Category Archives: creating value

Gordhan doesn’t know what tax is

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Pravin Gordhan is on record saying NHI won’t increase tax burden.

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.

Costs, prices and efficiency. In the Dark.

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I’ve blogged before that it’s more the cost of electricity and the efficiency of its generation that we should be concerned about rather than the price we ultimately pay. From a national perspective, we pay generation and transmission costs regardless of what the price on our bill is. The profit or loss comes out of our taxes after all.

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.

Gaining new insight into insurer profitability through New Business Margin on Revenue

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The Value of New Business written by an insurers is a good measure of the value created through sales activity over a certain period. It’s not the easiest number to interpret in terms of profitability though.

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. Continue reading →

Have all the World Cup expenses been counted?

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Airports Company SA, “ACSA”  now has some of the highest fees  in the world. Apparently they need to fund the huge “investment expenditure” incurred  in upgrading on our airports recently for the World Cup.

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.

Skype Employee Share Options That Weren’t

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I deal with employee share options frequently. Mostly from a valuation perspective, but also from structuring performance and vesting conditions to retain an incentivise key staff. Now I can’t say these decisions are never controversial, but without fail the intention of the employer is to provide a fair deal to staff.

That is until I heard about Skype’s apparent shenanigans. Not only does it appear they may have fired several executives prior to the purchase by Microsoft (allegedly to escape paying on unvested options as part of typical corporate takeover provisions in Employee Share Option agreements), but if you read this article about Skype employees who left and received no value for in-the-money, vested options, you start to wonder whether anyone will ever work for or with Silver Lake again. Continue reading →

The Primary Cause of Structural Unemployment in South Africa: Poor Education Standards and Policy

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South Africa’s unemployment is a different creature from that in the US and in the developed world’s papers at the moment. We don’t have a cyclical lack of demand (although demand isn’t as robust as I’d like).  We have massive, unmanaged structural unemployment in large sectors of the economy.

I say “in large sectors of the economy” because it isn’t true to say that we have universal unemployment. In fact, a feature of structural unemployment is that it usually is not uniform throughout the economy (like cyclical unemployment often is).  I don’t know any actuaries or engineers who are unemployed for more than a brief period between jobs, and usually the jobs start and end back to back. There will be other examples too.

Unemployment is driven by education

Interesting that 75% of our unemployed are “unskilled”. (I heard this on the radio, so I don’t know that  the number is correct or it’s source, but it does map to my previous analysis based on census showing unemployment by education level attained.

  • The unemployment rate for those with less than “matric with university exemption” is between 30% and 40%.
  • Matric with university exemption unemployment is 23%
  • The unemployment rate for this with better than “matric with university exemption” is on average below 10%.
Supply and Demand for Labour

Supply and Demand for Labour

Economic growth isn’t the only solution to unemployment; in fact it’s not even necessarily a solution.  Prior periods of strong economic growth added jobs only very slowly. We have massive, structural unemployment in this country. We are making some of the right noises with our government’s new jobs plan and jobs fund.

Education in South Africa is not performing as needed

However, given the obvious relationship to education, why don’t we take the problems of our education system seriously? Continue reading →

New Business Margin on Revenue

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A new measure of life insurance new business profitability is required.

What is New Business Margin?

Many life insurers currently calculate a measure of the profitability of new business sold over a period called “new business margin”. As defined by the CFO Forum’s MCEV Principles and confirmed in South Africa’s PGN107 covering embedded values, this is the Value of New Business (VNB) divided by the Present Value of New Business Premiums (PFNBP) calculated on a consistent basis.

This is a useful measure since it shows, on average, how much of each premium goes to shareholders as profit, after deducting operating costs, benefits paid to policyholders and a cost of the capital required to support the business.

It’s far more useful than a common previous metric of VNB / API where API is Annual Premium Income or APE Annual Premium Equivalent, since the numerator reflects a multi-year stream of profits and the denominator just a single year. It’s a more difficult number to interpret intuitively.

Of course, New Business Margin is also fatally flawed. Continue reading →