Fair Values of Financial Instruments

6 Months Ended

Jun. 30, 2011

Fair Values of Financial Instruments [Abstract]

4) Fair Values of Financial Instruments

Fair values of financial instruments are determined using valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair values are generally measured using quoted prices in active markets for identical assets or liabilities or other inputs, such as quoted prices for similar assets or liabilities, that are observable either directly or indirectly. In those instances where observable inputs are not available, fair values are measured using unobservable inputs for the asset or liability. Unobservable inputs reflect the Corporation’s own assumptions about the assumptions that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current market exchange. Certain financial instruments, particularly insurance contracts, are excluded from fair value disclosure requirements.

The methods and assumptions used to estimate the fair values of financial instruments are as follows:

(i)

The carrying value of short term investments approximates fair value due to the short maturities of these investments.

	(ii)		Fair values for fixed maturities are determined by management, utilizing prices obtained from an independent, nationally recognized pricing service or, in the case of securities for which prices are not provided by a pricing service, from independent brokers. For fixed maturities that have quoted prices in active markets, market quotations are provided. For fixed maturities that do not trade on a daily basis, the pricing service and brokers provide fair value estimates using a variety of inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, bids, offers, reference data, prepayment rates and measures of volatility. Management reviews on an ongoing basis the reasonableness of the methodologies used by the relevant pricing service and brokers. In addition, management, using the prices received for the securities from the pricing service and brokers, determines the aggregate portfolio price performance and reviews it against applicable indices. If management believes that significant discrepancies exist, it will discuss these with the relevant pricing service or broker to resolve the discrepancies.

	(iii)		Fair values of equity securities are based on quoted market prices.

	(iv)		Fair values of long term debt issued by Chubb are determined by management, utilizing prices obtained from an independent, nationally recognized pricing service.

The carrying values and fair values of financial instruments were as follows:


	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
	(in millions)

Assets
Invested assets
Short term investments	$	1,690	$	1,690	$	1,905	$	1,905
Fixed maturities		37,367		37,367		36,519		36,519
Equity securities		1,663		1,663		1,550		1,550

Liabilities
Long term debt		3,975		4,262		3,975		4,318

A pricing service provides fair value amounts for approximately 99% of the Corporation’s fixed maturities. The prices obtained from a pricing service and brokers generally are non-binding, but are reflective of current market transactions in the applicable financial instruments.

At June 30, 2011 and December 31, 2010, the Corporation held an insignificant amount of financial instruments in its investment portfolio for which a lack of market liquidity impacted the determination of fair value.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:

Level 1 — Unadjusted quoted prices in active markets for identical assets.

Level 2 — Other inputs that are observable for the asset, either directly or indirectly.

Level 3 — Inputs that are unobservable.

The fair value of fixed maturities and equity securities categorized based upon the lowest level of input that was significant to the fair value measurement was as follows:


	June 30, 2011
	Level 1		Level 2		Level 3		Total
	(in millions)

Fixed maturities
Tax exempt	$	—	$	20,156	$	8	$	20,164

Taxable
U.S. Government and government agency and authority obligations		—		832		—		832
Corporate bonds		—		6,666		189		6,855
Foreign government and government agency obligations		—		6,516		6		6,522
Residential mortgage-backed securities		—		1,092		16		1,108
Commercial mortgage-backed securities		—		1,886		—		1,886

		—		16,992		211		17,203


Total fixed maturities		—		37,148		219		37,367

Equity securities		1,655		—		8		1,663


	$	1,655	$	37,148	$	227	$	39,030


	December 31, 2010
	Level 1		Level 2		Level 3		Total
	(in millions)

Fixed maturities
Tax exempt	$	—	$	19,765	$	9	$	19,774
Taxable
U.S. Government and government agency and authority obligations		—		829		—		829
Corporate bonds		—		6,483		165		6,648
Foreign government and government agency obligations		—		6,135		26		6,161
Residential mortgage-backed securities		—		1,329		21		1,350
Commercial mortgage-backed securities		—		1,757		—		1,757

		—		16,533		212		16,745


Total fixed maturities		—		36,298		221		36,519

Equity securities		1,537		—		13		1,550


	$	1,537	$	36,298	$	234	$	38,069

- Definition

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the Company is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risk is are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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