Digit

[TwoCitiesCapital]

38 minutes ago, Viking said:

So over the past 3 months Go Digit General Insurance has increased in market value by about $1.1 billion. Not too shabby. 

 

Now what exactly does this mean for Fairfax? 

 

It means Carson Blocks entire thesis is falling apart

 

"It'll never IPO" 

"It's not worth anything close to what Fairfax marks it at"

 

[dartmonkey]

8 minutes ago, dartmonkey said:

Is it possible to estimate Fairfax's ownership position in Digit General Insurance? Is 65% too high?

 

 

 

8 minutes ago, dartmonkey said:

So it looks like the full stake would have been worth $1.33b+$1.84  = $3.17b on June 30,

OK, please ignore what I just wrote, since it's hard to believe that 36% of Digit Insurance is worth $1.33b and the preferreds are worth 38% more, or 50% of Digital, which would be a total of 86%. I don't know why the preferreds SEEM to be worth so much, but the answer doesn't sound right.

[nwoodman]

1 hour ago, dartmonkey said:

 

 

 

OK, please ignore what I just wrote, since it's hard to believe that 36% of Digit Insurance is worth $1.33b and the preferreds are worth 38% more, or 50% of Digital, which would be a total of 86%. I don't know why the preferreds SEEM to be worth so much, but the answer doesn't sound right.

I had crack see attached.  Based on share count and closing price of INR 373 I get a valuation for FFH’s position in the listed entity Go Digit General Insurance at around $1.5bn.  This excludes Digit Life Insurance, which has the same promoters but I believe is a separate entity that also resides in the Digit Infoworks entity.  I would not be surprised if the Life Insurer ends up being worth as much or more than the P&C business in <10 years time based on higher potential penetration rates (uptake). So your $3bn+ may be a happy coincidence

 

“India's life insurance industry is expected to grow at a CAGR of 10% from INR 9.3 trillion ($151.7 billion) in 2024 to INR 13.5 trillion ($216.1 billion) in 2028, driven by rising demand for traditional life insurance policies, favorable regulatory changes, and increasing adoption of insurtech.  The non-life insurance sector is projected to expand at a CAGR of 9.9% from INR 3.35 trillion ($40.36 billion) in 2024 to INR 4.89 trillion ($57.3 billion) by 2028.

Life insurance penetration in India increased from 2.2% in FY 2002 to 3.2% in FY 2022, while non-life insurance penetration grew from 0.5% to 1% during the same period. Despite this growth, India's insurance penetration rates remain lower compared to other Asian markets like Japan, South Korea, Hong Kong, and China as of 2023.”

Digit Ownership.pdf

[Viking]

42 minutes ago, nwoodman said:

I had crack see attached.  Based on share count and closing price of INR 373 I get a valuation for FFH’s position in the listed entity Go Digit General Insurance at around $1.5bn.  This excludes Digit Life Insurance, which has the same promoters but I believe is a separate entity that also resides in the Digit Infoworks entity.  I would not be surprised if the Life Insurer ends up being worth as much or more than the P&C business in <10 years time based on higher potential penetration rates (uptake). So your $3bn+ may be a happy coincidence

 

“India's life insurance industry is expected to grow at a CAGR of 10% from INR 9.3 trillion ($151.7 billion) in 2024 to INR 13.5 trillion ($216.1 billion) in 2028, driven by rising demand for traditional life insurance policies, favorable regulatory changes, and increasing adoption of insurtech.  The non-life insurance sector is projected to expand at a CAGR of 9.9% from INR 3.35 trillion ($40.36 billion) in 2024 to INR 4.89 trillion ($57.3 billion) by 2028.

Life insurance penetration in India increased from 2.2% in FY 2002 to 3.2% in FY 2022, while non-life insurance penetration grew from 0.5% to 1% during the same period. Despite this growth, India's insurance penetration rates remain lower compared to other Asian markets like Japan, South Korea, Hong Kong, and China as of 2023.”

Digit Ownership.pdf 51.06 kB · 3 downloads

@nwoodman does your summary include the value of the compulsory convertible preferred shares in Digit that Fairfax owns?

