Postretirement benefits

Chubb provides postretirement benefits to eligible employees and their dependents through various defined contribution plans and defined benefit plans sponsored by Chubb. With the acquisition, Chubb assumed the outstanding pension and other postretirement benefit plan obligations of Chubb Corp, which consisted of several non-contributory defined benefit pension plans covering substantially all its employees, and several other postretirement benefit plans to retired employees. After the acquisition, Chubb also sponsors the defined contribution plans covering Chubb Corp employees.

Defined benefit pension plans

We maintain non-contributory defined benefit pension plans that cover certain employees located in the U.S., U.K., Canada, and various other statutorily required countries. We account for pension benefits using the accrual method. Benefits under these plans are based on employees' years of service and compensation during final years of service. All underlying plans are subject to periodic actuarial valuations by qualified actuarial firms using actuarial models to calculate the expense and liability for each plan. We use December 31 as the measurement date for our defined benefit pension plans.

Under the Chubb Corp plans, prior to 2001, benefits were generally based on an employee’s years of service and average compensation during the last five years of employment. Effective January 1, 2001, the formula for providing pension benefits was changed from the final average pay formula to a cash balance formula. Under the cash balance formula, a notional account is established for each employee, which is credited semi-annually with an amount equal to a percentage of eligible compensation based on age and years of service plus interest based on the account balance. Chubb Corp employees hired prior to 2001 will generally be eligible to receive vested benefits based on the higher of the final average pay or cash balance formulas.

Other postretirement benefit plans

We also assumed Chubb Corp other postretirement benefit plans, principally healthcare and life insurance, to retired employees, their beneficiaries, and covered dependents. Healthcare coverage is contributory. Retiree contributions vary based upon retiree’s age, type of coverage, and years of service requirements. Life insurance coverage is non-contributory. Chubb funds a portion of the healthcare benefits obligation where such funding can be accomplished on a tax-effective basis. Benefits are paid as covered expenses are incurred.

Amendments to U.S. Qualified and Excess Pension Plans and U.S. Retiree Healthcare Plan

On October 31, 2016, we harmonized and amended several of our U.S. retirement programs to create a unified retirement savings program. In 2020, we will transition from a traditional defined benefit pension program that had been in effect for certain employees to a defined contribution program. Additionally, after 2025, we plan to eliminate a subsidized U.S. retiree healthcare and life insurance plan that had been in place for certain employees. Both amendments required a remeasurement of the plan assets and benefit obligations with updated assumptions, including discount rates and the expected return on assets.

The plan amendments and related remeasurement of the obligation at October 31, 2016 resulted in a net decrease to the benefit obligations of $496 million as follows:


•	The amendment of the pension plan and excess pension plan resulted in a pre-tax curtailment gain of $113 million immediately recognized in income during the fourth quarter of 2016 as it reduced expected years of future service of active plan participants.

•

The amendment of the retiree healthcare plan resulted in a reduction in the obligation of $383 million, of which $410 million will be amortized as a reduction to expense over the next 4.5 years as it relates to benefits already accrued. During the fourth quarter of 2016 and for the year ended 2017, $15 million and $89 million, respectively, was amortized as a reduction to expense. Additionally, during 2017, the number of involuntary departures due to the Chubb integration met our established threshold for recognition in income. As a result, we recognized $39 million of accelerated amortization. At December 31, 2017, the remaining curtailment benefit balance was $267 million which will be amortized as a reduction to expense over the next 3.5 years.

