January 29, 2008
The Securities Authority
22 Kanfei Nesharim St.
Jerusalem 95164
Through MAGNA
The Tel Aviv Stock Exchange Ltd
54 Ahad Haam St.
Tel Aviv 65202
Through MAGNA
Re: Embedded Value of The Phoenix Insurance Company Ltd
The Company hereby gives notice as follows:
Clarification regarding forward-looking information:
Circular 2007-01-11 of the Supervisor of Insurance states:
"It is clarified that the embedded value is forward-looking information, as defined in section
32A(a) of the Securities Law, 5728-1968 (hereinafter – the Securities Law), and that liability
under sections 31 and 32 of the Securities Law and under section 42A of the Control Law which
applies Chapter E of the Securities Law, mutatis mutandis, shall not apply thereto owing to the
fact that it was not realized, wholly or partly, or it was realized in a different manner than
foreseen."
1. Circular No. 2007-01-11 of the Supervisor of Insurance from August 12, 2007 requires insurance
companies to publish, every year, together with the financial statements for the year's first quarter,
information concerning the embedded value ("EV") of long-term insurance policies (life
insurance and health insurance). Accordingly, The Phoenix Insurance Company Ltd, a subsidiary
of the Company (hereinafter: "Phoenix Insurance") is expected to publish, by the end of May
2008, the embedded value of Phoenix Insurance as of December 31, 2007. In addition, the
circular specifies that by December 31, 2007 the insurance companies must submit to the
Supervisor of Insurance information concerning the embedded value as of December 31, 2006.
Phoenix Insurance submitted to the Supervisor of Insurance such a report concerning the
embedded value of its long-term life and health insurance policies as of December 31, 2006
(hereinafter: the "EV Report"). The EV Report was submitted in accordance with the circular
and prepared in conformity with the rules and principles set out in the report of the Committee on
Publication of the Embedded Value (hereinafter: the "Committee's Report")1.
The EV Report as of December 31, 2006 was prepared solely for the purpose of reporting to
the Supervisor and is not audited. Phoenix Insurance will be publishing the embedded value
as of December 31, 2007 in accordance with the Supervisor's aforesaid circular.
A copy of the Committee's Report can be found on the website of the Ministry of Finance – Capital Market,
Insurance and Savings Division (www.mof.gov.il).
1
2. The embedded value is an estimate of the value of the life and health insurance portfolio 2. The
embedded value is basically calculated using actuarial methods for the capitalization of future
earnings. The embedded value consists of two components: (a) "value of the portfolio in force" –
capitalization of the anticipated flow of future earnings from the existing portfolio, less the cost of
the required capital; (b) "adjusted equity" – the equity of Phoenix Insurance after adjustments for
consistency with the value of the portfolio in force.
It is emphasized that the embedded value does not include the value of non-life (elementary)
insurance business, including the personal accident, overseas travel and foreign workers
lines, other areas of activity of Phoenix Insurance and companies controlled by it, including
pension funds, and the ability to generate business in the future (goodwill).
It is further emphasized that the embedded value does not take into account capital
surpluses held by the Company (The Phoenix Holdings Ltd) and invested in other activities
and businesses, such as: Excellence Investments Ltd and Mehadrin Ltd.
It is thus understood that the embedded value does not reflect the market value or the
economic value of Phoenix Insurance, and certainly not the total market value or economic
value of the Company (The Phoenix Holdings Ltd).
3. According to the EV Report, the embedded value (EV) as of December 31, 2006 is NIS 3,959
million (of which NIS 742 million represents equity adjusted for consistency with the value of the
portfolio in force3, and NIS 3,270 million represents the present value of future earnings less tax
and after deduction of the cost of required capital in the amount of NIS 53 million. The "value of
new business" ("VNB") of policies that were sold in 2006 was estimated in the EV Report at NIS
101 million4. The "value of new business" reflects an estimate of the contribution to the
embedded value of life and health policies that were sold and collective policies that were
renewed in the course of 2006.
4. As stated, the embedded value was calculated according to the methodology established in the
Committee's Report. The assumptions used in the model are "best estimate assumptions," i.e.
without conservatism coefficients.
