Fair value measurements

9 Months Ended

Sep. 30, 2012

Fair value measurements

Note 15. Fair value measurements

Our financial assets and liabilities are summarized below according to the fair value hierarchy. The carrying values of cash and cash equivalents, accounts receivable and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values. As of September 30, 2012 and December 31, 2011, the carrying values and fair values of financial assets and liabilities were as follows (in millions).

	Carrying Value		Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2012—Assets and liabilities carried at fair value:
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies	$	2,583	$	2,583	$	1,111	$	1,470	$	2
States, municipalities and political subdivisions		2,829		2,829		—		2,829		—
Foreign governments		11,530		11,530		4,694		6,836		—
Corporate bonds		12,338		12,338		—		11,687		651
Mortgage-backed securities		2,609		2,609		—		2,609		—
Investments in equity securities		88,027		88,027		87,928		64		35
Other investments		14,445		14,445		—		—		14,445
Derivative contract assets (1)		343		343		—		245		98
Derivative contract liabilities:
Railroad, utilities and energy (2)		230		230		11		212		7
Finance and financial products:
Equity index put options		9,517		9,517		—		—		9,517
Credit default obligations		492		492		—		—		492
Other		81		81		—		81		—
September 30, 2012—Assets and liabilities not carried at fair value:
Other investments		5,254		6,189		—		—		6,189
Loans and finance receivables		13,230		12,713		—		968		11,745
Notes payable and other borrowings:
Insurance and other		13,405		14,198		—		14,198		—
Railroad, utilities and energy		35,732		42,084		—		42,084		—
Finance and financial products		13,372		14,372		—		13,529		843
December 31, 2011—Assets and liabilities carried at fair value:
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies		2,935		2,935		843		2,090		2
States, municipalities and political subdivisions		3,070		3,070		—		3,069		1
Foreign governments		10,843		10,843		4,444		6,265		134
Corporate bonds		12,448		12,448		—		11,801		647
Mortgage-backed securities		2,892		2,892		—		2,892		—
Investments in equity securities		76,991		76,991		76,906		63		22
Other investments		11,669		11,669		—		—		11,669
Derivative contract assets (1)		327		327		—		205		122
Derivative contract liabilities:
Railroad, utilities and energy (2)		336		336		12		320		4
Finance and financial products:
Equity index put options		8,499		8,499		—		—		8,499
Credit default obligations		1,527		1,527		—		—		1,527
Other		113		113		—		113		—

⁽¹⁾ Included in other assets.

⁽²⁾  Included in accounts payable, accruals and other liabilities.

As of December 31, 2011, the carrying values and fair values of financial assets and liabilities that are not carried at fair value were as follows (in millions).

	Carrying Value		Fair Value
Other investments	$	5,252	$	6,258
Loans and finance receivables		13,934		13,126
Notes payable and other borrowings:
Insurance and other		13,768		14,334
Railroad, utilities and energy		32,580		38,257
Finance and financial products		14,036		14,959

The fair values of 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 of investments in fixed maturity securities and notes payable and other borrowings 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 and we 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 pricing assets or liabilities. Fair value measurements of non-exchange traded derivative contracts and certain other investments are based primarily on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants.

A reconciliation 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 of 2011 follows (in millions).

	Investments in fixed maturity securities			Investments in equity securities			Other investments			Net derivative contract (liabilities)
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			—
Dispositions		(34	)		—			—			—
Settlements		—			—			—			(25	)
Transfers out of Level 3		—			—			(8,800	)		1
Balance at September 30, 2011	$	780		$	16		$	11,976		$	(10,403	)

A reconciliation 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 of 2012 follows (in millions).

	Investments in fixed maturity securities			Investments in equity securities		Other investments		Net derivative contract (liabilities)
Balance at December 31, 2011	$	784		$	22	$	11,669	$	(9,908	)
Gains (losses) included in:
Earnings		—			—		—		(199	)
Other comprehensive income		6			13		2,776		3
Regulatory assets and liabilities		—			—		—		—
Dispositions		(8	)		—		—		—
Settlements, net		—			—		—		186
Transfers out of Level 3		(129	)		—		—		—
Balance at September 30, 2012	$	653		$	35	$	14,445	$	(9,918	)

During the first nine months of 2011, we transferred our investments in GS Preferred Stock and GE Preferred Stock from Level 3 to Level 2 given the then pending redemptions of the investments which occurred on April 18, 2011 and October 17, 2011, respectively. There were no transfers into Level 3 for the first nine months of 2012 or 2011. 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.

Gains and losses included in 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 settlement transactions. Gains and losses included in other comprehensive income are included as components of the net change in unrealized appreciation of investments and the reclassification of investment appreciation in earnings, as appropriate in the Consolidated Statements of Comprehensive Income.

Quantitative information as of September 30, 2012, 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 Input	Weighted Average
Other investments:
Preferred stocks	$	11,749	Discounted cash flow	Expected duration	10 years
				Discount for transferability restrictions and subordination	97 basis points
Common stock warrants		2,696	Warrant pricing model	Discount for transferability and hedging restrictions	19%
Net derivative liabilities:
Equity index put options		9,517	Option pricing model	Volatility	22%
Credit default-states/municipalities		472	Discounted cash flow	Credit default spreads	100 basis points

For certain credit default and other derivative contracts where we could not corroborate that the fair values or the inputs were observable in the market, fair values were based on non-binding price indications obtained from third party sources. Management reviewed these values relative to the terms of the contracts, the current facts, circumstances and market conditions, and concluded they were reasonable. We did not adjust these prices and therefore, they have been excluded from the preceding table.

Our other investments that are carried at fair value consist of a few relatively large private placement transactions and include perpetual preferred stocks and common stock warrants. These investments are subject to contractual restrictions on transferability and/or provisions that prevent us from economically hedging our investments. In applying discounted estimated cash flow techniques in valuing the perpetual preferred stocks, we made assumptions regarding the expected durations of the investments, as the issuers may have the right to redeem or convert these investments. We also made estimates regarding the impact of subordination, as the preferred stocks have a lower priority in liquidation than the investment grade debt instruments of the issuers, which affected the discount rates. In valuing the common stock warrants, we used a warrant valuation model. While most of the inputs to the model are observable, we are subject to the aforementioned contractual restrictions. We have applied discounts with respect to the contractual restrictions. Increases or decreases to these inputs would result in decreases or increases to the fair values.

Our equity index put option and credit default 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 and many contracts have long durations, and therefore are illiquid. For these and other reasons, we classified these contracts as Level 3. 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 current index price, contract duration, dividend and interest rate inputs (which include a Berkshire non-performance input) which are observable. However, the valuation of long-duration options is inherently subjective, given the lack of observable transactions and prices, and acceptable values may be subject to wide ranges. Expected volatility inputs represent our expectations after considering the remaining duration of each contract and that the contracts will remain outstanding until the expiration dates without offsetting transactions occurring in the interim. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values.

Our state and municipality credit default contract values reflect credit default spreads, contract durations, interest rates, bond prices and other inputs believed to be used by market participants in estimating fair value. We utilize discounted cash flow valuation models, which incorporate the aforementioned inputs as well as our own estimates of credit default spreads for states and municipalities where there is no observable input. Increases or decreases to the credit default spreads will produce increases or decreases in the fair values.