Fair value measurements

9 Months Ended

Sep. 30, 2011

Fair value measurements

Note 16.    Fair value measurements

The estimated fair values of our financial instruments are shown in the following table (in millions). The carrying values of cash and cash equivalents, accounts receivable and accounts payable, accruals and other liabilities are deemed to be reasonable estimates of their fair values.

	Carrying Value				Fair Value
	September 30, 2011		December 31, 2010		September 30, 2011		December 31, 2010
Investments in fixed maturity securities	$	34,048	$	34,883	$	34,048	$	34,883
Investments in equity securities		68,062		61,513		68,062		61,513
Other investments		20,519		23,009		21,555		24,147
Loans and finance receivables		14,003		15,226		13,335		14,453
Derivative contract assets (1)		278		574		278		574
Notes payable and other borrowings:
Insurance and other		13,748		12,471		14,200		12,705
Railroad, utilities and energy		32,644		31,626		37,289		33,932
Finance and financial products		14,092		14,477		14,934		15,191
Derivative contract liabilities:
Railroad, utilities and energy (2)		492		621		492		621
Finance and financial products		10,421		8,371		10,421		8,371

(1) Included in Other assets

(2) Included in Accounts payable, accruals and other liabilities

Fair values for substantially all of our financial instruments were measured using market or income approaches. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value.

The hierarchy for measuring fair value consists of Levels 1 through 3.

Level 1 – Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets. Substantially all of our investments in equity securities are traded on an exchange in active markets and fair values are based on the closing prices as of the balance sheet date.

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. Fair values for our investments in fixed maturity securities are primarily based on price evaluations which incorporate market prices for identical instruments in inactive markets and market data available for instruments with similar characteristics. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit rating, estimated duration, 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 or related observable inputs that can be corroborated at the measurement date. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities. Measurements of non-exchange traded derivative contracts and certain other investments carried at fair value are based primarily on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants. We value equity index put option contracts based on the Black-Scholes option valuation model which we believe is widely used by market participants. Inputs to this model include current index price, expected volatility, dividend and interest rates and contract duration. Our credit default contracts are primarily valued based on models that incorporate observable credit default spreads, contract durations, interest rates and other inputs believed to be used by market participants in estimating fair value. Our credit default and equity index put option contracts are not exchange traded and certain contract terms are not standard in derivatives markets. For example, we are not required to post collateral under most of our contracts. For these reasons, we classified these contracts as Level 3.

Financial assets and liabilities measured and carried at fair value on a recurring basis in our financial statements are summarized, according to the hierarchy previously described, as follows (in millions).

	Total Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2011
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies	$	2,292	$	686	$	1,603	$	3
States, municipalities and political subdivisions		3,154		—		3,153		1
Foreign governments		13,196		5,765		7,309		122
Corporate bonds		12,601		—		11,947		654
Mortgage-backed securities		2,805		—		2,805		—
Investments in equity securities		68,062		67,964		82		16
Other investments		15,276		—		3,300		11,976
Net derivative contract (assets)/liabilities:
Railroad, utilities and energy		413		18		188		207
Finance and financial products:
Equity index put options		8,849		—		—		8,849
Credit default obligations		1,324		—		—		1,324
Other		49		—		26		23

	Total Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2010
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies	$	2,197	$	535	$	1,658	$	4
States, municipalities and political subdivisions		3,581		—		3,581		—
Foreign governments		11,912		5,633		6,167		112
Corporate bonds		14,054		23		13,346		685
Mortgage-backed securities		3,139		—		3,139		—
Investments in equity securities		61,513		61,390		88		35
Other investments		17,589		—		—		17,589
Net derivative contract (assets)/liabilities:
Railroad, utilities and energy		390		7		52		331
Finance and financial products:
Equity index put options		6,712		—		—		6,712
Credit default obligations		1,239		—		—		1,239
Other		77		—		137		(60	)

Reconciliations of assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the first nine months ended September 30, 2011 and 2010 follow (in millions).

	Investments in fixed maturity securities			Investments in equity securities			Other investments			Net derivative contract liabilities
Balance at December 31, 2009	$	918		$	304		$	18,562		$	(9,196	)
Gains (losses) included in:
Earnings		—			—			—			(1,914	)
Other comprehensive income		30			(22	)		(610	)		—
Regulatory assets and liabilities		—			—			—			(35	)
Purchases, sales, issuances and settlements		(1	)		(1	)		—			130
Transfers into (out of) Level 3		(140	)		(260	)		—			3
Balance at September 30, 2010	$	807		$	21		$	17,952		$	(11,012	)
Balance at December 31, 2010	$	801		$	35		$	17,589		$	(8,222	)
Gains (losses) included in:
Earnings		—			—			—			(2,244	)
Other comprehensive income		7			(19	)		(1,813	)		—
Regulatory assets and liabilities		—			—			—			87
Acquisitions		6			—			5,000			(51	)
Dispositions		(34	)		—			—			26
Transfers into (out of) Level 3		—			—			(8,800	)		1
Balance at September 30, 2011	$	780		$	16		$	11,976		$	(10,403	)

Gains and losses included in net earnings are included as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate and are related to changes in valuations of derivative contracts and disposal or settlement transactions. Other investments with Level 3 measurements at December 31, 2010 included our investments in GS, GE, Dow and Wrigley preferred stock and the GS and GE warrants. On September 1, 2011, we acquired preferred stock and common stock warrants of the Bank of America Corporation at an aggregate cost of $5 billion.  As of March 31, 2011, we transferred our investment in GS Preferred Stock to Level 2 measurements given the then pending redemption of that investment which occurred on April 18, 2011. As of September 30, 2011, we transferred our investment in GE Preferred from Level 3 to Level 2, as a result of the pending redemption which occurred on October 17, 2011.