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Thursday, August 05, 2021

Post Digit Insurance stake sale, $1.4-bn windfall for investor Fairfax

Watsa’s investment in this comparatively small insurance firm has appreciated by ten times in a period of four years, making it one of the fastest appreciations in the insurance sector.

Written by George Mathew
Mumbai | Updated: July 7, 2021 4:54:36 am
Since Digit was founded in 2017, Toronto-based Fairfax has invested approximately $154 million in the former.

Prem Watsa, founder of Fairfax group, has struck a goldmine in his investment in Go Digit General Insurance Ltd. Fairfax Financial Holdings has made a $1.4-billion (around Rs 10,000 crore) gain after Digit launched a $200-million share sale at a valuation well above Fairfax’s investment in the four-year-old company.

Watsa’s investment in this comparatively small insurance firm has appreciated by ten times in a period of four years, making it one of the fastest appreciations in the insurance sector.

Since Digit was founded in 2017, Toronto-based Fairfax has invested approximately $154 million in the former. That investment is currently carried on Fairfax’s balance sheet at $532 million and, when the new equity issuances by Digit close and the Indian government and regulatory approvals are given, will have an aggregate market value of approximately $2.3 billion, Fairfax said.

Fairfax had recently acquired a majority stake in CSB Bank.

On Monday, Digit — which boasts of cricketer Virat Kohli as an investor — said it was raising money by selling stock to a group of institutional investors that includes Faering Capital, Sequoia Capital India and IIFL Alternate Asset Managers. The latest financing values Digit Insurance at $3.5-billion (Rs 25,900 crore).

Compared to this, the market valuation of public sector New India Assurance — India’s largest general insurance firm — is around Rs 27,826 crore ($ 3.76 billion). Digit’s total premium income in the first two months of FY22 was Rs 506 crore with market share of 1.71 per cent whereas New India recorded a premium income of Rs 6,079 crore and a market share of 20.52 per cent.

When the new equity issuances by Digit Insurance close, the increased valuation of Digit Insurance will result in Fairfax recording a net unrealised 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), Fairfax said.

The stock sale 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. Fairfax is a holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and the associated investment management.

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 per cent to 74.0 per cent and Fairfax obtains regulatory approval specific to its holdings in Digit, it said.

Fairfax’s 49.0 per cent equity interest in Digit comprises a 45.3 per cent interest in Digit common shares and a 3.7 per cent 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 per cent and, as a result, the remainder of Fairfax’s investment in Digit compulsorily convertible preference shares is recorded at fair value through profit, Fairfax said.

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