Digit

[glider3834]

Big news on Digit!

https://www.livemint.com/companies/start-ups/digit-insurance-s-value-soars-to-3-5-billion-after-fresh-funding-11625161231729.html

 

 

 

 

 

 

 

[glider3834]

1 minute ago, glider3834 said:

Big news on Digit!

https://www.livemint.com/companies/start-ups/digit-insurance-s-value-soars-to-3-5-billion-after-fresh-funding-11625161231729.html

 

 

 

 

 

 

 

Once the funding is completed, Digit’s valuation will almost double to $3.5 billion from $1.9 billion previously, Goyal said over phone. The company had raised $18.5 million from existing investors including Faering, A91 Partners, and TVS Capital in January.

The valuation makes Digit India’s third most valuable fintech, surpassing payments provider Razorpay and Pine Labs, which were valued at $3 billion each earlier this year.

 

[petec]

Even assuming dilution, Fairfax’s stake is now nearly 2.5bn. 
 

At what point will they have to mark to market? This is a much bigger equity raise than January, but I’m not sure what the rules are. 

[Viking]

WOW! Given the size of the equity raise ($200 million) it seems likely to me that Fairfax will need to recognize Digit at a much higher valuation. The equity raise in Dec 2019 was $91 million and resulted in a revaluation ($350 million gain for Fairfax). There is close to a $2 billion gap right now = $70 / share. Below are some comments on Digit in the 2020AR.

———————-

2020AR page 8: All our operations had very good reserving, and they all had a combined ratio less than 100% except Bryte (because of COVID-19 business interruption losses) and Digit (which is still in start up mode but is growing at a very fast pace in India, beginning from scratch about three years ago). The recent budget in India will permit us to increase our ownership in Digit to 74%.

 

2020AR Page 8: Digit, under Kamesh Goyal’s leadership, is continuing its outstanding growth record in its fiscal year ending March 31, 2021, with gross premiums expected to grow by 40% to $400 million. Its combined ratio is expected to drop to 113% and, including investment income, it should be profitable. Amazing performance for a start-up! Digit raised $18 million in 2020 at a valuation of $1.9 billion from some private equity investors. (In our books, Digit continues to be valued based on a 100% level of $900 million.) We are very excited about Digit’s growth prospects in the years to come. Also, many of our insurance companies expect to benefit from Digit’s technological and innovation leadership.

 

2020AR page 12: We equity account our 49% ownership in Digit, which is carried at $42 million; in addition, we have convertible preferred shares carried at $475 million – all at the valuation of Digit on a 100% basis of $900 million.

 

Date of initial investment: Feb 2017

Ownership: 49%

Cost: $154 million

Fair Value Dec 30, 2020: $596 million

Compounded Annualized Return: 68.5%

 

2020AR page 21: In India, Digit continued to build out its capabilities, utilizing cutting edge technology to enhance its expansion in this rapidly growing market. Expected to reach $400 million in gross premiums written in less than four years, Digit, led by CEO Kamesh Goyal, is now producing a net bottom line profit, though not yet an underwriting profit.

 

2020AR page 65: Preferred Stock $487.7

• (3) Primarily comprised of the company’s investment in compulsory convertible preferred shares of Go Digit Infoworks Services Limited (‘‘Digit’’). The company also holds a 49.0% equity interest in Digit as described in note 6.

 

Page 71: (10) On December 23, 2019 Go Digit Infoworks Services Private Limited (‘‘Digit’’) entered into definitive agreements whereby its general insurance subsidiary Go Digit Insurance Limited (‘‘Digit Insurance’’) subsequently issued approximately $91 (6.5 billion Indian rupees) of new equity shares primarily to three Indian investors. This transaction valued Digit Insurance at approximately $858 (61.2 billion Indian rupees) and resulted in the company recording net unrealized gains on investments of $350.9 on its investment in Digit compulsory convertible preferred shares. The company also holds a 49.0% equity interest in Digit as described in note 6.

