QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File No. 1-11778
CHUBB LIMITED
(Exact name of registrant as specified in its charter)
Switzerland
98-0091805
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Baerengasse 32
Zurich, Switzerland CH-8001
(Address of principal executive offices) (Zip Code)
+41 (0)43 456 76 00
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES þ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, par value CHF 24.15 per share
CB
New York Stock Exchange
The number of registrant’s Common Shares (CHF 24.15 par value) outstanding as of April 18, 2019 was 457,870,731.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Chubb Limited and Subsidiaries
1. 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 9 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:
March 31
December 31
(in millions of U.S. dollars)
2019
2018
Cash
$
1,271
$
1,247
Restricted cash
122
93
Total cash and restricted cash shown in the Consolidated statements of cash flows
$
1,393
$
1,340
c) Goodwill
During the three months ended March 31, 2019, Goodwill increased $57 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 our recognizing a right-of-use asset of $608 million, which was recorded within Other assets, and a lease liability of $653 million, 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 the 2018 Form 10-K for information on accounting guidance not yet adopted.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)
Chubb Limited and Subsidiaries
2. Investments
a) Fixed maturities
March 31, 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
$
3,760
$
50
$
(19
)
$
3,791
$
—
Foreign
21,796
658
(112
)
22,342
—
Corporate securities
27,519
476
(170
)
27,825
(5
)
Mortgage-backed securities
16,369
173
(112
)
16,430
(1
)
States, municipalities, and political subdivisions
10,180
123
(28
)
10,275
—
$
79,624
$
1,480
$
(441
)
$
80,663
$
(6
)
Held to maturity
U.S. Treasury and agency
$
1,144
$
11
$
(3
)
$
1,152
$
—
Foreign
1,503
34
(3
)
1,534
—
Corporate securities
2,543
30
(34
)
2,539
—
Mortgage-backed securities
2,484
16
(6
)
2,494
—
States, municipalities, and political subdivisions
5,462
67
(8
)
5,521
—
$
13,136
$
158
$
(54
)
$
13,240
$
—
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 months ended March 31, 2019 and 2018, $9 million of net unrealized appreciation and $4 million of net unrealized depreciation, respectively, related to such securities are included in OCI. At March 31, 2019 and December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)
Chubb Limited and Subsidiaries
2018, AOCI included cumulative net unrealized appreciation of $3 million and $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 5 b) (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, 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:
March 31
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
$
3,776
$
3,785
$
3,569
$
3,568
Due after 1 year through 5 years
27,308
27,593
27,134
27,005
Due after 5 years through 10 years
23,367
23,690
24,095
23,543
Due after 10 years
8,804
9,165
8,767
8,814
63,255
64,233
63,565
62,930
Mortgage-backed securities
16,369
16,430
15,758
15,540
$
79,624
$
80,663
$
79,323
$
78,470
Held to maturity
Due in 1 year or less
$
614
$
616
$
536
$
537
Due after 1 year through 5 years
3,111
3,125
3,122
3,106
Due after 5 years through 10 years
4,246
4,287
4,468
4,407
Due after 10 years
2,681
2,718
2,785
2,723
10,652
10,746
10,911
10,773
Mortgage-backed securities
2,484
2,494
2,524
2,486
$
13,136
$
13,240
$
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)
Chubb Limited and Subsidiaries
recognized in Net income equals the difference between the security’s amortized cost and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.
Corporate securities
Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. Chubb developed projected cash flows for corporate securities using market observable data, issuer-specific information, and credit ratings. We use historical default data by Moody’s Investors Service (Moody’s) rating category to calculate a 1-in-100 year probability of default, which results in a default assumption in excess of the historical mean default rate. Consistent with management's approach, Chubb assumed a 32 percent recovery rate (the par value of a defaulted security that will be recovered) across all rating categories rather than using Moody's historical mean recovery rate of 42 percent. We believe that use of a default assumption in excess of the historical mean is conservative.
