One more time with ... tables!

I learnt a new skill.  It's how to create tables in html. I then learnt an even better skill, how to get Excel to create tables in html, so here is my first table created by Excel:

		2010	2009	2008
	Notes	$'000	$'000	$'000
Premium revenue	5	901,370	829,486	758,238
Claims expense		(635,929)	(599,297)	(553,910)
HBRTF/RETF Levy		(109,898)	(86,978)	(73,128)
State levies		(22,045)	(21,177)	(19,922)
Claims handling expenses	6	(14,407)	(18,384)	(17,683)
Net claims incurred		119,091	103,650	93,595
Acquisition costs	6	(32,512)	(26,642)	(25,625)
Other underwriting expenses - ongoing	6	(39,514)	(36,847)	(34,916)
Other underwriting expenses - demutualisation and listing costs	6	0	0	(10,858)
Underwriting expenses		(72,026)	(63,489)	(71,399)
Underwriting result		47,065	40,161	22,196
Investment income	5	45,794	(1,167)	8,783
Other income	5	1,291	1,183	1,463
Investment expenses	6	(1,344)	(651)	(1,325)
Other expenses - ongoing	6	(5,840)	(7,931)	(3,548)
Other expenses - donation to nib foundation	6	0	0	(25,000)
Other expenses - demutualisation and listing costs		0	0	(7,640)
Profit/(loss) before income tax		86,966	31,595	(5,071)
Income tax expense/(benefit)	7	(25,441)	(7,809)	5,421
Profit/(loss) from continuing operations		61,525	23,786	350
Profit/(Loss) from discontinued operations			0	54
Revaluation of land and buildings			(3,156)
Available for sale financial assets			(88)
Income tax related to components of other comprehensive income			26
Profit/(Loss) for the year attributable to equity holders		61,525	20,568	404

This table sets out the Profit and Loss statements for the years 2008 to 2010 as they appear in the financial statements.  I've added it here because I re-read my last two posts and I couldn't understand them.  I figured if I, being the one who wrote them, couldn't understand them then what hope does anyone else have.  So here is a summary of the two posts with tables, which hopefully will make things much easier to understand.

So, we use the historical P&L to work out the "indicated earning power" or in other words, how much money we think the company can make.

Step One is to remove the non-recurrent items, that means anything that is a one off.  The presence of zeros is a good indicator of this, ie the items "Other underwriting expenses - demutualisation and listing costs", "Other expenses - demutualisation and listing costs" and "Other expenses - donation to nib foundation" only appear in 2008, so we can take them out. There are also a few items listed below the line "Profit/(loss) from continuing operations" which are once-offs, so we can also take them out.  If we do that, we get to here:

		2010	2009	2008
	Notes	$'000	$'000	$'000
Premium revenue	5	901,370	829,486	758,238
Claims expense		-635,929	-599,297	-553,910
HBRTF/RETF Levy		-109,898	-86,978	-73,128
State levies		-22,045	-21,177	-19,922
Claims handling expenses	6	-14,407	-18,384	-17,683
Net claims incurred		119,091	103,650	93,595
Acquisition costs	6	-32,512	-26,642	-25,625
Other underwriting expenses - ongoing	6	-39,514	-36,847	-34,916
Underwriting expenses		-72,026	-63,489	-60,541
Underwriting result		47,065	40,161	33,054
Investment income	5	45,794	-1,167	8,783
Other income	5	1,291	1,183	1,463
Investment expenses	6	-1,344	-651	-1,325
Other expenses - ongoing	6	-5,840	-7,931	-3,548
Profit/(loss) before income tax		86,966	31,595	38,427
Income tax expense/(benefit)	7	-25,441	-7,809	5,421
Profit/(loss) from continuing operations		61,525	23,786	43,848

So can I identify a figure for indicated earnings from this? I might be able to conclude that the underwriting result will increase next year, but the investment result is anyone's guess.

So was there any point in doing this exercise? Yes, because:
1. I now have a better understanding of the risks the business is subjected to - low on the insurance side, high on the investment side.
2. I also have to question the capability of management when they can spend a entire report only talking about one part of the business (insurance) and completing ignorning the other (investment).
2. I have a base for comparision with other companies, which may prove more or less volatile in their earnings.

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.