Earnings Call: Q4 2022

Mar 23, 2023

Summary

2022 comprehensive income exceeded ILS 1.1bn as core activities grew, but market effects weighed on results. Q4 income was ILS 526m, with 2023 dividends and buybacks supporting shareholder returns.

Hello, this is David Alexander, Deputy CEO of Phoenix Holdings. Thank you for joining us today for the group's financial review of 2022 and the fourth quarter of 2022. The call will be led by Phoenix Holdings CEO, Eyal Ben Simon, and Phoenix Holdings CFO, Eli Schwartz. The presentation for the call can be found on our website or on 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 will answer questions that were discussed today on the Hebrew call. You can send any additional questions to any one of us individually or to the email address ir@fnx.co.il. We will make ourselves available to meet with investors who are interested in learning more or discussing our performance, our strategy, or asking questions. 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 this call, the group's performance can be best understood together with the full financial statements that are available on our website or the Tel Aviv Stock Exchange website. First, Eyal Ben Simon, CEO of Phoenix Holdings, will highlight the key results and discuss our strategy and our targets. Then, Eli Schwartz, CFO, will review the financial performance in more detail and go into each of the segments. Hello, and thank you for joining the call today. The Phoenix is a leading Israeli financial group with profitability and strong resilience and flexibility, especially in changing times like these. In the last five years, The Phoenix has grown assets under management by 20% annually, with an average ROE of 15%. We have a solvency ratio of 202% with transitional measures and over ILS 10 billion in shareholders' equity. The Phoenix has four core business areas: insurance, asset management, credit, and financial products distribution. We manage over ILS 370 billion, which is roughly more than $100 billion. The Israeli economy continues to perform well compared to key OECD peers, with continued strong growth in 2022. Inflation is above 5%, but still significantly below international benchmarks. Israel has been relatively resilient for several reasons, including economic structures that adjust to inflation and some degree of independence in key areas like energy and agriculture. The Bank of Israel is continuing the process of increasing interest rates that created volatility in the capital market during 2022 and also affected our financial results. However, the increase of the U.S. interest rates has moderated and may moderate in Israel as well. While market savings AUMs were down in 2022 due to negative returns, wealth accumulation is a long-term structural trend that is expected to continue. Looking ahead, market volatility is continuing into 2023. Market conditions in Israel may also be impacted by proposed judicial reform, which are being challenged in Israel, and by the recent events in the U.S. and Europe impacting financial institution and markets. Despite the effects of the capital markets, The Phoenix delivered a return on equity of 11.4% in 2022 and income of more than ILS 1.1 billion. In the fourth quarter, which was stronger than the first three quarters, the return on equity was 23% and income was over ILS 500 million. Assets under management ended the year at ILS 371 billion, with shareholders' equity over ILS 10 billion. Solvency was 202% as of June 30th. Today, we announce a dividend in the amount of ILS 177 million, which is ILS 0.70 per share. This is in addition to the dividend we distributed last September in the amount of ILS 160 million. In total, the dividend distributed by Phoenix from 2022 income amounts to ILS 377 million, reflecting a rate of 30% of the group annual comprehensive income. To understand the group results, we look at the contributions of the income from core business versus the effect of investment, the interest rates, and special items. Total comprehensive income in 2022 was more than ILS 1.1 billion. As we can see, the group continues to show strong growth in the core businesses compared to last year in both the insurance in dark blue, as well as additional activities in orange. This is the key indicator of improving performance, including asset management, distribution, and credit activities in addition to insurance. We can also see the positive impact of special items. During the year, the comprehensive income was affected by the negative impact of investments compared to 3% real returns, which was partially offset by the effect of the interest rate increase. The net negative impact on 2022 income is ILS 238 million in light blue. This can be seen in light blue. This is why the total income decreased in 2022 compared to 2021, despite the continued growth in the income from the core businesses. In the fourth quarter, total comprehensive income was ILS 526 million due to continued growth in the income from the core business, as well as a positive capital market effect. Given the market volatility, our focus on growing income from our core businesses and shifting the mix to fee-based income from the additional core businesses is driving long-term growth and reduced volatility. It allows us to produce positive results even with such significantly negative market conditions, and it builds the platforms for the future. The group continues to show financial resilience in different market conditions with responsible risk management. Our corporate account or nostro portfolio yield this year was 1.9% on a nominal basis, and over the past five years, the average was 5.6% on a nominal basis. You can see the broad allocation of our nostro investments on the right, with 70% in fixed income. In addition, we remain focused on dynamic investment and risk management, especially in the period, including regarding changes in interest rates and balance sheet management. We feel that we have built the leading investment team in Israel and are building strong international capabilities to complement our leading position in Israel. We announced today an additional dividend distribution in the amount of ILS 177 million, which brings our total dividend distribution for 2022 to an amount of ILS 377 million for the revenues for the income of 2022. This reflects 30% of annual comprehensive income, consistent with our policy. We're