Obligations and funded status

The funded status of the pension and other postretirement benefit plans as well as the amounts recognized in Accumulated other comprehensive income at December 31, 2017 and 2016 was as follows:



	Pension Benefits												Other Postretirement Benefits
	2017						2016						2017			2016
	U.S. Plans			Non-U.S. Plans			U.S. Plans			Non-U.S. Plans
(in millions of U.S. dollars)	U.S. Plans			Non-U.S. Plans			U.S. Plans			Non-U.S. Plans
Benefit obligation, beginning of year	$	3,035		$	1,025		$	10		$	559		$	165		$	16
Acquisition of Chubb Corp	—			—			3,153			372			—			506
Service cost	63			17			75			18			2			10
Interest cost	105			27			103			30			4			17
Actuarial loss (gain)	232			(4		)	131			204			(2		)	36
Benefits paid	(132		)	(28		)	(79		)	(22		)	(14		)	(11		)
Amendments	—			—			—			(9		)	(23		)	(410		)
Curtailments	—			(32		)	(259		)	(7		)	2			—
Settlements	(18		)	(8		)	(99		)	(7		)	—			—
Foreign currency revaluation and other	—			80			—			(113		)	3			1
Benefit obligation, end of year	$	3,285		$	1,077		$	3,035		$	1,025		$	137		$	165
Plan assets at fair value, beginning of year	$	2,765		$	962		$	9		$	564		$	159		$	—
Acquisition of Chubb Corp	—			—			2,473			315			—			138
Actual return on plan assets	441			100			359			168			6			29
Employer contributions	53			63			98			67			6			3
Benefits paid	(132		)	(28		)	(79		)	(22		)	(14		)	(11		)
Settlements	(18		)	(8		)	(95		)	(7		)	—			—
Foreign currency revaluation and other	—			83			—			(123		)	—			—
Plan assets at fair value, end of year	$	3,109		$	1,172		$	2,765		$	962		$	157		$	159
Funded status at end of year	$	(176	)	$	95		$	(270	)	$	(63	)	$	20		$	(6	)
Amounts recognized in Accumulated other comprehensive income, not yet recognized in net periodic cost (benefit):
Net actuarial loss (gain)	$	(227	)	$	82		$	(207	)	$	156		$	12		$	17
Prior service cost (benefit)	—			6			—			(2		)	(288		)	(395		)
Total	$	(227	)	$	88		$	(207	)	$	154		$	(276	)	$	(378	)

The accumulated benefit obligation for the pension benefit plans was $4.3 billion and $3.8 billion at December 31, 2017 and 2016, respectively. The accumulated benefit obligation is the present value of pension benefits earned as of the measurement date based on employee service and compensation prior to that date. It differs from the pension benefit obligation in the table above in that the accumulated benefit obligation includes no assumptions regarding future compensation levels.

The net components of the funded status of the pension and other postretirement benefit plans are included in Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets.

Chubb’s funding policy is to contribute amounts that meet regulatory requirements plus additional amounts determined based on actuarial valuations, market conditions and other factors. All benefit plans satisfy minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA).

At December 31, 2017, we estimate that we will contribute $28 million to the pension plans and $2 million to the other postretirement benefits plan in 2018. The estimate is subject to change due to contribution decisions that are affected by various factors including our liquidity, market performance and management discretion.

The weighted-average assumptions used to determine the projected benefit obligation were as follows:



	Pension Benefits
	U.S. Plans		Non-U.S. Plans		Other Postretirement Benefits
	U.S. Plans		Non-U.S. Plans		Other Postretirement Benefits
December 31, 2017
Discount rate	3.59	%	2.76	%	2.77	%
Rate of compensation increase	4.00	%	3.46	%	N/A
December 31, 2016
Discount rate	4.14	%	2.83	%	2.97	%
Rate of compensation increase	4.00	%	3.57	%	N/A

The components of net pension and other postretirement benefit costs reflected in Net income and other changes in plan assets and benefit obligations recognized in other comprehensive income were as follows:



