Note 18. Fair value measurements

Our financial assets and liabilities are summarized below as of June 30, 2017 and December 31, 2016 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)
June 30, 2017
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies		$ 4,792		$ 4,792		$ 3,326		$ 1,466		$ —
States, municipalities and political subdivisions		1,103		1,103		—		1,103		—
Foreign governments		8,922		8,922		7,143		1,779		—
Corporate bonds		7,559		7,559		—		7,552		7
Mortgage-backed securities		1,035		1,035		—		1,035		—
Investments in equity securities		137,113		137,113		137,104		8		1
Investment in Kraft Heinz common stock		15,584		27,871		27,871		—		—
Other investments		20,234		20,234		—		20,234		—
Loans and finance receivables		14,559		15,015		—		1,095		13,920
Derivative contract assets ⁽¹⁾		123		123		2		15		106
Derivative contract liabilities:
Railroad, utilities and energy ⁽¹⁾		139		139		2		120		17
Equity index put options		2,494		2,494		—		—		2,494
Notes payable and other borrowings:
Insurance and other		27,781		28,489		—		28,489		—
Railroad, utilities and energy		60,701		68,603		—		68,603		—
Finance and financial products		13,788		14,296		—		13,973		323

December 31, 2016
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies		$ 4,527		$ 4,527		$ 3,099		$ 1,428		$—
States, municipalities and political subdivisions		1,216		1,216		—		1,216		—
Foreign governments		9,001		9,001		7,237		1,764		—
Corporate bonds		7,604		7,604		—		7,540		64
Mortgage-backed securities		1,117		1,117		—		1,117		—
Investments in equity securities		122,032		122,032		122,031		—		1
Investment in Kraft Heinz common stock		15,345		28,418		28,418		—		—
Other investments		17,256		17,256		—		—		17,256
Loans and finance receivables		13,300		13,717		—		13		13,704
Derivative contract assets ⁽¹⁾		142		142		5		43		94
Derivative contract liabilities:
Railroad, utilities and energy ⁽¹⁾		145		145		3		114		28
Equity index put options		2,890		2,890		—		—		2,890
Notes payable and other borrowings:
Insurance and other		27,175		27,712		—		27,712		—
Railroad, utilities and energy		59,085		65,774		—		65,774		—
Finance and financial products		15,384		15,825		—		15,469		356

⁽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 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 assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the six months ending June 30, 2017 and 2016 follow (in millions).


	Investments in fixed maturity securities		Investments in equity securities and other investments				Net derivative contract liabilities
Six months ending June 30, 2017
Balance at December 31, 2016		$ 64		$	17,257			$	(2,824	)
Gains (losses) included in:
Earnings		—			—				473
Other comprehensive income		1			1,156				(2	)
Regulatory assets and liabilities		—			—				(2	)
Acquisitions, dispositions and settlements		(58)			—				(50	)
Transfers into/out of Level 3		—			(18,412	)			—

Balance at June 30, 2017		$ 7		$	1			$	(2,405	)

Six months ending June 30, 2016
Balance at December 31, 2015		$100		$	21,403			$	(3,785	)
Gains (losses) included in:
Earnings		—			—				(737	)
Other comprehensive income		1			(927	)			—
Regulatory assets and liabilities		—			—				(11	)
Acquisitions, dispositions and settlements		5			—				(35	)
Transfers into/out of Level 3		(1)			—				195

Balance at June 30, 2016		$105		$	20,476			$	(4,373	)

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 primarily the net change in unrealized appreciation of investments and the reclassification of investment appreciation in net earnings, as appropriate in our Consolidated Statements of Comprehensive Income.

As disclosed in Note 7, we expect to exercise our BAC Warrants in the third quarter of 2017 using the BAC Preferred as consideration and additionally, RBI intends to redeem our RBI Preferred investment. As of June 30, 2017, we based our valuations of these investments on these expectations and we significantly reduced expected durations and effectively eliminated the discounts for transferability and other restrictions. As a result, we concluded the Level 3 inputs used in the previous fair value determinations of our investments in BAC Warrants and RBI Preferred were not significant and that the valuations of such investments were Level 2 measurements as of June 30, 2017.

Quantitative information as of June 30, 2017, with respect to significant 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

Derivative contract liabilities:

Equity index put options

2,494

Option pricing model

Volatility

19%

Our equity index put option 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. 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.