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Stability of Insurance Companies

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									Stability of Insurance
Companies
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                               Contents
                     1.	   Introduction	..............................................................................................................................................4
                     2.	   The	Structure	of	the	Insurance	Sector	......................................................................................................5
                     3.	   Characteristics	of	the	Activity	..................................................................................................................10
                     4.	   Risks	and	an	Assessment	of	Stability	.......................................................................................................26
                           Insurance	risk	...........................................................................................................................................28
                           Market	risk		..............................................................................................................................................30
                           Liquidity	risk	............................................................................................................................................35
                           Credit	risk	.................................................................................................................................................36
                                           .
                           Re-insurance	............................................................................................................................................39
                           Capital	Adequacy	.....................................................................................................................................43
                           Appendix	A:	Holding	Structures	of	the	Principal	Stockholders	in	Israeli	Insurance	Companies	...........48                                        .
                           Appendix	B:	Active	Insurance	Companies	and	Licensing	Activities	in	2004	.........................................54


                     List of Tables
                     Table	C-1	                Number	of	Active	Insurance	Companies,	and	Those	Also	Engaging	
                     	                                           .
                                               in	Life	Insurance		...............................................................................................................5
                     Table	C-2	                The	GDP,	Life	Insurance	Premiums	and	Non-life	Insurance	Premiums		..........................6          .
                     Table	C-3	                Number	of	Authorized	Insurance	Agent	Licenses	
                     	                         (licensed	to	market	insurance),	Classified	by	Insurance	Lines	..........................................7
                     Table	C-4	                Ratio	of	Premiums	to	Agents,	in	NIS	millions	...................................................................7
                     Table	C-5	                Market	Concentration	and	Competition	Indices	................................................................9
                     Table	C-6	                Main	Financial	Data	of	the	Insurance	Companies		............................................................13
                     Table	C-7		               Yield	on	Accounting	Equity	by	Insurance	Companies,	2000-2004	...................................16
                     Table	C-8		               Comparison	of	Revenue	from	Management	Fees		.............................................................19
                     Table	C-9		               Aggregate	Pre-tax	Profits	from	Life	and	Non-life	Insurance	Businesses,	
                     	                         by	Insurance	Companies	....................................................................................................22
                     Table	C-10	               General	and	Administrative	Expenses,	in	NIS	thousands,	
                     	                         and	the	Ratio	of	General	and	Administrative	Expenses	to	
                     	                         Total	net	premiums	in	retention	in	Life	Insurance,	percent................................................24
                     Table	C-11	               General	and	Administrative	Expenses	in	NIS	thousands,	
                     	                         and	the	Ratio	of	General	and	Administrative	Expenses	to	Total	Life	
                     	                         Insurance	Reserves,	percent	...............................................................................................25
                     Table	C-12		              The	Ratio	between	Net	Insurance	Reserves	and	AveragePremiums	net	of	reinsurance	and	
                                               Average	Claims	net	of	reinsurance	.....................................................................................29
                     Table	C-13		              Rate	of	the	Yield	on	Equity	and	the	Correlation	with	the	Yield	
                     	                         Attained	on	the	Capital	Market	...............................................................................31
                     Table	C-14			             Ratio	of	Negotiable	Assets	to	Total	Assets,	by	Companies	-	2004	....................................33
                     Table	C-15	               Ratio	of	Credit	(Other	Than	Exposure	to	Reinsurance)	
                     	                                                                      .
                                               to	Total	Assets,	Excluding	Avner	and	Karnit	.....................................................................37




                                  Annual Report 2004
                                                                                         Stability of Insurance Companies


Table	C-16		    Credit	Components,	Excluding	Government	Bonds	and	Deposits	
	               in	Banks	..............................................................................................................................38
Table	C-17	     Total	Credit	by	Rating	(excluding	Avner	and	Karnit),		......................................................39
Table	C-18		    Percentage	of	Premiums	net	of	reinsurance	.......................................................................43
Table	C-19	     Composition	of	the	Recognized	Equity	and	the	Reserve	for	Special	Risks	
	               in	Life	Insurance	in	Insurance	Companies	in	2004,	NIS	thousands	..................................44
Table	C-20		    Indices	for	Examining	Capital	Adequacy	-	Equity	Development	
	               in	Active	Insurance	Companies	(Non-consolidated	Equity)	
	               during	the	years	2000-2004,		..............................................................................................46

