IDI Insurance Company published its second-quarter report.
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 | 305.4 |
| Taxes on income | 108.7 |
| Net profit | 196.7 |
| Attributable to shareholders | 196.7 |
| Basic earnings per share | NIS 13.43 |
| Balance sheet total | 6,716.5 |
| Shareholders' equity | 1,334.7 |
Why There Is No Revenue Line and No Operating Profit Here
This is a deliberate omission, not an oversight.
The revenue line in the structured filing stands at NIS 1,830.9 million, and no operating profit line appears at all.
And as I wrote this week at Clal Insurance and at Migdal too, a figure like that at an insurer cannot be given an unambiguous reading.
"Revenue" at an insurance company can include premiums collected, income from investing those premiums, movements in insurance reserves, and management fees - and each of those behaves entirely differently.
And without separating them, "margin" is not a meaningful term. There is no cost of sales here and no operating line in the conventional sense.
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.
The Return on Equity
NIS 196.7 million to shareholders, on equity of NIS 1,334.7 million - about 14.7% in a single quarter.
And that is a high level, which deserves careful reading.
In a single quarter, an insurer's profit comes from two entirely different sources: the margin on the insurance activity - the gap between premiums and claims and expenses - and 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 underwriting did not change at all.
And the separation between the two is not in the structured filing - it is in the full accounts.
And I deliberately do not multiply 14.7% by four. At an entity whose result derives partly from capital markets, a quarter is not an annual run rate.
The Tax: 35.6%
NIS 305.4 million before tax, NIS 196.7 million after - that is, tax of NIS 108.7 million.
An effective rate of 35.6%, against a corporate rate of 23%.
And that is the fourth today in the same range, after Analyst at 37.1%, Altshuler Shaham Pension at 36.4% and IBI at 32.9%.
The pattern is too consistent among Israeli financial institutions to be coincidental, and it is generally explained by profit tax - an additional levy applying to certain financial institutions beyond the corporate rate.
The structured quarterly filing 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 235.2 million rather than 196.7 - a gap of roughly NIS 38.5 million in a single quarter.
The Balance Sheet
| Balance sheet total | NIS 6,716.5 million |
| Shareholders' equity | NIS 1,334.7 million |
| Ratio | 5.0 times |
And 5.0 times is a relatively low ratio for an insurer. For comparison, Clal Insurance stands at 16.8 times.
And the difference is not one of policy but of the kind of business: general insurance - motor, home, health - does not accumulate long-term reserves the way life insurance and pensions do. An insurer specialising in general insurance holds a far smaller balance sheet relative to its equity.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
What I take from this report is that comparing two insurers has to start with the question of what they insure.
IDI and Clal filed a day apart, both insurance companies - and their ratio of balance sheet to equity differs by a factor of three. That is not a difference in quality and not in risk; it is a difference in the kind of policies.
And what they do share is the tax rate: 35.6% against 33.3%. That is probably the structure, and here it takes about NIS 38.5 million a quarter.
And what I do not know from this report is the more important part: how much of the NIS 196.7 million 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 - and only one of them recurs in a bad year.
So what I would look for in the full accounts is the combined ratio - the ratio of claims and expenses to premiums. It is the only figure that describes underwriting quality without the influence of capital markets.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
