Famed investor Warren Buffett's warnings of slowing profits in the insurance industry haven't dampened Prem Watsa's outlook for growth opportunities.
Insurance and investment firm Fairfax Financial Holdings Ltd. has been expanding operations in property and casualty insurance worldwide, and CEO Mr. Watsa said he thinks his company has built the financial strength to weather the tough investing climate.
"It's a cyclical business, and [Mr. Buffett is] exactly right that, right now, it's difficult," Mr. Watsa said of the property and casualty insurance business. "But that doesn't mean it will be difficult forever. It could change, and only companies that are financially strong and have the ability to take advantage of higher prices will do well."
Mr. Watsa picked up the moniker "Canada's Warren Buffett" years ago, owing to his value-investing approach and expanding investments in insurance. He's also known for being a market bear – Fairfax has fully hedged its equity portfolio to protect against the possibility of a financial storm arising from global economic woes.
But when it comes to insurance, Mr. Watsa sounds more optimistic than the Oracle of Omaha. While Mr. Buffett, the CEO of Berkshire Hathaway Inc., is warning of a multiyear profit wane, Mr. Watsa said his company is positioned well to grow.
"It's a good bet that industry results over the next 10 years will fall short of those recorded in the past decade, particularly for those companies that specialize in reinsurance," Mr. Buffett wrote in his annual note to shareholders in late February, adding that seemingly interminable low interest rates also challenge insurers' ability to earn profits.
Both Berkshire and Fairfax have reinsurance businesses.
Berkshire Hathaway has a pool of capital $87.7-billion (U.S.) deep that it invests to earn profits. This float has been growing for decades, but Mr. Buffett warned investors that future growth will be "tough to achieve," since some businesses will expand, but others will taper off.
In his own letter to shareholders, Mr. Watsa recently said he's very excited about the company's insurance operations as Fairfax posted its best underwriting results in its 30 years in business. In 2015, Fairfax reported $7.5-billion (Canadian) in premiums in different markets around the world.
So, while Mr. Watsa agrees that there are challenges ahead for the insurance industry, he has a brighter view on the outlook for the business. "We think there might be more opportunity in our industry as time goes by because we have not reached for yield," he said. "A lot of our competitors have reached for yield in term of buying corporate bonds at very small spreads. They've reached for yield in high yield bonds. They've reached for yield in common stock," he said.
Both Fairfax and Berkshire rely on their meaty insurance businesses for capital to invest, and as investors they are focused on long-term opportunities.
But their strategies also diverge. On top of the equity hedging, Fairfax has become known for its investments in distressed businesses, such as BlackBerry Ltd.and in financial institutions where economies are strained such as Ireland in 2011 or Greece last year. And Berkshire, which used to invest primarily in insurance companies and publicly traded stocks, is now teaming up with companies like Brazilian investment firm 3G Capital, which led last year's merger of Kraft Foods Group Inc. and H.J. Heinz.