Fair Values of Financial Instruments

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Abstract]

Fair Values of Financial Instruments

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 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 determined by management, utilizing quoted market prices.

(iv) Fair values of warrants included in other invested assets are determined by management, utilizing an option pricing model.

(v) 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:

	March 31, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in millions)
Assets
Invested assets
Short term investments	$	1,860	$	1,860	$	2,528	$	2,528
Fixed maturities		38,216		38,216		38,076		38,076
Equity securities		1,848		1,848		1,663		1,663
Other invested assets		63		63		46		46
Liabilities
Long term debt		3,575		4,331		3,575		4,372

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 March 31, 2013 and December 31, 2012, 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:

	March 31, 2013
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Short term investments	$	180	$	1,680	$	—	$	1,860
Fixed maturities
Tax exempt		—		19,704		5		19,709
Taxable
U.S. government and government agency and authority obligations		—		1,026		—		1,026
Corporate bonds		—		8,385		137		8,522
Foreign government and government agency obligations		—		6,959		—		6,959
Residential mortgage-backed securities		—		398		8		406
Commercial mortgage-backed securities		—		1,594		—		1,594
		—		18,362		145		18,507
Total fixed maturities		—		38,066		150		38,216
Equity securities		1,834		—		14		1,848
Other invested assets		—		—		63		63
	$	2,014	$	39,746	$	227	$	41,987
Liabilities
Long term debt	$	—	$	4,331	$	—	$	4,331

	December 31, 2012
	Level 1		Level 2		Level 3		Total
	(in millions)
Assets
Short term investments	$	182	$	2,346	$	—	$	2,528
Fixed maturities
Tax exempt		—		19,907		6		19,913
Taxable
U.S. government and government agency and authority obligations		—		1,039		—		1,039
Corporate bonds		—		7,779		158		7,937
Foreign government and government agency obligations		—		7,008		—		7,008
Residential mortgage-backed securities		—		446		9		455
Commercial mortgage-backed securities		—		1,724		—		1,724
		—		17,996		167		18,163
Total fixed maturities		—		37,903		173		38,076
Equity securities		1,655		—		8		1,663
Other invested assets		—		—		46		46
	$	1,837	$	40,249	$	227	$	42,313
Liabilities
Long term debt	$	—	$	4,372	$	—	$	4,372