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Commitments, contingencies, and guarantees | 9 Months Ended
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Sep. 30, 2019
Commitments and Contingencies Disclosure [Abstract] |
Commitments, contingencies, and guarantees | Commitments, contingencies, and guarantees a) Derivative instruments Foreign currency management As a global company, Chubb entities transact business in multiple currencies. Our policy is to generally match assets, liabilities, and required capital for each individual jurisdiction in local currency, which would include the use of derivatives discussed below. We do not hedge our net asset non-U.S. dollar capital positions; however, we do consider economic hedging for planned cross border transactions. Derivative instruments employed Chubb maintains positions in derivative instruments such as futures, options, swaps, and foreign currency forward contracts for which the primary purposes are to manage duration and foreign currency exposure, yield enhancement, or to obtain an exposure to a particular financial market. Chubb also maintains positions in convertible securities that contain embedded derivatives. Investment derivative instruments are recorded in either Other assets (OA) or Accounts payable, accrued expenses, and other liabilities (AP), convertible bonds are recorded in Fixed maturities available for sale (FM AFS), and convertible equity securities are recorded in Equity securities (ES) in the Consolidated balance sheets. These are the most numerous and frequent derivative transactions. In addition, Chubb purchases to be announced mortgage-backed securities (TBAs) as part of its investing activities. Under reinsurance programs covering GLBs, Chubb assumes the risk of GLBs (principally GMIB) associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The GLB reinsurance product meets the definition of a derivative instrument. Benefit reserves in respect of GLBs are classified as Future policy benefits (FPB) while the fair value derivative adjustment is classified within AP. Chubb also generally maintains positions in exchange-traded equity futures contracts on equity market indices to limit equity exposure in the GMDB and GLB books of business. All derivative instruments are carried at fair value with changes in fair value recorded in Net realized gains (losses) in the Consolidated statements of operations. None of the derivative instruments are designated as hedges for accounting purposes. The following table presents the balance sheet locations, fair values of derivative instruments in an asset or (liability) position, and notional values/payment provisions of our derivative instruments:
|  |  |  |  | September 30, 2019 |  |  |  |  | December 31, 2018 |
| Consolidated Balance Sheet Location |  | Fair Value |  |  | Notional Value/ Payment Provision |  |  | Fair Value |  |  | Notional Value/ Payment Provision |
(in millions of U.S. dollars) |  | Derivative Asset |  |  | Derivative (Liability) |  |  |  | Derivative Asset |  |  | Derivative (Liability) |  |
Investment and embedded derivative instruments: |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts | OA / (AP) |  | $ | 10 |  |  | $ | (59 | ) |  | $ | 2,888 |  |  | $ | 15 |  |  | $ | (19 | ) |  | $ | 2,185 |
Cross-currency swaps | OA / (AP) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 45 |
Interest rate swaps | OA / (AP) |  | — |  |  | — |  |  | — |  |  | — |  |  | (115 | ) |  | 5,250 |
Options/Futures contracts on notes, bonds, and equities | OA / (AP) |  | 12 |  |  | (4 | ) |  | 853 |  |  | 13 |  |  | (19 | ) |  | 1,046 |
Convertible securities (1) | FM AFS / ES |  | 5 |  |  | — |  |  | 8 |  |  | 9 |  |  | — |  |  | 11 |
TBAs | FM AFS |  | — |  |  | — |  |  | — |  |  | 6 |  |  | — |  |  | 6 |
|  |  | $ | 27 |  |  | $ | (63 | ) |  | $ | 3,749 |  |  | $ | 43 |  |  | $ | (153 | ) |  | $ | 8,543 |
Other derivative instruments: |  |  |  |  |  |  |  |  |  |  |  |  |
Futures contracts on equities (2) | OA / (AP) |  | $ | 6 |  |  | $ | — |  |  | $ | 582 |  |  | $ | 23 |  |  | $ | — |  |  | $ | 507 |
Other | OA / (AP) |  | 1 |  |  | — |  |  | 207 |  |  | 2 |  |  | — |  |  | 74 |
|  |  | $ | 7 |  |  | $ | — |  |  | $ | 789 |  |  | $ | 25 |  |  | $ | — |  |  | $ | 581 |
GLB (3) | (AP) / (FPB) |  | $ | — |  |  | $ | (935 | ) |  | $ | 1,729 |  |  | $ | — |  |  | $ | (861 | ) |  | $ | 1,750 |
(1) | Includes fair value of embedded derivatives.
