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To grasp what damage the La Nationale affair wreaked on The Israel Phoenix Assurance Company (TASE: PHOE), and on the entire insurance sector, we have to look at the value of Israel's five biggest insurance companies.

At the start of the 1990s, Phoenix was aiming to become Israel's biggest insurance company. La Nationale was merely a bitty grand-daughter company at the edge of its business. Phoenix meant to leave Migdal Insurance (TASE: MGDL) and Clal Insurance (TASE: CLIS) gasping in its dust.

If only the phenomenon profits that La Nationale had reported for the first years of the 1990s had been real..

In those years, the insurance industry stood slack-jawed before the performance of little La Nationale and its charismatic leader, Dr Moshe Pereg.  In the gay years is 1993-1994, almost every day La Nationale reported some major business deal.

Pereg was ambitious: not for him the sale single policies: he wanted big deals. With the union of garage workers, the diamond merchants, and meanwhile the two main insurance agents - one of which was Meir Shamir (yes, the man who today owns Mivtach Shamir Holdings (TASE: MISH)) - were signing deal after deal with kibbutzes and pension funds too.

The Magen pension fund was one of them. There, La Nationale and Meir Shamir used the names of kibbutz members who had died, according to an inquiry by CPA Boaz Yifat, which exposed the affair and led to the arrests of Pereg and Shamir.

Later Shamir managed to escape charges under circumstances that never were clear.

While everybody in the sector talked of long-term investments, Pereg sniggered. "The long-term consists of 50 short terms," he said. "I want to make money in 45 of them."

His idea was to bring the reinsurers abroad as many "names" of insurance customers as possible, for the company and its star agents to receive the fat fees for the initial sale of policies, to present high profits, and based on that profit - to raise money from the public.

In 1995 it turned out that the deals had been signed in advance for short terms, of about three years, and were canceled after the company and the agents received their share of the pie.

The one financing the baking of the pie never had a chance to taste it: the reinsurers, and the public of investors who bought La Nationale stock.

In the years since the affair's exposure, the Phoenix group sank into a long, painful process of rehabilitation. The La Nationale chairman and CEO of the parent company, Bar Kochva Ben Gera, led the curative effort, maybe as punishment for the scam going down right under his nose.

The rehab included compensation for the reinsurers, a settlement in the class action motion of the shareholders against the company and its managers, and leading a legal battle that ultimately spared charges against the Phoenix owners - Joseph Hackmey, Ben Gera, and Prof Haim Ben Shahar (who had been in charge of the La Nationale management committee).

The cost was that Phoenix completely lost its way.

Pereg's short-cut, backed by the Phoenix controlling shareholders, was designed to make the company the leader in its field, and the most profitable. All it achieved was to leave Phoenix in fifth place.