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Fair value measurements

Our financial assets and liabilities are summarized below as of December 31, 2014 and December 31, 2013 with fair values shown according to the fair value hierarchy (in millions). 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)
December 31, 2014
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies	$	2,930	$	2,930	$	2,264	$	666	$	—
States, municipalities and political subdivisions		1,912		1,912		—		1,912		—
Foreign governments		12,270		12,270		7,981		4,289		—
Corporate bonds		8,771		8,771		—		8,763		8
Mortgage-backed securities		1,753		1,753		—		1,753		—
Investments in equity securities		117,470		117,470		117,424		45		1
Investment in Heinz Holding Preferred Stock		7,710		8,416		—		—		8,416
Other investments		22,324		22,324		329		—		21,995
Loans and finance receivables		12,566		12,891		—		33		12,858
Derivative contract assets ⁽¹⁾		108		108		1		13		94
Derivative contract liabilities:
Railroad, utilities and energy ⁽¹⁾		230		230		18		169		43
Finance and financial products:
Equity index put options		4,560		4,560		—		—		4,560
Credit default		250		250		—		—		250
Notes payable and other borrowings:
Insurance and other		11,894		12,484		—		12,484		—
Railroad, utilities and energy		55,579		62,802		—		62,802		—
Finance and financial products		12,736		13,417		—		12,846		571

December 31, 2013
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies	$	2,658	$	2,658	$	2,184	$	473	$	1
States, municipalities and political subdivisions		2,345		2,345		—		2,345		—
Foreign governments		11,073		11,073		7,467		3,606		—
Corporate bonds		11,237		11,254		—		10,187		1,067
Mortgage-backed securities		2,040		2,040		—		2,040		—
Investments in equity securities		117,505		117,505		117,438		60		7
Investment in Heinz Holding Preferred Stock		7,710		7,971		—		—		7,971
Other investments		17,951		17,951		—		—		17,951
Loans and finance receivables		12,826		12,002		—		454		11,548
Derivative contract assets ⁽¹⁾		87		87		3		15		69
Derivative contract liabilities:
Railroad, utilities and energy ⁽¹⁾		208		208		1		198		9
Finance and financial products:
Equity index put options		4,667		4,667		—		—		4,667
Credit default		648		648		—		—		648
Notes payable and other borrowings:
Insurance and other		12,440		12,655		—		12,655		—
Railroad, utilities and energy		46,655		49,879		—		49,879		—
Finance and financial products		13,129		13,505		—		12,846		659

⁽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 fair values 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.

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 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.

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 each of three years ending December 31, 2014 follow (in millions).


	Investments in fixed maturity securities			Investments in equity securities and other investments			Net derivative contract liabilities
Balance at December 31, 2011	$	784		$	11,691		$	(9,908	)
Gains (losses) included in:
Earnings		—			—			1,873
Other comprehensive income		5			4,094			—
Regulatory assets and liabilities		—			—			(2	)
Acquisitions, dispositions and settlements		(8	)		—			190
Transfers into (out of) Level 3		(129	)		—			—

Balance at December 31, 2012		652			15,785			(7,847	)
Gains (losses) included in:
Earnings		312			522			2,652
Other comprehensive income		(14	)		3,177			(1	)
Regulatory assets and liabilities		—			—			1
Dispositions and settlements		(578	)		(31	)		(60	)
Transfers into (out of) Level 3		—			(1,495	)		—

Balance at December 31, 2013		372			17,958			(5,255	)
Gains (losses) included in:
Earnings		—			—			524
Other comprehensive income		13			1,373			—
Regulatory assets and liabilities		—			—			5
Acquisitions		—			3,000			1
Dispositions and settlements		(2	)		—			1
Transfers into (out of) Level 3		(375	)		(335	)		(35	)

Balance at December 31, 2014	$	8		$	21,996		$	(4,759	)

Gains and losses included in earnings are included as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate and are primarily related to changes in the values 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 our Consolidated Statements of Comprehensive Income. In 2013, we transferred the fair value measurements of the GS Warrants and GE Warrants out of Level 3 because we concluded that the unobservable inputs were no longer significant.

Quantitative information as of December 31, 2014, 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

Other investments:

Preferred stocks

14,819

Discounted cash flow

Expected duration

7 years

Discount for transferability
restrictions and subordination

147 basis points

Common stock warrants

7,175

Warrant pricing model

Discount for transferability
and hedging restrictions

Net derivative liabilities:

Equity index put options

4,560

Option pricing model

Volatility

Credit default municipalities

250

Discounted cash flow

Credit spreads

36 basis points

Other investments currently consist of preferred stocks and common stock warrants that we acquired in a few relatively large private placement transactions. 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 debt instruments of the issuers, which affected the discount rates used. 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 and we have applied discounts with respect to such restrictions. Increases or decreases to these inputs would result in decreases or increases to the fair values of the investments.

Our equity index put option and credit default 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 many contracts have relatively long durations. 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 (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. Expected 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 without offsetting transactions occurring in the interim. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values of the liabilities.