Phoenix Financial Ltd (PHOE) Earnings Call Transcript & Summary

[AUDIO GAP] call today. Questions you may have. You can ask for a Zoom meeting or you can be is in person, we expect to be in New York next week. And in general, we arrive in New York and London several times a year. Please note that the call includes forward-looking statements that actual results may be different. Eyal will highlight the key results and update on the new guidance and strategic growth road map, and then Eli will review the financial results and segment breakdown in more detail.

Hello, and thank you for joining the call today. Phoenix is a leading Israeli financial firm with $180 billion in assets under management and distinctive competitive advantages. We have 2 lines of businesses. First, a multiline insurance business including a leading P&C as well as significant life and health businesses. The second is a broad asset management business with platforms generating strong growth and high margins. These include the market-leading investment house, a growing wealth business, the leading distribution network of brokers and advisers and a growing financing platform. Both activities are growing, generating quality earnings and strong cash flows. Phoenix has a resilient capital position, liquidity and ratings. We use our cash flows to accelerate growth, distribute dividends and execute buybacks. The Israel economy continues to demonstrate remarkable resilience and growth. Indicators show a strong rebound from the war including GDP growth and inflation. CDS rates are decreasing to 2023 levels and local capital markets outperformed leading global markets so far in 2025. Israel's potentially supported by a very positive long-term structural trends. Going forward, Phoenix is well positioned to capture the opportunities in the local market. Q3 and first 9 months of the year were strong for Phoenix. In Q3, we generated ILS 800 million, EPS of ILS 3.2 with a return on equity of 29%. Year-to-date, comprehensive income was ILS 2.3 billion, EPS of ILS 9 and return on equity of 27%. Here, we highlight the main takeaways from the reporting period. We continue to see strong business performance. Year-to-date, we generated core income of nearly ILS 2 billion, Phoenix continues to focus on strategic growth of high multiple activities. We completed the purchase of 17% of Phoenix agencies increasing our holdings from 78% to 95%. We're accelerating growth and value creation across this business. Phoenix is committed to distribute quarterly dividends. Today, we announced a dividend of ILS 320 million, representing ILS 1.3 per share. In addition, we executed almost ILS 188 million by end of Q3. Phoenix continued to grow core income in both businesses and in all of our platforms. The insurance business generated ILS 1.3 billion year-to-date. Asset Management generated ILS 683 million with strong growth year-over-year. Core return on equity was 23%. Strong investment performance contributed ILS 314 million to the bottom line year-to-date. A strong Q3 quarter in both lines of business together led us to generate core income of ILS 667 million with core return on equity of 24%. Again, strong investment performance generated additional ILS 138 million of nonoperating effects. In the first 9 months of the year, we generated about 9% annualized yields in our corporate account. This is 4.6% above nominal risk-free rates in the period and the 5 years average yield is 4% above nominal risk-free rates. In order to better reflect this performance in our core income results, we're updating our normalization method from 2.25% above risk-free to 2.5% starting in Q4. When we implemented IFRS 17, we said that we would start conservatively with 2.25%, and we now believe we can increase this figure with confidence. It is still well below the historic average of 4% creating significant upside to our core income normalization. Looking forward, our focus is to maximize investment performance of our capital pools and provide competitive risk-adjusted yields for our clients and for our balance sheet. Phoenix is committed to distribute attractive dividends every quarter and we averaged roughly 5% dividend yield in the last few years. Today, we announced a dividend of ILS 320 million for the quarter. Together with the ILS 630 million announced in previous quarters, were at ILS 950 million year-to-date. So far, we executed ILS 188 million in buybacks, and we updated our annual plan to ILS 300 million given the higher trading volumes in the share. These dividends are supported by strong internal cash flow. Each platform is remitting cash as dividends to the group level on a quarterly basis, each according to a distribution policy. This cash flow gives us flexibility to distribute dividends every quarter, execute buybacks, perform strategic acquisition and fuel organic growth. We will now share our new guidance and discuss strategic execution in each line of business. Our current run rate already puts us within previous guidance for 2027. As a result, we're today providing new medium-term targets for 2028. We're aspiring to grow core income to reach ILS 3.3 billion to ILS 3.5 billion in 2028. Of this, we're targeting ILS 1.9 billion to ILS 2.1 billion from insurance and ILS 1.3 billion to ILS 1.5 billion from asset management. Our updated plans are based on market trends moving faster than estimated. Our platforms are generating stronger performance than we planned and in agencies, we increased our holdings to 95%. This guidance is based on several factors. We see significant opportunities in the market and we built strong distinctive capabilities in order to capture them. We're executing a proven strategy that is disrupting Israeli financial services and we have clear road maps for growth and value creation. We're shifting our business mix to high multiple activities and already our asset management platforms are growing quickly and generating significant value. And we have a strong capital position to invest in growth, capture M&A opportunities and distribute dividends. The market opportunity is based on long-term structural trends. This includes population growth, improved productivity and wealth accumulation. This result is significant value creation in financial services, which is growing in value at 16% annually, and this value is shifting from banks toward asset managers and insurance companies which together in Israel account for only 25% of the market cap compared to almost 50% in the U.S. This is driven by changing client demand from deposits and real estate to more sophisticated investment solutions like in the U.S. and U.K. Phoenix is aiming to best serve this demand and capture the value opportunity. As you can see, Phoenix has a track record of strong growth in core income across both insurance and asset management. Looking ahead at 2028, we're targeting ILS 3.3 billion to ILS 3.5 billion in group core income and over 25% of return on equity. Of this, roughly ILS 2 billion would come from insurance and up to ILS 1.5 billion will come from asset management. We aim to be a double-digit growth business with mid-single-digit capital return. Beyond these figures, we also see potential upside coming from investment performance above normalized levels of risk-free rates, plus 2.5% and which are well below the historic average of 4%. We also see upside from broader M&As and from technology which we are currently implementing, including AI. We believe this could have a significant impact on the business, but they are difficult to forecast. We're committed to this guidance, and we have clear road maps for achieving it. The role of group leadership is to lead the value creation, the risk management and the people across the group. In the insurance, we are focusing on smart growth in high multiple activities like P&C while continuing to optimize the business. In Asset Management, we're working to accelerate growth and the entire group is shifting to businesses with higher multiples, higher margins and less capital needs. Our target for AUMs is ILS 700 million to ILS 800 million in 2028. We're already at ILS 600 billion (sic) [ ILS 600 million ] , and our focus now is not only growth but shifting to the more attractive high-margin segments. Our growth engines in asset management are very profitable, generating primarily fee-related earnings, growing EBITDA and cash flow. EBITDA continues to show strong growth within ILS 1.2 billion in the first 9 months of the year. We're aiming for roughly ILS 2.5 billion in 2028. We can now deep dive into the businesses. Within Asset Management, we continue to grow the wealth investment and retirement activities, Phoenix is a market leader, and we intend to continue and use our competitive advantages to grow with the market and capture market share. Our private brokerage platform is growing quickly with over 82,000 of clients. Q3 shows strong results with continued organic growth, while targeting roughly ILS 700 million income in 2028, roughly twice the previous target of 2027. The Brokers and Advisors segment focuses on benefit administration, retirement planning, investments and insurance agencies. The platform activity continues to grow at double digits both organically and via acquisitions. During the quarter, we increased our holdings in this business from 78% to 95%, and we're focusing on accelerating value creation. Here, we're aiming for ILS 400 million to ILS 500 million income and ILS 800 million to ILS 900 million EBITDA in 2028. Phoenix continues to grow our financing activity while focusing on profitability and risk management. The business is based on Phoenix gamma, which is a strong platform that provides credit card clearing and SME and consumer credit solutions. We're now targeting ILS 250 million to ILS 300 million in income in 2028. In the insurance business, we're growing P&C in line with our strategy to focus on high multiple capital-light activities targeting ILS 6.3 billion to ILS 6.7 billion in premium in 2028. We're working to expand competitive advantage mainly by investing in data and technology in sales, pricing and claims. Across all our insurance businesses we're optimizing business models in CSM, shifting to digital self-service and improving productivity. We have a very long runway of growth and are already investing in the next wave of growth. To reach our 2028 guidance, we're focusing on growth and execution. But as we look past 2028, we are building advanced data and analytics capabilities. We're developing client-focused skills and infrastructure. And we're striving to deliver best-in-class global investments to Israel wealth and retail clients. Now Eli will take it from here and review the financial results and segments in more details. Please, Eli?

