Note 18. Fair value measurements

Our financial assets and liabilities are summarized below as of June 30, 2018 and December 31, 2017 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, 2018
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies	$	3,438	$	3,438	$	2,413	$	1,025	$	—
U.S. states, municipalities and political subdivisions		464		464		—		464		—
Foreign governments		7,565		7,565		5,715		1,850		—
Corporate bonds		6,413		6,413		—		6,408		5
Mortgage-backed securities		644		644		—		644		—
Investments in equity securities		179,729		179,729		179,681		48		—
Investment in Kraft Heinz common stock		17,530		20,444		20,444		—		—
Loans and finance receivables		14,211		14,485		—		87		14,398
Derivative contract assets ⁽¹⁾		149		149		1		30		118
Derivative contract liabilities:
Railroad, utilities and energy ⁽¹⁾		93		93		—		75		18
Equity index put options		2,006		2,006		—		—		2,006
Notes payable and other borrowings:
Insurance and other		25,158		25,422		—		25,422		—
Railroad, utilities and energy		62,664		67,284		—		67,284		—
Finance and financial products		8,951		9,148		—		9,121		27
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	$	—
U.S. 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

(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 the six months ending June 30, 2018 and 2017 follow (in millions).


	Investments in equity and fixed maturity securities		Net derivative contract liabilities
Six months ending June 30, 2018
Balance at December 31, 2017	$	6	$	(2,069)
Gains (losses) included in:
Earnings		—		256
Regulatory assets and liabilities		—		(14)
Acquisitions, dispositions and settlements		(1)		(79)

Balance at June 30, 2018	$	5	$	(1,906)

Six months ending June 30, 2017
Balance at December 31, 2016	$	17,321	$	(2,824)
Gains (losses) included in:
Earnings		—		473
Other comprehensive income		1,157		(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	$	8	$	(2,405)

Gains and losses included in earnings are included as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate. In 2017, gains and losses included in other comprehensive income were 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.

On June 30, 2017, we announced our intention to exercise our investment in Bank of America Corporation Warrants (“BAC Warrants”) for common stock in the third quarter of 2017 and that we expected to use our investment in Bank of America Corporation Preferred Stock as consideration. In the second quarter of 2017, Restaurant Brands International, Inc. (“RBI”) announced its intention to redeem our investment in RBI Preferred Shares in the fourth quarter of 2017. As of June 30, 2017, we based our valuations of these investments on such 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 Shares were not significant and that the valuations of such investments were deemed Level 2 measurements.

Quantitative information as of June 30, 2018, 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
Technique

Unobservable Input

Weighted
Average

Derivative liabilities:

Equity index put options

2,006

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.