(2) | Related to GMDB and GLB blocks of business.
(3) | Includes both future policy benefits reserves of $426 million and $409 million and fair value derivative adjustment of $509 million and $452 million at September 30, 2019 and December 31, 2018, respectively. Note that the payment provision related to GLB is the net amount at risk. The concept of a notional value does not apply to the GLB reinsurance contracts.
At September 30, 2019 and December 31, 2018, derivative liabilities of $30 million and $95 million, respectively, included in the table above were subject to a master netting agreement. The remaining derivatives included in the table above were not subject to a master netting agreement. The following table presents net realized gains (losses) related to derivative instrument activity in the Consolidated statements of operations:
| Three Months Ended |  |  | Nine Months Ended |
| September 30 |  |  | September 30 |
(in millions of U.S. dollars) | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Investment and embedded derivative instruments: |  |  |  |  |  |  |
Foreign currency forward contracts | $ | (20 | ) |  | $ | (2 | ) |  | $ | (57 | ) |  | $ | 5 |
Interest rate swaps | (55 | ) |  | 26 |  |  | (270 | ) |  | 26 |
All other futures contracts, options, and equities | (22 | ) |  | 13 |  |  | (83 | ) |  | 47 |
Convertible securities (1) | — |  |  | — |  |  | 2 |  |  | — |
Total investment and embedded derivative instruments | $ | (97 | ) |  | $ | 37 |  |  | $ | (408 | ) |  | $ | 78 |
GLB and other derivative instruments: |  |  |  |  |  |  |
GLB (2) | $ | (106 | ) |  | $ | 54 |  |  | $ | (57 | ) |  | $ | 133 |
Futures contracts on equities (3) | (6 | ) |  | (100 | ) |  | (89 | ) |  | (122 | )
Other | (14 | ) |  | (8 | ) |  | (8 | ) |  | 2 |
Total GLB and other derivative instruments | $ | (126 | ) |  | $ | (54 | ) |  | $ | (154 | ) |  | $ | 13 |
| $ | (223 | ) |  | $ | (17 | ) |  | $ | (562 | ) |  | $ | 91 |
(1) | Includes embedded derivatives.
(2) | Excludes foreign exchange gains (losses) related to GLB.
(3) | Related to GMDB and GLB books of business.
b) Derivative instrument objectives (i) Foreign currency exposure management A foreign currency forward contract (forward) is an agreement between participants to exchange specific foreign currencies at a future date. Chubb uses forwards to minimize the effect of fluctuating foreign currencies as discussed above. (ii) Duration management and market exposure Futures Futures contracts give the holder the right and obligation to participate in market movements, determined by the index or underlying security on which the futures contract is based. Settlement is made daily in cash by an amount equal to the change in value of the futures contract times a multiplier that scales the size of the contract. Exchange-traded futures contracts on money market instruments, notes, and bonds are used in fixed maturity portfolios to more efficiently manage duration, as substitutes for ownership of the money market instruments, bonds, and notes without significantly increasing the risk in the portfolio. Investments in futures contracts may be made only to the extent that there are assets under management not otherwise committed. Exchange-traded equity futures contracts are used to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, an increase in reserves for GMDB and GLB reinsurance business. Options An option contract conveys to the holder the right, but not the obligation, to purchase or sell a specified amount or value of an underlying security at a fixed price. Option contracts are used in our investment portfolio as protection against unexpected shifts in interest rates, which would affect the duration of the fixed maturity portfolio. By using options in the portfolio, the overall interest rate sensitivity of the portfolio can be reduced. Option contracts may also be used as an alternative to futures contracts in the synthetic strategy as described above. The price of an option is influenced by the underlying security, expected volatility, time to expiration, and supply and demand. The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Although non-performance is not anticipated, in order to minimize the risk of loss, management monitors the creditworthiness of its counterparties and obtains collateral. The performance of exchange-traded instruments is guaranteed by the exchange on which they trade. For non-exchange-traded instruments, the counterparties are principally banks which must meet certain criteria according to our investment guidelines. Interest rate swaps An interest rate swap is a contract between two counterparties in which interest payments are made based on a notional principal amount, which itself is never paid or received. Under the terms of an interest rate swap, one