 

Page 74: (3) On December 23, 2019 Digit entered into definitive agreements whereby its general insurance subsidiary Digit Insurance subsequently issued approximately $91 (6.5 billion Indian rupees) of new equity primarily to three Indian investors. This transaction valued Digit Insurance at approximately $858 (61.2 billion Indian rupees) and valued the company’s 49.0% equity interest in Digit at $122.3 at December 31, 2019. The company’s 49.0% equity interest in Digit is comprised of a 45.3% interest in Digit common shares and a 3.7% interest through Digit compulsory convertible preferred shares that are considered in-substance equity. Foreign direct ownership in the insurance sector in India is limited to 49.0% and as a result the remainder of the company’s investment in Digit compulsory convertible preferred shares is recorded at FVTPL as described in note 5.

 

Page 167: Fairfax Asia also has an investment in Digit compulsory convertible preferred shares.

 

Page 199: (12) On December 23, 2019 Go Digit Infoworks Services Private Limited (‘‘Digit’’) entered into definitive agreements whereby its general insurance subsidiary Go Digit Insurance Limited (‘‘Digit Insurance’’) subsequently issued approximately $91 (6.5 billion Indian rupees) of new equity primarily to three Indian investors. This transaction valued Digit Insurance at approximately $858 (61.2 billion Indian rupees) and resulted in the company recording net unrealized gains on investments of $350.9 on its investment in Digit compulsory convertible preferred shares.

Edited July 2, 2021 by Viking

[petec]

Does anyone know whether the convertible prefs have an anti-dilution clause? Or has Fairfax been diluted here?

[bluedevil]

At this rate, Digit will be worth more than the rest of Fairfax in the not too distant future.

 

I say that tongue in cheek, but it actually wouldn't surprise me.

 

Digit is winning with customers; it is built on highly scalable technology; and it has a huge potential market. 

 

Prem's pivot from ICICI Lombard to Digit was a masterstroke, and may bear great fruit in the future.  

[petec]

30 minutes ago, bluedevil said:

Prem's pivot from ICICI Lombard to Digit was a masterstroke, and may bear great fruit in the future.  

Absolutely!

 

It’s almost like he’s not a complete moron…

[glider3834]

On 7/2/2021 at 3:30 PM, petec said:

Even assuming dilution, Fairfax’s stake is now nearly 2.5bn. 
 

At what point will they have to mark to market? This is a much bigger equity raise than January, but I’m not sure what the rules are. 

at around USD 2.5 bil , then Digit would be worth approx 20% of Fairfax's current market cap 

 

And this is of a US $154 million cost basis in 2017 - that would be  close to a 16 bagger!

 

I am fully expecting Fairfax to raise their fair value given its carrying value is sitting at USD 517 (at 31 Dec-20) which is substantially below approx pro forma USD 2.4 - 2.5 bil (depending on dilution) value based on this funding round that is also the largest in Digit's history. But lets wait & see if they go all the way to USD 2.5 bil or opt for a more conservative number and hold booking those gains for a future date.

 

petec it looks like there will be some dilution or 5% based on press reports for the parent co. of Digit Insurance which is Go Digit Infoworks Service Pvt Ltd which is jointly owned by Fairfax (with majority stake) and Kamesh Goyal , but we will have to wait to find out what Fairfax's new interest will be I suspect it will still be around the 70% area (based on Fairfax being able to move from 49% to 70% area with new FDI rules for foreign owned insurers)

 

Kamesh Goyal and team at Digit deserve our praise! They have done a phenomenal job during a really tough period & are continuing that form- I actually had a look at their recently released AR 2020/21 - there is such an intense focus on the customer & addressing all those pain points with insurance in a very smart, tech savy way (BTW I really liked the youtube video links in AR where they have  kids simplify their insurance language  & having Virat Kohli come aboard as their brand ambassador for Digit is also absolutely brilliant  ( he recently became the first person from Asia to have more than 100 million followers on Instagram https://indianexpress.com/article/sports/cricket/virat-kohli-becomes-first-asian-celebrity-to-have-100-million-followers-on-instagram-7210415/)

 

I also watched a recent interview where Kamesh said IPO is definitely an option at some stage but unlikely to do this year and Prem ruled it out in the annual meeting for this year suggesting instead Digit was at the beginning stage of potentially capturing a big market share (their share is currently at 1.6%). Either way I am looking forward to seeing how this all plays out.

 

 

[petec]

4 hours ago, glider3834 said:

I actually had a look at their recently released AR 2020/21

Do you have a link?

