Two Acquisitions of 1996
There were two acquisitions by Berkshire in 1996, both with qualities they seek – excellent business economics and an outstanding manager.
Kansas Bankers Surety (KBS)
This was an insurance company with an extraordinary underwriting record and an outstanding manager, Don Towle. Don has first-hand relationships with hundreds of bankers, and knows every details of the company.
It took Warren Buffett less than one day to look at the financial statements of the company before deciding to buy it.
FlightSafety International is a world leader in the training of pilots. The CEO of the company is Al Ueltschi, 79 years old at the time of acquistion.
It took Warren Buffett 60 seconds upon meeting Al to know that he was exactly the kind of manager that Berkshire needed.
If you can recall, I had previously uploaded an interview that Robert Miles had with Al Ueltschi.
The results for both primary insurance and super-cat reinsurance business were outstanding in 1996.
What counts in the insurance business is the amount of float generated and the cost of the float.
This is important to understand as float is a major component of Berkshire’s intrinsic value that is not reflected in book value.
In an insurance operation, float is the money held by the company (but they don’t own). It arises because premiums are always collected before losses are paid out.
Typically, the premiums collected by insurers do not cover the losses and expenses they have to pay. This “underwriting loss” is the cost of float.
An insurance business has value if its cost of float over time is less than the cost the company would incur to obtain the funds.
In Berkshire, the insurance businses has been a big winner as their cost of float has been less than nothing for many years. This access to “free” money has boosted their performance in a major way.