counterparty makes interest payments based on a fixed interest rate and the other counterparty’s payments are based on a floating rate. Interest rate swap contracts are used occasionally in our investment portfolio as protection against unexpected shifts in interest rates, which would affect the fair value of the fixed maturity portfolio. By using interest rate swaps in the portfolio, the overall duration or interest rate sensitivity of the portfolio can be impacted. Cross-currency swaps Cross-currency swaps are agreements under which two counterparties exchange interest payments and principal denominated in different currencies at a future date. We use cross-currency swaps to reduce the foreign currency and interest rate risk by converting cash flows back into local currency. We invest in foreign currency denominated investments to improve credit diversification and also to obtain better duration matching to our liabilities that is limited in the local currency market. Other Included within Other are derivatives intended to reduce potential losses which may arise from certain exposures in our insurance business. The economic benefit provided by these derivatives is similar to purchased reinsurance. For example, Chubb may enter into crop derivative contracts to protect underwriting results in the event of a significant decline in commodity prices. (iii) Convertible security investments A convertible security is a debt instrument or preferred stock that can be converted into a predetermined amount of the issuer’s equity. The convertible option is an embedded derivative within the host instruments which are classified in the investment portfolio as either available for sale or as an equity security. Chubb purchases convertible securities for their total return and not specifically for the conversion feature. (iv) TBA By acquiring TBAs, we make a commitment to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBAs and issuance of the underlying security, we account for our position as a derivative in the consolidated financial statements. Chubb purchases TBAs both for their total return and for the flexibility they provide related to our mortgage-backed security strategy. (v) GLB Under the GLB program, as the assuming entity, Chubb is obligated to provide coverage until the expiration or maturity of the underlying deferred annuity contracts or the expiry of the reinsurance treaty. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as Future policy benefits and valued similar to GMDB reinsurance. Other changes in fair value arise principally from changes in expected losses allocated to expected future premiums. Fair value represents management’s estimate of an exit price and thus, includes a risk margin. We may recognize a realized loss for other changes in fair value due to adverse changes in the capital markets (e.g., declining interest rates and/or declining U.S. and/or international equity markets) and changes in actual or estimated future policyholder behavior (e.g., increased annuitization or decreased lapse rates) although we expect the business to be profitable. To mitigate adverse changes in the capital markets, we maintain positions in exchange-traded equity futures contracts, as noted under section "(ii) Futures" above. These futures increase in fair value when the S&P 500 index decreases (and decrease in fair value when the S&P 500 index increases). The net impact of gains or losses related to changes in fair value of the GLB liability and the exchange-traded equity futures are included in Net realized gains (losses). c) Securities lending and secured borrowings Chubb participates in a securities lending program operated by a third-party banking institution whereby certain assets are loaned to qualified borrowers and from which we earn an incremental return. The securities lending collateral can only be drawn down by Chubb in the event that the institution borrowing the securities is in default under the lending agreement. An indemnification agreement with the lending agent protects us in the event a borrower becomes insolvent or fails to return any of the securities on loan. The collateral is recorded in Securities lending collateral and the liability is recorded in Securities lending payable in the Consolidated balance sheets. The following table presents the carrying value of collateral held under securities lending agreements by investment category and remaining contractual maturity of the underlying agreements:
|  | Remaining contractual maturity |
|  | September 30 |  |  | December 31 |
|  | 2019 |  |  | 2018 |
(in millions of U.S. dollars) |  | Overnight and Continuous |
Collateral held under securities lending agreements: |  |  |  |
Cash |  | $ | 562 |  |  | $ | 756 |
U.S. Treasury and agency |  | 70 |  |  | 64 |
Foreign |  | 249 |  |  | 795 |
