1. This week, IDB Holdings subsidiary Clal Insurance Enterprise Holdings launched Clal Finances Batucha, Israel’s largest non-banking financial group. Gabriel Perel will head the concern, which will manage NIS 35 billion in assets, and function as the financial arm of, and operate in tandem with, Clal Insurance, Israel’s second largest insurance company.
Clal Insurance Enterprise Holdings president and CEO Avigdor Kaplan told “Globes” that Clal’s financial activity was synergetic to its insurance business. “Our strategic goal is to base the group on four fields: life insurance, non-life insurance, pensions, and financial services. We can provide the customer with a variety of long-term solutions for savings,” he said.
Kaplan added that parallel financial activity was synergetic to the insurance business: “Long-term money management and providing financial services creates advantages in insurance, while also benefiting from the advantages that insurance provides. In setting up Clal Finances, Clal Insurance is completing its reorganization and restructuring, according to the model followed by the major global insurance companies.”
Clal Finances will combine all Clal Insurance services in one firm, including underwriting, foreign currency, provident funds, mortgages, money management, brokerage services, research, and analysis. Clal Finances will also manage money from Clal Insurance policyholders and nostro funds.
2. In recent years, all the major insurance groups, except for Israel Phoenix Assurance, have been entering the financial services field. The trend began in 1992, when the companies were denied government largess, and the issuing of designated bonds for life insurance policies was halted. For lack of choice, the insurance companies entered the capital market, like the provident funds did before them, and the pension fund are doing now.
Within a few years, the insurance companies realized that the insurance business was only one factor. The question of what to do with the accumulated money from premiums and what yield can be obtained is equally important. The Supervisor of Insurance relaxed the rules for investment, and there are almost no restrictions now on the companies’ investments.
At the same time, Clal Insurance’s business philosophy is substantially different from that of its competitors. At Migdal Insurance (TASE:MGDL), for example, the investment division, which deputy general manager Anat Levin heads, is part of the insurance company, while Migdal Capital Markets handles capital market activity, which is completely separate, and directly subordinate to the CEO. Clal Insurance has now created a separate concern Clal Finances which is responsible for all capital management: both funds obtained from policyholders and funds from the portfolios managed by Clal Finances, which come from customers who are not necessarily policyholders.
The other difference is in the variety of products. Clal offers a complete selection of financial products. In addition to portfolio management and provident funds, Clal Finances offers mortgages, securitization, underwriting services, and foreign currency services. Migdal, Israel Phoenix, and Harel Insurance do not offer this selection.
The main difference, however, lies in Clal’s strategic world view. When Perel maps out his competitors, he doesn’t see Anat Levin or Harel investment manager Amir Hessel. Perel’s competitors are the banks: Bank Leumi (TASE:LUMI), Bank Hapoalim (LSE:BKHD; TASE:POLI), and Israel Discount Bank (TASE:DSCT). Perel has good reason for constantly repeating his mantra, “We’re the largest non-banking financial group in Israel.”
3. A key link in the Clal chain is supplied by Ilanot Batucha CEO Shuky Abramovich. Ilanot Batucha is a brand name perhaps the only investment house whose name means something to the people in the street. Furthermore, Ilanot Batucha is also the largest investment house in Israel, with thousands of customers, a good research department, and leading analysts.
Ilanot Batucha, however, is also a money-loser, with a NIS 23 million loss in 2001. Clal Insurance acquired control of Ilanot Batucha in March for NIS 168 million. Since then, Abramovich has spearheaded a streamlining campaign, making the investment house leaner and meaner.
Being part of an insurance company gives Ilanot Batucha a built-in advantage. Clal Insurance has almost a million customers, some of whom probably fit the ideal profile for an Ilanot Batucha customer. It’s no simple matter to recruit Clal Insurance customers as Ilanot Batucha customers, though; it’s the company’s biggest challenge.
On the other hand, the insurance company won’t give Ilanot Batucha any discounts. While the insurance company is a very big customer for brokerage services supplied by Ilanot Batucha, Kaplan states categorically, “There won’t be any cross-subsidization. Ilanot Batucha will have to offer a competitive price for the brokerage services we need. At the same time, it may get first refusal rights.”
4. Clal Insurance faces two challenges in its strategy. The first is fitting into the new financial supermarket. Will the deal flow enable Clal Insurance to leverage its capabilities? Will the new group be able to position itself as a provider of unique services and complete solutions? The second concerns the complex relations between a financial services company and insurance agents. The insurance agents are the key. In order for Clal Finances to make the whole greater than the sum of its parts, it must cooperate with the 1,300-odd insurance agents who work with Clal Insurance.
The branches and sales personnel of the distribution set-up are the key to success, Clal Gemel CEO Giora Sarchansky says. “The banks have been supplying inferior products to their customers in the provident, advanced training, and mutual funds for years, but they still have absolute control of the market.”
Sarchansky explained that marketing and distributing their products through their branches gave the banks an advantage over private concerns. Clal Finances' answer is the company’s insurance agents. “We have only begun to work in cooperation with the agents, but this channel is rapidly growing and expanding,” he said. At a conference for launching new products three weeks ago, Kaplan commented on the upcoming life insurance reform, saying, “We’ll have to lower our profit margins and commissions (on life insurance products, E.P.). At the same time, agents with their wits about them can even increase their income.”
Kaplan was referring precisely to this issue. An insurance agent who is hit hard by lower life insurance commissions will now be able to market a wide variety of products, from provident funds and mortgages to advanced training and pension funds. The selection of products will give the agent a competitive advantage over other agents in working with customers, provide him or her with another source of income, and create an effective distribution tool for Clal Finances.
”We give agents penetration commissions,” Sarchansky says. “The commissions are a given percentage of management fees” For insurance agents, regularly accumulating commissions, even if low, are the stuff of dreams. They provide agents with regular income in the long term, especially when they come from stable savings plans like provident, pension, and advanced training funds.
5. 2004 will be a breakthrough year for insurance and pensions. The combination of the reforms in life insurance and pensions will revolutionize the industry. It appears that Clal Insurance will start 2004 ready, strong, and with a clear strategy.
The quartet under Kaplan (executive VP Sammy Bassat - non-life insurance, Dan Kahal life insurance, Ronen Tov pensions, and Perel) gives Clal Insurance the tools to handle the anticipated changes. Clal Insurance’s profile life insurance products are expected to become the industry standard. The company is also on the verge of a breakthrough in pensions, with a strong brand the Atudot Pension Fund. With the launching of Clal Finances, the last piece of the jigsaw puzzle has now fallen into place.
Published by Globes [online] -l www.globes.co.il - on October 29, 2003