
8

Separate account assets
1,970

 
97

 

 
2,067

Total assets measured at fair value (1)
$
6,982

 
$
80,381

 
$
1,156

 
$
88,519

Liabilities:
 
 
 
 
 
 
 
Investment derivative instruments
$
30

 
$

 
$

 
$
30

Other derivative instruments

 

 
11

 
11

GLB (2)

 

 
466

 
466

Total liabilities measured at fair value
$
30

 
$

 
$
477

 
$
507

(1) 
Excluded from the table above are partially-owned investments, investment funds, and limited partnerships of $3,594 million and other investments of $20 million at March 31, 2017 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, 2016
Level 1

 
Level 2

 
Level 3

 
Total

(in millions of U.S. dollars)
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturities available for sale
 
 
 
 
 
 
 
U.S. Treasury and agency
$
2,175

 
$
695

 
$

 
$
2,870

Foreign

 
21,366

 
74

 
21,440

Corporate securities

 
23,468

 
681

 
24,149

Mortgage-backed securities

 
13,962

 
45

 
14,007

States, municipalities, and political subdivisions

 
17,649

 

 
17,649

 
2,175

 
77,140

 
800

 
80,115

Equity securities
773

 

 
41

 
814

Short-term investments
1,757

 
1,220

 
25

 
3,002

Other investments (1)
384

 
259

 
225

 
868

Securities lending collateral

 
1,092

 

 
1,092

Investment derivative instruments
31

 

 

 
31

Other derivative instruments
3

 

 

 
3

Separate account assets
1,784

 
95

 

 
1,879

Total assets measured at fair value (1)
$
6,907

 
$
79,806

 
$
1,091

 
$
87,804

Liabilities:
 
 
 
 
 
 
 
Investment derivative instruments
$
54

 
$

 
$

 
$
54

Other derivative instruments

 

 
13

 
13

GLB (2)

 

 
559

 
559

Total liabilities measured at fair value
$
54

 
$

 
$
572

 
$
626


(1) 
Excluded from the table above are partially-owned investments, investment funds, and limited partnerships of $3,626 million and other investments of $25 million at December 31, 2016 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.

There were no transfers of financial instruments between Level 1 and Level 2 for both the three months ended March 31, 2017 and 2016.

Fair value of alternative investments
Alternative investments include investment funds, limited partnerships, and partially-owned investment companies measured at fair value using NAV as a practical expedient. The following table presents, by investment category, the expected liquidation period, fair value, and maximum future funding commitments of alternative investments:
 
 
 
 
 
March 31

 
 
 
December 31

 
Expected
Liquidation
Period of Underlying Assets
 
 
 
2017

 
 
 
2016

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

 
Maximum
Future Funding
Commitments

 
Fair
Value

 
Maximum
Future Funding
Commitments

Financial
5 to 9 Years
 
$
548

 
$
398

 
$
548

 
$
428

Real Assets
3 to 7 Years
 
612

 
186

 
536

 
230

Distressed
5 to 9 Years
 
350

 
179

 
485

 
179

Private Credit
3 to 7 Years
 
244

 
248

 
236

 
259

Traditional
3 to 9 Years
 
1,563

 
870

 
1,550

 
930

Vintage
1 to 2 Years
 
18

 
14

 
21

 
14

Investment funds
Not Applicable
 
259

 

 
251

 

 
 
 
$
3,594

 
$
1,895

 
$
3,627

 
$
2,040



Included in all categories in the above table, except for Investment funds, are investments for which Chubb will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. Further, for all categories except for Investment funds, Chubb does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.
Investment Category:
 
Consists of investments in private equity funds:
Financial
 
targeting financial services companies such as financial institutions and insurance services worldwide
Real Assets
 
targeting investments related to hard physical assets such as real estate, infrastructure and natural resources
Distressed
 
targeting distressed corporate debt/credit and equity opportunities in the U.S.
Private Credit
 
targeting privately originated corporate debt investments including senior secured loans and subordinated bonds
Traditional
 
employing traditional private equity investment strategies such as buyout and growth equity globally
Vintage
 
made before 2002 and where the funds’ commitment periods had already expired

Investment funds
Chubb’s investment funds employ various investment strategies such as long/short equity and arbitrage/distressed. Included in this category are investments for which Chubb has the option to redeem at agreed upon value as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investment fund investments may be redeemed monthly, quarterly, semi-annually, or annually. If Chubb wishes to redeem an investment fund investment, it must first determine if the investment fund is still in a lock-up period (a time when Chubb cannot redeem its investment so that the investment fund manager has time to build the portfolio). If the investment fund is no longer in its lock-up period, Chubb must then notify the investment fund manager of its intention to redeem by the notification date prescribed by the subscription agreement. Subsequent to notification, the investment fund can redeem Chubb’s investment within several months of the notification. Notice periods for redemption of the investment funds range between 5 and 120 days. Chubb can redeem its investment funds without consent from the investment fund managers.

Level 3 financial instruments
The fair values of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) consist of various inputs and assumptions that management makes when determining fair value. Management analyzes changes in fair value measurements classified within Level 3 by comparing pricing and returns of our investments to benchmarks, including month-over-month movements, investment credit spreads, interest rate movements, and credit quality of securities.

The following table presents the significant unobservable inputs used in the Level 3 liability valuations. Excluded from the table below are inputs used to determine the fair value of Level 3 assets which are based on single broker quotes and contain no quantitative unobservable inputs developed by management.
(in millions of U.S. dollars, except for percentages)
Fair Value
 
 
Valuation
Technique
 
Significant
Unobservable Inputs
 
Ranges
March 31, 2017

 
December 31, 2016

 
 
 
GLB (1)
$
466

 
$
559

 
Actuarial model
 
Lapse rate
 
3% – 34%
 
 
 
 
 
 
 
Annuitization rate
 
0% – 78%
(1) 
Discussion of the most significant inputs used in the fair value measurement of GLB and the sensitivity of those assumptions is included within Note 4 a) Guaranteed living benefits.

The following tables present a reconciliation of the beginning and ending balances of financial instruments measured at fair value using significant unobservable inputs (Level 3):
 
Assets
 
 
Liabilities
 
Three Months Ended
Available-for-Sale Debt Securities
Equity
securities

Short-term investments

Other
investments

 
Other
derivative
instruments

GLB(1)

March 31, 2017
Foreign

 
Corporate
securities

 
MBS

 
 
(in millions of U.S. dollars)
 
 
 
 
Balance – beginning of period
$
74

 
$
681

 
$
45

 
$
41

$
25

$
225

 
$
13

$
559

Transfers into Level 3

 
29

 

 



 


Transfers out of Level 3

 
(54
)
 

 



 


Change in Net Unrealized Gains (Losses) included in OCI
(1
)
 
(8
)
 

 


4

 


Net Realized Gains/Losses
(1
)
 
(1
)
 

 



 
(2
)
(93
)
Purchases
14

 
156

 
1