Phoenix Financial Ltd. (PHOE) Earnings Call Transcript & Summary

Hello. This is David Alexander, Deputy CEO of Phoenix Holdings. Thank you for joining us today for the group's financial review for the third quarter of 2023. The call will be led by Phoenix Holdings CEO, Eyal Ben Simon; and CFO, Eli Schwartz. The presentation for the call can be found on our website or the Tel Aviv Stock Exchange website. The presentation provides key points on the financial statements released this morning and should be read together with the full financials. At the end of the call, we'll answer questions that were discussed today on the Hebrew call. You can send any additional questions to us individually or at the e-mail address [email protected]. We'll also make ourselves available to meet with investors to discuss performance, strategy or any questions you may have. Please note that this call will include forward-looking statements and that the actual future results may be different. In addition to the presentation and the call, the group's performance can best be understood together with the full financial statements available on our website. Eyal Ben Simon, CEO of Phoenix Holdings, will first provide an update on how the conflict in Israel is impacting the Phoenix and will then highlight key results and discuss our strategy and targets. Eli Schwartz, the Group CFO, will then review the financial results and segment breakdown in more detail.

Hello, and thank you for joining the call today. The Phoenix is a leading Israeli financials group with over ILS 420 billion or 110 -- over $110 billion assets under management. The group has grown assets under management by 20% annually over the past 5 years with an average ROE of 15%. At the same time, the Phoenix has a strong capital position and solvency ratio with local and international ratings from Moody's and S&P. The group has financial resilience during times of volatility and the resources to capture opportunities and acquisitions when they're attractive. Core group activities include insurance, asset management, distribution and credit. In the first 9 months of the year, these businesses generated core income of over ILS 600 million to the insurance, ILS 170 million to the asset management, ILS 110 million to distribution and ILS 40 million for the credit, respectively. Each business is actively managed for value creation based on growth and capturing the potential in the Israeli market. Before reviewing our performance, we would like to provide an update on the Gaza conflict and how it affects us. As you know, Israel was attacked on October 7, and all of us at the Phoenix send condolence to the families of people, who were murdered, wishes good health and recovery to the injured and strength the kidnapped and their families. Since October 7, the conflict has had an impact on the Israel economy. Uncertainty is higher. Many people have been called to reserve duty and many families have been relocated away from the -- away from border areas. Capital markets, yield curves and exchange rates were impacted immediately and macro effects are expected also in 2024. However, the economy is fundamentally very strong. There are very positive long-term macro and structural trends. National debt is low and foreign currency reserves are relatively high. And we have a culture of resilience and innovation. Already, we're seeing signs of resilience. The economy continues to run and people have returned to working in the offices. Capital markets have been liquid and resilient, including bond markets, equities and currency markets with the help of proactive regulators. Even after the impact of the conflict, Israel's GDP is expected to grow at 2% to 3% both this year and 2024. And if we look at the past geopolitical events, Israeli equity markets have gained a median of 32% within the first 12 months after each and every event. At the Phoenix, we worked on the first day of the conflict to ensure full business continuity with all client services KPIs at high levels. Remove work -- remote work was activated immediately and most workers returned to the office within 3 weeks. From the first day, we actively managed and prioritized activities. We deployed strong risk management capabilities to create full transparency and scenario analysis, and we shared the highlights with the market quickly. We developed explicit principles for action and extensive internal communications to ensure a culture of resilience, flexibility and empathy. And we raised ILS 350 million in October to create additional liquidity. And perhaps more importantly, we quickly pivoted to supporting immediate national and social needs. In the first days, we decided to partner with Barzilai Hospital, which was receiving many of the insureds as well as serving population of half a million civilians under rocket attacks. We worked with Barzilai's management team to secure immediate supplies for the operating in trauma facilities that allow them to work effectively at very high capacity. And we worked with international friends and partners to bring additional support to this Hospital Barzilai. In addition, we supported additional important causes with funding and volunteering. And we worked to help clients and agents with special dedicated funds up to ILS 10 million and service centers. On October 22, we published an initial assessment of exposures and risk. And today, we update these figures in the financial statements. The capital and liquidity positions of The Phoenix is strong and is expected to stay strong under scenario analysis. And there is limited actual or expected impact on income, primarily from capital market exposures. Core insurance income impact is mitigated by reinsurance life -- in life and disability and by state coverage for property claims for war. Core services income is not materially impacted with stable assets under management to date. In non-operating income, we did see an immediate impact from capital markets. But this effect started to reverse in recent weeks as markets have started to rebound. We continue to carefully and actively manage investment and capital market exposures, including Israeli equities and fixed income as well as currency. In terms of key metrics, the Israel economy continues to look resilient overall, even though specific sectors have been more materially impacted. After reducing forecast due to the conflict, the Bank of Israel still expects GDP growth to be 2.3% in 2023 and 2.8% in 2024, which is pretty impressive. Reduced demand is expected to lower inflation in 2024. And while currently, there are many workers who are in reserve or unpaid leave, unemployment after the conflict is expected to stay below 4% next year. Phoenix is prepared for various economic scenarios, both to manage risk, but also to capture opportunities in more positive scenarios. The Phoenix created ILS 217 million in comprehensive income in the third quarter and ILS 515 million year-to-date. This was driven by strong income from core businesses despite negative non-operating effects from capital markets. Return on equity was 8.9% for the quarter and 6.9% year-to-date. However, core return on equity without non-operating effect was 12.7% in the third quarter and 12.6% year-to-date. We continue to grow our assets under management. And solvency remains high at 205% as of June 30, above longer-term targets. Here, we see a breakdown of income between core insurance and services on the one hand and non-operating effects