The insurance sector has become one of the main drivers of the rises on the Tel Aviv Stock Exchange in the past six months. The sector index has risen by 84% in that period, more than three times the rise in the flagship Tel Aviv 35 Index. The strong financials released by insurance companies, showing huge profits for last year, provide an explanation for the recent rises in their stock prices.
Four of the largest insurance companies in Israel published their 2024 results last week. Migdal and Clal Insurance reported a comprehensive profit for the year of NIS 1 billion each, double and treble their profits for 2023 respectively. Menora Mivtachim reported a comprehensive profit of NIS 1.25 billion (up 75%), and The Phoenix reported a profit of NIS 2.1 billion, almost double the profit in the previous year.
But while two of the companies, The Phoenix and Menora Mivtachim, saw their stock prices rise by over 5% on the day they released their financials, pulling the entire sector upwards, Clal and Migdal each fell by more than 6%.
Timing, and a little luck
So why was the market enthused by The Phoenix and Menora Mivtachim’s performances, and disappointed by Migdal and Clal? Part of the explanation lies in the general momentum on the day each published its reports, or in other words, luck. The Phoenix and Menora Mivtachim benefitted from the fact that they published last Thursday and on Monday, respectively, before the resumption of hostilities in the Gaza Strip, when the local market still felt optimistic and stocks rose.
Clal, on the other hand, released its financials on Tuesday, the morning after the IDF’s surprise attack in the Gaza strip, which ended the ceasefire. The Tel Aviv 90 Index responded with a 2.4% fall, after rising by more than 35% in the six months up to then. Migdal reported on Wednesday, also during an IDF operation in the Gaza Strip. "It’s psychology," a market source said, "When you release financials in a falling market, you take a worse hit."
That explanation is insufficient, however, since the other insurance companies were not "infected" by the sharp falls in Clal and Migdal. On Wednesday afternoon, for example, The Phoenix and Menora Mivtachim were up by about 1%, while Migdal fell 7%, and Clal fell a further 4% after its sharp fall on Tuesday.
Migdal’s dependence on the capital market
Market sources who spoke to "Globes" all pointed to the same reasons for the enthusiasm at Menora Mivtachim and The Phoenix’s financials, versus the disappointment at those from Clal and Migdal. As one of them said, "The financials of Clal and Migdal, which were good in themselves, only highlighted the gaps in performance and sharpened the advantages of The Phoenix and Menora, which are characterized by higher profitability, and which are in the right market segments: general insurance and pensions, while at The Phoenix, in addition, there is the company’s dominance in credit (through subsidiary Gama, N.A.), insurance agencies, and financial asset management (through investment house Excellence, N.A.).
"These two are also less involved in segments considered problematic, such as health and life insurance," the source added. At the end of the 2020s, all the insurance companies exited private nursing care insurance, which is a part of health insurance, and the segment is on a run-off track.
The nursing care insurance provided by the health funds is also in difficulties. Only recently the fear arose that those insured by the Clalit fund would be left without cover.
Another source said, "The market understands that at Migdal, for example, most of the fourth quarter profit derived from the rise on the stock market. Migdal is very dependent on returns in the capital market, and so if the market takes a downturn, it will be hurt, and that goes into the pricing." In the case of Clal, the source says, "Despite the good financials, if I have to choose between a lower-priced company and a company that in my view is superior quality, I’m prepared to pay a premium for the quality company. I will therefore prefer The Phoenix and Menora."
Return on equity
When we asked the sources about gaps between the different companies’ numbers, they referred us to the return on equity that each of them generates, an accepted metric in the financial services sector. While Clal and Migdal had returns on equity of 11-12% last year, The Phoenix and Menora Mivtachim reported much higher returns, of 19% each, on the basis of the old accounting standard (IFRS 4), and that’s a very significant gap.
The Phoenix’s guidance was also seen as better. "The Phoenix set a return on equity target of 16-17% under the old standard, which translates to 20-22% under the new insurance industry standard (IFRS 17, N.A.), but at Clal it will be only 12-15% under the new standard," a market source said. "The market was disappointed by Clal, and expected more, because it’s clear that under the new standard, which brings recognition of profits forward, their return ought to jump."
Moty Citrin, head of financial institutions and structured finance at rating agency Midroog, adds, "Investors look first and foremost at return on equity. In that respect, Clal and Midgal lag behind the other large companies, because their portfolios contain a substantial component of executive insurance. That product is in run-off and does not generate profits, and is expected to weigh on the insurance portfolios of both companies until it expires. By contrast, it is noticeable that in the financial statements of Menora and The Phoenix, most of their portfolios rest on non-life insurance, where premiums grew by an average of 30% last year. It’s a cycle. In my view, we are currently positioned close to the peak, which translated into high profitability in the sector, and comes more strongly to the fore in the financials of Menora and The Phoenix."
Migdal Group CEO Ronen Agassi says however that he is pleased with the results. "Our core activity was much better than in the previous year, a profit of nearly NIS 900 million with no special cause, with profit on regular activity basically double that of the previous year. In our planning, we planned to improve underwriting profit to NIS 950 million in 2027, and happily it happened even sooner. We closed the management fees hole that we had of about a billion shekels, and even collected variable management fees of NIS 130 million."
Nevertheless, Agassi admits that the profit was very much impacted by "investment profit that was positive thanks to the rise in interest rates - our assets are exposed to interest rate changes - and the fourth quarter was particularly strong." Looking ahead, he tries to encourage investors, and declares that the company has advanced another stage towards approval of a dividend distribution. "We think it will happen in 2027, in accordance with the plan. Of course we’d be delighted to be surprised if it comes sooner."
Published by Globes, Israel business news - en.globes.co.il - on March 20, 2025.
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