Digit

[SharperDingaan]

As this is a 'material' transaction IFRS basicaly allows 2 choices.

1) Report the higher value ($47) on the face of the financials, along with a dislosure note relating to the following $14 regulatory aspect, or 2) no change on the face of the financials, and a disclosure note outlining the entire $63 'market' revaluation.  Go with 1) and you also improve the financial ratios.

 

In an efficient market, the choice of disclosure shouldn't matter.

However, we all know markets are NOT as efficient as claimed .....

 

SD

 

 

 

[glider3834]

6 hours ago, Viking said:

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. 

no worries Viking I really appreciate your insights & valuable comments (the positive and the negative) from everyone on this board!

 

 

 

 

[chrispy]

Nice catch on Friday and thank you for sharing your discussions. The 4-5 percent gain on the Canadian exchange does not seem to fully reflect the transaction. Puts the share price right where it was a week ago... Will be interesting to see if shares will be available for FRFHF at a good price in the morning

Edited July 6, 2021 by chrispy

[Viking]

Chrispy, i do find it interesting how much the price of the average stock fluctuates quite a bit month to month, quarter to quarter and year to year. Fairfax (US$) was trading Friday right where it was the end of March. My guess is Fairfax will earn about $20/share in Q2. We now also have a very large Digit gain to be booked in 2H. Looks to me like the story is much better today than March 31. 
 

Fairfax is also trading below where it was trading pre-covid. Its insurance business is in much better shape (we thought a hard market was starting in early 2020 and now we KNOW we are in the middle of a hard market) and the investment portfolio is at a much higher valuation today. The big negative is the increase in total debt. On balance, it looks to me like Fairfax is much better positioned today than it was in early 2020. 
 

‘The story’, in Peter Lynch language, continues to get better with Fairfax. Eventually the stock will respond  and patient investors will be rewarded. 
 

Fairfax currently reminds me of the fellow in Reminiscences of a Stock Operator who said sagely that the big money is made (once you have established the right position) by sitting on your hands (doing nothing) ... or something like that  

Edited July 6, 2021 by Viking

[glider3834]

30 minutes ago, Viking said:

Chrispy, i do find it interesting how much the price of the average stock fluctuates quite a bit month to month, quarter to quarter and year to year. Fairfax (US$) was trading Friday right where it was the end of March. My guess is Fairfax will earn about $20/share in Q2. We now also have a very large Digit gain to be booked in 2H. Looks to me like the story is much better today than March 31. 
 

Fairfax is also trading below where it was trading pre-covid. Its insurance business is in much better shape (we thought a hard market was starting in early 2020 and now we KNOW we are in the middle of a hard market) and the investment portfolio is at a much higher valuation today. The big negative is the increase in total debt. On balance, it looks to me like Fairfax is much better positioned today than it was in early 2020. 
 

‘The story’, in Peter Lynch language, continues to get better with Fairfax. Eventually the stock will respond  and patient investors will be rewarded. 
 

Fairfax currently reminds me of the fellow in Reminiscences of a Stock Operator who said sagely that the big money is made (once you have established the right position) by sitting on your hands (doing nothing) ... or something like that  

Agreed

 

Another way of looking at the Fairfax's valuation is also comparing the GPW/NPW to the market cap & that is also well down - take a look at price/sales ratio which is sitting at 0.57 versus 0.83 over the last 5 years according to morningstar

https://www.morningstar.ca/ca/report/stocks/valuation.aspx?t=0P00006821&lang=en-CA

 

Considering the high quality & very profitable insurance business that Fairfax has built, that is surprising. Even with margin pressure from lower interest rates & I think Fairfax are more than combating this issue with higher investment gains now from their equity portfolio, dividends, monetising investments through IPOs(still potentially more to come in 2021) and post-covid bounce in their non-insurance subs.

 

Also with double digit growth in premium in Q1 2021 and if that continues through 2021 which seems a good bet, then Fairfax will effectively be adding the equivalent of another insurance company acquisition in terms of premium growth.

 

There has definitely been a negative perception around the investment performance of Prem & Co over the last number of years, which I attribute in large part to their macro call to short/hedge their portfolio & that has supported the bear thesis which in turn has depressed the share price.

 

Big wins like this one with Digit are one way to chip away at that negative perception. Lets face it, 35 years at 18.7% compounded growth in book value is no fluke , 2021 might see that compounded return lift even higher.

