1997: Can Buffett explain the Kansas Banker Surety business?

AUDIENCE MEMBER: I’m Richard Tomkins (PH) from Gallatin, Tennessee. And I have just two quick questions.

Could both of y’all discuss the Kansas Bankers business and its competitors? How big of a moat Kansas Bankers has in the industry and if they’re going to expand, you know, outside of the 22 or 20 states that they’re currently in. And that’s A.

And, then, secondly, just clue us in a little bit more on the five-year discount notes that you did that were tied to the Salomon stock. And was that a way to unload it? Or just kind of give us a little more than what we saw in the annual.

WARREN BUFFETT: Sometimes in the insurance business, you have a choice between being a good business or a big business. And fortunately, Don Towle, who runs Kansas Banker Surety, has chosen for a good business.

It’s a specialized operation that sells, as its name implies, to bankers, and primarily policies that have fidelity coverage.

That is just not a big volume business in the whole United States. They do it exceptionally well. Don knows every, you know, he knows every account. He knows every claim. You know, he runs a fabulous operation. But it’s not an operation that can double or triple in size doing what it does and doing well. There just aren’t — there’s not the opportunity there.

On the other hand, I think it’s tough to compete against Don because he brings an element of knowledge and personal attention to the account and factors of that sort that a really large company would have trouble duplicating.

Charlie, you want to add anything on Kansas Bankers?

CHARLIE MUNGER: Yeah. There’s a huge class of businesses in America which are very strong and will throw out large amounts of cash in relation to their size but which can’t rationally be expanded very much. And if you try and expand certain kinds of businesses, you’re throwing money down the rat hole.

The beauty of the Berkshire Hathaway system is that such businesses are very welcome here because the cash comes into headquarters and is allocated there.

If there’s anything sensible to do at the subsidiary level, we always want it done. But there are businesses where — lots of businesses — where there isn’t much of a way of redeploying the cash.

WARREN BUFFETT: Part the reason they have a moat around them is that they’re of a size and have specialized skills that other organizations just can’t get into it. I’ll give you another example, and that’s somewhat the same field.

There’s a company called Western Surety. It’s changed ownership a couple of times. Charlie and I went up to see them 15 years ago about buying it at Sioux Falls.

They write notary bonds. And they write a whole bunch of things that have $50 premiums or $25 premiums. They have — it was a company doing not that many millions of premiums, but they had 30,000 agents. But each agent, you know, may have done $500 worth of business within a year or a thousand dollars.

Well, Chubb can’t go after that business the same way. We certainly can’t at National Indemnity. They have a distribution system that works wonders. But you can’t pump two or three times the volume through that distribution system. And if you could pump it through, there would’ve been more competition.

So there are businesses that have certain natural limits that, you know, you want to be careful that you don’t talk yourself into thinking a business that has limits and find out that it really has way more potential.

I mean, it would’ve been a shame if Mr. [Asa Griggs] Candler decided that Coca-Cola only appealed to people in Atlanta or something of the sort. So you have to be a little careful on that.

But we — a fellow like Don will be very good at understanding, you know, where his competitive advantages can take him and where they don’t take him. He’s done a terrific job over the years doing it.