Digit

[nwoodman]

https://www.moneycontrol.com/budget/india-s-insurance-market-poised-to-grow-the-fastest-in-g20-economic-survey-article-12925602.html

 

“The Swiss Re Institute, as quoted in the survey, has forecast  11.1 percent growth for India's insurance sector from 2024 to 2028, attributing this to an expanding middle class, technological advancements, and supportive regulatory frameworks.”

[This2ShallPass]

12 hours ago, nwoodman said:

https://www.moneycontrol.com/budget/india-s-insurance-market-poised-to-grow-the-fastest-in-g20-economic-survey-article-12925602.html

 

“The Swiss Re Institute, as quoted in the survey, has forecast  11.1 percent growth for India's insurance sector from 2024 to 2028, attributing this to an expanding middle class, technological advancements, and supportive regulatory frameworks.”

Digit is down 2% since ipo. In last 6 months, it's down 12% vs 4% for sensex.

 

Has anyone been following it closely, any underlying business issues or simply high priced ipo?

 

[SafetyinNumbers]

59 minutes ago, This2ShallPass said:

Digit is down 2% since ipo. In last 6 months, it's down 12% vs 4% for sensex.

 

Has anyone been following it closely, any underlying business issues or simply high priced ipo?

 

The IPO was at 272 so it’s up almost 10% from there. The business seems to be doing well so it’s probably just profit taking in an overall weak market for Indian small caps and financials.

[dartmonkey]

1 hour ago, This2ShallPass said:

any underlying business issues or simply high priced ipo?

 

those are not the only two possibilities. there’s also “business is doing fine, share price will do what share prices do”

 

here are the Q3 results published a week ago. they look fine to me, i wouldn’t worry… https://www.godigit.com/content/dam/godigit/general/investor-relations/financial-information/financial-results-q3-fy-2024-25.pdf

[nwoodman]

5 hours ago, This2ShallPass said:

Digit is down 2% since ipo. In last 6 months, it's down 12% vs 4% for sensex.

 

Has anyone been following it closely, any underlying business issues or simply high priced ipo?

 

MS provides limited coverage (attached).  Based on the most recent IRDAI figures growth has slowed but that was off some pretty amazing figures.  For non-life they have 2.85% of the market.  If the market in aggregate grows double digits then even with no market share growth that should still look good in terms of float in 5-10 years time.  No doubt the share price will bounce around but longer term this is a decent portion of the Fairfax thesis for me.

 

Also consider the life insurance division, that is not publicly listed, has 0.28% of First Year Premiums after only getting a license in June 23. First year premiums measures new business but does not account for policy renewals or retention.  So a decent but not completely perfect proxy for market share. 

 

 If both get to around 3% market share towards the end of the decade then it will be quite the story.  I think they are targeting closer to 5% market share

 

 

 

Thinking more about the changes announced in the Indian Budget this morning:

 

The Indian government’s move to allow 100% FDI in insurance addresses some structural challenges for foreign investors like Fairfax Financial Holdings, but it does not automatically resolve the specific regulatory hurdle Fairfax faces with its CCPS conversion in Go Digit Infoworks (parent company of Go Digit Insurance). Here’s a breakdown:

 

Key Context of Fairfax’s CCPS Issue

 

1.    Regulatory Rejection (2022–2024):
    •    IRDAI blocked Fairfax’s proposal to convert its CCPS in Go Digit Infoworks into equity, as it would make the Indian promoter (Go Digit Infoworks) a subsidiary of Fairfax, violating rules that prohibited foreign-owned subsidiaries from acting as promoters of Indian insurers under the 74% FDI regime .

 

2.    Structural Hurdle:
    •    The rejection centered on the subsidiary rule, not the FDI cap. Even at 74% FDI, Indian promoters could not be subsidiaries of foreign entities. Fairfax’s CCPS conversion would have diluted founder Kamesh Goyal’s stake and shifted control .

Impact of 100% FDI on Fairfax’s Case

3.    Positive Developments:
    •    Removal of Partner Dependency: 100% FDI eliminates the need for foreign investors to partner with Indian entities, simplifying ownership structures .
    •    Regulatory Review: The government plans to “review and simplify” existing guardrails, potentially addressing restrictions on subsidiary structures. This could create a pathway for Fairfax’s conversion request.
4.    Unresolved Challenges:
    •    Subsidiary Rule Ambiguity: The 100% FDI announcement does not explicitly override IRDAI’s prohibition on foreign-owned subsidiaries acting as promoters. Without clarity here, Fairfax’s CCPS conversion remains in limbo .
    •    Conversion Ratio Penalty: Go Digit was fined ₹1 crore in 2024 for failing to disclose changes to CCPS conversion terms, highlighting ongoing regulatory scrutiny of such instruments .