[glider3834]

13 minutes ago, petec said:

Do you have a link?

yes sure https://www.godigit.com/financials Annual Reports show in 'Public Disclosures"

[petec]

Thanks!

[Daphne]

FFH announces potential Digit gains
 

Note: All dollar amounts in this Press Release are expressed in U.S. dollars.)

TORONTO, July 05, 2021 (GLOBE NEWSWIRE) -- Fairfax Financial Holdings Limited (“Fairfax”) (TSX: FFH and FFH.U) announces that Go Digit General Insurance Limited (“Digit Insurance”), an Indian digital general insurance subsidiary of Fairfax’s 49%-owned Go Digit Infoworks Services Private Limited (“Digit”), has entered into agreements with Faering Capital, Sequoia Capital India, IIFL Alternate Asset Managers and certain other parties to raise approximately $200 million (14.9 billion Indian rupees) for new equity shares, valuing Digit Insurance at approximately $3.5 billion (259.5 billion Indian rupees). The transactions are subject to customary closing conditions, including regulatory approval, and are expected to close in the third quarter of 2021.

When the new equity issuances by Digit Insurance close, the increased valuation of Digit Insurance will result in Fairfax recording a net unrealized gain on investments of approximately $1.4 billion on its investment in Digit compulsorily convertible preference shares (an increase of approximately $47 in book value per basic share). In addition at that time, the pre-tax excess of fair value over carrying value of Fairfax’s equity accounted interest in Digit will increase by approximately $0.4 billion (an increase of a further approximately $14 in book value per basic share), which will not be reflected in Fairfax’s consolidated net earnings or in the calculation of book value per share until the Indian government gives final approval of its announced intention to increase foreign ownership limits in the insurance sector from 49.0% to 74.0% and Fairfax obtains regulatory approval specific to its holdings in Digit.

Fairfax’s 49.0% equity interest in Digit is comprised of a 45.3% interest in Digit common shares and a 3.7% interest through Digit compulsorily convertible preference shares that are considered in-substance equity. Foreign direct ownership in the insurance sector in India is currently limited to 49.0% and, as a result, the remainder of Fairfax’s investment in Digit compulsorily convertible preference shares is recorded at fair value through profit.

Since Digit was founded in 2017, Fairfax has invested approximately $154 million in the company. That investment is currently carried on Fairfax’s balance sheet at $532 million and, when the new equity issuances by Digit Insurance close and the above-mentioned Indian government and regulatory approvals are given, will have an aggregate market value of approximately $2.3 billion. This will result in a gain of approximately $1.8 billion, resulting in an increase in the book value of Fairfax of approximately $61 per basic share.

[bearprowler6]

Great news in many ways! The magnitude of the unrealized gain in such a short period of time (since 2017) is nothing short of amazing. Perhaps more importantly the press release which clearly outlines the value of Fairfax's investment in Digit and potential book value increase adds a level of transparency rarely seen at Fairfax that should be applauded. Although it pains me to say this----well done Prem!

[Xerxes]

Lots of economic value created at Digit. Good stuff !

 

Hopefully the accounting windfall in Q3, does not get offset by (1) large one-off cat events in Q3 and (2) by shorts-gone-mad.

Wait a minute, we don't have to worry about (2) anymore !! 

 

That being said, I wonder what is the point of the press release here. This is not even close yet.

Or perhaps they intend to close the total return swaps soon, so want to capture as much call option as possible before un-winding the trade.

[petec]

30 minutes ago, Xerxes said:

That being said, I wonder what is the point of the press release here. This is not even close yet.

 

I think this is a material event, and as such they may feel they have to report it themselves rather than let the market figure it out from Indian news reports. Also, they know they will be asked when and why the gain will be recorded, so they might as well lay it out (given that it is not a matter of choice).

[Viking]

Glider thanks for posting the Digit news last Thursday. The news was material to Fairfax and investors were given a small window of time to make some money. Great example of the value posters on this board provide members. Well done!  

——-

So where does Fairfax book value sit as of today? (Edited as per Xerxes and Petec comments below)
March 31 = US $497

Est Q2 earnings = $20 (ex Digit)

Est June 30 BV = $520

Digit gain = $61 (once transaction closes and is approved by regulators Q3 or perhaps Q4?)

