Clal Insurance Enterprises published its second-quarter report, and it is the largest of the Israeli companies that filed today.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
The Quarter
| NIS millions | The quarter |
|---|---|
| Pre-tax profit | 1,587 |
| Taxes on income | 528 |
| Net profit | 1,059 |
| Attributable to shareholders | 1,054 |
| Non-controlling interests | 5 |
| Basic earnings per share | NIS 13.08 |
| Balance sheet total | 195,869 |
| Shareholders' equity | 11,633 |
Why There Is No Revenue Line Here
This is a deliberate omission, not an oversight.
The revenue line in the quarterly filing stands at NIS 4,475 million, and a figure of that magnitude at an insurer cannot be given an unambiguous reading from the structured filing. At an insurance company, "revenue" can include premiums, investment income on the company's own book, investment income on the policyholders' book, and management fees - and each of those behaves entirely differently.
A number I cannot interpret is a number I do not present. The remaining lines of the report - pre-tax profit, tax, net profit, equity and the balance sheet - are consistent with one another and appear above.
This is exactly the same reason we omitted the revenue line at Migdal Insurance two days ago.
The Structure of an Insurer
The number that defines Clal is not the profit but the balance sheet: NIS 195.9 billion against shareholders' equity of NIS 11.6 billion - a ratio of 16.8 times.
And this is not leverage in the ordinary sense. Most of an insurer's balance sheet holds assets held against insurance and pension liabilities - savers' and policyholders' money, not money the company borrowed in order to invest.
The right comparison is not to an industrial company with debt, but to an entity that manages other people's money and charges for doing so.
The Return
NIS 1,054 million to shareholders for the quarter, on equity of NIS 11,633 million - a return of about 36.2% in annualised terms.
And this is a level that deserves to be read carefully.
At an asset-managing institution, quarterly profit comes from two entirely different sources: from the margin on insurance and pension activity, and from the return on the company's own investment portfolio.
The first recurs; the second depends on the market. A quarter in which equity markets rose will show a high return on equity at an insurer, even if the insurance activity did not change at all.
And the separation between the two is not in the structured filing - it is in the full report.
So a return of 36.2% in a single quarter is not a forecast for the year, and it does not necessarily indicate an improvement in the business.
The Tax
NIS 528 million on pre-tax profit of NIS 1,587 - an effective rate of 33.3%, against a corporate tax rate of 23%.
The gap, about ten percentage points, is familiar at Israeli financial institutions. It generally arises from profit tax - an additional levy applying to certain financial institutions on top of the ordinary corporate rate.
But the quarterly report does not detail the tax reconciliation, so I do not assert that this is the reason here.
What can be said: had the rate been 23%, net profit would have been about NIS 1,222 million rather than 1,059 - a gap of roughly NIS 163 million in a single quarter.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
A profit of a billion shekels in a quarter is a large number, and at an insurer it is also a number that is hard to interpret without a breakdown.
What I know from this report with certainty: the company earned NIS 1,059 million, paid tax at an effective rate of 33.3%, and manages a balance sheet of NIS 195.9 billion against equity of 11.6.
And what I do not know is the more important part: how much of this is underwriting and how much is the market. At an insurer, the difference between the two is the difference between a business that prices risk correctly and a business that enjoyed a good quarter on the exchange. Both produce the same bottom line, and only one of them recurs in a bad year.
So what I would look for in the full report is that breakdown - and the tax rate: if 33.3% is a permanent structure, it takes about NIS 163 million a quarter, and that is a number worth knowing whether it recurs.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
