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Fair value measurements
12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
Fair value measurements

Notes to Consolidated Financial Statements (Continued)

(20)

Fair value measurements

Our financial assets and liabilities are summarized below as of December 31, 2019 and December 31, 2018, 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, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury, U.S. government corporations and

   agencies

 

$

3,090

 

 

$

3,090

 

 

$

3,046

 

 

$

44

 

 

$

 

Foreign governments

 

 

8,638

 

 

 

8,638

 

 

 

5,437

 

 

 

3,201

 

 

 

 

Corporate bonds

 

 

6,352

 

 

 

6,352

 

 

 

 

 

 

6,350

 

 

 

2

 

Other

 

 

605

 

 

 

605

 

 

 

 

 

 

605

 

 

 

 

Investments in equity securities

 

 

248,027

 

 

 

248,027

 

 

 

237,271

 

 

 

46

 

 

 

10,710

 

Investment in Kraft Heinz common stock

 

 

13,757

 

 

 

10,456

 

 

 

10,456

 

 

 

 

 

 

 

Loans and finance receivables

 

 

17,527

 

 

 

17,861

 

 

 

 

 

 

1,809

 

 

 

16,052

 

Derivative contract assets (1)

 

 

145

 

 

 

145

 

 

 

 

 

 

23

 

 

 

122

 

Derivative contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Railroad, utilities and energy (1)

 

 

76

 

 

 

76

 

 

 

6

 

 

 

59

 

 

 

11

 

Equity index put options

 

 

968

 

 

 

968

 

 

 

 

 

 

 

 

 

968

 

Notes payable and other borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance and other

 

 

37,590

 

 

 

40,589

 

 

 

 

 

 

40,569

 

 

 

20

 

Railroad, utilities and energy

 

 

65,778

 

 

 

76,237

 

 

 

 

 

 

76,237

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury, U.S. government corporations and

   agencies

 

$

4,223

 

 

$

4,223

 

 

$

2,933

 

 

$

1,290

 

 

$

 

Foreign governments

 

 

7,502

 

 

 

7,502

 

 

 

5,417

 

 

 

2,085

 

 

 

 

Corporate bonds

 

 

7,440

 

 

 

7,440

 

 

 

 

 

 

7,434

 

 

 

6

 

Other

 

 

733

 

 

 

733

 

 

 

 

 

 

733

 

 

 

 

Investments in equity securities

 

 

172,757

 

 

 

172,757

 

 

 

172,253

 

 

 

203

 

 

 

301

 

Investment in Kraft Heinz common stock

 

 

13,813

 

 

 

14,007

 

 

 

14,007

 

 

 

 

 

 

 

Loans and finance receivables

 

 

16,280

 

 

 

16,377

 

 

 

 

 

 

1,531

 

 

 

14,846

 

Derivative contract assets (1)

 

 

172

 

 

 

172

 

 

 

2

 

 

 

52

 

 

 

118

 

Derivative contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Railroad, utilities and energy (1)

 

 

111

 

 

 

111

 

 

 

1

 

 

 

101

 

 

 

9

 

Equity index put options

 

 

2,452

 

 

 

2,452

 

 

 

 

 

 

 

 

 

2,452

 

Notes payable and other borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance and other

 

 

34,975

 

 

 

35,361

 

 

 

 

 

 

35,335

 

 

 

26

 

Railroad, utilities and energy

 

 

62,515

 

 

 

66,422

 

 

 

 

 

 

66,422

 

 

 

 

 

(1)

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

Notes to Consolidated Financial Statements (Continued)

(20)

Fair value measurements (Continued)

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, 2019 follow (in millions).

 

 

 

Investments

in equity and

fixed maturity

securities

 

 

Net

derivative

contract

liabilities

 

Balance December 31, 2016

 

$

17,321

 

 

$

(2,824

)

Gains (losses) included in:

 

 

 

 

 

 

 

 

Earnings

 

 

 

 

 

888

 

Other comprehensive income

 

 

1,157

 

 

 

(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 (losses) included in:

 

 

 

 

 

 

 

 

Earnings

 

 

 

 

 

(118

)

Other comprehensive income

 

 

 

 

 

2

 

Regulatory assets and liabilities

 

 

 

 

 

3

 

Acquisitions

 

 

2

 

 

 

3

 

Dispositions and settlements

 

 

(1

)

 

 

(164

)

Balance December 31, 2018

 

 

7

 

 

 

(2,343

)

Gains (losses) included in:

 

 

 

 

 

 

 

 

Earnings

 

 

404

 

 

 

1,972

 

Other comprehensive income

 

 

 

 

 

(1

)

Regulatory assets and liabilities

 

 

 

 

 

(26

)

Acquisitions

 

 

10,000

 

 

 

6

 

Dispositions and settlements

 

 

(4

)

 

 

(465

)

Balance December 31, 2019

 

$

10,407

 

 

$

(857

)

 

Notes to Consolidated Financial Statements (Continued)

(20)

Fair value measurements (Continued)

We acquired investments in Occidental Cumulative Perpetual Preferred Stock (“Occidental Preferred”) and Occidental common stock warrants in August 2019 at an aggregate cost of $10 billion. We currently consider the fair value measurements to contain Level 3 inputs. See Note 4. We acquired preferred stock and common stock warrants of Bank of America Corporation (“BAC”) in 2011. We exercised the BAC warrants to acquire BAC common stock in August 2017. As payment of the cost to acquire the BAC common stock, we surrendered substantially all of the BAC preferred stock. Additionally, in December 2017, Restaurant Brands International Inc. (“RBI”) redeemed a $3 billion private placement security that we acquired in 2014. During 2017, we concluded the Level 3 inputs used in the previous fair value determinations of the BAC warrants, BAC preferred stock and RBI investments were not significant and we transferred these measurements from Level 3 to Level 2.

Quantitative information as of December 31, 2019, 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

 

Investments in equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

$

10,314

 

 

Discounted cash flow

 

Expected duration

 

10 years

 

 

 

 

 

 

 

 

 

Discount for transferability restrictions and subordination

 

375 basis points

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock warrants

 

 

90

 

 

Warrant pricing model

 

Expected duration

 

10 years

 

 

 

 

 

 

 

 

 

Volatility

 

26%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative contract liabilities

 

 

968

 

 

Option pricing model

 

Volatility

 

16%

 

 

Investments in equity securities at December 31, 2019 included the Occidental Preferred and common stock warrants. These investments are subject to contractual restrictions on transferability and contain provisions that currently prevent us from economically hedging our investments. In applying discounted cash flow techniques in valuing the Occidental Preferred, we made assumptions regarding the expected duration of the investment. The Occidental Preferred is redeemable at Occidental’s option beginning in 2029. We also made estimates regarding the impact of subordination, as the Occidental Preferred has a lower priority in liquidation than debt instruments. In valuing the Occidental common stock warrants, we used a warrant valuation model. While most of the inputs to the model are observable, we made assumptions regarding the expected duration and volatility of the warrants. The Occidental common stock warrants expire on the one-year anniversary on which no Occidental Preferred remains outstanding.

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. We determine the fair value of the equity index put option contract liabilities based on the Black-Scholes option valuation model. Given the current index values, remaining contract durations and applicable strike prices for these contracts, we believe the only significant model input after December 31, 2019 is the prevailing index price, which is observable.