NIB P&L continued

We saw in my last post that the bottom line is not always the bottom line - by removing just a few no-recurrent items what on the surface looks like a good result can, in reality, be a poor results.

So, after removing costs associated with listing on the ASX, setting up the NIB Foundation and net results from investing, the indicated earning power (IEP) for nib in FY2008 was $36.4m and dropped to $25.6m in FY2009.  I have performed the same exercise on the FY2010 results and again the (NPAT) falls by one-third, down to $17.1m.

So things are not looking so good for nib, but having three years worth of data makes the trends clearer.  In terms of their basic business - selling insurance policies and paying claims - the results are all good. The "underwriting result" has increased from $60.5m in FY2008 to $63.5m in FY2009 to $72.0m in FY2010.  So why is the underwriting result going one way and the IEP going the other way?  There are two aspects to this:

1. tax, and
2. investment result

Tax

In my last post, I did not adjust for tax in my assessment of IEP.  I did this on the basis that tax is an expense that reduces returns to shareholders.  However, looking at it again, the IEP result is being obscured by the fact that the loss due to non-recuring costs FY2008 has provided a tax benefit, the FY2009 tax paid is more typical of a standard year, and the FY2010 tax paid is higher due to the profit made on investments.  So, if I apply the company tax rate of 30% to the before-tax-IEP, I end up with new results as follows:

• FY2008 - $21.7M
• FY2009 - $23.4M and
• FY2010 - $29.8m

In short, a little knowledge is a dangerous thing.


Investment Result

Looking at the P&L, I'm going to use the term "Investment Result" to refer to the sum "Investment Income" minus "Investment Expenses".  I originally excluded Investment Result from my calculation of IEP for the years FY2008 and FY2009 because it represented such a small part of the results.  Obtaining the FY2010 results however, highlights the importance of examining as many years of results as you can when assessing a potential investment.  Here are the Investment Performance results for the last three years:

• FY2008 - $7.5m
• FY2009 - ($1.8m) loss
• FY2010 - $44.5m 

Suddenly, in 2010 the investment result is as important as the underwriting result. You would think that this would make the investment result an important topic of the shareholder review, however, in both the FY2009 and FY2010 shareholder reviews there is only a couple of paragraphs which merely set out a few facts.  Disappointingly, as we have no basis for estimating the investment result for future years, we have no way of assessing a IEP for this side of the business.