The first quarter of 2018 was not a good one for Israel's large insurance groups. Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) posted a NIS 32 million loss in the quarter, compared with a NIS 308 million profit in the first quarter of 2017. Menorah Mivtachim Holdings Ltd.'s (TASE: MORA) profit plunged 73% to NIS 15 million in the quarter.
What caused this drop in profit? Migdal explains in its reports, "Low interest rates are having a substantial effect on both the return for the group's customers and the group's profits, including the group's insurance liabilities." Migdal adds, "Following the strong fluctuations in the interest curve in 2017, during which the curve fell in comparison with the end of 2016, fluctuation in the interest curve continued in the first quarter of 2018, compared with the fourth quarter of 2017."
The result was a rise in Migdal's insurance reserves at the expense of its profits. Furthermore, revenue from investment also fell in the first quarter as a result of lower capital market prices, especially in the stock market, which also pushed down profits. This is also likely to affect the other major insurance groups, depending on the composition of each one's business. The Winograd Committee's recommendations for liability insurance had a negative impact on the insurance groups' results in the first quarter of 2017.
"Migdal's loss no surprise"
Migdal reported a 5% rise in premiums and fees, which totaled NIS 5.5 billion, thanks to a similar increase in long-term savings, higher premiums in general insurance following Migdal's win in a tender for auto insurance for state employees for 2018, and a 14% rise in health insurance premiums.
At the same time, Migdal Capital Markets' revenue from financial services dropped 8% to NIS 37.2 million in the first quarter, and its pre-tax profit was NIS 1.2 million, compared with NIS 5.6 million in the first quarter of 2017.
Migdal's main source of profit is insurance branches, especially the long-term savings sector. Due to interest rate volatility and the capital market results, which had a negative impact on profits from investments and revenue from variable handling fees and in general, pre-tax profit in the long-term savings sector was down sharply from NIS 402 million in the first quarter last year to only NIS 1.4 million in the first quarter of 2018.
Migdal lost NIS 20 million on general insurance in the first quarter and also lost money on health insurance, albeit much less - less than NIS 4 million. Migdal is in the midst of replacing its top executives; Doron Sapir will replace Ofer Eliahu, the son of the company's controlling shareholder who resigned because of tense relations with his father, as CEO in early June.
Leumi Capital Markets Israeli shares desk manager Eyal Debi described Migdal's loss as "minor" and "no surprise." He added, "At times when market prices are declining, insurance companies cannot be judged on the basis of their profits." He explained that they should be assessed on the basis of revenue, which is "critical for insurance companies, because this covers up for the erosion of underwriting profits in recent years." He concludes: "The bottom line may look bad, but this was certainly expected, so as long as the top row goes on growing, we don't attribute too much importance to a loss in the first quarter."
Menorah Mivtachim grows in pensions
Menorah, managed by CEO Ari Kalman, reported that its premiums and fees grew 14% to NIS 5.9 billion in the first quarter. The company made a profit in long-term savings and lost money on life insurance. Its pre-tax profit from general insurance rose 60%, while the company lost almost NIS 30 million on health insurance as a result of higher reserves, despite growth in premiums.
Menorah, the new pension market leader, posted a NIS 36 million pre-tax profit on pension business in the first quarter, compared with NIS 27 million in the corresponding quarter last year. Most of the increase came from higher management fees, primarily as a result of an increase in the volume of managed assets. Menorah sold its financial services business, and currently has a minority holding in Altshuler Shaham Mutual Funds Management.
Ayalon Holding Ltd. (TASE: AYAL), a smaller insurance company managed by CEO Arik Yogev, also experienced a drop in profit in the first quarter. The company's premiums increased by less than 1% to NIS 912 million, due to lower general insurance premiums, offset by life and health insurance.
Ayalon lost money on long-term savings and life insurance, as well as on its minority holdings in pensions and provident funds, which are managed by Meitav Dash Investment House Ltd. Ayalon did make a profit on health and general insurance, but barely half as much as last year.
In the bottom line, Ayalon, controlled by Levy Rachmani, made a NIS 15.8 million overall net profit in the first quarter, 19% less than in the corresponding quarter last year. This includes a NIS 7.2 million first quarter profit on the sale of its holdings in its investment house. The company had a one-time NIS 10 million profit net of tax in the first quarter of 2017 from the settlement of a derivative lawsuit.
Published by Globes [online], Israel business news - www.globes-online.com - on May 29, 2018
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