Quietly, without fanfare, and at a time when the entire economy has undergone economic, political, and security upheavals, Menora Mivtachim Holdings Ltd. (TASE: MMHD) is ending 2023 on a high note. The group, which until recently was the smallest of the Israeli insurance sector’s five biggest companies, now ranks third in terms of market cap (NIS 5.5 billion), surpassing Migdal and Clal - the sector’s largest companies during the past decade - by NIS 1 billion.
Those who believed in the company and invested in Menora Mivtachim shares at the beginning of the year have seen a handsome return on their investment. In fact, compared with the competition, this is the highest return by a considerable margin. From January until Tuesday, Menora Mivtachim's share price leapt sharply by more than 34%. By comparison, The Phoenix Holdings, the sector’s largest insurance group in terms of market cap and assets, rose by 1% during this period, and Migdal by about 7.5%.
Since the beginning of the year, the same investors have also benefited from NIS 175 million in dividends. In the first nine months of 2023, Menora Mivtachim posted a comprehensive profit of NIS 534 million (post tax), the highest in the industry in this period. In the third quarter, Menora Mivtachim also hit an insurance sector high with a NIS 270 million profit, meaning an annualized return on equity (ROE) of 12.1% for three quarters, and 18.3% ROE in the third quarter alone.
"Oftentimes, when a stock shows such a high return, we praise the performance but note that the economic window has closed, and the opportunity is over," wrote Eyal Dabby, director of micro research at Leumi Capital Markets in a report issued to clients. "So, this is exactly the point: despite the vast improvement in value, we continue to claim resolutely that Menora Mivtachim is still an excellent investment today." Dabby added, "This is our most preferred insurance stock".
However, since this is a company with a controlling interest, those who benefit from the bulk of the profits are the majority shareholders, the Gurvitz and Griffel families, who own 63% of the company.
So, how did a company that was founded almost 90 years ago and which hasn’t made too many waves since, get to this high point?
A family business with stable management
Menora Mivtachim is one of the oldest insurance companies in Israel. It was founded in 1935 during the British mandate, as a private company called General Liability Office. In 1982, it was taken public by then-owner David Hirschfeld, whose son-in-law, Ari Kalman, is the current CEO of Menora Mivtachim Holdings.
And here is one of the key factors that make Menora Mivtachim a strong company: stable management of both the insurance company and the public holding company. The Gurvitz and Griffel families are the owners; their direct offspring and other relatives have served in the company’s most senior positions for many years, like competing insurance company Harel, which is controlled by the Hamburger family. The chairman of the board of directors of the holding company is Eran Griffel, who is married to Tali, daughter of the late controlling owner Menachem Gurvitz. Ari Kalman's son, Michael, was appointed CEO of the insurance company at the beginning of 2023, and is one of the main people responsible for its growth in recent years.
The family nature of Menora Mivtachim's management has proven itself, but may also be quite a headache in the future. The fact that the children and their spouses are managing it successfully at present, does not guarantee that this method will be successful in generations to come. History has shown that far more family-owned companies become embroiled in difficult and bitter conflicts, than companies with fewer emotional ties.
Along with the family members, it is impossible to ignore the CEO who preceded Kalman, Yehuda Ben Assayag, who in five years transformed Menora Mivatchim from a company that the industry did not think could compete with Migdal and Clal, into a powerful force that left the two behind.
Profiting where the competitors lose
Menora Mivtachim was apparently the first to prepare in advance for the large losses that car insurance has inflicted on insurance companies in recent quarters. (In the first nine months of 2022, the aggregate loss in the car insurance sector was NIS 1.3 billion). Menora Mivtachim therefore managed to come out ahead of everyone else by moving to profit in this area. As reported by "Globes" last week, Menora Mivtachim was the only company that posted a profit in the first nine months of the year in property damage liability insurance for vehicles (comprehensive and third party), with a profit of NIS 63 million, and also posted the largest profit, NIS 71 million, on compulsory vehicle insurance.
Menora Mivtachim identified macro developments in the Israeli automobile market, such as the increase in thefts, and made sure to manage underwriting correctly. For example, the company focused on specific types of vehicles, gave others a miss, and invested in high-quality insurance agents.
But 2023 hasn’t been the only strong year for Menora Mivtachim. A look at profits from property vehicle insurance of the five largest insurance companies since 2018, (and until the end of the third quarter of this year), reveals that Menora Mivtachim recorded a cumulative profit of NIS 452 million during this period. The competition lags by a considerable margin: Migdal with NIS 75 million, Harel with NIS 26 million, Phoenix with NIS 20 million, and Clal even recorded a NIS 64 million loss. Menora Mivtachim accounts for some 90% of the profits on property vehicle insurance during this period.
