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Can’t get enough of that float
The year 1996 saw Wesco advance further into insurance with the purchase of Kansas Bankers Surety (KBS) for approximately $80m in cash.
The following year KBS contributed $6m to the net operating income of the insurance businesses.
This may not seem a great return on the $80m, but Buffett and Munger reckoned it had such good economics with an excellent underwriting record, and an outstanding manager, that KBS would soon be contributing a lot more.
The Kansas Bankers Surety business
KBS started in 1909 as an underwriter of deposit insurance for Kansas banks. This means that it insured money deposited in a bank, guaranteeing that it will be returned to the depositor even in the event of a bank closure (the amount beyond that covered by the federal government).
Over the years, it expanded to include small and medium-sized community banks spread through 22 mainly midwestern states.
It also offered policies which paid out if the directors and managers of the banks became publically liable for misdeeds, etc. (directors and officers indemnity policies). Premiums were also charged for bank employment practices policies, bank annuity and mutual funds indemnity policies and bank insurance agents professional errors and omissions indemnity policies.
Being entirely focused on a subset of banks, and being so recognised and knowledgeable in that field, gave KBS a competitive advantage.
The key person Buffett and Munger identified at KBS was Donald Towle, the President. He had a great knowledge of the niche market, and ran a tight ship assisted by only 13 officers and employees.
In his 1996 BH letter Buffett called him “….an extraordinary manager. Don has developed first-hand relationships with hundreds of bankers and knows every detail of his operation. He thinks of himself as running a company that is “his,” an attitude we treasure at Berkshire.”
Of course, Buffett is always systematic in his search for good investments!
In the 1996 BH letter Buffett poked fun at himself for the supposed haphazard way in which some companies are selected for purchase:
“You might be interested in the carefully-crafted and sophisticated acquisition strategy that allowed Berkshire to nab this deal. Early in 1996 I was invited to the 40th birthday party of my nephew’s wife, Jane Rogers. My taste for social events being low, I immediately, and in my standard, gracious way, began to invent reasons for skipping the event. The party planners then countered brilliantly by offering me a seat next to a man I always enjoy, Jane’s dad, Roy Dinsdale – so I went.
The party took place on January 26. Though the music was loud – Why must bands play as if they will be paid by the decibel? – I just managed to hear Roy say he’d come from a directors meeting at Kansas Bankers Surety, a company I’d always admired. I shouted back that he should let me know if it ever became available for purchase.
On February 12, I got the following letter from Roy: “Dear Warren: Enclosed is the annual financial information on Kansas Bankers Surety. This is the company that we talked about at Janie’s party. If I can be of any further help, please let me know.” On February 13, I told Roy we would pay $75 million for the company – and before long we had a deal. I’m now scheming to get invited to Jane’s next party.”
The already strong market position of KBS was enhanced by the BH association. Don Towle said that being part of Berkshire means that no one questioned their ability to pay out on claims. He also said that Buffett was very good at simply letting the company grow without interference.
Today KBS is still run by a very small team, still very focused on insuring banks and still headquartered in Kansas.
CORT Business Services
Wesco bought into the business of renting furniture for placing in offices and apartments by buying CORT Business Services in February 2000, paying $384 million in cash.
The key ingredients of so many Buffett and Munger purchases were there: a good business in an unglamorous, overlooked sector, and therefore not overpriced; and an outstanding manager, Paul Arnold.
It was the national leader with 117 showrooms, and was on the rebound from an aborted leveraged buyout.
In 1999, total revenues were $354 million. Of this, $295 million was furniture rental revenue and $59m was furniture sales revenue. Before-tax profits in 1999 was $46m.
Most large US companies rent from it when they need temporary furnishings. Generally when the furniture has been rented out three times it is sold off at its clearance centres.
From the outset Paul Arnold was guaranteed “no interference from Wesco headquarters. We would be crazy to second-guess a man with his record in business.”(Munger’s letter to Wesco shareholders, 1999).
Munger also expressed his expectation that there would be a “considerable expansion” of this business.
A very long term focus
Despite their initial optimism, Buffett and Munger had to be very patient with this one – in fact, they are still waiting for a good return.
Demand for office fur………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1.