building a track record of dividend distributions under our dividend policy, having distributed over ILS 500 million in both 2021 and 2022 calendar years. In addition, the group announced share buyback program for 2023 in the amount of ILS 100 million. Our shareholders' equity stands at ILS 10 billion after the semi-annual dividend distribution of ILS 160 million in September and repurchase shares in the amount of ILS 56 million in 2022. The group will continue to distribute dividends from its profits based on our dividend policy while strengthening the group's capital. We will now review the implementation of the strategy and the progress toward our strategic targets. Two years ago, we shared our strategic plan with specific targets across all four growth engines: insurance, asset management, distribution, and credit. We set targets which we updated upwards one year ago, reflecting our confidence in the continued growth of the group's businesses. In 2022, we continued to implement the strategy across all activities in our all four growth engines. The strategy consists of four 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. 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. These strategies aims to create value with several catalysts, growing income and shifting the mix forward 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. Regarding our targets, clearly capital markets are having an impact. You can see that in our income and our return on equity, we still performed close to our targets for 2025. The profits from the non-insurance core activities without one-time profits announced to ILS 390 million in 2022, significant growth compared to 2021. We're also growing shareholders' equity and are on track to reach the strategic targets we have set for the group. We believe that these targets are achievable in the timeframe and regardless of the cycle that we see in the capital markets. We believe that our growing income from activities puts us in a strong position going forward. We can look at the growth of each activity in the insurance, starting, of course, with insurance. In the insurance business, we see that total premiums and contributions continue to grow across the group to ILS 19.7 billion with CAGR of 12%. We can see accelerated growth in P&C premiums, which is dark blue at the bottom of the slide, as part of our strategy. In terms of insurance business targets, P&C premiums continue to grow, and we expect to be on track for well over ILS 4 billion in the medium term. Expense ratio are at or near targets, and we continue to improve as we grow. Solvency is above target, creating significant flexibility. And the income from the insurance core business continues to grow and reached the level of ILS 790 million in 2022. The second area of strategic activity is asset management. The Phoenix has built a wide offering in asset management, from ETFs and mutual funds to alternatives to retirement solutions. We also have a growing private and institutional brokerage and portfolio management business. In light of the strength of The Phoenix brand, we recently rebranded Excellence as the Phoenix Investment House and are starting to enjoy marketing and sales synergies. As of end of 2022, our AUMs stood at 371 billion ILS. The stability is due to continued net inflows despite negative market returns. The net inflows across our activities are due to the group's capabilities, track record, distribution, service, and branding. In recent months, we have also signed agreements to acquire Epsilon Investment House and assets and activities from Psagot Investment House, which include mutual funds, ETFs, and portfolios. The purchases are very synergetic thanks to the existing platforms in our investment house, and we expect a significant increase in revenues due to the purchases without a significant increase in expenses. With the transactions, subject to synergies, to regulatory approvals, the AUMs would have been close to 400 billion ILS on a pro forma basis. We are also progressing toward our targets for asset management. As for 2022, we continued to see growth in pension and provident business, as well as continued growth in revenues from our investment house activity. The third strategic area is distribution. Phoenix Agencies is the leading platform in Israel for insurance agencies and brokers, and includes some of the leading brands, including Agam and Shekel. These include two of the three leading employees' benefits and retirement planning platforms, as well as leading P&C agency, plus specialist players. The agencies continue to grow both organically and inorganically, and are managed on a standalone 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. The agency segment grew revenues in 2022 by 20% from 635 million ILS to 769 million ILS. Our target is 900 million ILS to 1 billion ILS, and we believe we are in the right direction. The agencies are the market leader, but only have 6% share of the highly fragmented market with significant opportunities for growth. We carried out a restructuring plan in December 2022 with the goal of aligning ownership and management to drive value creation in the coming years. The fourth strategic business is credit. Our credit business continues to grow based on the continued growth of Gama SME financing company and project finance business. Together, the group has a portfolio of over 5 billion ILS and is building a strong record and capabilities, and does not include credit activity related to client investment. This also does not yet include consumer credit, which we are building in parallel. Given the challenging macro trends and ongoing uncertainty, we continue to grow carefully, ensuring strong risk management, monitoring, and controls. Going forward, we believe credit will be an important source of value creation in the years to come. Going forward, we continue to focus on resilience, growth, and value creation. We intend to continue to focus on value creation and strategic execution, which we do not expect to be impacted by the potential control transaction. We are positioned well going into 2023 with a strong balance sheet and good liquidity. We are 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, including data and digital skills, as well as our organization and client-focused culture. In terms of sustainability, we are expanding our activities and ESG reporting and aspire to lead