Chubb Ltd 10-Q

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Refer to Item 7A included in our 2020 Form 10-K. 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. We do not hedge our net asset non-U.S. dollar capital positions. We occasionally engage in hedging activity for planned cross border transactions. For an estimated impact of foreign currency movement on our net assets denominated in non-U.S. currencies, refer to Item 7A in our 2020 Form 10-K. This information will be updated and disclosed in interim filings if our net assets in non-U.S. currencies change materially from the December 31, 2020 balances disclosed in the 2020 Form 10-K. Reinsurance of GMDB and GLB guarantees Chubb views its variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance with the probability of long-term economic loss relatively small, at the time of pricing. Adverse changes in market factors and policyholder behavior will have an impact on both realized gains (losses) and net income for GLB and both Life Insurance underwriting income and net income for GMDB. When evaluating these risks, we expect to be compensated for taking both the risk of a cumulative long-term economic net loss, as well as the short-term accounting variations caused by these market movements. Therefore, we evaluate this business in terms of its long-term economic risk and reward. For the GMDB reinsurance business, net income is directly impacted by changes in future policy benefit reserves. For the GLB reinsurance business, net income is directly impacted by changes in the fair value of the GLB liability (FVL), which is classified as a derivative for accounting purposes. The FVL calculation is directly affected by market factors, including equity levels, interest rate levels, credit risk, and implied volatilities, as well as policyholder behaviors, such as annuitization and lapse rates, and policyholder mortality. The tables below are estimates of the sensitivities to instantaneous changes in economic inputs (e.g., equity shock, interest rate shock etc.) or actuarial assumptions at June 30, 2021 of the FVL and of the fair value of specific derivative instruments held (hedge value) to partially offset the risk in the variable annuity guarantee reinsurance portfolio. The following assumptions should be considered when using the below tables: • Equity shocks impact all global equity markets equally • Our liabilities are sensitive to global equity markets in the following proportions: 80 percent—90 percent U.S. equity, and 10 percent—20 percent international equity. • Our current hedge portfolio is sensitive only to U.S. equity markets. • We would suggest using the S&P 500 index as a proxy for U.S. equity, and the MSCI EAFE index as a proxy for international equity. • Interest rate shocks assume a parallel shift in the U.S. yield curve • Our liabilities are also sensitive to global interest rates at various points on the yield curve, mainly the U.S. Treasury curve in the following proportions: 5 percent—15 percent short-term rates (maturing in less than 5 years), 15 percent—25 percent medium-term rates (maturing between 5 years and 10 years, inclusive), and 65 percent—75 percent long-term rates (maturing beyond 10 years). • A change in AA-rated credit spreads impacts the rate used to discount cash flows in the fair value model. AA-rated credit spreads are a proxy for both our own credit spreads and the credit spreads of the ceding insurers. • The hedge sensitivity is from June 30, 2021 market levels and only applicable to the equity and interest rate sensitivities table below. • The sensitivities are not directly additive because changes in one factor will affect the sensitivity to changes in other factors. The sensitivities do not scale linearly and may be proportionally greater for larger movements in the market factors. The sensitivities may also vary due to foreign exchange rate fluctuations. The calculation of the FVL is based on internal models that include assumptions regarding future policyholder behavior, including lapse, annuitization, and asset allocation. These assumptions impact both the absolute level of the FVL as well as the sensitivities to changes in market factors shown below. Actual sensitivity of our net income may differ from those disclosed in the tables below due to fluctuations in short-term market movements. 