List of Charts
Chart	C-1	      Distribution	of	Life	Insurance	Premiums	by	Insurance	Groups,	percent	...........................8
Chart	C-2	      Distribution	of	Non-life	Insurance	Premiums	by	Insurance	Groups,	percent	....................8
Chart	C-3	      Rate	of	the	Yield	on	Accounting	Equity,	2000	-	2004	........................................................14
Chart	C-4		     Yield	on	Equity	in	Banks*	and	Insurance	Companies	-	
	               Industry	Average,	2002	-	2004	...........................................................................................17
Chart	C-5	      Composition	of	the	Pre-tax	Profit	by	Insurance	Businesses	
	               (Life	and	Non-life),	percent	...............................................................................................20
Chart	C-6	      Ratio	of	Profit	from	Life	Insurance	and	Non-Life	Insurance	
	               Businesses	to	Gross	Premiums	...........................................................................................21
Chart	C-7		     Rate	of	the	Yield	on	Equity	and	the	Correlation	with	the	
	               Yield	Attained	on	the	Capital	Market	.................................................................................31
Chart	C-8		     Ratio	of	Negotiable	Assets	to	Total	Assets	.........................................................................32
Chart	C-9	      Insurance	Company	Assets	-	Ratio	of	Assets	Traded	Abroad	
	               to	Total	Negotiable	Assets	..................................................................................................34
Chart	C-10			   Ratio	of	Cash,	Cash	Equivalents	and	Negotiable	Assets	to	
	               Current	Liabilities	(excluding	Participating	Life	Insurance	Plans)	....................................36
Chart	C-11	     Distribution	of	the	Risk	by	Reinsurers	...............................................................................42
Chart	C-12	     Indices	for	Examining	Capital	Adequacy	-	Ratio	of	Equity	
	               to	Total	Assets,	Ratio	of	Equity	to	Reserves	in	Life	Insurance	
	               and	Non-life	Insurance	.......................................................................................................47            Annual Report 2004




                                                                                                                                                     
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     1       Introduction

                     The	contribution	of	the	insurance	sector	to	the	economy	is	in	the	creation	of	opportunities	for	
                     households	and	companies	to	effect	transactions	at	reduced	risks.	This	sector	also	contributes	
                     to	the	economy	by	its	recruitment	of	long-term	sources	of	capital,	sources	that	increase	the	
                     potential	for	long-term	investments.
                     Many	reforms	have	been	implemented	in	recent	years	in	the	insurance	market,	whose	aims	
                     are	to	improve	consumer	welfare,	to	enhance	competition,	to	increase	the	sources	of	credit	
                     and	to	prevent	conflicts	of	interest.	The	latest	changes	having	material	impact	on	the	economy	
                     are	the	acquisition	of	the	new	pension	funds,	which	had	been	controlled	by	the	Histadrut,	
                     and	the	fact	that	the	insurance	companies	are	now	the	entities	managing	the	funds	of	the	
                     vast	majority	of	members	(approximately	94%	of	the	active	members	in	the	new	pension	
                     funds	 are	 depositing	money	to	funds	controlled	 by	 the	insurance	 companies).	 Previously,	
                     the	 pension	 market	 had	 been	 blocked	 to	 the	 insurance	 companies.	The	 changes	 that	 took	
                     place	indicate	the	official	entry	of	the	insurance	companies	into	this	market;	now	they	are	
                     managing	assets	at	the	assessed	volume	of	about	NIS	24	billion	(new	pension	funds	as	at	
                     December	31,	2004).
                     Many	 potential	 sources	 of	 financing,	 which	 can	 finance	 the	 real	 activity	 in	 the	 economy,	
                     are	today	concentrated	in	the	insurance	companies.	Some	of	these	sources	are	the	insurance	
                     companies’	 nostro	 reserve	 funds,	 the	 life	 insurance	 reserve	 funds,	 members’	 accruals	 in	
                     pension	funds,	and,	once	the	Bechar	Committee	reform	is	implemented,	additional	sources	
                     should	 be	 added,	 assuming	 that	 the	 insurance	 companies	 will	 be	 acquiring	 some	 of	 the	
                     provident	funds	and	mutual	funds	from	the	banks.




