Harel in the Media

Finding the hidden value in risk


Insurance companies emphasize the sale of death "risk" policies to increase the potential value of new sales as part of their profit-based policies.
In recent years, investors in insurance companies have gained another tool to help assess their value. It is the embedded value (EV) report published by the companies, which is designed to measure the potential value of their long-term life and health insurance policies, as well as the value of their pension business.
The EV figure of insurance companies does not include the latent value of their non-life insurance business, or their financial services and provident funds operations, or their ability to create new business in the future (goodwill).
This time, we will focus on value of new business (VNB), which last year grew at four of the top five insurance companies - Migdal Insurance and Financial Holdings Ltd., Clal Insurance Enterprises Holdings Ltd., Harel Insurance Investments and Financial Services Ltd., The Phoenix Holdings Ltd., Menorah Mivtachim Holdings Ltd. - increasing by an average of 25% over 2009 (when it grew by 35.5% over 2008, so that the two-year growth was 69%).
In addition to the growth in the potential profit margins in the companies' new portfolio, as indicated by the VNB, for some time we have been hearing from the five companies that the life insurance market is competitive, together with a corresponding increase in their expenses, which strongly affect the VNB (as it rises it reduces the value of new business and in general). The 2010 VNB figure for Menorah is an example: due to higher expenses, its VNB was 15% lower than in 2009
How can this be?
This raises the question: if the market shows strong VNB growth due to improved profit margins, where is the fierce market competition and the heavy costs for implementing regulations? Where does the increased value of new business come from if the profit margins for long-term risk have not marvelously changed in these years (although Harel Insurance and Clal Insurance had higher expenditures in 2010) when the disability insurance market was considered as having low profit margins, if any?

As it happens, beyond the capitalization aspects, it seems that the reason lies in a change of thinking by the insurance companies about policies that are based more on profit margins and not just on a wish to increase sales. This means that the companies are increasing their risk sales (pure insurance in case of death), just as the five big companies recorded in 2010. This insurance, the VNB also indicates, is profitable.

An industry leader told us this week about the VNB of the big insurance companies that “in the world of insurance, there is room for improving the companies’ profit margins, and the private market is not saturated at all.” He added, “There is thinking about profit margins.”

This conceptual process is repeated at the five big groups and trickles down to the EV line in new the companies’ new business in 2010.

Another question now arises: Taking these market conditions into account, will the high VNB growth rates continue, or is the industry approaching the more normal condition of marginal growth, or even decline in some years? Another industry leader definitely thinks so. We are nearing a shallower curve in the VNB growth line, and the companies are rolling up their sleeves and beginning to compete with greater intensely in more profitable markets, while continuing to emphasize greater efficiency in sales with the objective of lowering their expenses.

VNB in millions of shekels


 2010 2009  2008 


 515 429  286 


466  349  229 


426  292  300 


242  284  204 


 190 119  68* 

* Excluding VNB of pension business
Cashing in with a twist?
Does the increase in the cashing in of life insurance policies as a proportion of the average reserves indicate the start of a trend of policy mobility from hand to hand by agents?

The insurance industry is a special industry whose results at any point in time are strongly affected by temporary external factors, beginning with capital market yields and changes in the Consumer Price Index. In contrast, a major part of the products that it creates (insurance policies) are for the long term. It is therefore difficult to judge the industry on the basis of quarterly financial reports, and it is sometimes even wrong to determine trends in the industry based on the results of one, or even two quarters.

Nonetheless, the first signs of trends or uncertain indications of current trends (potential) definitely exist. Some signs are ambiguous can be seen in the financial reports of the five big insurance groups for the first quarter of this year, the most important of which relates to the growth all five companies showed in the cashing in of life insurance policies. The growth is in both absolute terms and as a proportion of the average reserves.

In the first quarter, Migdal Insurance and Financial Holdings Ltd. reported an annualized cashing in rate of 2.4% of the average reserves. The rates at Clal Insurance Enterprises Holdings Ltd., Harel Insurance Investments and Financial Services Ltd., The Phoenix Holdings Ltd., Menorah Mivtachim Holdings Ltd. were 3.2%, 2.7%, 2.8% and 4.1%, respectively. The rates in the corresponding quarter of last year were 2.3%, 2.8%, 2.25%, 2.7%, and 3.9%, respectively.

At this time, we can even see that the rates at four of the five large insurance groups have returned to slightly higher levels than in 2009. However, we emphasize that the cashing in rates are still low, and it would be better to take a longer perspective on these companies.

How much? The financial reports of the five large insurance groups showed increases in the cashing in, while at the same time, we also hear from some companies that output of these companies has increased. This apparently means that a new trend is beginning of the transfer of policies from hand to hand within the industry, indicating that mobility by agents is rising.

“Not yet continental drift”
This is not necessarily a negative trend. Industry sources with whom we spoke said that, at the moment, this is felt at old capital policies which are receiving new secured down payments, and not the cashing in of policies in favor of private consumption. Currently, amounts total a few tens of millions of shekels, not “continental drift”.

In any event, as mentioned above, it is still premature to declare a trend, as only the results of one quarter are available. But is this a trend of increased transfer of money by agents (which is also reflected in commissions)? Is there an increase in the movement of current polices from one company to another at the initiative of insurance agents based solely on consideration of commissions, in a way that might resemble the “twisting” era, heaven forbid?

In any event, if this is the start of a cashing in trend, it is important to verify that this is not a too extensive movement of policies motivated by commissions, but only for the good of the customer. For the insurance companies, this might imply a change in direction, after several years of declines in the cashing in of policies, and this will have an effect on the companies’ profit margins as well as on their embedded values (EV). Time will tell if a trend has in fact begun, or if this is a quarterly spike that signifies nothing.


Cashing in, as a percentage of reserves (annualized)

 Company  1st quarter 2011   1st quarter 2010  Full-year 2010    Full-year 2009
 Harel   2.4%   2.3%   2.2%   2.5%
 Clal   3.2%   2.8%   2.7%   3.0%
 Migdal   2.7%   2.5%   2.3%   2.5%
 Menorah   2.8%   2.7%   2.5%   2.8%
 Phoenix    4.1%    3.9%    3.8%    3.8%


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