"Profitability from underwriting activity jumped significantly. Looking at the underwriting profit in the third quarter, it's hard not to admire the result - a 60% increase (in all activity, R.W.) compared with the corresponding period," Dabby wrote in his survey of Menora Mivatchim. "What is interesting, and no less important, is the fact that improvement was recorded across the entire sector, with the exception of the health sector, where erosion of profitability characterizes the entire industry, and also there was no significant exceptional income in the current profit. In general insurance, (car, home, liability, etc.) the sharp rise in profit amounted to growth of 128% compared with the third quarter of last year. Understandably, these high growth rates are the result of zero profitability in the property vehicle industry in the corresponding period, but there was also growth of tens of percent in liability, and other areas."
Acquisitions aside from insurance
Menora Mivtachim probably saw, along with the rest of the industry, The Phoenix’s transformation in recent years, as it went from being an insurance company to a financial group. Menora Mivtachim realized, as did the other insurance companies, that dependence on the volatile capital markets weakened them, and expansion into other sectors was needed.
Aided by a range of subsidiaries, the company currently engages in additional activities that are not those of traditional insurance companies, such as providing retail credit, check discounting, financing small and medium-sized businesses, and investments in the real estate and the solar energy sectors.
In the business credit sector, Menora Mivtachim owns 70% of ERN, and has a stake in Ampa Capital. In the third quarter of last year, when capital markets plunged sharply, the insurance group's takeover of credit company ERN brought Menora Mivtachim a NIS 158 million profit, while companies such as Harel and Migdal recorded millions in losses.
Menora Mivtachim - like Clal which acquired credit card company Max, and Harel, whose purchase of Isracard has been delayed due to opposition from the Israel Competition Authority - realized that this was an area that could generate high revenue even in times of economic crisis. Menora Mivtachim competed with Harel for the purchase of Isracard, and even valued it higher at NIS 3.5 billion compared with Harel's NIS 3.3 billion, but since its offer was only for control of Isracard, the shareholders preferred Harel's offer to purchase all the shares. This does not mean that Menora Mivtachim has abandoned the idea of acquiring a credit card company, and it is possible we will see the company vie to purchase CAL when it is put up for sale by Israel Discount Bank in the coming years (unless the bank prefers to take CAL public), or even try again to acquire control of Isracard, should Harel’s acquisition bid fail.
Last year, Menora Mivtachim agreed on a partnership with IBI Investment House in subsidiary IBI Quality, which provides reverse mortgages, and this year reached an agreement with Direct Finance in which the latter will allocate 15% of its subsidiary Mimun Yashir Real Estate to the insurance group (which also received an option to increase the investment by an additional 4.99%). So, it seems that the company has not yet closed the chapter on loans and financing.
At the same time, as mentioned, Menora Mivatchim invests in diverse fields such as solar energy. Just last year, for example, together with Paz, it invested $325 million dollars in a photovoltaic project in Texas, and owns almost half the shares. This year, it realized an investment in a solar project in Spain with millions of dollars in profits, and a 25% annual return (in partnership with Clal, Helios Energy Investments, and Caesarea Holdings).
At the beginning of the year, Menora Mivtachim entered another promising field: logistics centers. It announced it was investing in Nadav B. Logistics, owned by businessman Nadav Balila, at about a NIS 300 million valuation (after money), becoming a 49% stakeholder.
The pension fund changed everything
On September 2, 2004, Israel’s insurance industry was shaken to its very core. Menora, the fifth largest insurance company at the time, purchased the largest pension fund at the time, Mivtachim, for NIS 710 million.
In 2004, the amount of the transaction was almost double the early valuations, but today it is clear that this was an extremely profitable investment that allows Menora Mivtachim to control about 30% of pension fund assets in Israel - NIS 210 billion in assets under management.
The company's total profit (pre tax) from the pension business in the first nine months of 2023 amounted to roughly NIS 136 million, up 11% compared with the corresponding period last year. In the third quarter alone, it was about NIS 52 million, an increase of about 30% compared with the corresponding quarter last year. Together with all long-term savings activity (provident funds and executive insurance), the underwriting profit in the sector in the first nine months of the year was NIS 317 million.
Off-limits areas
Along with entering profitable areas of activity, it is just as important to know where not to tread. Regarding Menora Mitvtachim, there are mainly two that have become albatrosses around the competition’s necks in recent years: executive insurance and the long?term care insurance.
Menora Mivtachim has a relatively small portfolio of executive insurance. For some of these policies, the insurance companies are required to pay an annuity even at the end of the pre-defined period, and they are obliged to set aside amounts for these insurances in the profit and loss statement due to future obligations.
As for long-term care insurance, Menora Mivtachim's portfolio is also relatively small. Therefore, the area that had become a loss-maker (due to the increase in claims, and longer life expectancy) impacted it less than its competitors.
Published by Globes, Israel business news - en.globes.co.il - on December 21, 2023.
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