the market in the selected areas. Now, I would like to hand over the presentation to Eli Schwartz, the Group CFO, who will review the financial results and segments in more details. Eli, please. Thank you, Eyal. During the fourth quarter, all segments were profitable, including P&C, health, and life. Group income was ILS 526 million after tax, higher than the previous quarters. In the additional core business, we saw a profit before tax of ILS 164 million in the fourth quarter, with strong growth in investment service. If we look at the breakdown by the income source during the fourth quarter, the total income before tax was ILS 777 million. On the left, the income from operation was ILS 458 million, including ILS 286 million from insurance underwriting. On the right, we see a positive of ILS 319 million pre-tax impact, primarily from capital markets and interest rate effect. Looking at the full year, we report ILS 1.1 billion comprehensive income. It can be seen that about 40% of the total income of 2022 was from additional core activities. In the insurance business, on the left, the income from the health segment increased due to the raising of the interest rate, but was offset by negative equity returns. P&C recorded a small income, mainly due to capital market effect. On the right side, you can see the significant contribution and growth in the core activities, pension and provident business, financial service, and agencies, all of which increased significantly compared to the same period last year. Breaking down the 2022 income by source, the total pre-tax income was ILS 1.6 billion. The income from operation was ILS 1.8 billion, significantly above 2021. We can see the improvement in all areas, including insurance underwriting, pension and provident funds, agencies, and credit. On the right side, we see the negative impact of investment compared to 3% real returns, which was offset significantly by interest rate effect. The natural hedge provides stability during the challenging year. The Phoenix balance sheet continued to show strength. The total equity was growing in 2022. The strong balance sheet, the debt compositions, and the solvency positions provide financial strength in the group this volatile period, and will support the group ability to capture business operations going forward. We will now review each segment in more details. The P&C segment continues to face a challenging cycle, but improving in line with the company expectations. During 2022, underwriting profit was ILS 287 million, but negative contribution was recorded from investment. For the fourth quarter, however, we see underwriting profit of ILS 168 million, with overall income of ILS 213 million pre-tax, an improvement compared to previous quarters. The motor property business recorded a loss in 2022 in the fourth quarter by ILS 182 million and ILS 54 million respectively, but was offset by positive contribution from the parallel compulsory motor business. The health segment benefit from rising interest rates this year, contribution of ILS 1.1 billion in 2022 and ILS 172 million during the quarter. The company still has ILS 255 million in a LAT reserve if interest rate continue to increase in 2023. But more important in a strong underwriting profit, which has a growth of ILS 250 million last year to ILS 296 million this year. The life segment contribute pre-tax income of ILS 611 million in 2022, with ILS 215 million in underwriting profit. Here we also see the positive impact of interest rate. Other equity returns had a significant negative impact of ILS 845 million pre-tax income in 2022, and positive of ILS 113 million in the fourth quarter due to investment and capital market effect. The additional core activities are growing year-on-year, and with much lower volatility and smaller capital market impact than the insurance business. In the pension and the provident segment, we see growth of ILS 49 million last year to ILS 89 million this year. This is due to continued growth, economic of scale, and synergies from the Halman merger executed in 2021. The investment service segment include the Phoenix Investment House and Phoenix Advanced Investments. These activities contribute income of ILS 235 million before tax in 2022. On this, ILS 171 million was from operations, strong growth compared to ILS 113 million in 2021. In the fourth quarter, income increased by ILS 53 million compared to ILS 18 million in the fourth quarter of 2021. The agencies segment continue to grow, both organically and inorganically, creating a value in this business as part of the strategic plan. The agencies contribute ILS 300 million pre-tax income in 2022, compared to ILS 272 million last year, a growth of 10%. In term of profit of operation, growth was higher, from ILS 231 million to ILS 278 million. In December, we complete the restructuring to align management and structure for accelerated value creation. The credit segment, which including Gama results, generate income of ILS 73 million in 2022. Profit from operation grow significantly from ILS 37 million to ILS 73 million. Gama credit portfolio reached to ILS 2 billion, an increase of 132% since 2022. Thank you, Eli. We will now review the questions that were discussed just now in the conference call in Hebrew. The first question is about profitability. Net income decreased significantly compared to 2021 because of capital market and investment returns. In the last two months, we see that the markets continue to be volatile. Is it still correct to assume 3% real yields in forward planning and targets? Thank you, David. Yes, in the long term, as we can see, our average was above 3% real returns if we take measurements of the last five years. The 3% real returns are a tool for planning and management and allow for transparency for investors. In reality, we aim for higher returns, upside to the plan, as of course, as we could see in prior years. At the same time, we manage investment and risk dynamically with careful controls. Although 2022 and, of course, the beginning of 2023 are not the best for investors, we still believe that over time, we will exceed the 3% real results or real returns. Next question. The motor segment results improved lately. What is your forecast for 2023 in this segment? Actually, motor is very cyclical activity. The cycle of 2022 was more significant than previous cycles that I have seen in the past due to main