(14) Fair Values of Financial Instruments

(a) 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 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:


	December 31
	2013				2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in millions)
Assets
Invested assets
Short term investments	$	2,114	$	2,114	$	2,528	$	2,528
Fixed maturities (Note 2)		37,091		37,091		38,076		38,076
Equity securities		1,810		1,810		1,663		1,663
Other invested assets		—		—		46		46
Liabilities
Long term debt (Note 6)		3,300		3,806		3,575		4,372

At December 31, 2013 and 2012, 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 December 31, 2013 and 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:


	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


	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

(b) The methods and assumptions used to estimate the fair value of the Corporation’s pension plan and other postretirement benefit plan assets, other than assets invested in pooled funds, are similar to the methods and assumptions used for the Corporation’s other financial instruments. The fair value of pooled funds is based on the net asset value of the funds.

Based on the fair value hierarchy, the fair value of the Corporation’s pension plan assets categorized based upon the lowest level of input that was significant to the fair value measurement was as follows:


	December 31, 2013
	Level 1		Level 2		Level 3		Total
	(in millions)
Short term investments	$	—	$	37	$	—	$	37

Fixed maturities
U.S. government and government agency and authority obligations		—		224		—		224
Corporate bonds		—		370		1		371
Foreign government and government agency obligations		—		104		—		104
Mortgage-backed securities		—		211		6		217

Total fixed maturities		—		909		7		916

Equity securities		573		1,145		—		1,718
Other assets		21		14		11		46

	$	594	$	2,105	$	18	$	2,717


	December 31, 2012
	Level 1		Level 2		Level 3		Total
	(in millions)
Short term investments	$	—	$	33	$	—	$	33

Fixed maturities
U.S. government and government agency and authority obligations		—		238		1		239
Corporate bonds		—		321		—		321
Foreign government and government agency obligations		—		79		1		80
Mortgage-backed securities		—		174		—		174

Total fixed maturities		—		812		2		814

Equity securities		457		947		—		1,404
Other assets		29		9		16		54

	$	486	$	1,801	$	18	$	2,305

The fair value of the Corporation’s other postretirement benefit plan assets was $130 million and $96 million at December 31, 2013 and 2012, respectively. Based on the fair value hierarchy, the fair value of these assets was categorized as Level 1 based upon the lowest level of input that was significant to the fair value measurement.