Thank you, Eyal. In the third quarter, comprehensive income was ILS 803 million. When looking on the income by source, we see a strong performance of Asset Management generating ILS 400 million before tax, 43% increase year-over-year. Total comprehensive income for 9 months was ILS 2.3 billion. We saw another solid performance of insurance generating almost ILS 2 billion before tax. Nonoperating effects were positive and generate ILS 584 million before tax. This was driven by strong performance in capital markets, partially offset by interest rate. Looking at the breakdown of the third quarter income by segment, we see impressive income growth across all platforms. We see health leading with the insurance, wealth investment leading with asset management activities. In the 9-month period, we see the importance of the P&C as well as Brokers & Advisors. Both are strategic growing engine for the group. Here, we can see the strong investment performance in other equity returns, segment generating over ILS 900 million pretax. The strong balance sheet and the debt structure provide financial strength to the group. We maintained low LTV in the Phoenix Financial as well as subsidiaries. This provides resilience in short-term and support group strategy and ability to capture business opportunities going forward. Our solvency for June 2025 remains at 182% with transitional measures. These strong solvency positions are above long-term 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 of ILS 713 million before tax in the first 9 months of the year. Our investment in technology and machine learning already contribute to the bottom line. So do our claims management process and value chain activities such as spare part. They enable us to improve our underwriting and claims management and to improve profitability. In the Health segment, we see the improvement of the underwriting profit to ILS 744 million before tax. This compares to ILS 673 million last year a growth of over 10%. The Life segment generated ILS 307 million before tax improvement in the underwriting profit was partially offset by nonoperating effect mainly interest rate. Other equity returns were impacted positively by capital market and strong investment performance. The Wealth & Investment segment contributed ILS 339 million pretax in the first 9 months of the year. This segment includes activities of the Phoenix Investment House, Phoenix Capital Partners and investment policies. We see a strong growth in mutual funds, ETF, including synergy from the Psagot acquisitions. Our brokerage business continues to go to over 82,000 accounts. We also see a growth in income for wealth and alternative as we continue to grow the business. This also includes investment policies. The retirement business contribution was ILS 122 million pretax with significant increase in the core income year-on-year. We are focusing on efficiency and improvement of profitability, and you can see the impact of the results. The Brokers & Advisors segment include the Phoenix agencies and delivered ILS 312 million of income before tax and store growth year-over-year. The business shows strong organic growth as well as synergies for M&As. In line with our strategy, we completed transaction to increase our holding for 78% to 95%. We continue to capture value in the fragment market. The Financing segment generated strong income growth to ILS 133 million before tax. This will maintain the responsible credit portfolio with strong risk management. Roughly half of the income is a fee-related earnings generated in the credit card clearing activities. We see ongoing contribution of merger in Phoenix Construction Finance business from the insurance company last year into the business. Our consumer credit activity is now scaling up and growing successfully.

