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

Hello. This is David Alexander, Deputy CEO of Phoenix Financial. Thank you for joining us to discuss the group's financial review of the fourth quarter and full year for 2024. We -- the call will be led by Phoenix CEO, Eyal Simon; and CFO and Deputy CEO, Eli Schwartz. The presentation for the call can be found on our website or the Televiv Stock Exchange website. This 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 to the e-mail address Inc. We'll make ourselves available to meet with investors to discuss performance, strategy or any questions you have. Please note that this call will include forward-looking statements and actual results may be different. In addition to the presentation in the call, of course, you can see the group's performance best through the full financial statements available on our website. First, Eyal will highlight key results for the year and discuss our strategic growth and targets. Then Eli will review the financial results and the segment breakdown in more detail.

Hello, and thank you for joining the call today. Phoenix is a leading Israeli financial group with over $140 billion in assets under management. We have 2 lines of activities. First, is a multi-line insurance businesses, including a leading P&C platform as well as significant life and health operations. The insurance business generates high returns on equity and we continue to grow and optimize the activities. The second activity is asset management. This includes the market-leading investment house, a growing wealth business, leading financial distribution footprint and a growing SME credit platform. These growth engines are based mostly on fees and commissions with strong growth and cash generation. Phoenix has a strong capital position, liquidity and solvency ratio. We were covered by leading international and Israeli investment banks and rating agencies. We use our strong cash flows to grow, distribute dividends and execute buybacks. I -- the Israeli economy remained resilient in 2024 despite the war. Local capital markets outperformed leading global indices in 2024. And International investors continue to show interest in the local economy. The main indicators show resilience and a rebound since the start of the war, including GDP growth and inflation. Israel's potential is supported by very positive long-term structural trends, young and growing population, wealth accumulation, a vibrant tech sector, increasing productivity and strong markets. A key trend for us is the growing long-term saving opportunity where retirement solution are managed by Phoenix and several other institutions. These large capital pools are adding to liquidity and market resilience as demonstrated over the last year. Going forward, Phoenix is well positioned to capture these opportunities. 2024 was another strong year for Phoenix with growth across activities. We generated more than ILS 2 billion in comprehensive income and return on equity of 18.6%. In Q4, Phoenix generated more than ILS 800 million in income and above 30% return on equity. We grew our assets under management to over $140 billion. Phoenix continued to demonstrate financial resilience with high liquidity and solvency ratio despite local headwinds. We -- last year, we published strategic targets and road maps for 2027, and we will reassess these will -- and we will reassess this and provide updates during 2025. Phoenix reports growth in core income in both lines of activities. Total core income without nonoperating effect was ILS 1.75 billion in 2024, more than 30% growth year-over-year. This brings us closer to our 2027 targets of ILS 2 billion. Core return on equity was 15.9%, close to the 2027 target range of 16% to 18%. In -- in Q4, we generated ILS 418 million in core income and 15.6% in return on equity. Nonoperating effects contributed over ILS 300 million driven mainly by strong investment performance. Phoenix's investment management capabilities in Israel are one of our competitive advantages. In 2024, we generated strong returns in corporate Nostro account as well as client other people money accounts. We continue to develop our capabilities by partnering with leading international managers. We recently established Phoenix Capital Partners, which will create value for the group through investment management and wealth distribution. Over the last few years, since adopting our dividend policy, we distributed more than ILS 2.9 billion in dividends and buybacks. We -- this represents over 5% dividend yield since 2021. Today, we announced a dividend of ILS 565 million. Overall, 49% of 2024 income will be distributed as dividends and buybacks, including this distribution. We continue to focus on strong cash flow generation that we can then use to growth, business organically and inorganically in parallel to dividend and buybacks. I -- we will now discuss strategic execution towards our targets. Phoenix is growing towards 2027 targets in both lines of activities. In insurance, we're already within range before the positive impact from implementing IFRS 17 in 2025. In Asset Management, we continue to grow toward our targets. Looking forward, we see potential upside of ILS 400 million