I haven’t analysed the details thoroughly so maybe they are correct. I suspect that it’s more dogmatic following of views from those who don’t understand the pros and cons well enough to change their mind.

For example, if higher taxes are bad for employment and investment, surely lower taxes would be good for employment and investment? I doubt that the DA is arguing that the current level of taxes is exactly optimal, so shouldn’t they have been campaigning more loudly for lower taxes?

The reality is that, considered on their own, higher taxes will reduce rates of return to shareholders. This will make marginal operations unecnomical, which could result in job losses. The lower after-tax profit may also push  operations with marginal rates of return to below the required hurdle rate of some investors, reducing total investment in the sector.

This is, of course, true for all taxes. Hopefully there aren’t too many people left who believe that taxes should not exist.

So one real question is whether the tax rate is optimal, given the funds that can be directed towards government revenues in general and to specific employment creation and industrial development programmes specifically.

A second real question is whether the “price” for the permanent removal of natural resources being charged is appropriate (a combination of taxes and royalties) and from a philosophical perspective, who “owns” our country’s natural resources?

This leads to the third question or point that the DA really should be more aware of. Nationalisation, the Freedom Charter, and vast income inequalities are all part of a potent political conversation in South Africa. With nationalisation almost entirely off the table at the moment, being able to demonstrate in some manner that the “riches under the ground” are better being shared with everyone is an important political point to counter the more extreme political views.

The DA, in this instance, is blind to the subtler political benefits of this approach, blind to the definite benefits of increased revenues, blind to the possible benefits of focussed attention on this industry cluster, but completely convinced of the first-year economics free market principle of “tax leads to deadweight loss of consumer and supplier surplus” and thus lower employment and investment.

I always maintained that “nationalisation” isn’t necessarily appropriation of assets without compensation, although the popular views and worst fear-mongering viewed this as the only possibility. It’s refreshing to hear that “nationalisation” was considered on its merits against private operation of firms rather than just as a way to redistribute wealth. (Ok, at least one article wasn’t mad panic.)

The increase in taxes is also basically expected. Although new and changing taxes does add uncertainty, it provides a sense that the rules are being followed.  Tax rates on energy companies in many Middle Eastern countries is high – sometimes near 50%. So the government fiscus does benefit from the energy that belongs to all its citizens.

It’s also a, slightly sneaky, way of re-settting historical land ownership and mineral right royalties and licensing. If “we got it wrong and sold them too cheaply in the past, we can always recoup through higher or new taxes”. Maybe a little cynical but not surprising.

The real free market fanatics will no doubt be in uproar about higher taxes destroying jobs and misallocating resources. There is a debate here, but the free market fanatics all too quickly forget that it’s hard to argue that the value of the minerals under our country have been fairly priced. Those markets can easily be described as “failed markets” with a number of externalities involved.

Even the hardest neoclassical economist will recognise these are very real limitations on Adam Smith’s invisible hand.

I’m continually disappointed that Moneyweb continues to partner with this distraction.

As I’ve done in the past, I’ve analysed very quickly some of the results of the most recent competition. As background to that, the basic rules are:

1. Put up R20,000 of your own money
2. Trade over three months in currencies, commodities single stock futures and some index trackers.
3. Whoever has the most at the end wins a million rand
4. Everyone keeps what is left of their initial “investment”

So let’s be clear, there are no long-term investment learnings here.

The winner did return 165.5% over 3 months, which is not an impressive performance even though it might look like it.  The point is, given the volatility of the investment universe available for the competition and the encouragement towards rampant risk-taking, it’s entirely pedestrian performance.  It’s very likely an individual’s performance will be good given the wide range of possible outcomes.

Let’s look at some other statistics

These are not performance statistics of which to be proud. They are similar to the losses incurred in prior competitions.

So in short, the competition cost the entrants in total just over a million rand. Losing a million rand is a great way to Make a Million.

It’s worth reading the entire article, but the main message is that we cannot use the dream or story or fairy tale of imminent migration into space and other planets as an excuse not to deal with the very real problems we have on Earth right now. The misconceptions, Hollywood induced and otherwise, about the ease of space travel or even the extent of our current capabilities, are massive.

As with so many things, the stories that fill our society can be very different from the harsh reality.

Managing poor performance is tough because it’s so easy and so attractive to shy away from communicating the truth. Avoiding conflict and not addressing problems is far worse for all concerned.

Robert Kiyosaki, author of “Rich Dad, Poor Dad” outlines a similar viewpoint in response to research that shows “nice guys earn less than mean guys”. His take is that it’s not actually “nice” to hide the truth and dance around issues. There’s never a need to make attacks personal, but sometimes the news is not good and it needs corrective action.

As Kiyosaki says, “cowards finish last”.

He clearly doesn’t understand income and expenditure. If government spends more, more tax must be collected. If employees don’t pay the tax, employers must pay the tax. If this is directly related to labour, you’ve just increased the cost of labour without a commensurate increase in productivity. Labour less attractive, fewer jobs.

The only way for NHI to not cost is if it replaces current health expenditure, in which case it’s about using funds more effectively. This is not the message I’m hearing.

Today there’s an interesting story that Joburg City Power marks up Eskom prices by 117% when calculating charges for their customers. Well, again, if City Power makes a profit it should in theory be reflected in lower other costs for Citizens.

It does make me wonder though, is this mark-up needed? If so, what is driving the additional costs? Inefficiencies, fraud, non-payment by some come to mind. So it’s still true that we should be looking critically at costs rather than superficially at prices charged.