                            Annual Report 2004
                                                                     Stability of Insurance Companies



2          The Structure of the Insurance Sector

Twenty-five	insurance	companies	are	operating	in	Israel	(including	Avner).	Three	of	these	
are	government	companies:	the	Natural	Disasters	Fund	in	Agriculture,	which	insures	against	
natural	 disasters	 in	 agriculture;	 Inbal,	 which	 insures	 government	 activities;	 and	 the	 Israel	
Foreign	Trade	Risks	Insurance	Corporation,	which	engages	in	long-term	foreign	trade	risk	
insurance	(exceeding	one	year).	


                               Table C-1
Number of Active Insurance Companies, and Those Also Engaging in Life Insurance

                                      2000        2001         2002                   2003              2004
   Total companies                     31          28            27                    25                25
                                             Of	which,	engaging	in:
     Life	Insurance                     16         14            14                     13                   12
Source:	Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division



In	 recent	 years,	 there	 has	 been	 a	 marked	 trend	 of	 mergers	 and	 acquisitions	 of	 insurance	
companies.	The	number	of	insurance	companies	diminished	from	31	in	2000	to	25	in	20041.	
Following	is	a	list	of	insurance	groups,	and	their	member	companies:
•	 The	Clal	Group	includes	the	Clal,	Arieh,	and	Clal	Credit	Insurance	companies.
•	 The	Migdal	Group	includes	the	Migdal	and	Hamagen	insurance	companies.
•	 The	Phoenix	Group	includes	the	Phoenix	and	Hadar	insurance	companies.
•	 The	 Menorah	 Group	 includes	 the	 Menorah	 Insurance	 Company	 (the	 merger	 with	
     Manolife	was	completed	in	2001).
•	 The	 Harel	 Group	 includes	 the	 Ishpuz,	 Dikla,	 Shiloah,	 Zion,	 Sahar-Zion,	Yehuda	 and	
     Harel	insurance	companies.
•	 The	Hachsharat	Hayeshuv	Group	includes	the	Hachsharat	Hayeshuv,	the	New	BSSCH,	
     and	the	Ashur	insurance	companies.
•	 The	Direct	Insurance	Group	includes	the	IDI	Direct	insurance	company.
•	 The	Government	Group	includes	the	Natural	Disasters	Fund,	Inbal	and	BSSCH.
•	 The	AIG	Group	includes	the	AIG	and	Ezer	insurance	companies.
                                                                                                                      Annual Report 2004




1.	 See	holding	structures	in	Appendix	A.




                                                                                                                  
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     •	       Other	companies	-	Ayalon,	Eliahu,	Shomera,	Shirbit,	Agricultural	Cooperative	Society,	
                              Continental	 (a	 special	 manager	 was	 appointed	 to	 handle	 its	 liquidation),	Agricultural	
                              Insurance	-	Cooperative	Society,	and	the	Avner	Corporation.


                     The	insurance	sector	is	one	of	the	key	sectors	in	the	economy.	The	volume	of	its	activity	in	
                     relation	to	the	gross	domestic	product	increased	from	4.1%	of	the	GDP	in	1999	to	6.1%	of	
                     the	GDP	in	2004.