 

These increased in value in Q2 (from year end). From Fairfax’s Q2 earnings release:

“On May 23, 2024 Digit Insurance, the general insurance subsidiary of the company's investment in associate Digit, completed an initial public offering comprised of an issuance of new equity and an offer for sale of existing equity shares held by Digit and other shareholders, which valued Digit Insurance at approximately $3 billion (249.5 billion Indian rupees or 272 Indian rupees per common share). As a result of the initial public offering and the increase in the fair value of the company's investment in Digit compulsory convertible preferred shares at June 30, 2024, the company recorded a total pre-tax benefit of $149.9 related to its investment in Digit.”
 

“The pre-tax gain to common shareholders' equity was comprised of:

• (i) a gain of $106.3 recorded in net changes in capitalization in the consolidated statement of changes in equity on the company's 49.0% equity interest in Digit (related to Digit's equity interest in Digit Insurance decreasing from 83.3% to 73.6%, resulting in the recognition of a dilution gain for the excess of fair value over the carrying value of Digit Insurance on the offer for sale and a dilution gain on new equity issuance), and
• (ii) a net gain on investments in the consolidated statement of earnings of $43.6 on the company's holdings of Digit compulsory convertible preferred shares. Digit Insurance's common shares are now traded on the BSE and NSE in India and closed at 338 Indian rupees per common share on June 30, 2024.”

 

Edited August 29, 2024 by Viking

[nwoodman]

32 minutes ago, Viking said:

@nwoodman does your summary include the value of the compulsory convertible preferred shares in Digit that Fairfax owns?

 

 

I believe the CCPS is what gets them to a 49% stake in Digit Infoworks. 

 

[glider3834]

2 hours ago, nwoodman said:

 

I believe the CCPS is what gets them to a 49% stake in Digit Infoworks. 

 

its higher - below from AR 2023 - but we have to adjust now post IPO sale

 

 

 

[nwoodman]

1 hour ago, glider3834 said:

its higher - below from AR 2023 - but we have to adjust now post IPO sale

 

 

 

That’s true, but subject to approval is the key.  My numbers are based on the 49% that is “in the hand” so to speak.  Still a good question for  a CC in terms of the likelihood of it gettng approved.  Not sure if it helps or hinders the cause the longer it remains unresolved

 

- If Fairfax’s ownership in Digit Infoworks increases to 68% following the conversion of securities, the effective ownership in Digit Insurance would increase to approximately 50.05%.

 

-Based on the current market price of 373 INR per share, Fairfax’s stake in Digit Insurance could be valued at approximately $2,063.80 million USD post-conversion.

 

Edited August 29, 2024 by nwoodman

[gfp]

9 hours ago, nwoodman said:

I had crack see attached.  Based on share count and closing price of INR 373 I get a valuation for FFH’s position in the listed entity Go Digit General Insurance at around $1.5bn.  This excludes Digit Life Insurance, which has the same promoters but I believe is a separate entity that also resides in the Digit Infoworks entity.  I would not be surprised if the Life Insurer ends up being worth as much or more than the P&C business in <10 years time based on higher potential penetration rates (uptake). So your $3bn+ may be a happy coincidence

 

“India's life insurance industry is expected to grow at a CAGR of 10% from INR 9.3 trillion ($151.7 billion) in 2024 to INR 13.5 trillion ($216.1 billion) in 2028, driven by rising demand for traditional life insurance policies, favorable regulatory changes, and increasing adoption of insurtech.  The non-life insurance sector is projected to expand at a CAGR of 9.9% from INR 3.35 trillion ($40.36 billion) in 2024 to INR 4.89 trillion ($57.3 billion) by 2028.

Life insurance penetration in India increased from 2.2% in FY 2002 to 3.2% in FY 2022, while non-life insurance penetration grew from 0.5% to 1% during the same period. Despite this growth, India's insurance penetration rates remain lower compared to other Asian markets like Japan, South Korea, Hong Kong, and China as of 2023.”

Digit Ownership.pdf 51.06 kB · 3 downloads

 

This analysis (36% of Digit insurance not including the CCPS) is correct.  The CCPS are in addition to this look through ownership level for the straight equity and will now be marked more or less to market based on Digit Insurance's market prices at quarter end.

