Fair value measurements

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Fair value measurements

Note 19. Fair value measurements

Our financial assets and liabilities are summarized below as of September 30, 2019 and December 31, 2018, with fair values shown according to the fair value hierarchy (in millions). The carrying values of cash and cash equivalents, U.S. Treasury Bills, receivables and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values.

	Carrying Value		Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2019
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations    and agencies	$	3,805	$	3,805	$	2,833	$	972	$	—
States, municipalities and political subdivisions		157		157		—		157		—
Foreign governments		8,023		8,023		5,752		2,271		—
Corporate bonds		6,704		6,704		—		6,701		3
Mortgage-backed securities		483		483		—		483		—
Investments in equity securities		220,051		220,051		209,195		51		10,805
Investment in Kraft Heinz common stock		13,770		9,091		9,091		—		—
Loans and finance receivables		17,135		17,367		—		1,758		15,609
Derivative contract assets (1)		144		144		—		18		126
Derivative contract liabilities:
Railroad, utilities and energy (1)		96		96		6		62		28
Equity index put options		1,236		1,236		—		—		1,236
Notes payable and other borrowings:
Insurance and other		37,176		40,409		—		40,381		28
Railroad, utilities and energy		65,018		76,008		—		76,008		—
December 31, 2018
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations    and agencies	$	4,223	$	4,223	$	2,933	$	1,290	$	—
States, municipalities and political subdivisions		189		189		—		189		—
Foreign governments		7,502		7,502		5,417		2,085		—
Corporate bonds		7,440		7,440		—		7,434		6
Mortgage-backed securities		544		544		—		544		—
Investments in equity securities		172,757		172,757		172,253		203		301
Investment in Kraft Heinz common stock		13,813		14,007		14,007		—		—
Loans and finance receivables		16,280		16,377		—		1,531		14,846
Derivative contract assets (1)		172		172		2		52		118
Derivative contract liabilities:
Railroad, utilities and energy (1)		111		111		1		101		9
Equity index put options		2,452		2,452		—		—		2,452
Notes payable and other borrowings:
Insurance and other		34,975		35,361		—		35,335		26
Railroad, utilities and energy		62,515		66,422		—		66,422		—

^{(1) Assets are included in other assets and liabilities are included in accounts payable, accruals and other liabilities.}

Notes to Consolidated Financial Statements (Continued)

Note 19. Fair value measurements (Continued)

The fair values of substantially all of our financial instruments were measured using market or income approaches. The hierarchy for measuring fair value consists of Levels 1 through 3, which are described below.

Level 1 – Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.

Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit ratings, estimated durations and yields for other instruments of the issuer or entities in the same industry sector.

Level 3 – Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities and it may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in valuing assets or liabilities.

Reconciliations of significant assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the nine months ended September 30, 2019 and 2018 follow (in millions).

				Gains (losses) included in:
	Balance – beginning of year			Earnings		Other comprehensive income			Regulatory assets and liabilities			Acquisitions, dispositions and settlements			Balance – September 30
Investments in fixed maturity and equity securities:
2019	$	307		$	499	$	—		$	—		$	10,002		$	10,808
2018		6			—		—			—			(1	)		5
Net derivative contract assets (liabilities):
2019		(2,343	)		1,528		(1	)		(40	)		(282	)		(1,138	)
2018		(2,069	)		446		—			(11	)		(141	)		(1,775	)

Quantitative information as of September 30, 2019, with respect to assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) follows (in millions).

	Fair Value		Principal Valuation Techniques	Unobservable Inputs	Weighted Average
Investments in equity securities:
Preferred stocks	$	10,363	Discounted cash flow	Expected duration	10 years
				Discount for transferability restrictions and subordination	375 basis points
Common stock warrants		136	Warrant pricing model	Expected duration	10 years
Derivative contract liabilities		1,236	Option pricing model	Volatility	16%

Investments in equity securities at September 30, 2019 included our investments in Occidental preferred stock and common stock warrants (see Note 4). These investments are subject to contractual restrictions on transferability and may contain provisions that prevent us from economically hedging our investments. In applying discounted cash flow techniques in valuing the perpetual preferred stock, we made assumptions regarding the expected duration of the investment, as the issuer may have the right to redeem or convert the stock. We also made estimates regarding the impact of subordination, as the preferred stock has a lower priority in liquidation than debt instruments of the issuer. In valuing the common stock warrants, we used a warrant valuation model. While most of the inputs to the model are observable, we made assumptions regarding the expected duration of the investment. Increases or decreases to these inputs would result in decreases or increases to the fair value of the investments.

Notes to Consolidated Financial Statements (Continued)

Note 19. Fair value measurements (Continued)

Our equity index put option derivative contracts are illiquid and contain contract terms that are not standard in derivatives markets. For example, we are not required to post collateral under most of our contracts and certain of the contracts have relatively long durations. For these and other reasons, we classified these contracts as Level 3 measurements. The methods we use to value these contracts are those that we believe market participants would use in determining exchange prices with respect to our contracts.

We value equity index put option contracts based on the Black-Scholes option valuation model. Inputs to this model include index price, contract duration and dividend and interest rate inputs (including a Berkshire non-performance input) which are observable. However, we believe that the valuation of long-duration options using any model is inherently subjective and, given the lack of observable transactions and prices, acceptable values may be subject to wide ranges. Volatility inputs represent our expectations, which consider the remaining duration of each contract and assume that the contracts will remain outstanding until the expiration dates. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values of the liabilities.