BV including Digit = $580 (not sure if $61 digit gain is pre or post tax?)

 

Stock price July 5 = CAN $560 = US $454

Price to BV = 0.78 (incl Digit transaction)

 

Fairfax is positioned exceptionally well should economic activity continue to pick up in 2H 2021 and into 2022. The US is leading the way. Canada and Europe (think Greece) are just getting started (reopening). The worst looks to be be behind India. Fairfax owns many businesses who have been underperforming and this underperformance had been holding back reported results; as we begin Q3 my guess is what has been a headwind will now become a tailwind and Fairfax will be firing on all cylinders moving forward: 

1.) hard market - perhaps driving best insurance results in its history

2.) more investments gains from its equity holdings

3.) improving results from operating companies contributing to reported earnings

—————————

Atlas is the current large holding that looks most undervalued to me. Fairfax has a position currently worth about US $1.5 billion. As Mr Market comes to appreciate the top line and EPS trajectory for the next 3 years it would not surprise me to see shares trade in the high teens - this would results in a $500 million gain for Fairfax (only part of which would impact net earnings because much of it is accounted for as an Associate position). My point is despite the run up of the past 8 months there is still the potential for significant value appreciation with the equity holdings. 

Edited July 5, 2021 by Viking

[Xerxes]

Globe & Mail incorrectly reporting this as "booked".

I am no expert, but they could have included this release as part of their Q2 results in a few weeks.

 

"Fairfax Financial Holdings Ltd. booked a US$1.4-billion gain after a subsidiary in India, Go Digit General Insurance Ltd., launched a US$200-million share sale at a valuation well above Fairfax’s investment in the four-year-old company." 

 

Fairfax books US$1.4-billion gain after insurance unit in India launches share sale - The Globe and Mail

 

Viking, you cannot include Digit gain into your Q2 results of BV.

Digit goes into Q3.

Edited July 5, 2021 by Xerxes

[Candyman1]

Makes one wonder what Digit's EV would be if they took it public.

[petec]

Are we sure this even goes into q3? I don't think they have said that. 

 

Also, are we sure the $61 is post-tax?

 

Either way, it is a superb result, and quite possibly only the start for Digit. Plus, the net excess of market value over carrying value is growing and the gap between tangible book and reported book is shrinking. All very positive.

 

My guess is in line with Viking's: "fully adjusted" book value is now approaching US$600, with more to come from India, Greece, Atlas, and possibly others.

[SharperDingaan]

Digit was 'booked' yesterday when the announcement was made. Results will show up in Q3.

 

SD

 

[Santayana]

By the time they report Q3, my guess is that Digit will be worth more than the valuation they're putting on it right now.

[petec]

12 minutes ago, SharperDingaan said:

Results will show up in Q3.

 

Where does it say this? All I can see on timing is this statement:

 

will not be reflected in Fairfax’s consolidated net earnings or in the calculation of book value per share until the Indian government gives final approval of its announced intention to increase foreign ownership limits in the insurance sector from 49.0% to 74.0% and Fairfax obtains regulatory approval specific to its holdings in Digit.

[Xerxes]

Petec => "The transactions are subject to customary closing conditions, including regulatory approval, and are expected to close in the third quarter of 2021."

 

On a different note, purely from an accounting point of view, can an associate be marked-up ? mark-downs are through impairment, just was not aware that IFRS allows marking up as well on an associate or a consolidated entity.

[petec]

16 minutes ago, Xerxes said:

Petec => "The transactions are subject to customary closing conditions, including regulatory approval, and are expected to close in the third quarter of 2021."

As I read it, that refers to the investment by Sequoia et al in Digit, NOT the legal change and regulatory approvals required for FFH to reflect the new valuation in its financial statements. 

[Xerxes]

I read it as two steps (granted it is not totally clear to me):

 

- +$47 in book value by close of Q3 once Digit issues those new shares to the new investors, allowing FFH to re-value its stake (not clear if FFH participates or if there is dilution)

 

- +$14 further when regulatory aspect goes through (Q4 or thereafter), allowing a higher % ownership, which implies that FFH is participating and adding more money. 

 

Again not clear to me