                                                         Table C-2
                              The GDP, Life Insurance Premiums and Non-life Insurance Premiums2,
                                                                          in NIS billions, percent

                                                                    1999            2000             2001            2002            2003            2004
                      GDP                                           461.7           498.8           494.3           490.7           497.0           524.7
                      GDP	of	the		
                                                                    322.9           356,0           347.5           338.4           344.2           369.7
                      business	sector
                      Total	life	and	non-life	
                      insurance	premiums	                            19.0            22.9            25.8            26.4            31.4            32.1

                      Percent	of	the	GDP                            4.1%            4.6%            5.2%             5.4%            6.3%            6.1%
                      Business	sector’s	
                      percentage	of	the	GDP                         5.9%            6.4%            7.4%             7.8%            9.1%            8.7%

                     Source:		Publications	of	the	Central	Bureau	of	Statistics,	insurance	company	reports	and	data	processed	by	the	Capital	
                     Market,	Insurance	and	Savings	Division.



                     Insurance	 marketers	 are	 individual	 insurance	 agents	 and	 corporations	 (some	 insurance	
                     agencies	are	owned	by	insurance	companies).	Some	insurance	companies	market	insurance	
                     directly,	 such	 as	 AIG	 and	 Direct	 Insurance.	 In	 2004,	 936	 insurance	 agencies	 (agent-
                     corporation)	 were	 authorized	 to	 operate	 in	 at	 least	 one	 of	 the	 insurance	 lines	 (property	
                     insurance,	personal	accident	insurance	within	the	scope	of	non-life	insurance,	life	insurance	
                     and	marine	insurance)3.




                     2.	 In	the	section,	Stability	of	Insurance	Companies	–	the	data	for	the	years	up	to	and	including	2003	are	adjusted	to	the	CPI	in	respect	of	
                         December	2003.	The	data	for	2004	are	nominal	data.
                     3.	 For	further	details	on	the	subject	of	licensing	of	insurance	agents,	see	section	“Insurance	Agent	Licensing	Department.”




                                 Annual Report 2004
                                                                     Stability of Insurance Companies



                                     Table C-3
                   Number of Authorized Insurance Agent Licenses
             (licensed to market insurance), Classified by Insurance Lines

              Line                    1999          2000          2001         2002          2003        2004
               Life                   5,834         6,732        6,322         6,820        7,103        7,032
           Non-Life                   4,746         5,871        5,178         5,471        5,820        5,424
       Life	+	Non-life                3,724         4,411        4,167         4,488        4,522        4,511
             Marine                    858           967          938           966          980         976
     Total	individual	agents	         8,564         8,761        8,844         8,689        8,509        8,265
  licensed	in	at	least	one	line
Source:		Capital	Market,	Insurance	and	Savings	Division	-	Insurance	Agent	Licensing	Department.



This	table	shows	that	there	has	not	been	any	significant	change	in	the	number	of	insurance	agents	
in	recent	years.	However,	an	indication	of	the	increased	use	of	the	insurance	instrument,	and	of	an	
improvement	in	the	means	of	distribution	can	be	seen	in	Table	C-4.	This	table	indicates	a	consistent	
rise	in	the	premiums	to	agents	ratio,	from	a	level	of	approximately	NIS	2.6	million	in	2000	to	about	
NIS	3.9	million	in	2004.


                                        Table C-4
                         Ratio of Premiums to Agents, in NIS millions

                           Ratio of Premiums to Agents, in NIS millions
                 1999                       2000        2001         2002         2003            2004      
                  2.2                        2.6           2.9          3          3.7            3.9
Source:		Capital	Market,	Insurance	and	Savings	Division	-	Insurance	Agent	Licensing	Department.




Market Concentration and Competition Indices
The	insurance	sector	in	Israel	is	characterized	by	high	market	concentration	(but	lower	than	
in	the	banking	sector).	Chart	C-1	clearly	illustrates	this	concentration.	The	concentration	in	
                                                                                                                   Annual Report 2004




the	life	insurance	line	is	high	according	to	all	indices,	compared	to	the	concentration	in	the	
non-life	insurance	line.	The	five	major	insurance	groups	rake	in	about	95%	of	the	proceeds	




                                                                                                               
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     from	life	insurance	policy	sales,	compared	to	about	69%	of	the	proceeds	from	sales	of	non-
                     life	insurance	policies.
                     	
