The embedded value reports’ figures recently published by the insurance companies indicate that the market is pricing Menorah Mivtachim on the basis of its current results, and less on the basis of its future potential.
Close to the publication of the financial reports for the first quarter, the insurance companies also published their embedded value (EV) reports. Each insurance group presents in this report the total value of its life insurance, health insurance, and pensions activity on the basis of the shareholders’ equity and the capitalization value of future profits of these operations, as of the end of 2010.
All the insurance companies reported EV growth. The most interesting figure is that of Menorah Mivtachim Holdings Ltd., which reported an EV of NIS 6.5 billion – close to the EV reported by Harel Insurance Investments & Financial Services Ltd. and higher than the EV of NIS 5.2 billion reported by The Phoenix Holdings Ltd. This is the vase even though Menorah Mivtachim is traded on the Tel Aviv Stock Exchange (TASE) at a lower market cap than Phoenix and substantially lower than Harel’s market cap.
“Not waiting for the future”
An examination of the EV multiple, i.e. the ratio between each company’s market cap and its EV, shows that Harel is traded at the industry’s highest EV multiple – 0.57. The biggest surprise is Menorah Mivtachim, which is traded at an especially low EV multiple of 0.38. The figures show that, despite the high EV presented by Menorah, the market values the company at a lower amount. Even after the EV was published, the market cap on the TASE did not change.
DS Brokerage analyst Meir Slater says attributes this to Menorah Mivtachim’s current results for both the first quarter of 2011 and in 2010, which were not as good as the results of all its competitors, with the exception of Clal Insurance Enterprises Holdings Ltd., because of the reinsurance business of its subsidiary Broadgate Underwriting Ltd., which was affected by a series of natural disasters.
“In addition to the large NIS 14 million fine levied by the Supervisor of Insurance, Menorah also had a lot of expenses. The company has few agencies, and it recently hired a lot of people to help its distribution. This immediately increased expenses, whereas substantial revenue from the measure will only arrive in a few years. The market prefers to focus on the current expenses and not wait for the future,” he says.
Evidence of Menorah’s heavy expenses can be seen in another important figure published by the companies in their EVs: the value of new business (VNB). The figure reflects the total value of sales of new policies during 2010, capitalized to the end of the policy period. The figure refers to three businesses – life insurance, health insurance, and pensions – and it dies not refer to other activities, such as the sale of non-life insurance policies.
Menorah Mivtachim is the only company that reported a drop in its VNB. While all the other insurance companies showed 20-60% growth in their VNB, Menorah’s VNB fell 15% to NIS 242 million. In general, the sharp VNB growth by the companies was due to steady growth in pensions and health insurance, and from more extensive operations in risk insurance – pure insurance in case of death without a savings component. Risk insurance is considered more profitable for the companies.
In absolute terms, Harel had the largest VNB growth, even though it is only the third largest company in the insurance industry. Harel’s VNB was NIS 515 million in 2010, compared with an VNB of NIS 426 million and NIS 466 million for Migdal Insurance and Financial Holdings Ltd. and Clal Insurance, respectively.
“We’re very proud of our VNB, which demonstrates how we are able to grow in all sectors. Even though we manage a smaller platform than the other companies, we succeeded in created higher new value this year compared with all the other companies,” Harel EO Michel Siboni told “TheMarker”, in response to the surprising figure.
The EV report, which the insurance companies are required to publish by the end of the first quarter of each year, is based on the companies’ internal and undisclosed figures with regard to their operations, and, together with the VNB, it therefore has priority of figures in the financial reports for analysis of an insurance company’s business. Analysts use the report’s figures to more accurately assess the value of an insurance company. Nonetheless, because of too low capitalization rates, on the basis of which the figure is calculated, analysts who use it tend to reduce it by 50% or more.
Menorah is underpriced
EV and VNB at the insurance companies, for 2010, in millions of shekels
| EV multiple**
* Including Dikla Insurance Company Ltd.
** market cap/EV ratio