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Fair value measurements

Our financial assets and liabilities are summarized below as of December 31, 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)
December 31, 2017
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies		$	3,953		$	3,953		$	2,360		$	1,593		$	—
States, municipalities and political subdivisions			854			854			—			854			—
Foreign governments			8,822			8,822			6,946			1,876			—
Corporate bonds			6,862			6,862			—			6,856			6
Mortgage-backed securities			862			862			—			862			—
Investments in equity securities			170,540			170,540			170,494			46			—
Investment in Kraft Heinz common stock			17,635			25,306			25,306			—			—
Loans and finance receivables			13,748			14,136			—			17			14,119
Derivative contract assets ⁽¹⁾			142			142			1			28			113
Derivative contract liabilities:
Railroad, utilities and energy ⁽¹⁾			82			82			3			69			10
Equity index put options			2,172			2,172			—			—			2,172
Notes payable and other borrowings:
Insurance and other			27,324			28,180			—			28,180			—
Railroad, utilities and energy			62,178			70,538			—			70,538			—
Finance and financial products			13,085			13,582			—			13,577			5
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			1,084			1,084			—			1,084			—
Investments in equity securities			139,288			139,288			122,031			—			17,257
Investment in Kraft Heinz common stock			15,345			28,418			28,418			—			—
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. 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 each of the three years ending December 31, 2017 follow (in millions).


	Investments in fixed maturity securities			Investments in equity securities			Net derivative contract liabilities
Balance December 31, 2014	$	8		$	21,996		$	(4,759	)
Gains (losses) included in:
Earnings		—			—			1,080
Other comprehensive income		(2	)		(593	)		(7	)
Regulatory assets and liabilities		—			—			(19	)
Acquisitions		101			—			—
Dispositions and settlements		(7	)		—			(83	)
Transfers into/out of Level 3		—			—			3

Balance December 31, 2015		100			21,403			(3,785	)
Gains (losses) included in:
Earnings		—			3,593			880
Other comprehensive income		(4	)		876			(2	)
Regulatory assets and liabilities		—			—			(11	)
Acquisitions		10			—			—
Dispositions and settlements		(41	)		(8,615	)		(101	)
Transfers into/out of Level 3		(1	)		—			195

Balance December 31, 2016		64			17,257			(2,824	)
Gains (losses) included in:
Earnings		—			—			888
Other comprehensive income		1			1,156			(3	)
Regulatory assets and liabilities		—			—			(1	)
Dispositions and settlements		(59	)		—			(129	)
Transfers into/out of Level 3		—			(18,413	)		—

Balance December 31, 2017	$	6		$	—		$	(2,069	)

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 4, we exercised our BAC Warrants to acquire BAC common stock on August 24, 2017. As payment of the cost to acquire the BAC common stock, we surrendered substantially all of our BAC Preferred. Additionally, RBI redeemed our RBI Preferred investment on December 12, 2017. In the second quarter of 2017, we concluded the Level 3 inputs used in the previous fair value determinations of the BAC Warrants, BAC Preferred Stock and RBI Preferred were not significant and we transferred these measurements from Level 3 to Level 2. In 2016, our Wrigley preferred stock investment was disposed and our Dow preferred stock investment was converted into Dow common stock.

Quantitative information as of December 31, 2017, 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

Derivative liabilities:

Equity index put options

2,172

Option pricing model

Volatility

17%

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.