on the other hand. The blue is core income from insurance, not including capital markets and special items. The orange is core income from services, mainly stable fee-based income. The gray is non-operating income, including investment performance above and below 3% real yields, interest rate effects and special items. We continue to grow our core income despite the challenging year. Year-to-date, we report ILS 617 million core income from insurance, ILS 338 million from services. At the same time, there was ILS 440 million negative impact from non-operating income, mostly investment offset by rates. For the third quarter, we see ILS 182 million core income from insurance and ILS 123 million from services with negative ILS 88 million from non-operating income. Return on equity for the quarter was 8.9%, but when looking at the core income, the normalized core return on equity was 12.7%. An important driver of group performance is the corporate account or Nostro. During the first 9 months of the year, returns were nominal, 4.2% on the annual basis and negative 10 basis point on the real basis. This is below the 3% real yields we use for planning and transparency. Our accounting is mark-to-market. On the one hand, this creates quarterly volatility. But on the other hand, it creates better transparency internally and for investors. You can see the broader allocation of our Nostro investments on the right, with roughly 70% in fixed income. We remain focused on dynamic investment and risk management, especially in this period. Shareholders' equity is above ILS 10 billion, and we continue to have a strong balance sheet. We issued a dividend in September, representing over 3% dividend yield. Our goal is to build a track record of relatively stable growing dividends. And we continue to execute the group's buyback program. The group will continue to distribute dividends from its profits based on our dividend policy, building our track record while strengthening the group's capital. We will now review the execution of the strategy and the progress towards our strategic targets. During the quarter, we continued to implement the strategy across all activities in all 4 growth engines, insurance, asset management, distribution and credit. The strategy consists of 4 value drivers. The first is accelerating growth in high ROE activities and shifting our mix to more valuable capital-light activities. Second, we continue to organize for improved client focus with innovation and efficiency, deepening our competitive advantage. We're also focusing on efficiency as part of our strategy execution to keep costs down during this period. Third, we actively manage the group and our business portfolio to unlock and create value. And fourth, we're increasingly deploying capital effectively against our priorities to reduce volatility and generate higher returns. We manage each of these value drivers across the group's activities. This strategy aims to create value with several catalysts, growing income and shifting the mix towards fee-based income, expanding margins and deepening competitive advantage, executing M&As and unlocking value across the group and driving cash flow and excess returns. We continue to work and make progress towards our medium-term targets, which have not changed as a result of the conflict. We continue to execute our strategy, and we believe in our ability to reach and exceed these targets. Core comprehensive income and core return on equity continue to grow even though capital markets impacted overall income and return on equity. Within this, core services income is growing strongly and has been a significant contributor to group performance year-to-date. We can now look at each business separately. First, in the insurance business, we see a decline in total premiums and contribution compared to last year, but an increase in the strategic P&C segment. P&C showed strong growth to ILS 3.4 billion premiums year-to-date compared to ILS 2.9 billion last year and ILS 1.1 billion for the quarter compared to ILS 900 million last year. Overall premiums and contributions declined due to primarily to investment policies, which are cyclical and impacted by capital market performance and executive retirements. In terms of insurance business targets, P&C premiums continue to grow, and we expect to be on track for the medium-term targets. Expense ratio are higher than last year, mostly due to inflation and we're focusing on efficiency to push them down back. Solvency remains above 200% as of June. And core comprehensive income without capital market effects grew to ILS 617 million during the first 9 months. The second business is asset management. As of the end of the third quarter, our assets under management grew to ILS 426 billion, up from ILS 371 billion in December, close to $115 billion. The growth is due to both continued inflows and also inorganic growth. The organic inflows across our activities are due to the group's capabilities track record, distributions, service and branding. In terms of acquisitions, we completed the Epsilon acquisition earlier this year and then the acquisition of portfolios and funds from Psagot. As discussed, since the end of the quarter, we have not seen material changes in assets under management. We're also progressing towards our targets for asset under management. We're on track for ILS 0.5 trillion under management by 2025 and revenues from investment services have grown to ILS 560 million year-to-date, on track for ILS 750 million in 2025. The third business is distribution. The Phoenix agencies in the leading platform -- is the leading platform in Israel for insurance agencies and brokers, including benefits and payroll administration and financial planning. The agencies continue to grow fee revenues to ILS 622 million year-to-date, but with 6% market share, there is still a lot of potential. They're managed on a stand-alone basis with the goal of creating value, not just distributing Phoenix products. They generate strong cash flows, are capital efficient and have attractive business models. As we previously announced, we're assessing interest from international investors for the agencies to unlock value in the short term and accelerate value creation in the medium term. The fourth strategic business is credit. The group portfolio is at ILS 5.5 billion, mostly in SME financing through Gama and real estate and project financing under the insurance business. This also does not yet include consumer credit, which we're building in parallel. During the quarter, we took 1% ownership of Gama through a successful tender offer for Gama's shares held by the public. Gama will remain a reporting entity with public debt. Going forward, we believe credit will be an important source of value creation and synergies in years to come. Going forward, we continue to focus on resilience, growth and value creation. We're actively managing activities and exposures in time of uncertainty. We continue to focus on execution and are positioned well for market volatility with a strong balance sheet and good liquidity. We're assessing opportunities and can make acquisitions if they have a good strategic and economic fit. We continue to invest in capabilities as part of the strategy. And at the same time, we're focusing on efficiency across all our activities. I would like now to hand over the presentation to Eli Schwartz, the Group CFO, who will review the financial results and segments in more detail. Please, Eli.

