Berkshire's biggest derivatives positions are put options sold to institutional investors on four major world equity indexes -- S&P 500, EuroStoxx 50, FTSE 100, and Nikkei 225. All but one of the indexes fell this quarter, with the Nikkei 225 being the sole gainer, adding roughly 3% during the quarter. Berkshire books a gain on these positions when the indexes rise and volatility falls.
Of particular note is that the U.S. volatility index surged toward the end of the second quarter on top of a three-month decline in the S&P 500 index. Expect some losses in the derivatives book, but don't make too much of it. Berkshire is quick to note that the gain or loss is all a matter of accounting until the options reach expiration and are settled in cash, but the first option won't reach expiration until 2018.
Unfortunately, the size of these positions can distort Berkshire's performance from quarter to quarter and year to year. The chart below shows the gains in its equity index puts over recent history, with Berkshire recognizing gains mostly due to rising global stock prices.
Its public equity holdings will prove to be a mixed bag. Stakes in Bank of America surged in value, but mostly after quarter-end. The same is true of the new Kraft Heinz combination, which began trading about a week after the close of the quarter.
Looking at its operating businesses
Long-term Foolish investors know that the Berkshire story isn't about the quarter-to-quarter swings in the company's net income from its stock and derivatives investments. The real story is in its operating businesses -- companies like insurers GEICO and its reinsurance businesses, railroad BNSF, and hundreds of other wholly owned companies that generate operating profits that pay dividends back to the corporate parent.
The company's underwriting results have been spectacular, as its diversified insurance lines produce very consistent underwriting profits on top of float-driven investment income. One should only hope that the trend of underwriting profitability continues.
Berkshire continues to grow in insurance, inking a deal with Australian insurer IAG this quarter in which Berkshire will receive 20% of its premiums and be liable for 20% of its claims. It also acquired 3.7% of the company, buying stock in a new placement for its shares. Meanwhile, it continues to expand in Asia and Australia, opening new offices in New Zealand for its recently formed Berkshire Hathaway Specialty Insurance subsidiary, which is headed by ex-AIG executives.
In its non-insurance businesses -- which are dominated by its railroad, utility, and energy investments -- the second quarter could prove telling for the rest of the year. Berkshire has been particularly critical of BNSF, calling its performance in 2014 "substandard" in its most recent quarterly report due to "significant service related challenges." Notably, revenue growth at BNSF has been lackluster; the company grew revenue 3% year over year in the first quarter, on a modest 1% increase in cars and revenue per car. Weekly traffic data suggests total carloads in 2015 are below the pace seen in 2014, with coal carloads leading the decline. Luckily, some of the decline should be offset with lower fuel costs.
Finally, the company's cash hoard remains a perennial topic of interest. Berkshire's deal-making pace has been relatively slow, and its companies generate billions of dollars in cash each year, with Warren Buffett and his right-hand man Charlie Munger responsible for allocating it for investors. After ending the first quarter with nearly $64 billion in cash and a slow pace of deals, it wouldn't be surprising to see Berkshire's cash hit yet another record high this quarter.