to ILS 600 million income above 2027 targets. ILS 300 million to ILS 400 million would come from insurance, where IFRS 17 will increase earnings and return on equity. On a pro forma basis, in the first half of 2024, the new standard would have led to over ILS 200 million in additional income. We also are optimizing our holding and reporting structure for IFRS 17. For example, frequent flyer credit-related holdings were moved from Insurance to Gama and investment policies will be reported under assets under management. On the side of Asset Management, an additional ILS 100 million to ILS 200 million in income could come from growth and restructuring. We intend to reassess and update our targets during 2025. Our value creation strategy focused on 4 drivers: accelerated growth in higher-margin, high multiple business, innovation for competitive advantage and efficiency, active management of people and structure and strategic deployment of capital and investments. Phoenix is well positioned to capture significant market opportunities. This includes wealth accumulation, demographic growth, consolidation and strong demand trends for financial solutions. After building platforms and capabilities, we are now focused on driving growth and creating value in each of the businesses. In parallel, we also continue to invest in deeper capabilities and competitive advantages for longer-term growth and value creation. This includes advanced data skills, analytic engines and improving how we work with clients. We believe that there is a long runway for growth and value creation in the market, and we continue to make sure Phoenix is well positioned to capture these opportunities. We continue to grow our assets under management to over $140 billion. More important than overall growth, we are focused on highly profitable activities such as the investment house, wealth and investment policies. In growth engines of asset management agencies and credit, we continue to grow EBITDA at 20% to 30% annually. These businesses generate significant fee-related income and commissions, making them very, very attractive. In Asset Management, we continue to grow the investment house with mutual funds, ETFs, portfolios and stock option administration. Last year, we executed an important acquisition with very high synergies, positioning the investment house as the market leader. We are also growing our wealth solutions for qualified investors. Mass market retirement products, including pension and provident funds also continue to grow. And here, we are focused on margins and efficiency. The Phoenix Agency's distribution platform includes several agencies for benefit administration, retirement planning, investments and insurance distribution. Phoenix agencies continue to grow at double digits, both organically and through roll-up acquisitions. The business generates strong cash flow, and we continue to see many opportunities in a highly fragmented market. We continue to grow our credit activity while focusing on profitability and risk management. The business is based on Phoenix Gama, a strong platform that provides SME credit solutions. We see strong growth from the merger of the construction finance activity from the insurance company 1 year ago. Last year, we successfully launched consumer lending, which is now scaling. And this year, we transferred the holding in the ELAL's frequent flyer program, which is focused on credit -- on credit cards. In the Insurance business, we continue to focus on competitive advantage in high return on equity activities. We're growing our P&C in line with our strategy, reaching ILS 4.8 billion in premiums. Insurance income and return on equity have grown and are within the range of 2027 targets. We will review and update targets in the coming quarters. The key to winning in the competitive P&C market is to manage a dynamic balance between growth and profitability. Phoenix is achieving these by creating competitive advantages in pricing, distribution, claims management, service and operations. Across all businesses, we're optimizing, shifting to digital self-service and improving productivity. In line with our business strategy, technology is a significant enabler for growth, profitability and long-term value creation. Our technology strategy focuses on competitive advantages, client experience, optimizations and resilience. In 2024, we launched a new app that allows clients to manage all their solutions in 1 place with simple and attractive user experience. This includes investments from retirement to portfolio to alternative -- to portfolio to alternatives as well as insurance and credit. As a leading financial group, Phoenix sees sustainability as a source of value creation as well as corporate responsibility. We're focused on proactively managing business opportunities and risks from distribution include -- from disruption, including climate and the energy transition. We're also committed to advocating for excellent co-point governance in Israel as the largest investor. And we are partnering with a portfolio of nonprofit ventures that are having a real impact on Israel society. Now Eli will take it from here and review the financial results and segments in more detail. Please, Eli?