 

Likely Outcomes
    •    Requires Further Regulatory Action: For Fairfax to convert its CCPS, IRDAI may need to explicitly permit foreign-owned subsidiaries as promoters under the revised FDI framework. The Budget 2025’s promise to “simplify guardrails” could enable this, but no formal amendments have been announced yet .
    •    Strategic Alternatives: Fairfax might pursue alternative structures, such as direct equity infusion into Go Digit General Insurance (the listed entity) or renegotiating the CCPS terms under the new FDI regime .

 

Conclusion
While 100% FDI removes the ceiling on foreign ownership, Fairfax’s CCPS issue hinges on whether IRDAI revises its subsidiary rule. The policy shift creates a favorable environment, but resolution requires specific regulatory adjustments. For now, Fairfax’s path to majority ownership of Go Digit remains conditional on further reforms.

 

GODIGIT_20250109_1753.pdf

Edited February 2 by nwoodman

[nwoodman]

Looks like they have had to pull in their horns a little and perhaps explains the slower growth:

 

https://www.financialexpress.com/money/expense-ratio-has-risen-post-eom-guidelines-go-digit-chairman-3651451/?t&utm_source=perplexity

 

https://www.financialexpress.com/business/banking-finance-go-digit-receives-irdai-show-cause-notice-over-excessive-expenses-3649103/?t&utm_source=perplexity

 

Go Digit’s expense ratio breach is directly tied to its growth strategy, particularly its rapid expansion in retail segments like motor and health insurance, which require significant upfront commissions and marketing costs. While the company has reduced its expense ratio from 41.1% to 38.2% in H1FY25, it remains above IRDAI’s 30% cap, prompting a show-cause notice for exceeding expenses in H1FY24 and H1FY25. Here’s how growth and regulatory compliance intersect:
Growth-Driven Expense Pressures
    1.    Upfront Cost Recognition:
    •    Go Digit’s business model incurs commissions and marketing expenses (₹572 crore in Q2FY25) immediately, while premiums are earned over the policy period. This mismatch inflates short-term expense ratios during growth phases.
    •    Example: Health insurance premiums doubled YoY in FY2024, but associated commissions are expensed upfront, contributing to elevated expense ratios.
    2.    Retail Segment Focus:
    •    Retail policies (motor: 69% of FY2024 premiums) require higher distribution costs compared to corporate segments. Go Digit’s 61,900+ partners in tier II/III cities drive growth but increase commission payouts.
    3.    Combined Ratio Impact:
    •    Despite premium growth (14.2% YoY in Q2FY25), the combined ratio worsened to 112.2% due to rising claims (₹851 crore) and expenses. Underwriting losses widened to ₹244.83 crore, reflecting growth-related inefficiencies.
Regulatory Response and Strategic Implications
    3.    IRDAI’s Show-Cause Notice:
    •    The notice highlights non-compliance with the 30% EoM cap for H1FY24 and H1FY25. Go Digit attributes this to delayed regulatory feedback on its forbearance application (filed May 2023), but enforcement pressures are mounting.
    2.    Growth vs. Compliance Trade-Off:
    •    Short-Term Slowdown Likely: To meet IRDAI’s cap, Go Digit may need to temper growth in high-commission segments (e.g., motor) and renegotiate agent commissions. This aligns with industry trends where insurers are shifting to lower-commission products.
    •    Long-Term Scaling Strategy: The company’s 3-year glide path aims to reduce expenses through tech-driven efficiencies (e.g., AI underwriting) and portfolio diversification into fire/crop insurance (lower claims ratios)

Spitballing:

Edited February 1 by nwoodman

[TwoCitiesCapital]

4 hours ago, This2ShallPass said:

Digit is down 2% since ipo. In last 6 months, it's down 12% vs 4% for sensex.

 

Has anyone been following it closely, any underlying business issues or simply high priced ipo?

 

 

I wouldn't be concerned about this.

 

The vast majority of IPO in the U.S. can be had for cheaper within the 2-year following the IPO (i.e. most end up trading down - at least temporarily - given how rich IPOs are often priced) which I why I have a strict rule against buying shares of any company that IPOd in the last 12 months. 

 

I would expect it would be similar for most IPOs in most countries as it is similar dynamics at play (limited float, large demand, lock-ups on insiders sales to meet that demand, etc). Once supply/demand balances, you tend to get lower prices. 

Edited February 2 by TwoCitiesCapital

[nwoodman]

MS with a breakdown by non-life insurance sector.  It looks like Digit’s speeding ticket is still intact

INDIA_20250214_1507.pdf

Edited Tuesday at 06:59 AM by nwoodman