Thank you, Eli. We'll now review the questions that were discussed in the conference call in Hebrew earlier. In your updated guidance, you significantly increased your income forecast for asset management. How do you explain this update? And what is behind it?

Well, we see accelerated market trends that we are seeing, practically, the space and the demand for Phoenix solution in that market are much bigger than we expected originally. Secondly, we see very strong performance in our platforms than what we expected originally. And we have increased our holdings in the Brokers & Advisors businesses that also contribute to that new guidance. So generally, as we see, there is a strong demand to Phoenix solutions in the Asset Management and Phoenix is much well positioned to capture this value.

Next question. You plan to reach ILS 3.3 billion to ILS 3.5 billion core income in 2028. How much will come from organic growth? And do you see room for M&As?

Our model relates to primarily to organic growth. But there is a lot of room to grow also on M&A as we have already demonstrated in previous years. Currently, the only acquisitions we assume in the plan are in the agencies, small acquisitions in the agencies. But definitely, there is a huge upside potential for M&As, especially in the wealth, asset management elements of increase of demand in the market. And this upside is not in the current plan. But as we demonstrated previously, we'll be in this market and will be a strong player with a very strong liquidity that we have and the desire to be a stronger player even in that market.

Next question for Eyal. You said at a conference this week that Phoenix is leading competitive disruption in Israeli Financial Services. Can you elaborate?

Yes. I've said in that conference that Phoenix is disruptor. Disruptor, it means that the -- or practically when we first entered with our new strategy, it was back in 2020 to the market. We put guidance for Phoenix. And this guidance actually was about changing the way that the financial market in Israel is performing and executing. And 5 years later, we see that it was proved to be true, meaning that we're the disruptor to take the market as a place it currently stands. So we're using global best practices and innovation across our businesses to show how can disruption move the market toward more positive and strong performance. We create new products, new services, like we implemented first BlackRock which is a leading American platform into local Israeli investment policy. We took spare parts company or spare parts initiative to merge it or to integrate it into our own businesses and create value. So Phoenix as a disruptor is a market leader and usually, when you are a market leader, you gain or you capture much faster and much bigger market shares.

Next question. You indicated that Phoenix is highly liquid with excess capital. Do you intend to increase the dividend payout rate?

Our commitment is at least a 50% dividend and buyback with at least 40% of dividends. We increased the distribution frequency and distribute every quarter. We intend to use the capital to invest in growth and M&As. But yes, we may make larger distributions in the future as well. It depends on the best way to deploy our capital.