Thank you, Eyal. In the fourth quarter, both of lines of business grow income. In addition, investment performance was very strong. This was partially offset by interest rate effects. Comprehensive income for the quarter was ILS 803 million after tax. For the full year of 2024 Insurance core income was ILS 1.76 billion before tax and Asset Management Agencies and Credit income was ILS 939 million before tax. Nonoperating effect was positive, driven by investment performance. Comprehensive income for the year was nearly ILS 2.1 billion after tax. Looking at the breakdown of the fourth quarter income by segment, we see a strong contribution of P&C activity. This is aligned with the group strategy. In the Asset Management and Agencies and Credit, we see a broad contribution to the group income for all segments. We see a similar picture for the entire year. Together with the contribution of P&C, we see contribution from all segments. Our Asset Management and Agencies activities are many recurring fees and commissions. They are generating solid contribution to the bottom line. Aligned with the IFRS 17 implementation guidelines, we published today pro forma results for the first half of 2024 under the new standards. This is compared to the results we already published in the IFRS 4. Impact of the IFRS 17 compared to the IFRS 4 is over ILS 200 million additional income in the 6-month period. [ ILS 20 million, ILS 25 million ] increase in comprehensive income and ILS 230 million interest in the core income. Most of the impact in the Health and Life segments. In addition, we will change our core income normalization methodology from 3% release in IFRS 4 to nominal risk-free plus ILS 2.25 billion in IFRS 17. Normalization will help us to distinguish between the core income and volatile nonoperating effect. We find the method better adjusted to the IFRS 17 less volatile in the new accounting and more potent. The strong balance sheet and debt structure provides financial strength to the group. They provide resilience and short-term support the group's strategy and ability to capture the business opportunity going forward. As a part of transition to the IFRS 17, the company equity will decrease by approximately ILS 640 million, while the tangible equity per share will increase due to the reduction of deferred acquisition cost by lLS 1.4 billion. Our solvency estimation for September 2024 remains high with 189 percentage with transition measures. The Insurance Board of Director updated a minimal dividend threshold to 121% solvency. This strong solvency positions above future target of 150% to 170% allow us flexibility in strategic choices, investment allocation and dividend. We will now review each segment in more details. P&C continued to show strong results. In motors, we see continued trend of profitability, growing premium and improved loss ratio. This was driven by the full implementation of machine learning models for underwriting and pricing. We also see a strong performance in property insurance during 2024. We -- in the Health segment, we see improvement of underwriting profit. This is despite the challenging year with significant regulatory reforms. This was partially offset by nonoperating effect, mainly interest rate. In the life segment, we also we see continued improvement in underwriting profit. Results were negatively impacted by capital market and positively by interest rate effect. We started collecting variable management fee again in the fourth quarter, which is a good indication going into 2025. I -- Other equity returns will impact positively by capital market. This segment includes activities of Phoenix Investment House and wealth activities for qualified investors. These activities contribute more than ILS 300 million in 2024 before tax. This was driven by growth in mutual funds, including synergies from the Psagot acquisitions. Our brokerage business continued to grow both in number of clients and income per client. We also see a growth in income for wealth as we reach the scale and growing the business. The retirement business contribution was ILS 93 million pretax with an increase in core income year-on-year. We are focusing on efficiency and improving profitability. The Distribution segment delivered ILS 300 million of income before tax. The business showed strong growth in revenue and in core income. The change in investment effect is the impact of capital restructuring from high net asset last year to some net debt this year. We continue to grow and examine opportunities to unlock value. Phoenix Gama generated strong income growth to maintain responsible credit portfolio in challenging environment. In 2024, we merged Phoenix Construction Finance business from the Insurance company. This is a significant synergy in 2024 and contribution to income. Our consumer credit activity launched during the year and is now scaling. We merged it with the Phoenix Gama, and we'll report it under this segment.