three vectors. First, the premium during COVID went down significantly, and it did not manage to adjust to the changes in severity and frequency over 2022. What we have seen is a very significant adjustment to the risk that will eventually impact the value or impact the profits of this business. Phoenix, during this semi-crisis of not actually matching the risk with the premium, took some very strong activities to create a much better pricing model and, of course, to improve the cost level and measurements and, of course, managing this business. I believe in the next few quarters, we will see a much more positive impact of that business in insurance. Next question. Fourth quarter results had improved significantly. Is the current rate indicative for the group? As we disclose in our financial, we separate the income from activities versus the market impact. You can see from the presentation that the income from activities is growing. This is the strategic plan, and this is our target, and we are aligned with this target. Next question is relating to credit. After the end of negotiations for cooperation with Isracard, how does the company now intend to grow in this segment? What might be the effects of the Harel-Isracard deal on the market structure and competition? As we explained and presented before, credit is one of the engines of that group. The reason that it has become an engine is because the market in Israel is relatively very concentrated and not really developed. Most of the credit provided in the Israeli market is provided by banks. So eventually, credit cards and other non-banking financing companies account for less than 10%. So it means that there is a lot of room for everybody. As we said, Phoenix is focusing on three or four main legs in the credit, the SME through Gama, project finance, of course, other activities of financing, and specifically consumer credit. As we presented many times in the past, and of course, in this case as well, there is huge room for many players in that market, whether it is through credit card companies or other facilities or other digital facilities that would be significant in the market in the next few years. If we look at other foreign markets and see what happened there in the credit, we will see the same trend in Israel in the coming years. So generally, there is a huge place for consumer and any other credit activities. Of course, competition, it is good for the market, and I believe that the competition will take out more market share from banks and will leave a lot of room to strong companies with strong balance sheet like Phoenix. Next question. The higher interest rate causes a slowdown in all areas of real estate. What is the extent of the company's credit exposure to developers and real estate contractors? We do have exposure for real estate. We publish in our reports the notes that give the information about exposure, indirect or non-direct, of real estates. It is important to say that in the recent years, we have changed our portfolio from direct asset holding to a strong platform with resilience balance sheet. Next question. Recently, we see that financial institutions abroad are encountering cash flow difficulties, creating ripples throughout the market. What is the impact of these events (Silicon Valley Bank, Signature Bank, Credit Suisse) on The Phoenix? We all know that we are currently in the middle of a very challenging period. Markets volatility, inflation, interest rate, other changes. As a financial institution, as a big investor in Israel and also in global markets, those changes have an impact on our group, on the savers, and of course, on our own account. Such changes are eventually impact of the interest, of the inflation, of the economical situation. So there is an impact, and currently negative impact, and we believe that in general, we will know how to get out once the situation is changing in a much better way, using our professional strength in the investments, in the risk management. So, currently, it is very challenging, but actually, this is the market situation that we see. Next question. In recent months, the company stock has been trading in high volatility due to market conditions. You stated that you approved another buyback program for the purchase of The Phoenix shares. In what cases will it be activated? The buyback is another tool in our arsenal of financial tools, like dividend, buyback, and of course, good and very comprehensive IR program. It is also a tool that we use, and we believe that Phoenix performance should be better as presented in the strategic targets. If we believe that the situation is not representing the right performance, we will be there to buy back our shares. It is important to say that also, we are under the regulation of the blackout period, so there is a time that we can buy our shares. Of course. The next question is regarding the possible shareholder transaction from the current controlling shareholders to potential acquiring controlling shareholders. The question is, how is the due diligence process progressing? Can you give an estimate of the timetable for completing the deal? The transaction, as said in the past, is between Gallatin and Centerbridge, the U.S. funds, to funds from the UAE. I do not know if there is an estimated timetable for signing. I can say that from the company's perspective, we continue to execute the strategy and focus on the value creation, and we will continue to do so in the future. Once we have more information like we had in the past, if something happens between the companies or the funds above us, we will update immediately. Thank you, Eyal. Those were the questions from the Hebrew call today. Investors are welcome to contact us directly. We are happy to answer questions. Please send us an email or reach out to us. The email for IR is ir@fnx.co.il, or you are welcome to reach out to any one of us individually. We will be happy to schedule time to discuss the performance, our strategy, the targets, and answer any questions. Finally, I would like to remind that the presentation, the other materials, like a recording of this call, will all be available on our website. In addition, for the first time, we will also publish on our website an Excel highlighting the key financial information from the financial statements to assist analysts and investors. Thank you again very much for joining the call.