For the three months ended March 31, 2019 and 2018, credit losses recognized in Net income for corporate securities were $6 million and nil, respectively.
Mortgage-backed securities
For mortgage-backed securities, credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates, and loss severity rates (the par value of a defaulted security that will not be recovered) on foreclosed properties.
For the three months ended March 31, 2019 and 2018, there were no credit losses recognized in Net income for mortgage-backed securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)
Chubb Limited and Subsidiaries
The following table presents the components of Net realized gains (losses):
Three Months Ended
March 31
(in millions of U.S. dollars)
2019
2018
Fixed maturities:
OTTI on fixed maturities, gross and net
$
(13
)
$
(1
)
Gross realized gains excluding OTTI
27
66
Gross realized losses excluding OTTI
(58
)
(88
)
Total fixed maturities
(44
)
(23
)
Equity securities:
Gross realized gains excluding OTTI
64
10
Gross realized losses excluding OTTI
(6
)
(21
)
Total equity securities
58
(11
)
Other investments
(44
)
29
Foreign exchange gains (losses)
13
(77
)
Investment and embedded derivative instruments
(130
)
17
Fair value adjustments on insurance derivative
114
38
S&P futures
(63
)
22
Other derivative instruments
(1
)
2
Other
—
1
Net realized gains (losses) (pre-tax)
$
(97
)
$
(2
)
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)
2019
2018
Balance of credit losses related to securities still held – beginning of period
$
34
$
22
Additions where no OTTI was previously recorded
6
—
Reductions for securities sold during the period
(8
)
(7
)
Balance of credit losses related to securities still held – end of period
$
32
$
15
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
March 31
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
$
58
$
(44
)
$
14
$
(11
)
$
29
$
18
Less: Net gains (losses) recognized from sales of securities
1
(2
)
(1
)
10
—
10
Unrealized gains (losses) recognized for securities still held at reporting date
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)
Chubb Limited and Subsidiaries
d) Gross unrealized loss
At March 31, 2019, there were 10,095 fixed maturities out of a total of 30,335 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $6 million. Fixed maturities in an unrealized loss position at March 31, 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
March 31, 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
$
68
$
—
$
2,298
$
(22
)
$
2,366
$
(22
)
Foreign
1,346
(26
)
4,228
(89
)
5,574
(115
)
Corporate securities
3,649
(62
)
6,206
(142
)
9,855
(204
)
Mortgage-backed securities
388
(1
)
8,974
(117
)
9,362
(118
)
States, municipalities, and political subdivisions
93
—
4,867
(36
)
4,960
(36
)
Total fixed maturities
$
5,544
$
(89
)
$
26,573
$
(406
)
$
32,117
$
(495
)
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) 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 March 31, 2019 and December 31, 2018 are investments, primarily fixed maturities, totaling $22.0 billion and $21.0 billion, respectively, and cash of $122 million and $93 million, respectively.