[dartmonkey]

11 hours ago, nwoodman said:

had crack see attached.  Based on share count and closing price of INR 373 I get a valuation for FFH’s position in the listed entity Go Digit General Insurance at around $1.5bn.  

 

That's nicely done. I think there is one mistake though, here:

 

Pre-IPO Valuation

Total Shares Outstanding (Approx.): 917.65 million shares

Pre-IPO Share Price: 272 INR

Fairfax’s Effective Ownership Pre-IPO: 40.82%

49% Å~ 83.3% = 40.82%

49% Å~ 73.6% = 36.06%

Calculation

Total Value of Digit Insurance Pre-IPO:

Fairfax’s Stake Pre-IPO:

Convert to USD (assuming 1 USD = 83 INR):

Post-IPO Valuation at June 30, 2024

Total Shares Outstanding: Approximately 917.65 million shares

 

The number you quote is very close to the post-IPO count listed here: https://www.chittorgarh.com/ipo/go-digit-general-insurance-ipo/1727/, but the pre-IPO count should be 41m lower:

 

Total Issue Size	96,126,686 shares (aggregating up to ₹2,614.65 Cr)
Fresh Issue	41,360,294 shares (aggregating up to ₹1,125.00 Cr)
Offer for Sale	54,766,392 shares of ₹10 (aggregating up to ₹1,489.65 Cr)
Issue Type	Book Built Issue IPO
Listing At	BSE, NSE
Share holding pre issue	875,842,046
Share holding post issue	917,202,340

 

 

The more important point is whether the 49% includes or doesn't include the ownership via the convertibles. It is true that there is a note in the table on p. 14 of the Q2 report that says: "Ownership percentages include the effects of financial instruments that are considered in-substance equity." 

 

On the other hand, in the annual report (p. 13), they pretty clearly say that the 49% stake would go to 68%, if the convertibles are converted: "

 

Confusion abounds! 

Edited August 29, 2024 by dartmonkey
corrected the excerpt from the AR

[gfp]

The 49% ownership of Go Digit Infoworks (the 73.6% owner of Digit Insurance) does not include the CCPS.

 

I believe the CCPS convert into shares of Go Digit Infoworks and not shares of Digit Insurance.  I would imagine they will not be converted until there is dilution in Digit Insurance that would cause Fairfax to indirectly own less than the current 50.05%.  

[dartmonkey]

21 minutes ago, gfp said:

I believe the CCPS convert into shares of Go Digit Infoworks and not shares of Digit Insurance.

Yes, when Fairfax refers to "Digit", they mean Go Digit Infoworks; for instance here, where they make it clear:

 

during the second quarter of 2024 the company's investment in Digit compulsory convertible preferred shares ("CCPS") was transferred from preferred stocks classified as Level 3 in the fair value hierarchy to Level 2 as the fair value of the CCPS is now principally determined through the traded market price of Digit's general insurance subsidiary, Digit Insurance, whereas the fair value was previously principally determined through an industry accepted discounted cash flow model.

https://www.fairfax.ca/wp-content/uploads/2024_08_August_01-FFH-2024-Q2-Interim-Report-Final.pdf

 

26 minutes ago, gfp said:

I would imagine they will not be converted until there is dilution in Digit Insurance that would cause Fairfax to indirectly own less than the current 50.05%.  

 

Given the fact that Fairfax has convertible shares that would take them to 68% of Digit (i.e. Go Digit Infoworks!), and since Digit's stake in Digit Insurance is currently 73.6%, Fairfax would own 68%*73.6%=50.06%, so your objective would already be achieved by the IPO dilution.

 

[Viking]

Thanks to everyone for wading in. Below is my current attempt to value Fairfax's ownership in Go Digit General Insurance. It doesn't seem to square with how Fairfax values its stake in 'Digit' so I view my summary as a work in progress (it likely contains errors).