The model does not include the value of future sales, but the calculation assumes the continuation
of business activity; general and administrative expenses were calculated based on the results of a
costing model prepared at Phoenix Insurance in regard to its expenses, including the allocation of
expenses to the different lines (life insurance, health insurance, etc.) and the loading of the
2
The business lines included in the EV calculation are: (a) personal policies in the life and health insurance
portfolio in force as of December 31, 2006; (b) collective policies in the life and health insurance portfolio in
force as of December 31, 2006. In accordance with the rules and guidelines in the Committee's Report, the
earnings of these collective policies were estimated only up to the policies' next renewal date.
3
It is clarified that the equity of The Phoenix Insurance Company Ltd as of December 31, 2006, before its
adjustment as stated, is NIS 1,105 million.
4
The VNB before the cost of required capital is NIS 106 million, the cost of required capital in respect of the
VNB having been estimated at NIS 5 million.
expenses onto various activities (production, management, investments, etc.); the demographic
assumptions included in the calculation were derived from internal studies of Phoenix Insurance
and conclusions based on the exercise of professional judgment relying on relevant experience
and also taking into account information from external sources, such as reinsurers.
The model employs a financing technique called "certainty equivalent," in which the cash
flows are adjusted to their inherent market risks, and they are therefore capitalized at riskfree interest. This risk-free interest is also used to estimate the anticipated yield on
investments. The future yield and the capitalization interest in real terms (beyond inflation)
were determined based on the yield curve of index-linked risk-free interest as of the end of
2006. Regarding the effect of this interest see section 6 below.
5. As stated, in the calculation of the embedded value according to the rules and guidelines in the
Committee's Report "best estimate assumptions" were applied, i.e. – assumptions based on a
projection of existing experience on the date of preparation of the report with respect to the
embedded value to the long-term future. The actual results could differ from those that were
estimated.
Deviations from the parameters and the assumptions used to forecast the embedded value
could materially affect the result.
These parameters include, inter alia: economic factors (e.g. – capitalization interest, yields),
demographic factors (e.g. – changes in mortality and morbidity), relevant legislation, taxation,
and changes in the business environment in which Phoenix Insurance operates. Future results that
deviate from the estimates made on the basis of "best estimate assumptions" are natural and can
be expected to occur even if there has been no change in Phoenix Insurance's operating
environment. Hence, it is to be expected that the actual results in every year will differ from those
forecast by the EV model, even if only because of normal random fluctuations. It is further
emphasized that the calculation of the embedded value does not include the effect of future events
– including the expected entry of the banks into the pension consulting business – whose effect on
the business results and on the embedded value Phoenix Insurance is unable to evaluate on the
date of the report. The calculation also does not take into account subjects that have still not been
anchored in binding legal rules, such as broadening of the possibilities of moving pension savings
between different types of pension programs as well as between similar programs, new capital
requirements that may be imposed on the insurance companies or any other scenario which is not
certain to be realized.
It is emphasized that the yield curve of index-linked risk-free interest published as of the
end of 2007 differs from the one used in the aforesaid calculation. This curve will be applied
in the calculation of the embedded value as of December 31, 2007.
6. As of the date of this report, Phoenix Insurance is still examining various issues and certain
assumptions that served as a basis for the EV calculation. Thus, in the opinion of Phoenix
Insurance, there may be changes in the assumptions following the completion of the studies which
it is carrying out.
In light of the above, below are sensitivity tests that examine the sensitivity of the results of the
calculation to changes in various parameters. It is clarified that the sensitivity tests do not
encompass all the changes that could occur in various assumptions, which have still not been
taken into account, and no conclusions should be drawn from the sensitivity analysis regarding
the company's assessment of a possible effect of regulatory changes that have still not been given
binding effect.
Change in EV
NIS mil.
Change in VNB
%
NIS mil.
%
Basic result
3,959
101
0.5% reduction in risk-free
interest rates in the calculation
of the value of the portfolio in
force, without a
corresponding reduction in
interest in respect of the
company's assets and reserves
(140)
(3.5)
1
1.1
10% increase in general and
administrative expenses
(89)
(2.2)
(9)
(8.5)
10% relative increase in the
rate of cancellations
(including redemptions and
settlements)
(146)
(3.7)
(14)
(14.3)
10% relative increase in
mortality rates of insured
(excluding pension recipients)
(75)
(1.9)
(7)
(7.1)
10% relative increase in
morbidity rates (rates of
claims in respect of health,
long-term care and work
disability products)
(162)
(4.1)
(16)
(16.3)
Sincerely yours,
The Phoenix Holdings Ltd
The above is a freely rendered translation. The formal and binding wording is the wording of the Immediate Report in
Hebrew as issued by the Company.