New Business Margin, which is the Value of New Business (VNB) as a percentage of the Present Value of New Business Premiums (PVNBP) is a common measure of profitability of that news business.

But it’s a flawed measure, especially when it comes to comparing product lines and insurers or even to understand the change in profitability from one period to the next. It uses and unequal yardstick to measure business.

New Business Margin on Revenue (NBMR) provides a significantly improved measure of profitability that can be used to compare margins across products, across insurers and across time. Further, it leads easily to a component analysis of the margin, adding additional insights to shareholders, brokers and regulators.

If you haven’t read my introductory post on New Business Margin on Revenue, it would be worthwhile doing so now – this post is going to illustrate the sort of results it provides in a practical, numerical example.

Example 1 considers how NBMR clarifies distortions from a change in mix of business.

Example 2 shows how more complex dynamics can be understood through a component analysis of NBMR. The spreadsheet showing the underlying calcs is attached at the end of this post.

Example 1 – A change in mix of business

AGGREGATE PICTURE

Let’s look at the sort of aggregate information you’ll typically see in an EV report.

What one might take from this analysis is that VNB is constant, but margins are declining to below 2.0%. If this is the only information on which to base our analysis, this company might be a clear “sell” and products and pricing need to be updated by management.

Let’s see how this would look using NBMR

From this table we see again that VNB has been constant, but that the profitability of the business has actually been slightly increasing.  So, although we should consider attending to the zero-growth VNB, the actual margin we’re achieving on our business on this measure has improved slightly from 25.5% to 26.1%.

This is a more accurate picture, because as you can see from the following tables, all that has changed is our mix of business – and the investment business that we’re writing more of now actually has a higher NBMR than the risk business we’re selling less of.  The traditional New Business Margin measure is distorted because it treats the entire premium paid by the policyholder as “revenue” when in fact only a small share of it is fees and charges and the rest is more like a deposit.  Again, banks measure profitability and performance through RoE, Cost to Income Ratios and Net Interest Rate Margin and only very much behind those the return on total assets.

Analysis of NBMR and components via product line

So the New Business Margin is constant on a product view, but when compared it appears as if there is a declining trend.  Also, at 26.7% of revenue taken as profit for investment business, this is profitable business, a fact not obvious from the superficially low New Business Margin of 1.3% (which is actually a perfectly good profit margin on that measure, just difficult to understand and compare).

The Revenue Per Premium (RPP) is 100% for risk business and 5% for investment business.  Depending on policy size, a 5% deduction from every premium might be a little on the high side and from a Treating Customers Fairly and sustainability perspective, this area may require some attention.  It’s also fair to ask “why are we losing market share in risk products and what can be done about it”, but at least we see this as a mix of business and market share issue and not a business margin issue.

Example 2 – Complex changes in volume, profitability and other components

Aggregate picture

Example 2 is more complex.  Let’s look at the aggregate information on a traditional presentation first.

In this case it looks like we have a severe margin squeeze problem in spite of increased business volumes and increased VNB. By now it should be clear that it’s dangerous drawing conclusions from this information.

A more coherent aggregate view can be obtained using NBMR:

Here we see a strong 2011 increase in all of VNB, Business Volumes and New Business Margin on Revenue after a poor year in 2010.  On the whole, we are hanging to customers longer than before (Discounted Premium Term or DPT up form 5.4 in 2010 to 5.6 in 2011, but still not at the levels of 2009. This is worth investigating.

The share of each premium we get as revenue has dropped sharply – clearly suggesting a change in mix of business as this sort of change wouldn’t typically be seen otherwise. Clearly we need to dig further, but the previously bleak picture is already looking better – and as we’ll see this is a more accurate reflection of business reality.

ANALYSIS OF NBMR AND COMPONENTS VIA PRODUCT LINE

Immediately we see a huge amount of new information.  Risk business has been declining in profitability significantly and has also had a dramatic increase in lapse rates (since the Discounted Premium Term has dropped to 3.2, suggesting major problems with persistency).

At the same time, although 2010 was a step backwards in terms of DPT for Investment business, the increase in volumes of business (API), allied with a restoration of the DPT to close to 2009 levels, a reduction in RPP (suggesting better value for policyholders, which should give rise to better future sales, lower persistency and less regulatory intervention) and a strong growth in NBMR, driven off efficiencies, expense reductions and economies of scale through greater sales.

Our risk business is in trouble and requires attention, but we are building a solid, profitable and sustainable investment business that should provide good returns to shareholders.

Conclusion

These are stylised examples filled with hidden good news. The reality is that many insurers are struggling in several business units.  The analysis and tools outlined here can help make better informed decisions around product strategy and pricing, and for analysts wanting to better understand the current and potential future financial performance of these stocks.

This begs the questions:

1. What business plans were used in determining investment on our airports?
2. How did actual experience compare to those budgets?
3. What can we and ACSA learn from the difference between expectations and actual?
4. Did the marketing benefit of the World Cup more than offset the de-marketing impact of higher costs of travel to (and inside) South Africa?
5. Have these “investment expenditures” been capitalised on ACSA’s balance sheet and has the resultant asset been impaired or not?
6. Have these additional costs been added to the official costs for the World Cup (and why not?)

Who am I kidding -  huge sums of money were spent on the gut feel that it was a good idea and because spending other people’s money is easy and it’s self-glorifying to build grand airports.