Note 18. Fair value measurements

Our financial assets and liabilities are summarized below as of March 31, 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)
March 31, 2018
Investments in fixed maturity securities:
U.S. Treasury, U.S. government corporations and agencies	$	3,608	$	3,608	$	2,399		$ 1,209		$ —
States, municipalities and political subdivisions		759		759		—		759		—
Foreign governments		7,888		7,888		5,906		1,982		—
Corporate bonds		6,819		6,819		—		6,813		6
Mortgage-backed securities		846		846		—		846		—
Investments in equity securities		172,976		172,976		172,928		48		—
Investment in Kraft Heinz common stock		17,687		20,272		20,272		—		—
Loans and finance receivables		13,845		14,084		—		18		14,066
Derivative contract assets ⁽¹⁾		141		141		1		26		114
Derivative contract liabilities:
Railroad, utilities and energy ⁽¹⁾		105		105		—		88		17
Equity index put options		2,378		2,378		—		—		2,378
Notes payable and other borrowings:
Insurance and other		25,663		26,046		—		26,046		—
Railroad, utilities and energy		62,667		68,603		—		68,603		—
Finance and financial products		10,755		11,059		—		11,035		24
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

(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 three months ended March 31, 2018 and 2017 follow (in millions).


	Investments in equity and fixed maturity securities			Net derivative contract liabilities
Three months ending March 31, 2018
Balance at December 31, 2017	$	6		$	(2,069	)
Gains (losses) included in:
Earnings		—			(176	)
Other comprehensive income		—			(1	)
Regulatory assets and liabilities		—			(9	)
Acquisitions, dispositions and settlements		—			(26	)
Transfers into/out of Level 3		—			—

Balance at March 31, 2018	$	6		$	(2,281	)

Three months ending March 31, 2017
Balance at December 31, 2016	$	17,321		$	(2,824	)
Gains (losses) included in:
Earnings		—			499
Other comprehensive income		1,157			(2	)
Regulatory assets and liabilities		—			1
Acquisitions, dispositions and settlements		(3	)		(23	)
Transfers into/out of Level 3		(1	)		—

Balance at March 31, 2017	$	18,474		$	(2,349	)

Gains and losses included in earnings are included as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate. 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.

Quantitative information as of March 31, 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
Techniques

Unobservable Inputs

Weighted
Average

Derivative liabilities:

Equity index put options

$2,378

Option pricing model

Volatility

18%

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.