Why Avigdor Kaplan Broke His Word

Avigdor Kaplan, the CEO of Clal Insurance (TASE: CLIS), doesn't need his horn trumpeted.

He's one of the most powerful and esteemed executives in the Israeli marketplace. To prove the point, he?s the only CEO who's managed to publicly make Nochi Dankner cry uncle, forcing the owner of the mighty IDB group to retreat from his plan to plant a chairman to whom Kaplan would have had to answer.

But strong as he is, Kaplan would hate to lose the reputation of having a word of gold.

With all the due respect that everybody has for Kaplan, his word isn't what it used to be. Ten months ago Kaplan gave Bank Discount his word: he agreed to buy its provident and mutual funds. But in those ten months, the provident funds market has turned mighty cold, the mutual funds have suffered from tremendous withdrawals, and Kaplan's ardor to complete the deal, as agreed on, has vanished.

So Kaplan recently demanded that Bank Discount give him a serious discount on the agreed-on price, and if not, the deal was off. As of this week, his threat stands.

You can count on Kaplan, who has a degree in law, to be sure that his demand for a discount does not breach the terms of the contract. Lawyers work hard to assure these fine points.

For economists, life is much simpler. Ten months ago Kaplan, backed by Nochi Dankner, agree to buy Bank Discount's provident and mutual funds. Today, probably with Dankner's backing again, he's reneging. The lawyers can call it what they like, but economists see it as Kaplan breaking his word.

We can assume that the fact that Kaplan heads one of the strongest financial bodies in Israel, and enjoys the support of the owners (Dankner), makes the shift easier. Only a body like Clal Insurance could afford to clash with Bank Discount. Yet even Clal Insurance, and distinguished businessmen like Kaplan and Dankner, don't like being perceived as fickle. Nobody would endanger their good name like that - unless they felt they had no choice.

What happened to force the Clal Insurance leaders to pirouette backwards? Two things, that boil down to one.

The one is the gigantic withdrawals from the mutual funds since the banks struck deals to sell their funds to the insurance companies. Ilanot Discount alone, which Clal Insurance is supposed to buy, lost NIS 4 billion in assets, or 29%.

The banks shrug and say that is what unbiased advice delivers. The insurance companies are convinced that the banks are sabotaging the mutual funds.

The insurers feel that the attack on the mutual funds is a precursor to the real assault, on the provident funds, and that battle will start when the banks start providing pension advice at the start of 2007. The billions that evaporated from the mutual funds will pale compared with the billions upon billions that the public will withdraw from provident funds, once the banks start dispensing advice on pension funds and life insurance programs, and once savers are allowed to move their money freely.

And that is the real problem that Kaplan and Dankner face: mobility.

The one thing that has really changed since Kaplan agreed to buy Bank Discount's provident funds is that the treasury's insurance commissioner promised that savers would be able to withdraw life insurance monies and move them to pension funds.

Clal Insurance is Israel's second biggest life insurance provider, and has a relatively small pension fund. It is more vulnerable than the other insurance companies to mobility. Clal Insurance knows it will have to invest every shekel it ha to protect its life insurance policies, and that means offering clients fat discounts to stay put. It is doubtful whether Clal Insurance has the energy and the means to mess around with protecting provident fund assets as well. That is reason enough to break one's word in public, and also attests to how well long-term savings mobility will serve the public.