In the past week, two insurance companies in Israel have succeeded in laying their hands on two of the three credit card companies in Israel.
If anyone is still wondering why Clal Insurance , which bought Max (formerly Leumi Card) and Harel, which had a NIS 3.3 billion bid for Isracard accepted, were so keen to complete these deals, the financials in the insurance industry provide a convincing answer.
Clal Insurance posted a comprehensive loss of NIS 237 million last year, while Max posted a NIS 248 million profit for the same period, 110% more than in the previous year. Harel’s comprehensive loss last year was NIS 77 million, while Isracard, which it is due to acquire after recently receiving approval from the company’s shareholders for the deal, posted a profit for 2022 of NIS 155 million.
In fact, of the five major insurance companies, only two ended 2022 with profits: The Phoenix Holdings, the largest insurance company in Israel in terms of market cap and assets, which posted a profit of NIS 1.1 billion; and Menorah Mivtachim, which posted a profit of NIS 410 million in Yehuda Ben Assayag’s last year as CEO. Assayag, during whose term Menorah Mivtachim rose in both status and market cap, has been appointed chairperson of the company. The fifth company, Migdal, posted the largest loss last year, of NIS 468 million.
It turns out that a considerable part of the profits of both The Phoenix and Menorah Mivtachim last year derived from credit, which is a growth engine for the credit card companies as well. The Phoenix, for example, has a 61% stake in non-bank credit company Gama Management and Clearing, which contributed NIS 35 million to its profit last year.
The Phoenix’s credit portfolio totals NIS 5.1 billion (yielding a total profit of NIS 73 million), and NIS 2.1 billion of that is in Gama. In 2021, The Phoenix posted a NIS 220 million one-time gain resulting from acquiring control of Gama.
Of course, it’s impossible to ignore growth of 43% in profits from insurance activity and growth in revenue from the activity of insurance agents, which, together with the credit activity, brought The Phoenix’s shareholders’ equity above NIS 10 billion for the first time.
Menorah Mivtachim has also identified credit as a main plank of its business. Last year, the company, which also bid for control of Isracard, completed the takeover of non-bank credit company ERN and its subsidiary Mimun Beclick, which contributed NIS 88 million and NIS 19 million respectively to its profit.
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Clal Insurance completes acquisition of Max
The race among the insurance companies to become armed with a credit business, as seen in the bidding for Isracard, is likely to reach a peak of intensity when the third credit card company, Cal (with a profit of NIS 309 million in 2022), is offered for sale by Discount Bank within the next few years.
No variable management fees
The profits from the credit sector, which have shot up thanks to the Bank of Israel’s interest rate hikes in the past year, contrast with the declines on the capital markets that characterized 2022. The five major insurance companies posted an aggregate loss in the high single-digit billions on their capital market activity last year. This compares with an aggregate profit in the billions in 2021.
Besides the direct losses on investments, the insurance companies have been hurt by their inability to charge variable management fees on executive insurance policies. These are “success fees” that they charge on positive returns on with-profits policies sold between 1991 and 2003. Until positive returns cover the negative ones, the company cannot charge these fees.
Last year, the insurance companies were affected by two other macro-economic changes. The first is the rise in the risk-free interest rate, which forms the basis for calculating the insurance companies’ commitments. When this interest rate rises, as happened last year, the companies have to reduce reserves and correspondingly increase pre-tax profit. For The Phoenix, for example, the rise reduced insurance reserves in 2022 in comparison with 2021 by NIS 1.6 billion, and the impact at Clal Insurance was similar. For Migdal, the interest rate rise led to a reduction in reserves and a rise in pre-tax profit of NIS 1.3 billion.
The other factor is the revision by the Capital Markets, Insurance and Savings Authority last June of the mortality tables, extending estimates of average life expectancy in Israel. As a result, the insurance companies had to revise the assumptions underlying their calculations of the commitments and coefficients in life insurance policies and reduce profits. At The Phoenix, for example, the effect was a reduction in pre-tax comprehensive profit of NIS 364 million, while at Migdal, which has the largest life insurance portfolio in the industry, the reduction was NIS 900 million.
Vehicle insurance losses
Insurance companies are making large losses on vehicle insurance. The rise in the number of accidents because of congestion in the roads, and rise in the cost of spare parts because of the Covid-19 pandemic and the war in Ukraine, which in turn led to a rise in vehicle theft, are just some of the causes of the insurance companies’ heavy losses on insuring vehicles (third party and comprehensive).
The five major insurance companies posted aggregate losses of some NIS 1 billion in this category last year, headed by Harel (a loss of NIS 253 million) and The Phoenix (NIS 240 million). If the nine other insurance companies active in this category are added, the aggregate loss grows by hundreds of millions of shekels more, and it weighs significantly on the companies’ underwriting profits.
The effect was clearly felt in insurance premiums in 2022. According to analysis by Wobi, a platform for comparing insurance products, premiums for comprehensive vehicle insurance rose by an average of 23% in 2022 in comparison with 2021, and for some models the rise was more than 30%. At the moment, this trend does not look as though it is about to end.
Published by Globes, Israel business news – en.globes.co.il – on April 3, 2023.
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