	Pension Benefits																	Other Postretirement Benefits
	U.S. Plans								Non-U.S. Plans
Year Ended December 31	2017			2016			2015		2017			2016			2015			2017			2016			2015
(in millions of U.S. dollars)	2017			2016			2015		2017			2016			2015			2017			2016			2015
Costs reflected in Net income:
Service cost	$	63		$	75		$	—	$	17		$	18		$	6		$	2		$	10		$	1
Interest cost	105			103			—		27			30			21			4			17			—
Expected return on plan assets	(189		)	(165		)	—		(42		)	(39		)	(29		)	(5		)	(8		)	—
Amortization of net actuarial loss (gain)	—			—			—		3			2			2			—			(1		)	(1		)
Amortization of prior service cost	—			—			—		—			(1		)	—			(89		)	(15		)	—
Curtailments	—			(117		)	—		(27		)	—			—			(37		)	—			—
Settlements	—			(2		)	—		—			1			1			—			—			—
Net periodic (benefit) cost	$	(21	)	$	(106	)	$	—	$	(22	)	$	11		$	1		$	(125	)	$	3		$	—
Changes in plan assets and benefit obligations recognized in other comprehensive income
Net actuarial loss (gain)	$	(21	)	$	(326	)	$	—	$	(57	)	$	49		$	(16	)	$	(3	)	$	17		$	—
Prior service cost (benefit)	—			—			—		—			(8		)	1			(23		)	(395		)	—
Amortization of net actuarial loss	—			—			—		(3		)	—			—			—			—			—
Amortization of prior service cost	—			—			—		—			—			—			89			—			—
Curtailments	—			117			—		(6		)	—			—			39			—			—
Settlements	1			2			—		—			(1		)	—			—			—			—
Total (increase) decrease in other comprehensive income	$	(20	)	$	(207	)	$	—	$	(66	)	$	40		$	(15	)	$	102		$	(378	)	$	—

The estimated net actuarial loss that will be amortized from AOCI into net periodic benefit costs in Net income for Non-U.S. pension plans during 2018 is $1 million. The estimated net prior service credit that will be amortized from AOCI into net periodic benefit cost in Net income during 2018 for U.S. other postretirement benefit plans is $80 million.

The weighted-average assumptions used to determine the net periodic pension and other postretirement benefit costs were as follows:



	Pension Benefits
	U.S. Plans		Non-U.S. Plans		Other Postretirement Benefits
Year Ended December 31	U.S. Plans		Non-U.S. Plans		Other Postretirement Benefits
2017
Discount rate in effect for determining service cost	4.20	%	3.55	%	2.84	%
Discount rate in effect for determining interest cost	3.53	%	2.61	%	2.44	%
Rate of compensation increase	4.00	%	3.57	%	N/A
Expected long-term rate of return on plan assets	7.00	%	4.23	%	3.00	%
2016
Discount rate in effect for determining service cost	4.38	%	3.85	%	4.32	%
Discount rate in effect for determining interest cost	3.59	%	3.44	%	4.02	%
Rate of compensation increase	4.00	%	3.33	%	N/A
Expected long-term rate of return on plan assets	7.00	%	4.79	%	6.34	%
2015
Discount rate	NM		3.51	%	NM
Rate of compensation increase	NM		3.09	%	NM
Expected long-term rate of return on plan assets	NM		4.81	%	NM
NM – not meaningful

The weighted-average healthcare cost trend rate assumptions used to measure the expected cost of healthcare benefits were as follows:



	U.S. Plans						Non-U.S. Plans
	2017		2016		2015		2017		2016
Healthcare cost trend rate	7.01	%	7.28	%	6.50	%	6.61	%	6.61	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	4.50	%	4.50	%	4.50	%	4.50	%	4.50	%
Year that the rate reaches the ultimate trend rate	2038		2038		2026		2029		2029

The healthcare cost trend rate assumption has a significant effect on the amount of the accumulated other postretirement benefit obligation and the net other postretirement benefit cost reported. To illustrate, a one percent increase in the trend rate for each year would increase the accumulated other postretirement benefit obligation at December 31, 2017 by approximately $8 million and the aggregate of the service and interest cost components of net other postretirement benefit cost for the year ended December 31, 2017 by approximately $1 million. A one percent decrease in the trend rate for each year would decrease the accumulated other postretirement benefit obligation at December 31, 2017 by approximately $7 million and the aggregate of the service and interest cost components of net other postretirement benefit cost for the year ended December 31, 2017 by approximately $1 million.