                                                         Chart C-1
                           Distribution of Life Insurance Premiums by Insurance Groups, percent

                                                                       5%




                                   The	Five	Major	Groups
                                   All	Other	Companies




                                                                            95%




                                                      Chart C-2
                      Distribution of Non-life Insurance Premiums by Insurance Groups, percent

                                                            31%



                                    The	Five	Major	Groups
                                    All	Other	Companies



                                                                                                69%




                            Annual Report 2004
                                                                                  Stability of Insurance Companies



                                         Table C-5
                          Market Concentration and Competition Indices

                Concentration and Competition  Concentration and Competition Indices 
                 Indices by Gross Premiums in       by Gross Premiums in the  
                    the Life Insurance Line          Non-life Insurance Line
                        2003                       2004                          2003                              2004
    HHI                 0.214                      0.214                         0.125                             0.118
    CR3                 0.719                      0.721                          0.53                             0.507
    CR5                 0.951                      0.952                         0.708                             0.692
Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.


The	Herfindahl-Hirschman	Index4	(HHI)	measures	the	level	of	concentration	in	any	specific	market	
sector.	The	Index	ranges	between	1	(full	concentration	-	one	entity	controls	the	entire	sector)	to	
1/N	(maximum	dispersion	-	the	optimal	situation).	N	is	the	number	of	entities	operating	in	the	
sector.	For	example,	in	2004,	13	companies	were	active	in	life	insurance;	therefore,	the	index	for	
maximum	dispersion	is	0.076.
During	the	last	two	years,	the	HHI	in	the	life	insurance	line	reached	0.214;	that	is,	the	situation	today	
is	2.6	times	worse	than	the	optimal	situation.	In	non-life	insurance,	in	order	to	arrive	at	the	precise	
implications	of	the	calculation	of	the	deviation	from	the	optimal	situation,	specific	lines	must	be	taken	
into	account,	rather	than	all	non-life	insurance	premiums,	since	not	all	companies	are	active	in	all	
lines.	In	the	compulsory	motor	vehicle	insurance	line,	19	companies	were	active	in	2004.	The	HHI	
is	0.07,	and	the	deviation	from	the	optimum	is	1.3	times	off	the	optimal	dispersion.	Therefore,	there	
has	been	an	improvement	compared	to	the	situation	in	2001,	when	the	deviation	had	been	two	times	
worse	than	the	optimal	dispersion
When	we	examine	the	reasons	for	the	differences	in	market	concentration,	it	is	important	to	keep	
in	mind	that	25	companies	are	operating	in	non-life	insurance,	compared	to	only	12	companies	in	
life	insurance.	Furthermore,	life	insurance	includes	a	savings	component	and	a	risk	component	at	
differing	rates,	and	constitutes	a	long-term	contract,	which	includes	obstacles	making	it	difficult	for	
insureds	to	switch	companies.	On	the	other	hand,	non-life	insurance	includes	solely	a	risk	component,	
and	the	contracts	in	non-life	insurance	are	usually	for	one	year	(although	sometimes	there	are	longer	
contracts).	Thus,	insureds	under	non-life	insurance	are	able	to	switch	companies	more	easily	than	
insureds	under	life	insurance.
                                                                                                                                              Annual Report 2004




4.	 The	Herfindahl-Hirschman	Index	is	calculated	by	totalling	the	squares	of	the	shares	obtained	by	dividing	each	entity’s	premiums	by	the	
    total	premiums	in	the	line.




                                                                                                                                    
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     3       Characteristics of the Activity

