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Archive for May, 2007

Ever wondered how Warren Buffett and his wife bought up their children?

Then you will want to read this article written about Susie Buffett, daughter of Warren Buffett.

One very admirable thing I found out was that when Warren Buffett was younger (and not so rich), he actually mortgaged his house in order to raise bail money for an African-American boy. Susan Thompson Buffett, the wife of Warren Buffett, had believed that the boy was innocent of the rape charge he was facing and therefore requsted for Warren to bail him out.

Warren agreed and the boy was subsequently not found guilty.

Truly the mark of a great man!

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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

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.

Insurance Operations

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.

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