Corporate securities |  | 17 |  |  | 15 |
Mortgage-backed securities |  | 18 |  |  | 45 |
Equity securities |  | 46 |  |  | 251 |
|  | $ | 962 |  |  | $ | 1,926 |
Gross amount of recognized liability for securities lending payable |  | $ | 962 |  |  | $ | 1,926 |
At September 30, 2019 and December 31, 2018, our repurchase agreement obligations of $1,416 million and $1,418 million, respectively, were fully collateralized. In contrast to securities lending programs, the use of cash received is not restricted for the repurchase obligations. The fair value of the underlying securities sold remains in Fixed maturities available for sale and the repurchase agreement obligation is recorded in Repurchase agreements in the Consolidated balance sheets. The following table presents the carrying value of collateral pledged under repurchase agreements by investment category and remaining contractual maturity of the underlying agreements:
| Remaining contractual maturity |
| September 30, 2019 |  |  | December 31, 2018 |
| 30-90 Days |  |  | Greater than 90 Days |  |  | Total |  |  | 30-90 Days |  |  | Greater than 90 Days |  |  | Total |
(in millions of U.S. dollars) |  |  |  |
Collateral pledged under repurchase agreements: |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and agency | $ | — |  |  | $ | 107 |  |  | $ | 107 |  |  | $ | — |  |  | $ | 259 |  |  | $ | 259 |
Mortgage-backed securities | 488 |  |  | 879 |  |  | 1,367 |  |  | 496 |  |  | 713 |  |  | 1,209 |
| $ | 488 |  |  | $ | 986 |  |  | $ | 1,474 |  |  | $ | 496 |  |  | $ | 972 |  |  | $ | 1,468 |
Gross amount of recognized liabilities for repurchase agreements |  |  |  |  | $ | 1,416 |  |  |  |  |  |  | $ | 1,418 |
Difference (1) |  |  |  |  | $ | 58 |  |  |  |  |  |  | $ | 50 |
(1) | Per the repurchase agreements, the amount of collateral posted is required to exceed the amount of gross liability.
Potential risks exist in our secured borrowing transactions due to market conditions and counterparty exposure. With collateral that we pledge, there is a risk that the collateral may not be returned at the expiration of the agreement. If the counterparty fails to return the collateral, Chubb will have free use of the borrowed funds until our collateral is returned. In addition, we may encounter the risk that Chubb may not be able to renew outstanding borrowings with a new term or with an existing counterparty due to market conditions including a decrease in demand as well as more restrictive terms from banks due to increased regulatory and capital constraints. Should this condition occur, Chubb may seek alternative borrowing sources or reduce borrowings. Additionally, increased margins and collateral requirements due to market conditions would increase our restricted assets as we are required to provide additional collateral to support the transaction. d) Fixed maturities At September 30, 2019, we have commitments to purchase fixed income securities of $799 million over the next several years. e) Other investments At September 30, 2019, included in Other investments in the Consolidated balance sheets are investments in limited partnerships and partially-owned investment companies with a carrying value of $4.6 billion. In connection with these investments, we have commitments that may require funding of up to $3.5 billion over the next several years. f) Income Taxes At September 30, 2019, $13 million of unrecognized tax benefits remain outstanding. It is reasonably possible that over the next twelve months, that the amount of unrecognized tax benefits may change resulting from the re-evaluation of unrecognized tax benefits arising from examinations by taxing authorities and the lapses of statutes of limitations. With few exceptions, Chubb is no longer subject to income tax examinations for years before 2010. g) Legal proceedings Our insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves. In addition to claims litigation, we are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance policies. This category of business litigation typically involves, among other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from our business ventures. In the opinion of management, our ultimate liability for these matters could be, but we believe is not likely to be, material to our consolidated financial condition and results of operations. h) Leases At September 30, 2019, the right-of-use asset was $577 million recorded within Other assets, and the lease liability was $617 million, which was recorded within Accounts payable, accrued expenses, and other liabilities on the Consolidated balance sheet. These leases consist principally of real estate operating leases that are amortized on a straight-line basis over the term of the lease.

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