In a recent study, the forensic-activist investing firm Muddy Waters revealed that Fairfax Financial Holdings “hatched a plan” to take extremely aggressive fair value gains on its ownership in unlisted insurer Go Digit General Insurance during 2021.
Muddy Waters reported accounting irregularities by a number of its holding companies in a report dated February 8. Aside from Quess Corp, Fairfax has been buying more shares in Indian businesses; notable examples include Thomas Cook and Bangalore International Airport.
“In Q42020 – Q12021, rather than buying back shares, Fairfax put in place Total Return Swaps (TRSes) on its stock. On the surface, TRSes seem like a risky way of returning capital to investors, because if the stock declined, Fairfax would take both P&L and Book Value hits. Plus, it has no anti-dilutive feature such as would be guaranteed to increase shareholder value permanently,” stated Muddy Waters.
According to Muddy Waters, Q12021 saw the first erroneous alteration of Digit’s carrying value. Given that Digit agreed to raise capital at a $1.9 billion valuation, Fairfax is likely due to post a $605 million fair value gain in Q42021 or Q42020.
However, Fairfax did not recognize any benefit of this kind until the next quarter, at which point Digit agreed to another financing round at a valuation of $3.5 billion. Fairfax had not yet finished putting its TRSes in place.
“Assuming that the market valued each dollar of Digit profit at $1 incremental share value, the gains on the TRSes added earnings juice of $160-170 million in 2021,” it added.
False reports
According to Muddy Waters, Fairfax stated that Digit was “already profitable” in 2021 in its 2021 Annual Report. Yet, Digit’s financial statements show net losses for the fiscal years 2022 and 2021 that concluded on March 31, 2022.
The research firm reduced Digit’s worth from its top of $3.5 billion in 2021 to its present valuation of $1.5 billion. The company’s ability to properly be referred to as an insuretech was also questioned in light of the claims that it has developed “little” of its own software and that agents still handle a large portion of Digit’s business.