 

I believe that if you take out the $5bil of losses from shorting (not to mention the opportunity cost from doing this), Fairfax's investment results were ok and then perhaps if you combine that with potentially a blow out year in 2021, with hopefully a 20% or greater jump in book value and all of a sudden you potentially get a game changer & shift in investor perception and a re-rating hopefully of Fairfax's valuation.

 

Also I think part of bear thesis is perception that Fairfax is an old school, value company whereas everyone wants to be invested in tech, but suddenly in just 4 years here we are with a $2.3 billion investment in a fast growing insurtech (Digit) (nearly 20% of Fairfax's market cap)  & there still appears to be enormous scope for potential growth for Digit in India (& globally ??). 

 

Anyway there are my rambling thoughts.. we are still only halfway through 2021... but I agree with you Viking & others that it is looking promising for Fairfax so far.

 

 

[petec]

4 hours ago, glider3834 said:

Also I think part of bear thesis is perception that Fairfax is an old school, value company whereas everyone wants to be invested in tech, but suddenly in just 4 years here we are with a $2.3 billion investment in a fast growing insurtech (Digit) (nearly 20% of Fairfax's market cap)  & there still appears to be enormous scope for potential growth for Digit in India (& globally ??). 

+1.

 

On another note, can anyone remember where Digit is held? Is it at the holdco or at the insurecos? And if it is at the insurecos, does the new valuation mean their underwriting capacity is increased without any need for capital from the holdco? I think this is the case, but I’m not 100% sure.

[Candyman1]

I know I brought this up before, but really think we are missing the point here somewhat discussing if the $47 hits in Q3 or Q4. The real issue to think about more is what will Digit trade at when it goes public. I have gone through the LMND filings and on first sight it looks like Digit is just better positioned than LMND. The insurance market in India is growing way faster than in the US, with larger population, higher GDP growth, higher percentage of population relying on cellphone, etc. And already making money. LMND has a 6.5 billion market cap now. Also VC valued Digit at 3.5 billion, I assume they think they can get a higher price too. CEO has mentioned going public too. Imagine if Digit goes public at $7 billion or higher. (I would not be surprised if that would be the case.) At $7 billion we are talking about $115 more in book value per share.

 

Edited July 6, 2021 by Candyman1

[petec]

1 hour ago, Candyman1 said:

I know I brought this up before, but really think we are missing the point here somewhat discussing if the $47 hits in Q3 or Q4. The real issue to think about more is what will Digit trade at when it goes public. I have gone through the LMND filings and on first sight it looks like Digit is just better positioned than LMND. The insurance market in India is growing way faster than in the US, with larger population, higher GDP growth, higher percentage of population relying on cellphone, etc. And already making money. LMND has a 6.5 billion market cap now. Also VC valued Digit at 3.5 billion, I assume they think they can get a higher price too. CEO has mentioned going public too. Imagine if Digit goes public at $7 billion or higher. (I would not be surprised if that would be the case.) At $7 billion we are talking about $115 more in book value per share.

 

 

Agreed. Digit has looked like a potential game changer for Fairfax since the beginning; now, it is starting to be one. Genuinely exciting. 

[Xerxes]

20 hours ago, SharperDingaan said:

As this is a 'material' transaction IFRS basicaly allows 2 choices.

1) Report the higher value ($47) on the face of the financials, along with a dislosure note relating to the following $14 regulatory aspect, or 2) no change on the face of the financials, and a disclosure note outlining the entire $63 'market' revaluation.  Go with 1) and you also improve the financial ratios.

 

In an efficient market, the choice of disclosure shouldn't matter.

However, we all know markets are NOT as efficient as claimed .....

 

SD

 

 

 

I don't know anything about re-valuation to the upside for associates in IAS 28. I am guess their accountants did all the legwork to get it here, ... but was just curious the accounting framework on this.

 

If FFH was selling a portion of its stake, I could understand the mark-up on the rest.

 

IAS 28 — Investments in Associates and Joint Ventures (2011) (iasplus.com) 

 

 

[bluedevil]

2 hours ago, Candyman1 said:

I know I brought this up before, but really think we are missing the point here somewhat discussing if the $47 hits in Q3 or Q4. The real issue to think about more is what will Digit trade at when it goes public. I have gone through the LMND filings and on first sight it looks like Digit is just better positioned than LMND. The insurance market in India is growing way faster than in the US, with larger population, higher GDP growth, higher percentage of population relying on cellphone, etc. And already making money. LMND has a 6.5 billion market cap now. Also VC valued Digit at 3.5 billion, I assume they think they can get a higher price too. CEO has mentioned going public too. Imagine if Digit goes public at $7 billion or higher. (I would not be surprised if that would be the case.) At $7 billion we are talking about $115 more in book value per share.

