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The reforms that allow for mobility between pension savings plans, instituted by Yadin Entebbe, the Finance Ministry's capital market and insurance supervisor, are gaining momentum, and the capital market is starting to respond accordingly. These reforms are intended primarily to make it easier for executive insurance policy holders to switch to better and less expensive pension plans. The reforms are also expected to result in lower management fees in the existing insurance plans.

Last Wednesday, Entebbe published an updated draft of the mobility regulations. Alon Glazer, of Leader Capital Markets, one of the brightest and most successful analysts in the market - even according to a survey conducted by TheMarker magazine among institutional investors - issued an interesting update on Sunday concerning the effect of the reforms on the worth of the insurance companies.

Glazer explained that the current draft was published after an examination of comments offered by the insurance companies, and its publication was accompanied by a declaration by Finance Minister Abraham Hirchson that the regulations will soon be put into effect.

Closing the gaps

Glazer explains the impact of the mobility regulations on the value of the insurance companies.

Transfers by existing clients: The main risk for the insurance companies is that existing clients will switch from life insurance plans to pension plans. The profitability of insurance policies (mainly old policies) is much higher than that of pension plans, and if clients switch to pension plans or provident funds, this could result in significant declines in the insurance companies' future profits.

Even so, Glazer figures that ultimately, not many policy holders will switch to other plans, for two main reasons: It is not worthwhile for holders of life insurance policies opened before 2001 to switch (because the terms are better, since mortality tables were updated in 2001), and inertia and lack of knowledge among policy holders will result in most of them leaving their policies as they are.

Client retention: Insurance companies will have to invest in client retention by offering improved policy terms (including lowering risk premiums, which are the most profitable part of the policies). This will result in a certain reduction in profitability even if clients do not switch.

Significant decline in differentials: The fact that from now on clients will be able to switch from one savings instrument to another will probably lead to a significant closing of the gaps between the various instruments. Glazer, in fact, says he believes that within a few years, the differences in the long-term savings instruments will be minimal.

Effect on the embedded value: There is no doubt that the companies' embedded value (E.V.,the actuary value of the existing life insurance portfolio), due to be published next year, will be affected by the changes, and the capitalization price used by the companies will likely be higher. This will have a direct impact on the value of the insurance companies.

Increase in the pension companies' assets: Glazer predicts that the mobility regulations (along with the entry of the banks into the pensions sector) will lead to increased assets for the new pension funds. These funds are already growing by about 25 percent a year, and he believes this growth will intensify. How badly will the value of the insurance companies be affected?

Glazer says that the new regulations undoubtedly harm the insurance companies' value, since most of their value stems from the old insurance portfolio, which is currently at risk.

"Even if the lion's share of the money is ultimately not moved," writes Glazer, "the harm to the embedded value, the need to retain customers, and the fact that the regulator has flagged pension products as preferable for the public, will all hurt the value of the existing portfolio, as well as future activities."

Less attractive

Glazer claims that all the insurance companies will probably suffer from the new regulations, with the worst hit being Migdal, which is a life-insurance heavy company.

The least affected will likely be Menora, which may even benefit from the new regulations. Glazer explains that Menora, which controls about 45 percent of the pension plan market, is expected to be on the benefitting end of the policy switches.

The company, he notes, has even publicly expressed support for the mobility regulations.

"The brand, and the good returns by Mivtachim and Menora, will attract a large share of the monies that will be transferred to pension funds," says Glazer.

Glazer continues to recommend relatively low holdings in the insurance sector, writing: "We believe that the new regulations, along with the anticipated harm to the performance of the insurance sector in general (mainly the compulsory auto insurance industry) in 2007, will reduce the attractiveness of shares in this sector."

Leader's forecast for the insurance shares favors Menora and Clal (which has less exposure to life insurance and is expected to benefit from the floating of Clal Finances).