Thank you, Eyal. During the third quarter, group income was ILS 217 million after tax. We saw growth in both core insurance and cross service profit compared to last year. Non-operating income, primarily from investment performance and interest rate effects had a significant negative impact of ILS 196 million before tax. On the right, you see a full breakdown. During the first 9 months of the year, the total comprehensive income was ILS 515 million. Again, we see a strong growth in both core insurance and core service. But we see on the right, the negative impact of non-operating factors, investment income and interest rate effects. Looking at the breakdown by the segment during the quarter, all segment contribute to the group income. Insurance contribute ILS 162 million pretax profit. Asset Management contribute ILS 69 million and additional service ILS 110 million. We see a similar trend in the ninth month. Insurance contribute ILS 144 million pretax. Asset management contribute ILS 240 million and additional service ILS 323 million. Here, we see the strong contributions of service due date in 2023. The strong balance sheet, the debt breakdown and the solvency positions provide financial strength to the group. They provide resilience in the short terms and support the group ability to capture business opportunities going forward. As discussed last quarter, we're now reporting solvency on the quarterly basis with a lag of 1 quarter. Today, we report that solvency for the end of June was steady of 205% with transition measures. This strong solvency position above longer-term target allow us flexibility in strategic choices and investment allocations and give us room from the interest rate coming ups, down. Also, the group generated strong cash flow for diverse activities, including both insurance and service. We will now review each segment in more details. The P&C segment continues to show improvement with ILS 301 million underwriting profit year-to-date, more than double of 2020. We see continued growth in premium and improvement of underwriting profit. In motor, we see combined underwriting profit of compulsory and property together of ILS 24 million in the quarter and ILS 94 million year-to-date compared to negative contributions last year. Overall, we continue to see the improvement of the market, but we're still in the cycle. The Health segment contribute ILS 295 million year-to-date. Lower underwriting profit is mainly due to the long-term care and higher claims. We've notified that Maccabi HMO that we will not renew the long-term care agreement. We also see a positive impact of interest rate in the quarter and negative overall year-to-date. The Life segment contribute ILS 46 million pretax in the quarter, but still at the loss before tax of ILS 37 million year-to-date. Underwriting profit increased in the quarter compared to last year. However, income was impacted negatively by investment performance and collection of variable fees, both the quarter and the year-to-date. Other equity returns will impact negatively by capital market. Moving to the Asset Management segment. In Pension & Provident fund income, contribution was ILS 64 million year-to-date. Quarterly contribution was impacted by special items, including the restructuring and claim provision. Investment Service -- the second asset management segment is the Investment Service. This includes The Phoenix Investment House, formerly Excellence and Phoenix Advanced Investments. This year, we started to break out contribution by different activities to provide more transparency on the business. These activities contribute ILS 176 million year-to-date and ILS 65 million in the quarter. The contribution is driven by the growth brokerage platform, which grew significantly compared to last year. The Agencies segment delivered ILS 221 million profit from operation year-to-date, with ILS 241 million overall. During the quarter, income before tax grew to ILS 86 million despite challenging market condition. We're assessing the interest from international investment -- investors in the agencies platform with the goal of unlocking value and creating more value going forward. The Creative segment, which includes Gama results, generate pretax income of ILS 77 million year-to-date. Gama continues to perform above '21 and '22 levels and has reduced exposure to check clearing, while increasing exposure to other types of credit. During the quarter, we successfully completed the tender offer of Gama, taking the company private with full ownership by The Phoenix.

