Fair value measurements

3 Months Ended

Mar. 31, 2013

Fair value measurements

Note 15. Fair value measurements

Our financial assets and liabilities are summarized below as of March 31, 2013 and December 31, 2012 with fair value shown 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.

	Carrying Value		Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2013
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies	$	2,916	$	2,916	$	1,067	$	1,848	$	1
States, municipalities and political subdivisions		2,822		2,822		—		2,822		—
Foreign governments		11,037		11,037		4,417		6,620		—
Corporate bonds		12,180		12,180		—		11,532		648
Mortgage-backed securities		2,428		2,428		—		2,428		—
Investments in equity securities		97,163		97,163		97,064		64		35
Other investments carried at fair value		16,669		16,669		—		—		16,669
Other investments carried at cost		5,262		6,092		—		—		6,092
Loans and finance receivables		12,751		11,939		—		389		11,550
Derivative contract assets (1)		126		126		—		52		74
Derivative contract liabilities:
Railroad, utilities and energy (1)		157		157		2		149		6
Finance and financial products:
Equity index put options		6,264		6,264		—		—		6,264
Credit default		445		445		—		—		445
Other		12		12		—		12		—
Notes payable and other borrowings:
Insurance and other		13,399		14,118		—		14,118		—
Railroad, utilities and energy		36,890		42,422		—		42,422		—
Finance and financial products		12,960		13,780		—		13,007		773
December 31, 2012
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies	$	2,775	$	2,775	$	1,225	$	1,549	$	1
States, municipalities and political subdivisions		2,913		2,913		—		2,912		1
Foreign governments		11,355		11,355		4,571		6,784		—
Corporate bonds		12,661		12,661		—		12,011		650
Mortgage-backed securities		2,587		2,587		—		2,587		—
Investments in equity securities		87,662		87,662		87,563		64		35
Other investments carried at fair value		15,750		15,750		—		—		15,750
Other investments carried at cost		5,259		6,134		—		—		6,134
Loans and finance receivables		12,809		11,991		—		304		11,687
Derivative contract assets (1)		220		220		1		128		91
Derivative contract liabilities:
Railroad, utilities and energy (1)		234		234		10		217		7
Finance and financial products:
Equity index put options		7,502		7,502		—		—		7,502
Credit default		429		429		—		—		429
Other		2		2		—		2		—
Notes payable and other borrowings:
Insurance and other		13,535		14,284		—		14,284		—
Railroad, utilities and energy		36,156		42,074		—		42,074		—
Finance and financial products		13,045		14,005		—		13,194		811

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

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 are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of alternative 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, which are described below.

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.

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 quarter of 2013 and 2012 follow (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		—			(1	)		—		1,022
Other comprehensive income		6			11			2,489		(3	)
Regulatory assets and liabilities		—			—			—		9
Acquisitions, dispositions and settlements		(6	)		—			—		31
Transfers into (out of) Level 3		(129	)		—			—		—
Balance at March 31, 2012	$	655		$	32		$	14,158	$	(8,849	)
Balance at December 31, 2012	$	652		$	35		$	15,750	$	(7,847	)
Gains (losses) included in:
Earnings		—			—			520		1,235
Other comprehensive income		(2	)		—			399		(3	)
Regulatory assets and liabilities		—			—			—		1
Dispositions		(1	)		—			—		—
Settlements, net		—			—			—		(27	)
Transfers into (out of) Level 3		—			—			—		—
Balance at March 31, 2013	$	649		$	35		$	16,669	$	(6,641	)

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 March 31, 2013, 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	$	11,912	Discounted cash flow	Expected duration	7 years
				Discount for transferability restrictions and subordination	97 basis points
Common stock warrants		4,757	Warrant pricing model	Discount for transferability and hedging restrictions	15%
Net derivative liabilities:
Equity index put options		6,264	Option pricing model	Volatility	20%
Credit default-states/municipalities		427	Discounted cash flow	Credit spreads	82 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 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 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 spreads for states and municipalities where there is no observable input. Increases or decreases to the credit spreads will produce increases or decreases in the fair values.