Plan Assets

The long term objective of the pension plan is to provide sufficient funding to cover expected benefit obligations, while assuming a prudent level of portfolio risk. The assets of the pension plan are invested, either directly or through pooled funds, in a diversified portfolio of predominately equity securities and fixed maturities. We seek to obtain a rate of return that over time equals or exceeds the returns of the broad markets in which the plan assets are invested. The target allocation of plan assets is 55 percent to 65 percent invested in equity securities (including certain other investments measured using NAV), with the remainder primarily invested in fixed maturities. We rebalance our pension assets to the target allocation as market conditions permit. We determined the expected long term rate of return assumption for each asset class based on an analysis of the historical returns and the expectations for future returns. The expected long term rate of return for the portfolio is a weighted aggregation of the expected returns for each asset class.

In order to minimize risk, the Plan maintains a listing of permissible and prohibited investments. In addition, the Plan has certain concentration limits and investment quality requirements imposed on permissible investments options. Investment risk is measured and monitored on an ongoing basis.

The following table presents the fair values of the pension plan assets, by valuation hierarchy. For additional information on how we classify these assets within the valuation hierarchy, refer to Note 4 to the Consolidated financial statements.



December 31, 2017	Pension Benefits
(in millions of U.S. dollars)	Level 1		Level 2		Level 3		Total
U.S. Plans:
Short-term investments	$	9	$	52	$	—	$	61
U.S. Treasury and agency	446		79		—		525
Foreign and corporate bonds	—		692		—		692
Equity securities	1,154		—		—		1,154
Total U.S. Plan assets ⁽¹⁾	$	1,609	$	823	$	—	$	2,432
Non-U.S. Plans:
Short-term investments	$	5	$	—	$	—	$	5
Foreign and corporate bonds	—		456		—		456
Equity securities	122		492		—		614
Total Non-U.S. Plan assets⁽¹⁾	$	127	$	948	$	—	$	1,075


⁽¹⁾	Excluded from the table above are $677 million and $95 million of other investments measured using NAV as a practical expedient related to the U.S. Plans and non-U.S. Plans respectively.



December 31, 2016	Pension Benefits
(in millions of U.S. dollars)	Level 1		Level 2		Level 3		Total
U.S. Plans:
Short-term investments	$	—	$	43	$	—	$	43
U.S. Treasury and agency	206		112		—		318
Foreign and corporate bonds	—		482		5		487
Equity securities	728		—		—		728
Derivative instruments	3		—		—		3
Total U.S. Plan assets ⁽¹⁾	$	937	$	637	$	5	$	1,579
Non-U.S. Plans:
Short-term investments	$	2	$	—	$	—	$	2
Foreign and corporate bonds	—		435		—		435
Equity securities	100		412		—		512
Total Non-U.S. Plan assets ⁽¹⁾	$	102	$	847	$	—	$	949


⁽¹⁾	Excluded from the table above are $1.2 billion and $13 million of other investments measured using NAV as a practical expedient related to the U.S. Plans and Non-U.S. Plans, respectively.

We had other postretirement benefit plan assets of $157 million and $159 million at December 31, 2017 and 2016, respectively, all of which are held in equity securities and categorized as Level 1.

Assets classified within Level 3 were nil and $5 million at December 31, 2017 and 2016, respectively, and the change in the balance during the years ended December 31, 2017 and 2016 was insignificant.

Benefit payments were $200 million and $213 million for the years ended December 31, 2017 and 2016, respectively. Expected future payments are as follows:



	Pension
For the years ending December 31	U.S. Plans		Non-U.S. Plans		Other Postretirement Benefits
(in millions of U.S. dollars)	U.S. Plans		Non-U.S. Plans		Other Postretirement Benefits
2018	$	129	$	23	$	17
2019	141		25		19
2020	148		29		20
2021	155		28		23
2022	163		27		25
2023-2027	881		159		44

Defined contribution plans (including 401(k))

Under these plans, employees' contributions may be supplemented by Chubb matching contributions based on the level of employee contribution. These contributions are invested at the election of each employee in one or more of several investment portfolios offered by a third-party investment advisor. Expenses for these plans totaled $166 million, $150 million, and $117 million for the years ended December 31, 2017, 2016, and 2015, respectively.