Taking Stock / Right Gamble, Wrong Horse

Since the beginning of the year the Tel Aviv-100 index has risen 11.5 percent, and needs just 1 percent more to cross the 600-point benchmark. The Maof-25 index, which tracks the movement of the 25 weightiest companies, needs more than 7 percent to get there.

Looming above the two is the index of industrial companies, which by virtue of the legendary Teva Pharmaceuticals has reached 830 points. Yes, industry was the winning gamble of the decade since the Tel Aviv Stock Exchange indexes were calibrated to 100 points.

There is only one Teva, but a glance at the indexes shows that there is one sector that makes industry, which includes Teva, look sick. That index has long since crossed 1,000 points, having reached 1,073. Which index is it? Insurance, of course.

Insure that car

No TASE sector has yielded more for investors than insurance, but it should be noted that not all sectors are adequately represented on the stock exchange. There is at least one giant sector that operates - like insurance - entirely in the domestic sphere, but most of its companies are privately held, and the public has no access to their books.

Delek Automotive has become a stock market legend. The company, controlled by Yitzhak Tshuva and his superstar manager Gil Agmon, imports Mazdas and Fords. Sound pedestrian? Its stock has risen by hundreds of percent, it has distributed a billion shekels in dividend and it has made Agmon the richest hired help in the land of Israel, after Eli Hurvitz of Teva and Amnon Landan of Mercury Interactive.

If you know the car importing industry intimately, you know that Delek Automotive really is a class act, but it isn't the only cash cow there. The five big car importers in Israel each net tens or hundreds of millions of shekels a year. Even a medium-sized outfit like UMI, which has its finances revealed in the statements of parent group Kardan, manages to earn NIS 30 million to NIS 50 million a year. In 2002 and 2003 it made NIS 42 million a year.

While the car industry has become highly competitive, the 10 big players are sharing a pie that's grown enormously in recent years. One result over the past three years is that we have seen the big car importers behind some of the biggest deals going down in Israel.

Leaning on his Mazda dealership, Yitzhak Tshuva swallowed up Dankner Investment. Driving his Peugeot and Citroen agency, Yitzhak Manor joined Nochi Dankner in the group controlling IDB Holdings. Israel Kass and Jacob Shachar, funded by their Honda and Volvo imports, bought The Israel Phoenix Assurance Company.

Shachar and Kass's gamble on Phoenix looked like a safe bet, as it is one of the oldest and strongest companies in Israel. But two years from the day Shachar and Kass wrote a $320 million check for Yossi Hackmey, his wife, and his sister, it looks like they bet on the right industry, just not on the right horse.

The duo paid a tremendous premium for Phoenix, acquiring the controlling interest from the Hackmeys at a company valuation of $550 million. Today its market cap is $450 million. It isn't the market's fault alone; it's Phoenix's too.

Time to go

Yossi Hackmey had always been considered the eccentric genius of the insurance sector. He got out at the right time, and at a terrific price. He must have been aware that Phoenix was suffering from protracted managerial problems that would impact its profit in the future, and it was time to leave.

Phoenix netted NIS 353 million in 2002 and 2003, while Harel Insurance Investments, which had been considered its little sister, netted NIS 534 million in those two years combined.

The result is that Harel, no longer a little sister, is trading at a market cap of $680 million, which is 50 percent above Phoenix's valuation.

Ask Arie Mientkavich, chairman of Israel Discount Bank, which bought 20 percent of Harel in 2001 for NIS 330 million. This month it sold a quarter of that holding, at a company valuation 85 percent higher. When Discount bought its Harel stake, the market clucked that it was paying too much. Yet since then Harel has done nothing but grow.

If Shachar and Kass didn't have their car dealership, then Bank Hapoalim, which lent them half a billion dollars to buy Phoenix, would be sweating bullets by now. It would be worried because unlike the car industry, where the big boys are merrily printing cash day in and day out, insurance is entering a new era. The customers are getting more savvy. In this new dawn, there will be far greater differences between aggressive, well-managed insurance companies and cumbersome, befogged ones.