Headed For Exit

Despite Warren Buffett's continued purchase of Wells Fargo (WFC) shares, he apparently does not have such enthusiasm for banks in general. Recently, Kansas Bankers Surety, a subsidiary of Berkshire Hathaway (BRK), was directed by Chairman Buffett to stop insuring bank deposits over the FDIC limit of $100,000.

In 1996, he boasted of the acquisition, writing "Kansas Bankers Surety (KBS), an insurance company whose name describes its specialty. The company, which does business in 22 states, has an extraordinary underwriting record, achieved through the efforts of Don Towle, an extraordinary manager. Don has developed first-hand relationships with hundreds of bankers and knows every detail of his operation." The deal was valued at about $75 million when it was announced.

Currently KBS does business in 38 states. The business earned $10.9 million last year on policy sales of $19.5 million, according to Oldwick, New Jersey-based ratings firm A.M. Best Co. While this is not high income given the price paid 12 years ago, KBS has excellent margins and is likely to require very little capital. Even more, KBS definitely requires very little staff with only 18 employees.

KBS is very profitable, but this exit will cost about 50% of the business. KBS still will defend lawsuits against bank executives (for those large bonuses?) and against costs of bad check writing. Compare KBS's profitability to that of Oklahoma City-based BancInsure Inc., a competitor of Kansas Bankers. BancInsure posted full-year 2007 net income of $2.57 million and policy sales of $47.4 million, according to data compiled by A.M. Best.

KBS clearly knows what they're doing. If KBS won't write the insurance, why would any individuals risk leaving any uninsured money in a bank.