Longer life expectancy wipes NIS 2.3b off insurance co profits

Pensioner  credit: Shutterstock/Goran Cakmazovic
Pensioner credit: Shutterstock/Goran Cakmazovic

The Phoenix was the only major Israeli insurance company to post a second quarter profit, while Migdal posted the largest loss.

The insurance companies did predict losses in the second quarter of this year because of the revision to the mortality tables by the Capital Markets, Insurance and Savings Authority in June, but the decline on the markets caused much greater aggregate losses than expected. The five largest insurance companies in Israel - The Phoenix Holdings, Harel, Migdal, Clal, and Menorah Mivtachim - posted an aggregate loss of NIS 1.87 billion for the second quarter, and of NIS 581 million for the first half year.

A large proportion of the second quarter losses is due, as mentioned, to the raising of the life expectancy of insurees from 78 to over 80, obliging the insurance companies to make provisions that will ensure their ability to meet their commitments to their customers.

The main effect is on executive insurance policies that promise those who save with them a pre-set pension coefficient. To calculate the monthly pension payment, the insurance companies divide the sum accumulated by the saver up until the retirement date by the coefficient, and the result is the guaranteed monthly payment.

Thus the lower the coefficient, the higher the payment. For example, an insuree who has saved NIS 1 million and has a coefficient of 200 months will receive a monthly payment of NIS 5,000.

The problem is that the insurance companies have to pay the same monthly amount even if the insuree lives longer than the period in the coefficient. For example, if the coefficient is 200 months (in the past there were even lower coefficients), i.e., 16.6 years, but the insuree lives longer than that after the retirement date, say twenty years, the insurance company will have to continue paying the same amount every month for a further 3.4 years, and that money will come off its profits.

Accordingly, as the Capital Markets, Insurance and Savings Authority’s life expectancy figure rises, the companies have to provide more money to meet their future liabilities. In 2013, the guaranteed coefficient in executive insurance policies was abolished, which made the product much less attractive, but the companies are of course still committed under the policies issued before that date.

The current revision to life expectancy resulted, as mentioned, in one-time provisions in the insurance companies’ financial statements for the second quarter of 2022, which were particularly high for the companies with pension portfolios containing the highest proportion of pre-2013 executive insurance policies, namely Migdal and Clal.

Migdal made a provision of NIS 923 million in the second quarter on account of the revised mortality tables, which is almost 40% of the NIS 2.23 billion aggregate provision by the five major companies. Clal’s was the second highest provision, at NIS 627 million. Migdal CEO Sagi Yogev told "Globes, "To the best of the company’s understanding, this is a matter of a one-time provision that will not recur in the coming years, and, as they say, there are few instances in which there are disadvantages of scale."

Accordingly, Migdal and Clal posted the biggest quarterly losses: NIS 1 billion and NIS 510 million respectively. Harel also posted a large loss for the second quarter, of NIS 436 million, despite a provision on account of the updated mortality tables of only NIS 280 million.

The insurance companies were also hit in the first half of the year, and particularly in the second quarter, by the sharp falls on the capital markets. Migdal and Menorah Mivtachim are the only companies to have published figures for losses due to those falls. They amounted to NIS 1.3 billion for Migdal and NIS 815 million for Menorah Mivtachim.

Apart from the direct damage from the fall in value of investments, the decline on the capital market meant that the insurance companies could not collect variable management fees on with-profit policies. The consequent "hole" was an aggregate NIS 2.6 billion for the five major companies. In July and August, the companies have achieved positive returns, but they still have a lot of work to do before they can go back to collecting variable management fees.

The Phoenix Holdings was the only one of the major insurance companies to post profits for the second quarter and the first half, of NIS 184 million and NIS 537 million. Menorah Mivtachim came next, with a small loss of NIS 7 million in the first half, its second quarter loss being NIS 97 million, while, as mentioned, Migdal recorded the largest losses.

Published by Globes, Israel business news - en.globes.co.il - on August 31, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Pensioner  credit: Shutterstock/Goran Cakmazovic
Pensioner credit: Shutterstock/Goran Cakmazovic
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