Fair Values of Financial Instruments

6 Months Ended

Jun. 30, 2014

5) Fair Values of Financial Instruments

Fair values of financial instruments are determined by management 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 of fixed maturities are determined by management, utilizing prices obtained from a third party, nationally recognized pricing service or, in the case of securities for which prices are not provided by a pricing service, from third party 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 determined by management, utilizing quoted market prices.

(iv)

Fair values of long term debt issued by Chubb are determined by management, utilizing prices obtained from a third party, nationally recognized pricing service.

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


	June 30, 2014				December 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in millions)
Assets
Invested assets
Short term investments	$	1,845	$	1,845	$	2,114	$	2,114
Fixed maturities		38,062		38,062		37,091		37,091
Equity securities		1,969		1,969		1,810		1,810

Liabilities
Long term debt		3,300		3,989		3,300		3,806

At June 30, 2014 and December 31, 2013, a pricing service provided 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, 2014 and December 31, 2013, 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 financial instruments.

Level 2 – Other inputs that are observable for the financial instrument, either directly or indirectly.

Level 3 – Significant unobservable inputs.

The fair value of financial instruments categorized based upon the lowest level of input that was significant to the fair value measurement was as follows:


	June 30, 2014
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Short term investments	$	284	$	1,561	$	—	$	1,845

Fixed maturities
Tax exempt		—		19,216		4		19,220

Taxable
U.S. government and government agency and authority obligations		—		1,286		—		1,286
Corporate bonds		—		9,066		128		9,194
Foreign government and government agency obligations		—		6,896		9		6,905
Residential mortgage-backed securities		—		246		4		250
Commercial mortgage-backed securities		—		1,196		11		1,207

		—		18,690		152		18,842


Total fixed maturities		—		37,906		156		38,062


Equity securities		1,963		—		6		1,969

	$	2,247	$	39,467	$	162	$	41,876

Liabilities
Long term debt	$	—	$	3,989	$	—	$	3,989


	December 31, 2013
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Short term investments	$	399	$	1,715	$	—	$	2,114

Fixed maturities
Tax exempt		—		18,416		5		18,421

Taxable
U.S. government and government agency and authority obligations		—		802		—		802
Corporate bonds		—		9,179		135		9,314
Foreign government and government agency obligations		—		6,881		9		6,890
Residential mortgage-backed securities		—		293		6		299
Commercial mortgage-backed securities		—		1,345		20		1,365

		—		18,500		170		18,670


Total fixed maturities		—		36,916		175		37,091


Equity securities		1,803		—		7		1,810

	$	2,202	$	38,631	$	182	$	41,015

Liabilities
Long term debt	$	—	$	3,806	$	—	$	3,806

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial 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 entity 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 risks 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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