                     2004	 was	 another	successful	 year	 for	 the	 insurance	 sector	 in	 Israel.	 Insurance	 companies	
                     showed	very	good	business	results	in	2004,	although	they	were	lower	than	their	record	year	
                     in	2003.
                     The	insurance	companies’	yield	on	capital	reached	a	ratio	of	25%	in	2004.	This	ratio	reflects	
                     a	decline	of	about	12	percentage	points	from	the	record	yield	achieved	in	2003.	At	the	same	
                     time,	the	companies’	accounting	equity	grew	at	the	rate	of	about	49%	between	2002	and	
                     2004	and	totalled	NIS	9.1	billion.	Improved	capital	adequacy	and	improved	stability	of	the	
                     insurance	companies	can	be	discerned:	the	significant	rise	in	the	companies’	capital	in	2004,	
                     totalling	about	NIS	1.4	billion,	was	not	the	result	of	an	increase	in	the	volumes	of	activity	as	
                     expressed	in	the	premiums.	Assuming	that	no	change	occurred	in	the	risk	that	the	insurance	
                     companies	assumed	per	monetary	unit	(expressed	in	shekels),	even	though	there	was	a	slight	
                     increase	in	the	volume	of	premiums	in	the	economy	(i.e.,	in	the	risk),	nevertheless,	there	was	
                     a	significant	rise	in	the	companies’	capital.
                     The	 insurance	 companies’	 profit	 is	 influenced	 by	 premiums	 that	 the	 insurance	 companies	
                     collect	 in	 consideration	 of	 the	 risk	 that	 they	 assume,	 by	 the	 profit	 on	 their	 investment	
                     activities	 (profits	 accruing	 on	 investments	 of	 amounts	 of	 insurance	 reserves),	 from	 the	
                     insurance	benefits	that	they	pay	as	a	result	of	the	insurance	events	that	occurred	and	from	
                     their	operating	expenses	(mainly	payments	to	their	product	distributors	and	their	general	and	
                     administrative	expenses).	
                     The	aggregate,	post-tax	profit	from	insurance	business	(NIS	2.14	billion)	is	about	16%	lower	
                     than	 the	 aggregate	profit	 in	 2003.	There	 has	 been	 a	 decline	 in	 the	 profitability	of	 the	 life	
                     insurance	line	(NIS	1.83	billion	before	tax	-	a	13%	decline	compared	to	2003),	and	a	decline	
                     in	the	profitability	of	the	non-life	insurance	lines	(profit	of	NIS	1.76	billion	before	tax	in	
                     2004	-	a	decline	of	about	20%	compared	to	2003).
                     Revenue	 from	 investments	 constitutes	 a	 key	 component	 in	 the	 financial	 results	 of	 the	
                     insurance	 companies,	 and	 the	 main	 explanation	 for	 the	 decline	 in	 profitability	 compared	
                     to	 the	 previous	 year	 is	 the	 effects	 of	 investment	 revenue.	 In	 2004,	 although	 the	 non-life	
                     insurance	sector	suffered	an	underwriting	loss,	the	transition	to	profit	in	this	line	was	created	
                     due	 to	 the	 investment	 profits.	 The	 total	 loss	 from	 non-life	 insurance	 business,	 excluding	
                     the	 investment	 profits,	 is	 approximately	 NIS	 87	 million.	 This	 indicates	 a	 downtrend	 in	
                     the	underwriting	loss	(the	underwriting	loss	reached	about	NIS	550	million	in	2003).	An	
                     analysis	 of	 the	 underwriting	 loss	 in	 2004	 shows	 that	 in	 product	 liability	 insurance	 lines	




                      10      Annual Report 2004
                                                                               Stability of Insurance Companies


