Item 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to Item 7A included in our 2021 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 2021 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, 2021, balances disclosed in the 2021 Form 10-K.
Effective April 1, 2022, Turkey was designated as a highly inflationary economy and therefore we changed the functional currency for our Turkish operations from the Turkish lira to the U.S. dollar. Our net assets denominated in the Turkish lira represent less than 0.1% of consolidated shareholders’ equity. Therefore, this change in the functional currency of our Turkish operations did not have a material impact on our financial condition or results of operations.
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.) at June 30, 2022, 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
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• 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 70 percent—80 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, 2022, market levels and only applicable to the equity and interest rate sensitivities table below.
• The sensitivities do not scale linearly and may be proportionally greater for larger movements in the market factors. Actual sensitivity of our net income may differ from those disclosed in the tables below due to fluctuations in short-term market movements.
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 $ 319 $ 221 $ 95 $ (57) $ (238) $ (455)
Increase/(decrease) in hedge value (73) — 73 147 220 293
Increase/(decrease) in net income $ 246 $ 221 $ 168 $ 90 $ (18) $ (162)
Flat (Increase)/decrease in FVL $ 127 $ — $ (150) $ (329) $ (538) $ (781)
Increase/(decrease) in hedge value (73) — 73 147 220 293
Increase/(decrease) in net income $ 54 $ — $ (77) $ (182) $ (318) $ (488)
-100 bps (Increase)/decrease in FVL $ (123) $ (273) $ (447) $ (650) $ (883) $ (1,146)
Increase/(decrease) in hedge value (73) — 73 146 220 293
Increase/(decrease) in net income $ (196) $ (273) $ (374) $ (504) $ (663) $ (853)
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 $ 60 $ (67) $ (1) $ 1 $ (18) $ 17
Increase/(decrease) in net income $ 60 $ (67) $ (1) $ 1 $ (18) $ 17
All our variable annuity reinsurance treaties include annual or aggregate claim limits and many include an aggregate deductible which limit the net amount at risk under these programs. For an estimated impact on the variable annuity net amount at risk from changes in equity market levels, refer to Item 7A in our 2021 Form 10-K. This information will be updated and disclosed in interim filings if the sensitivities change materially from the tables disclosed in the 2021 Form 10-K.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.