Thank you, Eli. We'll now review the questions that were discussed earlier in the conference call in Hebrew. First question. Last September, you shared strategic targets and road maps for 2027. And -- Today, you wrote that you see upside of ILS 400 million to ILS 600 million beyond the targets. What do you know today that you didn't know when you publish the targets on IFRS and overall?

First, we said that during presenting the 2027 targets back then in September, we said that it doesn't include the IFRS 17 numbers. Now after showing the first result of the first half of 2024 under the cues of IFRS 17, it shows that it's extra of ILS 200 million per -- per 2 quarters per half. So now we can say that at least -- or roughly ILS 400 million a year on top of what we presented back then in September. This is for IFRS 17. And -- but a few other things happened during the last half year first, the situation in Israel become more reasonable, I would say, this way in terms of the war and the risks in Israel. Secondly, very important regulation was removed out of the table on agency. So it opened up for us a few other opportunities. And third, the demand for financial products by individuals in Israel grew comparing to what we knew back then in September. So it's a half year after. So those elements or those changes allows us to come up with kind of potential. I believe in the next few months or a few quarters will come up with updated plan for 2027.

Next question. It seems that the Investment House activities continue to grow at a high rate. possible -- is it possible to maintain such a growth rate? What are the growth engines to ensure it happens?

As I said in the previous question, we see a growth in the demand for financial products by individuals. We've said in the past few times that Israel has changed in that perspective, meaning that more and more wealth is accumulated by individuals. In Phoenix, we've seen that a few years ago and we started to build our capabilities to capture this value creation or this demand for a financial product. The Investment House is one of the leading factors or leading engines to capture this value. And we have just accomplished a few months ago, the acquisition of the second acquisition of Psagot funds, and we see very strong synergies. We've seen very strong growth on the private accounts under the brokerage house. And we see general growth in demand, as I said, for a financial product or more investment products. We see that also on investment policies and alternative products, and we see it with the collaboration the leading brands -- with the leading global brands like Apollo, like KKR and so on. So in general, we see growth, the acquisition actually doubled in relatively very short time and made lots of value in the investment due to the synergies, as I said. But generally, in Israel, as a country, we see growing demand and Phoenix is ready to capture most of that demand in the market.

Next question. You report growth in your credit portfolio. Could you update on the launch of consumer credit? And are you interested in the [ CAL ] acquisition?

Well, we see growth according to the plan that we published on credit the specific consumer lending, we just launched a few months ago is working according to the plan. It's a unique platform in Israel. It's based on fully digital engine, end-to-end digital, we see that on weekends, for example, when individuals are -- actually access the system and take loans end-to-end in a digital way. So it's working according to the plan. It's based on a specific engine or underwriting engine that was built according to Phoenix needs and what we see in the next few years that will fit the need for credit. The credit in general, not only consumer credit is a blue ocean for a company like Phoenix is a very strong opportunity. And regarding [ CAL ], as we said a few times in the past, if it will meet, eventually we'll see the numbers, if it will meet the numbers and the criteria and the KPIs on the credit side that we have -- we've actually said to ourselves, we'll see that. And if not, we'll skip.

Next question. Together with the dividend you announced today, payout from 2024 income is close to 50%. Will you maintain this ratio or even increase it?

As we said in the long-term plan for 2027, 50% buyback -- dividend in cash and buybacks, it's part of the plan. We insist that definitely, we will see those numbers at least of 50% payout, and that's what we plan and that what we think that will happen as well.

Next question. Do you plan to collect variable management fees in 2025?

Before I let Eli answer, I want to say that Phoenix has managed to collect positively management fees on the so-called unit-linked policies. And also at the beginning of 2025 is still positive on that aspect. Under IFRS 17, the recognition of such performance of such fees would be smooth over the years, and it will meet actually the -- it will actually reduce the volatility of such -- such fees, and it will be a smoother, as I said, not like in IFRS 17, in IFRS 4, sorry, that it was actually recognized at the date accord, meaning the date happened, we had to recognize the fees. Now it will be smooth over the years, the profits and the losses as well, meaning both of them. But Eli, if you want to add something?

No. That's right.

Okay. That's fine.

Next question. How do you see the return of international investors to the Israeli market? Have we reached levels from before the war?

Well, you want to take it, David?

Okay. So from the Phoenix perspective, certainly, we've seen a lot of interest from international investors, including over the past year. And roughly 1/3 of Phoenix shares are currently held by international investors. We see growing interest in Israel. We don't think that the interest is back to where it was before the war, but we see many investors coming back. And we think more and more investors both are interested in the attractive pricing and opportunities that they're seeing in the Israeli market. but also in the long-term potential of the Israeli market. So the answer is they're coming back, but not yet at the rate and the potential that we saw before the war. Next question. Should the numbers you disclosed for H1 2024 be considered representative of IFRS 17 going forward?

We continue to learn about the IFRS 17 standard and keep the market update. During 2024, we updated that the implementation of the standard may improve the profitability of the insurance company. In the annual report, we report the first half of 2024, and we also maintained expectation for improvement of the target of 2027. Following the publication of the results of the first quarter of 2025, we will present the updated target of the market.

Okay. Thank you. These were the questions that we discussed on the call, the Hebrew call earlier today. Investors are welcome to contact us directly any time of via e-mail at [email protected]. We'll be happy to answer questions. We're happy to arrange Zoom calls to discuss in more detail. We're also periodically coming to New York and London and happy to meet in person in the U.S. and the U.K. and in general, available for questions and for discussions. Finally, I'd like to mention that you'll find this presentation and the other materials on our website, and the recording of the call will be uploaded tomorrow. Thank you again for joining the call.