-	both	directors’	liability	insurance	and	professional	liability	insurance	-	the	underwriting	
loss	reached	about	NIS	118	million;	neutralizing	this	loss	leads	to	an	underwriting	profit	of	
about	NIS	31	million.	Investment	profits	are	important	since	they	influence	both	the	profits	
of	 non-life	 insurance	 businesses	 and	 the	 profits	 in	 life	 insurance	 businesses	 (through	 the	
management	fee	from	the	participating	portfolio,	which	are	calculated	as	a	proportion	of	the	
total	assets	with	the	addition	of	a	proportion	of	the	profits	from	investments5).	This	also	finds	
expression	in	assured-yield	life	insurance	plans,	in	the	financial	margin	between	the	quoted	
yield	on	earmarked	bonds	that	insurance	companies	receive	from	the	State	and	a	lower	yield	
rate	assured	by	the	insurance	companies	to	their	insureds	in	the	plan.	The	year	2003	was	a	
record	year	for	revenues	from	investments.	The	life	insurance	investment	portfolio	generated	
profits	 of	 nearly	 NIS	 11	 billion,	 while	 the	 nostro	 investments	 in	 the	 non-life	 insurance	
portfolio	 generated	 profits	 totalling	 approximately	 NIS	 2.8	 billion.	 In	 2004,	 the	 revenue	
from	investments	was	lower	and	reached	a	total	of	about	NIS	7.5	billion	in	life	insurance,	
while	the	revenue	from	investments	in	non-life	insurance	totalled	about	NIS	1.85	billion.	A	
substantial	portion	of	the	profits	from	investments	in	life	insurance	was	credited	in	favor	of	
the	insureds’	savings,	particularly	in	the	participating	portfolio.	The	lower	profitability	of	the	
insurance	companies	in	2004	compared	to	the	previous	year	is	attributable	to	the	change	in	
the	yields	in	the	capital	market,	which	were	lower	in	2004	than	in	2003.	This	drop	in	income	
is	 so	 significant	 that,	 notwithstanding	 the	 favorable	 affects	 deriving	 from	 the	 increase	 in	
the	premiums	and	the	decrease	in	insurance	benefits	paid,	which	stems,	inter	alia,	from	the	
improved	employment	situation	in	the	economy,	the	yield	rate	this	year	did	not	reach	that	of	
the	previous	year.


In	2004,	the	total	aggregate	revenue	from	non-life	insurance	premiums	rose	by	about	1.7%	
compared	to	2003.	The	health	insurance	line	was	the	most	significant	line	contributing	to	
growth	in	the	non-life	insurance	sector.	On	the	other	hand,	a	decline	was	recorded	in	the	
compulsory	motor	vehicle	insurance	line.	In	2004,	the	revenue	from	life	insurance	premiums	
rose	to	a	total	of	about	NIS	14.2	billion.	The	reasons	for	this	are	the	recovery	in	the	economy,	
the	 improvement	 in	 the	 state	 of	 businesses	 and	 employment,	 as	 well	 as	 employees’	 job	
security.	This	recovery	was	accompanied	by	an	increase	in	deposits	to	existing	insurance	
plans	(due	to	pay	raises),	and	in	sales	of	new	policies.
The	 insurance	 companies	 paid	 about	 NIS	 426	 million	 less	 in	 life	 insurance	 benefits	 to	
                                                                                                                                         Annual Report 2004




5.	 In	participating	policies	issued	up	until	31.12.2003,	the	prevalent	maximum	management	fees	were	0.6%	of	the	accrued	savings,	and	
    15%	of	the	real	profits.	In	policies	issued	as	of	1.1.2004	the	prevalent	management	fees	are	1%	of	the	accrued	savings.




                                                                                                                              11
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     insureds	in	2004	compared	to	2003.	One	possible	explanation	for	this	is	the	significant	drop	
                     in	redemptions	of	accrued	savings	in	life	insurance	policies,	due	to	the	improved	employment	
                     situation	in	the	economy.	The	improved	employment	situation	led	the	public	to	be	less	in	need	
                     of	redeeming	their	savings	for	the	sake	of	daily	subsistence.	Another	possible	explanation	
                     is	 the	 decrease	 in	 “twisting.”	 Insurance	 agents	 initiated	 this,	 pursuant	 to	 the	 instructions	
                     from	the	Commissioner	of	Insurance	regarding	fair	disclosure	of	details	to	insureds.	Such	
                     disclosure	prevents	life	insurance	policies	from	being	redeemed	when	it	is	not	economically	
                     profitable.	 In	 non-life	 insurance	 as	 well,	 there	 was	 a	 reduction	 in	 the	 claims	 paid	 and	 in	
                     the	provision	for	pending	claims,	at	a	total	of	some	NIS	364	million.	This	reduction	in	the	
                     insurance	companies’	expenses	contributed	together	a	total	of	about	NIS	790	million	to	the	
                     aggregate	pre-tax	profits.
                     Approximately	NIS	577	million	are	the	reduction	in	operating	expenses	in	life	insurance.	
                     The	vast	majority	of	the	reduction	derives	from	a	decrease	in	the	expenditure	for	agents’	
                     commissions.	Up	until	the	end	of	2003,	most	of	the	commission	was	paid	to	the	agent	during	
                     the	year	in	which	he	sold	the	policies,	even	though	the	insurance	companies	received	the	
                     revenue	deriving	from	the	policies	over	many	years.	That	being	the	case,	the	Commissioner	
                     of	Insurance	promulgated	a	circular	letter	obligating	the	insurance	companies	to	implement	
                     the	parallel	principle,	and	to	defer	the	recognition	of	the	expense	across	the	years	in	which	
                     the	revenue	is	expected	to	be	received.	As	a	result,	pursuant	to	promulgation	of	the	circular	
                     letter,	commissions	to	agents	are	paid	over	a	period	ranging	between	seven	and	15	years,	
                     depending	upon	the	insurance	line	at	issue.	In	non-life	insurance,	when	most	of	the	insurance	
                     contracts	 are	 signed	 for	 a	 short	 period,	 there	 is	 less	 of	 an	 impact	 due	 to	 equalizing	 the	
                     commission	payments	over	the	years,	and	in	total,	the	rise	in	operating	expenses	totalled	
                     about	NIS	114	million.		