 

Agree. When you have a better mousetrap + great execution + a huge addressable market, you have the opportunity for explosive growth. Who knows what the future holds and whether Digit continues to win with customers and gain market share in the manner it has through its strategy (simplicity + tech enabled ease for customers) but the runway here is wide and very long. 
 

One more thing. FFH has operations around the world. What is TRULY exciting is the potential to replicate this model around the world where we already have tentacles.  Fairfax should be trying to copy Digit around the world as fast as it can, particularly in developing economies where it has more consumer facing businesses in auto and health —— or others will!!

[no_free_lunch]

Agreed Blue Devil and I have read that they are trying to learn and copy from digit. However what I have seen personally is trying to build up some new system is influenced by management.  I am not sure yet how much of this is the digit CIO vs the mousetrap.  My experience with Canadian insurance is the field is ripe for efficiency improvements and so hopefully more the latter.

 

Ffh book is up $60 USD just based on this transaction alone. Reported BV should be $500+ in q2, so do some math and we have book around $700 CAD vs share price today of $560.  Still great upside relative to market.

[glider3834]

13 hours ago, petec said:

+1.

 

On another note, can anyone remember where Digit is held? Is it at the holdco or at the insurecos? And if it is at the insurecos, does the new valuation mean their underwriting capacity is increased without any need for capital from the holdco? I think this is the case, but I’m not 100% sure.

looks to be held through Fairfax Asia - check out FFH 2020 AR

[Parsad]

16 hours ago, Candyman1 said:

I know I brought this up before, but really think we are missing the point here somewhat discussing if the $47 hits in Q3 or Q4. The real issue to think about more is what will Digit trade at when it goes public. I have gone through the LMND filings and on first sight it looks like Digit is just better positioned than LMND. The insurance market in India is growing way faster than in the US, with larger population, higher GDP growth, higher percentage of population relying on cellphone, etc. And already making money. LMND has a 6.5 billion market cap now. Also VC valued Digit at 3.5 billion, I assume they think they can get a higher price too. CEO has mentioned going public too. Imagine if Digit goes public at $7 billion or higher. (I would not be surprised if that would be the case.) At $7 billion we are talking about $115 more in book value per share.

 

 

Take this with a grain of salt, as a higher IPO price is something that could cut both ways...to the upside and downside depending on market sentiment.  What we know is that a consortium is paying a certain price willingly, and we've essentially got $60+ per share coming to the upside.  Anything else is icing on the cake!

 

On another note, with the departure of Paul Rivett, I would imagine there may be some broad changes at Fairfax, which we may be witnessing already.  While Prem remains Chairman, Paul had a significant influence from operations to investments, and with him gone, there will be a certain amount of streamlining going on as Wade, Andy, Peter Clarke and others have more responsibilities and perhaps a slightly different view of positions, holdings, ventures, insurance and the investing environment.  I truly think Fairfax is finally once again getting to a point where the constant comparison as a "mini-Berkshire" isn't out of line.  They don't have to reinvent the wheel...just copy it!  Cheers!

[cwericb]

Article on Seeking Alpha today:

https://seekingalpha.com/article/4438293-digit-capital-raise-highlights-fairfax-financials-attractive-valuation?mail_subject=frfhf-digit-capital-raise-highlights-fairfax-financial-s-attractive-valuation&utm_campaign=rta-stock-article&utm_content=link-0&utm_medium=email&utm_source=seeking_alpha

Edited July 8, 2021 by cwericb
Sorry, this should have probably been posted on the Fairfax 2021 thread

[dartmonkey]

Kind of amazing that Fairfax's share price remains at about $10 higher than it was prior to this news, $547.73 at close today, up from about 538 on Friday. This is despite the fact that we just found out that Fairfax's stake in Digit may be worth $2.5 bn instead of $858 mn, a gain that represents about 10% of Fairfax's market cap, or about $65 per share.

 

This compares to a gain of $80 per share since February 1st, as we keep getting good news about insurance operations and the investment portfolio. Using Viking's Feb 1 update (I should have used the June one, but I don't think there's been any substantial change in positions since then), I get $987 mn in gains for the positions worth more than $100 mn, or about $40 per share, before tax. 