 

Part of the challenge is Digit can mean many different things - Go Digit General Insurance, Go Digit Infoworks. And then we have the CCPS. And other businesses like life insurance part of 'Digit'. Bottom line, as I learn more (from Fairfax and others on this board) I will keep updating my model (like everything else I do related to Fairfax). 

 

So please take my summary below with the usual 'grain of salt.' And please continue to point out errors (with corrections, if you have them).

 

 

[nwoodman]

7 hours ago, dartmonkey said:

The number you quote is very close to the post-IPO count listed here: https://www.chittorgarh.com/ipo/go-digit-general-insurance-ipo/1727/, but the pre-IPO count should be 41m lower:

 

Thanks that makes sense

[nwoodman]

16 hours ago, Viking said:

 

 

Part of the challenge is Digit can mean many different things - Go Digit General Insurance, Go Digit Infoworks. And then we have the CCPS. And other businesses like life insurance part of 'Digit'.

 

Ain’t that the truth.  +1 in terms of thanks to all.  Btw hope you find time to give us your thoughts on Atlas, I have a view but a gross error check is always appreciated.  

[dartmonkey]

20 hours ago, Viking said:

Part of the challenge is Digit can mean many different things - Go Digit General Insurance, Go Digit Infoworks. And then we have the CCPS. And other businesses like life insurance part of 'Digit'

Yes. Fairfax actually has a pretty consistent presentation:

 

Go Digit Infoworks = "Digit"

Go Digit General Insurance (GODIGIT.NS) = "Digit Insurance"

 

Since the IPO, Digit owns 73.6% of Digit Insurance.

And Fairfax owns 49% of Digit, and has the CCPS convertibles to take its ownership to 68% if that is approved by regulators.

So they own or have convertibles to eventually own 68%*73.6% = 50.05% of Digit Insurance, but also 50.05% of the other assets that Digit owns, including Digit Life Insurance which may actually be worth more than we think. 

 

Here is why we may be seriously underestimating the value of Digit outside of the public Digit Insurance. Note that on p.13 of the Q2 report, they mention that private company preferred shares worth $1787m were transferred from Level 3 to Level 2, and in the note (3), they explain that this was because of the Digit Insurance IPO. Since the preferred shares (CCPS) only represent 19% of Digit, logically that would mean that Digit is worth $1787m/.19 = $9.4b, or even more, $10.7b, now that Digit shares have gone from 338 on June 30 to 383.7 at last night's close. That would mean that Fairfax's stake, 68%, would be worth $7.3b??

 

Could it be that the preferred shares get marked to market because they are less than 20% of Digit, while the equity shares have to be treated as an investment in associates because they are 20-50% of Digit?

[gfp]

4 minutes ago, dartmonkey said:

but also 50.05% of the other assets that Digit owns, including Digit Life Insurance which may actually be worth more than we think. 

 

I don't know the specifics but the Fairfax Annual Report seems to indicate they only hold a 24.2% interest in Digit Life - maybe that percentage increases by the same proportion as the Digit Insurance ownership if the CCPS are fully converted.  Either way - I don't think Fairfax's stake being worth $7.3 Billion (today) is anywhere close to the truth.  The quarterly marks on FFH's books are going to be close enough.  We can watch the share price of Go Digit Insurance and keep up on the market value

[dartmonkey]

1 hour ago, gfp said:

Either way - I don't think Fairfax's stake being worth $7.3 Billion (today) is anywhere close to the truth.  The quarterly marks on FFH's books are going to be close enough.

What do you make of the fact that the CCSP's alone are valued at $1.8b in Fairfax's Q2 report?

 

Specifically, the transfer out of category line, and the accompanying Note 3:

 

 

 

Edited August 30, 2024 by dartmonkey

[nwoodman]

Morgan Stanley recently initialed coverage on Go Digit.  A couple of notes attached

• PT Rs 345
• Summary of discussions with  Kamesh Goyal at their Asia Pacific Summit

GODIGIT_20241120_1635.pdf GODIGIT_20241111_1813.pdf

[UK]

14 minutes ago, Haryana said:

What's up with it, jumped over 10% today, or it's just volatility.

Do not forget, that according to MW it is almost worthless:))

[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, 2025 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, 2025 by nwoodman