76 Table of Contents • In addition, the tables below do not reflect the expected quarterly run rate of net income generated by the variable annuity guarantee reinsurance portfolio if markets remain unchanged during the period. All else equal, if markets remain unchanged during the period, the FVL will increase, resulting in a realized loss. This realized loss occurs primarily because the guarantees provided in the underlying contracts continue to become more valuable even when markets remain unchanged. We refer to this increase in FVL as “timing effect”. The unfavorable impact of timing effect on our FVL in a quarter is not reflected in the sensitivity tables below. For this reason, when using the tables below to estimate the sensitivity of FVL in the third quarter of 2021 to various changes, it is necessary to assume an additional $5 million to $45 million increase in FVL and realized losses. Note that both the timing effect and the quarterly run rate impact to net income change over time as the book ages. Sensitivities to equity and interest rate movements (in millions of U.S. dollars) Worldwide Equity Shock Interest Rate Shock +10% Flat -10% -20% -30% -40% +100 bps (Increase)/decrease in FVL $ 329 $ 221 $ 91 $ (77) $ (285) $ (548) Increase/(decrease) in hedge value (83) — 83 166 249 332 Increase/(decrease) in net income $ 246 $ 221 $ 174 $ 89 $ (36) $ (216) Flat (Increase)/decrease in FVL $ 132 $ — $ (164) $ (360) $ (603) $ (904) Increase/(decrease) in hedge value (83) — 83 166 249 332 Increase/(decrease) in net income $ 49 $ — $ (81) $ (194) $ (354) $ (572) -100 bps (Increase)/decrease in FVL $ (102) $ (261) $ (449) $ (673) $ (948) $ (1,286) Increase/(decrease) in hedge value (83) — 83 166 249 332 Increase/(decrease) in net income $ (185) $ (261) $ (366) $ (507) $ (699) $ (954) Sensitivities to Other Economic Variables AA-rated Credit Spreads Interest Rate Volatility Equity Volatility (in millions of U.S. dollars) +100 bps -100 bps +2% -2% +2% -2% (Increase)/decrease in FVL $ 62 $ (70) $ (1) $ 1 $ (15) $ 14 Increase/(decrease) in net income $ 62 $ (70) $ (1) $ 1 $ (15) $ 14 Sensitivities to Actuarial Assumptions Mortality (in millions of U.S. dollars) +20% +10% -10% -20% (Increase)/decrease in FVL $ 19 $ 9 $ (9) $ (19) Increase/(decrease) in net income $ 19 $ 9 $ (9) $ (19) Lapses (in millions of U.S. dollars) +50% +25% -25% -50% (Increase)/decrease in FVL $ 88 $ 48 $ (55) $ (117) Increase/(decrease) in net income $ 88 $ 48 $ (55) $ (117) Annuitization (in millions of U.S. dollars) +50% +25% -25% -50% (Increase)/decrease in FVL $ (390) $ (207) $ 224 $ 470 Increase/(decrease) in net income $ (390) $ (207) $ 224 $ 470 Variable Annuity Net Amount at Risk All our VA reinsurance treaties include annual or aggregate claim limits and many include an aggregate deductible which limit the net amount at risk under these programs. The tables below present the net amount at risk at June 30, 2021 following an immediate change in equity market levels, assuming all global equity markets are impacted equally. 77 Table of Contents a) Reinsurance covering the GMDB risk only Equity Shock (in millions of U.S. dollars) +20 % Flat -20 % -40 % -60 % -80 % GMDB net amount at risk $ 299 $ 284 $ 406 $ 801 $ 899 $ 765 Claims at 100% immediate mortality 153 160 177 166 149 128 The treaty claim limits function as a ceiling as equity markets fall. As the shocks in the table above become incrementally more negative, the impact on the NAR and claims at 100 percent mortality begin to drop due to the specific nature of these claim limits, many of which are annual claim limits calculated as a percentage of the reinsured account value. There is also some impact due to a small portion of the GMDB reinsurance under which claims are positively correlated to equity markets (claims decrease as equity markets fall). b) Reinsurance covering the GLB risk only Equity Shock (in millions of U.S. dollars) +20 % Flat -20 % -40 % -60 % -80 % GLB net amount at risk $ 743 $ 1,050 $ 1,607 $ 2,372 $ 2,949 $ 3,349 The treaty claim limits cause the net amount at risk to increase at a declining rate as equity markets fall. c) Reinsurance covering both the GMDB and GLB risks on the same underlying policyholders Equity Shock (in millions of U.S. dollars) +20 % Flat -20 % -40 % -60 % -80 % GMDB net amount at risk $ 36 $ 44 $ 55 $ 70 $ 85 $ 96 GLB net amount at risk 282 373 504 679 868 1,011 Claims at 100% immediate mortality 37 36 35 35 35 35 The treaty limits control the increase in the GMDB net amount at risk as equity markets fall. The GMDB net amount at risk continues to increase as equity markets fall because most of these reinsurance treaties do not have annual claim limits calculated as a percentage of the underlying account value. The treaty limits cause the GLB net amount at risk to increase at a declining rate as equity markets fall.