Thank you, Eli. We'll now review the questions that were discussed in the conference call in Hebrew. The first question. There seems to be challenges in some of the nonbank credit companies. Are you looking at the possibility of expanding in the field of credit with acquisitions?

Thank you. We have a very strong organic growth on credit, but we do see opportunities in the challenges in the market, for example, transactions and of course, structural changes. Phoenix, as you all know, have a few areas, where we provide credit and kind of changes -- structural changes can improve that facility or the way that we facilitate the credit in the future.

Second question. We're starting to see how cash flow difficulties affect companies that are highly leveraged, such as in real estate. What is the extent of exposure and risk in your credit portfolio? And what is the level of provisions that you have made so far?

So you can see in the full exposure for the real estate on the annual reports and the presentation that we shared with you. We've conducted a full examination of the credit portfolio and have made a provision as necessary. However, the portfolio has a good collaterals and based on the external assessment of the -- external knowledge, the provision are not significant.

Next question. Is the conflict changing your medium-term ROE target of 12% to 15%?

The answer is no. We continue to execute on our strategy. The period is challenging, but the group has a very strong foundation and that creates advantages and, of course, also opportunities to stand behind those 12% to 15% targets.

Next question. Are you continuing to work towards bringing an international investor to the agencies?

We have completed the structural changes, making Itzik Oz, Executive Chairman for the agencies. This, together with only a 6% market share, puts us in a very good position for stand value creation. Yes, we're assessing indications from international investors, who can help unlock value and accelerate value creation going forward. And once we have something in hand or close, we'll, of course, be very transparent as usual.

Next question, how does uncertainty impact your investment policy and the level of liquidity?

Phoenix has a high solvency ratio, strong liquidity and high risk rating. This allows us to operate with flexibility in operation and investment. We consistently monitor the market, and we have a clear risk management and investment process for assessing and updating investment allocation.

Next question. What opportunities do you identify in 2024?

We're constantly looking at strategic acquisitions. On the investment side, we're seeing growing opportunities. The Israel economy is strong and resilient and in the past, has rebounded quickly after conflicts.

Next question. Do you identify redemptions and withdrawals of investments and savings products and what do you expect going forward?

Most of the company's products are long term with few redemptions. We did see limited outflows at the beginning of the conflict, but Israeli clients are not fast to change positions and know that after uncertainty, there is often a rebound.

And last question, what is the proposed change in the collective long-term care agreement with HMO Maccabi?

Practically, the current agreement is ending at the end of this year, a month from now. And practically, there might be a continuation, but any continuation -- any continue of that agreement will not include any kind of risk on Phoenix, not insurance risk and not any operational risk. So it would be kind of a service or kind of agreement that is not like the previous one.

Those were the questions. Investors are welcome to contact us directly any time or via e-mail. And as mentioned, we'll be happy to answer questions or range of conversation or have a discussion in more detail. Our e-mail address is [email protected]. Finally, I'd like to mention that you'll find the presentation and other materials, including a recording of this call on our website. Thank you again for joining the call.