The following table presents the components of restricted assets:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)
Chubb Limited and Subsidiaries
3. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)
Chubb Limited and Subsidiaries
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)
Chubb Limited and Subsidiaries
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, 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
March 31, 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
$
3,168
$
623
$
—
$
3,791
Foreign
—
21,982
360
22,342
Corporate securities
—
26,483
1,342
27,825
Mortgage-backed securities
—
16,352
78
16,430
States, municipalities, and political subdivisions
—
10,275
—
10,275
3,168
75,715
1,780
80,663
Equity securities
766
—
55
821
Short-term investments
1,785
1,293
—
3,078
Other investments (1)
411
342
11
764
Securities lending collateral
—
1,861
—
1,861
Investment derivative instruments
15
—
—
15
Other derivative instruments
7
—
—
7
Separate account assets
2,991
139
—
3,130
Total assets measured at fair value (1)
$
9,143
$
79,350
$
1,846
$
90,339
Liabilities:
Investment derivative instruments
$
52
$
195
$
—
$
247
Other derivative instruments
12
—
—
12
GLB (2)
—
—
338
338
Total liabilities measured at fair value
$
64
$
195
$
338
$
597
(1)
Excluded from the table above are partially-owned investments, investment funds, and limited partnerships of $4,464 million and other investments of $91 million at March 31, 2019 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)
Chubb Limited and Subsidiaries
December 31, 2018
Level 1
Level 2
Level 3
Total
(in millions of U.S. dollars)
Assets:
Fixed maturities available for sale
U.S. Treasury and agency
$
3,400
$
745
$
—
$
4,145
Foreign
—
21,071
345
21,416
Corporate securities
—
25,284
1,299
26,583
Mortgage-backed securities
—
15,479
61
15,540
States, municipalities, and political subdivisions
—
10,786
—
10,786
3,400
73,365
1,705
78,470
Equity securities
713
—
57
770
Short-term investments
1,575
1,440
1
3,016
Other investments (1)
381
303
11
695
Securities lending collateral
—
1,926
—
1,926
Investment derivative instruments
28
—
—
28
Other derivative instruments
25
—
—
25
Separate account assets
2,686
137
—
2,823
Total assets measured at fair value (1)
$
8,808
$
77,171
$
1,774
$
87,753
Liabilities:
Investment derivative instruments
$
38
$
115
$
—
$
153
GLB (2)
—
—
452
452
Total liabilities measured at fair value
$
38
$
115
$
452
$
605
(1)
Excluded from the table above are partially-owned investments, investment funds, and limited partnerships of $4,244 million and other investments of $95 million at December 31, 2018 measured using NAV as a practical expedient.
(2)
Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the Consolidated balance sheets.
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
2019
2018
(in millions of U.S. dollars)
Fair
Value
Maximum
Future Funding
Commitments
Fair
Value
Maximum
Future Funding
Commitments
Financial
2 to 9 Years
$
591
$
188
$
596
$
193
Real Assets
2 to 11 Years
762
449
704
362
Distressed
2 to 7 Years
263
98
296
105
Private Credit
3 to 8 Years
134
291
147
310
Traditional
2 to 14 Years
2,331
2,573
2,362
2,735
Vintage
1 to 2 Years
125
43
56
—
Investment funds
Not Applicable
258
—
83
—
$
4,464
$
3,642
$
4,244
$
3,705
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)
Chubb Limited and Subsidiaries
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
funds where the initial fund term has 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 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. The majority of our fixed maturities classified as Level 3 used external pricing when markets are less liquid due to the lack of market inputs (i.e., stale pricing, broker quotes).
(in millions of U.S. dollars, except for percentages)
Fair Value
Valuation
Technique
Significant
Unobservable Inputs
Ranges
March 31, 2019
December 31, 2018
GLB (1)
$
338
$
452
Actuarial model
Lapse rate
3% – 32%
Annuitization rate
0% – 42%
(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 3 a) Guaranteed living benefits.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)
Chubb Limited and Subsidiaries
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
GLB (1)
March 31, 2019
Foreign
Corporate securities
MBS
(in millions of U.S. dollars)
Balance – beginning of period
$
345
$
1,299
$
61
$
57
$
1
$
11
$
452
Transfers into Level 3
3
5
—
—
—
—
—
Transfers out of Level 3
(15
)
—
—
—
—
—
—
Change in Net Unrealized Gains (Losses) included in OCI, including foreign exchange
6
4
—
1
—
—
—
Net Realized Gains/Losses
(1
)
1
—
(2
)
—
—
(114
)
Purchases
53
128
18
9
—
—
—
Sales
(5
)
(37
)
—
(10
)
—
—
—
Settlements
(26
)
(58
)
(1
)
—
(1
)
—
—
Balance – end of period
$
360
$
1,342
$
78
$
55
$
—
$
11
$
338
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date