Digit

[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 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 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 by dartmonkey