Berkshire is large and diversified, but three components of the business really move the needle. The performance of its insurance units, the BNSF railroad, and the stock portfolio and put options overshadows virtually everything else.
With that in mind, here are a few particular issues underlying the three major drivers of Berkshire's bottom line.
1. Insurance underwriting
Berkshire's results through the first three quarters of 2015 (fourth-quarter results will come out in February) showed weaker underwriting profits. Berkshire's underwriting margin fell to 4.4% in the first three quarters of 2015, down from 6.5% for the full year of 2014.
GEICO was a major driver of the decline. As gas prices fell, Americans took to their cars, resulting in an increase in frequency of auto losses. In addition, the company saw the severity of property damage and collision losses rise in the "four to six" percent range. Notably, the Manheim Used Vehicle Value Index is reaching a peak not seen since 2011. One has to ask how much longer used-car values will remain elevated. Lower used-car prices are better for insurers because they have to pay out less in the case of an accident.
Likewise, General Re's first nine months of 2015 were relatively unspectacular. Berkshire noted in its filings that the industry's capacity to write policies is making the market more competitive. General Re wrote 9% less business in the first nine months of 2015 than in 2014, adjusting for currency fluctuations.
For 2016, used-car and gas prices will have an outsize effect on GEICO. Likewise, one can expect General Re to write fewer policies if insurance prices continue to soften.
The railroad is one of the most important earnings drivers for Berkshire, large in size and a sponge for Berkshire's excess capital. This year may see a slowdown in profits.
Other railroads, including CSX, have already reported lower volumes in the fourth quarter of 2015. CSX reported that its coal volume fell 32% in the fourth quarter compared with the year-ago period. BNSF has coal exposure, in addition to exposure to the oil patch.
After moving a record amount of oil in December 2014, volume has since peaked. (In March, BNSF was already shipping 25% fewer cars than at its peak at the end of 2014, mostly because of lower oil prices.)
Falling energy prices provide an interesting, though temporary, benefit. In its filings, BNSF notes that it levies fuel surcharges on its customers based on a lagging price for diesel fuel. Thus, in periods where prices are falling, BNSF imposes surcharges based on old (higher) prices while paying the current (lower) price for fuel.
3. The stock portfolio and put options
The market has fallen by about 7.4% as measured by the S&P 500 ETF, but some of Berkshire's financial-heavy stock portfolio is doing even worse.
Large positions, including Wells Fargo and American Express, are down 8.5%, and 9.6% year to date. Last year's loser, IBM, and one of Berkshire's newest holdings, Kraft Heinz, have managed to lose less than the broad market but are still trading lower with the rest of the market.
Mark-to-market losses in the company's put options are almost certain. Not only are global markets trading lower, but volatility has also increased in the first few days of 2016, which would result in a mark-to-market loss if the puts were marked at fair value as of Jan. 13.
Buffett loves to sell put options because they allow him to collect a premium at the time the contracts are written, which can be invested for years until the contracts are settled. Think of it like a long-term bet on global stock prices with the benefit of investable float.
Though not a fundamental driver of earnings, whether or not Berkshire repurchases stock will have an impact on the company's 2016 performance. The stock traded for about 1.25 times book value at Sept. 30, very close to the 1.2 book value at which Buffett has said share repurchases would become attractive. If anything, the proximity to the threshold for repurchases should put a limit on downside going into the new year.