 

We also had pretty strong first quarter insurance earnings announced in April, and a hard insurance market that seems to be ongoing. n 

 

All told, the market seems to be pricing in the assumption that much of these gains will prove to be ephemeral, and that Fairfax will find some way of blowing up the current happy environment. I guess 20 years of stagnant share price does tend to make you think that...

[nwoodman]

Thanks again Glider, I have added the IRDAI monthly non-life GWP numbers link to this thread, to make it easier (for me) to find

 

https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_List.aspx?DF=MBFN&mid=3.2.8 under Home >> Insurers >> General >> Monthly business figures

[nwoodman]

Another possible data point.  Not even an an insurer just an aggregator
 

https://techcrunch.com/2021/08/01/indian-online-insurer-policybazaar-files-for-ipo-seeks-to-raise-over-800-million/
 

In papers submitted to the market regulator in India, PolicyBazaar said it is looking to raise $504 million by issuing new shares while the rest will be driven by sale of shares by existing investors. Local media reports said the startup is looking to raise at a valuation of up to $6 billion.

[glider3834]

interesting article - could China's regulatory moves could provide further tailwinds for Digit, Fairfax India & FFH??

https://www.bloomberg.com/news/articles/2021-07-30/venture-capital-firms-turn-to-india-with-china-s-tech-crackdown

 

Does anyone remember Prem saying something along these lines- in China the opportunities are known but the risks are unknown, but in India the risks are known but the opportunities are unknown

[glider3834]

On 7/30/2021 at 2:36 PM, nwoodman said:

Thanks again Glider, I have added the IRDAI monthly non-life GWP numbers link to this thread, to make it easier (for me) to find

 

https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_List.aspx?DF=MBFN&mid=3.2.8 under Home >> Insurers >> General >> Monthly business figures

 

no worries

[nwoodman]

Just for reference, current market cap for LMND is 5bn ($80/share after hours) 

• Lemonade (NYSE:LMND) stock drops 8.8% after the digital-forward insurance company after the tech-driven insurer still has no date for launching its auto insurance product, the "timing of which is hard to tie down," the company said.
• Q2 GAAP loss per share of $0.90 matches the consensus estimate.
• Boosts guidance for full-year revenue to $123M-125M, up from its previous range of $117M-120M; consensus estimate is $118.9M.
• Sees in-force premium at Dec. 31 of $380M-384M, up from $376M-382M it expected previously.
• Still sees year adjusted EBITDA loss of $169M-173M.
• For Q3 2021, Lemonade (LMND) expects in-force premium at Sept. 30 of $336.0M-339.0M; compares with $296.8M at June 30, 2021.
• Sees Q3 revenue of $32.5M-33.5M vs. consensus of $32.2M.
• Expects Q3 gross earned premium of $76.5M-77.5M; compares with $66.9M in Q2.
• For Q2 2021, premium per customer of $246 increases from $229 in Q1.
• Q2 adjusted EBITDA loss of $40.4M widened from a loss of $18.2M in Q2 2020.
• Q2 total revenue of $28.2M beats the average analyst estimate of $26.8M and declined from $29.9M in the year-ago quarter.
• Net loss ratio of 80% rose from 70% a year ago.

 

 

[petec]

Good lord. What kind of a clown measures ebitda for an insurance company?

[nwoodman]

8 minutes ago, petec said:

Good lord. What kind of a clown measures ebitda for an insurance company?

Absolutely, if you want a laugh you should check out their quarterly earnings report.  Despite previous comparisons it is the first time I have glanced at it.  If I was ever to do a pairs trade, Long FFH short LMND would be it.

[petec]

I know almost nothing about it and so far I think that's too much.

[Candyman1]

https://assets.empirefinancialresearch.com/uploads/2021/08/HCI-Presentation-Phase-2-Partners.pdf

 

Typtab

[nwoodman]

Graph of monthly IRDAI figures for Digit (LHS) vs the Total Insurance Market (RHS).  Numbers are pretty volatile and how reliable they are, who knows.  Compounding curves are eyeballed, so don't put too much weight on them.  Overlaid Covid-19 cases, perhaps a minor correlation.  Spectacular growth off a low base but  we already knew that.  Will be interesting to add in another year or two down the line. The usual caveats on profitable underwriting etc. apply of course.

 

Spreadsheet attached in case you want to play around with the compiled data on a rainy afternoon 

 

IRDAI Data.xlsx