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Fair Values of Financial Instruments
6 Months Ended
Jun. 30, 2012
Fair Values of Financial Instruments [Abstract]  
Fair Values of Financial Instruments

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 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 based on 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, 2012     December 31, 2011  
    Carrying
Value
    Fair
Value
    Carrying
Value
    Fair
Value
 
    (in millions)  

Assets

                               

Invested assets

                               

Short term investments

  $ 2,012     $ 2,012     $ 1,893     $ 1,893  

Fixed maturities

      37,513         37,513           37,184           37,184  

Equity securities

    1,583       1,583       1,512       1,512  
         

Liabilities

                               

Long term debt

    3,575       4,281       3,575       4,085  

 

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, 2012 and December 31, 2011, 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 financial instruments categorized based upon the lowest level of input that was significant to the fair value measurement was as follows:

 

                                 
    June 30, 2012  
    Level 1     Level 2     Level 3     Total  
    (in millions)  

Assets

       

Short term investments

  $ 115     $ 1,897     $     $ 2,012  
   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturities

                               

Tax exempt

          20,254       6       20,260  
   

 

 

   

 

 

   

 

 

   

 

 

 

Taxable

                               

U.S. government and government agency and authority obligations

          1,076             1,076  

Corporate bonds

          6,935       149       7,084  

Foreign government and government agency obligations

          6,660             6,660  

Residential mortgage-backed securities

          600       10       610  

Commercial mortgage-backed securities

          1,823             1,823  
   

 

 

   

 

 

   

 

 

   

 

 

 
            17,094       159       17,253  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Total fixed maturities

          37,348       165       37,513  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Equity securities

    1,575             8       1,583  
   

 

 

   

 

 

   

 

 

   

 

 

 
         
    $     1,690     $   39,245     $        173     $   41,108  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Liabilities

                               

Long term debt

  $     $ 4,281     $     $ 4,281  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                 
    December 31, 2011  
    Level 1     Level 2     Level 3     Total  
    (in millions)  

Assets

       

Short term investments

  $ 117     $ 1,776     $     $ 1,893  
   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturities

                               

Tax exempt

          20,203       8       20,211  
   

 

 

   

 

 

   

 

 

   

 

 

 

Taxable

                               

U.S. government and government agency and authority obligations

          868             868  

Corporate bonds

          6,313       152       6,465  

Foreign government and government agency obligations

          6,820       3       6,823  

Residential mortgage-backed securities

          845       10       855  

Commercial mortgage-backed securities

          1,962             1,962  
   

 

 

   

 

 

   

 

 

   

 

 

 
            16,808       165       16,973  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Total fixed maturities

          37,011       173       37,184  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Equity securities

    1,504             8       1,512  
   

 

 

   

 

 

   

 

 

   

 

 

 
         
    $     1,621     $   38,787     $        181     $   40,589  
   

 

 

   

 

 

   

 

 

   

 

 

 
         

Liabilities

                               

Long term debt

  $     $ 4,085     $     $ 4,085