(MENAFN- ValueWalk) In the early stages of his career, Warren Buffett was gifted with some fantastic opportunities. One such opportunity was National American Fire Insurance, a company that went through its ups and downs and eventually ended up in Buffett's pocket thanks to a quirk of its ownership structure.
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The story of National American Fire goes back to 1906 when Howard Fieldstead Ahmanson, the company's founder, was born in Omaha, Nebraska. Ahmanson founded the H.F. Ahmanson company in 1927, and the firm quickly became the most significant underwriter of casualty insurance within the state (Ahmanson when to the University of Southern California).
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In 1943, Ahmanson bought control of Omaha-based National American Insurance Company, previously owned by his father but the family had lost control of the business in 1925.
National American Fire: Buffett's coup
Over the next few decades, the business grew rapidly. In 1947, Ahmanson purchased the Home Building and Loan Association, a savings and loan association with assets of less than $1 million, for $162,000. This firm became the cornerstone of the business and 18 further units were acquired to be merged under the Home Savings and Loan.
National American Fire Insurance was one of the companies under the Ahmanson umbrella. I was effectively a personal holding company for one of the smartest investors in the insurance business. And it was cheap, dirt cheap in fact, but no one knew this.
'I found National American Fire Insurance…NAFI was controlled by an Omaha guy, one of the richest men in the country, who owned many of the best-run insurance companies in the country. He stashed the crown jewels of his insurance holdings in NAFI. In 1950, it earned $29.02. The share price was $27. Book value was $135. This company was located right here in Omaha, right around the corner from (where), I was working as a broker. None of the brokers knew about it.'
According to Alice Schroeder's "," the reason why this business was so undervalued and so unknown was that it was super illiquid. Most of the shares were held by investors spread out around the country, who had bought at a higher level (around $100) and at $27 they were unwilling to sell out (also unwilling to buy more):
'The company's worthless stock had been sold to farmers all over Nebraska in 1919 by unscrupulous promoters in exchange for the Liberty Bonds issued during World War I. Since then its certificates had lain crumbling in draws, while their owners gradually lost hope of ever seeing their money again.' …
'William Ahmanson, a prominent Omaha insurance agent, had originally been sucked into it unawares, set up as a local front man for what had started out as a fraud. But the Ahmanson family had gradually turned it into a legitimate company.Now Howard Ahmanson, William's son, was feeding top-drawer insurance business into National American through Home Savings of America, a company he had founded in California, which was becoming one of the largest and most successful savings-and-loan companies in the United States.'
…
'I tried to buy the stock for a long time. But none of it was getting to me, because there was a security dealer in town and Hayden [Howard's brother] had given this guy the shareholders list. This stockbroker -- he regarded me as a punk kid. But he had the list. And I didn't have the list. So he was buying the stock at thirty for Hayden's account.'
This opportunity was too good for Buffett to pass up, so he set out to buy the stock traveling around and offering between $35 and $100.
'I didn't want Howard to know because I was topping his price. He had been picking it off at thirty bucks, and I'd had to raise the price some. The shareholders had been listening for probably ten years at thirty bucks, so it was the first time the price moved.
Finally, towards the end, I paid a hundred. That was the magic number because it was what they'd paid in the first place. A hundred bucks, I knew, would bring out all the stock. And sure enough, one guy came in when Dan Monen [Buffett's partner and proxy] was doing this and he said, 'We brought this like sheep, and we're selling it like sheep.'
The fascinating thing about this trade is that the value of National American Fire was well known. At the link above there's the page from the Moody's manual laying out the financials.
Nonetheless, investors were still happy to get out at $100 or less because that seemed to be a reasonable price based on the market movements. Buffett, on the other hand, was happy to pay $100 because even at this level, 270% above the prevailing market price, he's still buying at 75% of book value and only four times earnings. For a business that earned a return on equity of 21% for 1950, this valuation makes little sense.
While he was buying the stock, Buffett kept the certificates in the original owners' names so the Ahmansons would have no idea he was buying. When he finally accumulated 10%, 'I walked into Hayden's office, I plopped them all down [the certificates] and said I wanted to transfer them to my name. And he said, 'My brother's going to kill me.' But in the end, he transferred the stock.'
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