                      1      Annual Report 2004
                                                                          Stability of Insurance Companies



                                          Table C-6
                        Main Financial Data of the Insurance Companies
                               (on the basis of Consolidated Balance Sheets)

                                                                                      Rate of Change between the Years
                 Item                        2002          2003          2004        2004-2002 2003-2004 2003-2002
Profitability
Net	profit	(after	tax)                      967,609      2,557,056     2,140,637     121.20%     -16.30%     164.30%
Profit	from	life	insurance	businesses	
                                           1,107,362     2,102,740     1,830,164      65.30%     -13.00%      89.90%
(before	tax)
Profit	from	non-life	insurance	
                                           1,026,658     2,196,666     1,761,869      71.60%     -19.80%     114.00%
businesses	(before	tax)
Premiums and Claims  
Premiums	in	life	insurance	                13,966,887 13,827,363 14,241,850           2.00%       3.00%       -1.00%
Premiums	in	non-life	insurance	            17,230,402 17,482,555 17,785,095           3.20%       1.70%        1.50%
Total	payments	to	insureds	in	life	
                                           7,164,465     7,936,447     7,510,506      4.80%       -5.40%      10.80%
insurance
Claims	paid	and	provision	for	pending	
                                           10,894,316 12,924,681 12,560,320           15.30%      -2.80%      18.60%
claims	in	non-life	insurance
Investment Profits
Investment	profits	in	life	insurance       -373,171      10,906,532    7,551,138     2123.50%    -30.80%    3022.70%
Investment	profits	in	non-life	insurance    -24,513       2,869,779    1,848,800     7642.20%    -35.60%    11807.30%
Operating Expenses 
Commissions,	general	and	
                                           3,346,433     3,388,915     2,812,320         	          	           	
administrative	expenses	-	life	insurance
Commissions,	general	and	
administrative	expenses	-	non-life	        3,373,948     3,544,192     3,658,638         	          	           	
insurance
Balance Sheet Data
Total	Balance	Sheet                        130,173,314   147,679,429   161,334,592    23.90%      9.20%       13.40%
Total	assets	in	the	participating	
                                           40,708,099 52,322,459 60,509,441           48.60%      15.60%      28.50%
portfolio	in	life	insurance	
Total	assets	in	the	assured-yield	
                                           43,952,900 44,601,894 44,543,905           1.30%       -0.10%      1.50%
portfolio	in	old	life	insurance
Equity and Dividends
Accounting	equity                          6,136,903     7,776,390     9,140,072      48.90%      17.50%      26.70%
Dividend	distributed*                       300,092       918,492      1,006,309     235.30%       9.60%     206.10%
Yield	on	equity**                             17%           37%           25%            	            	          	
Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.
                                                                                                                         Annual Report 2004




Notes:
*	 Dividend	taken	from	the	non-consolidated	financial	statements.
**	 Calculated	by	dividing	the	profit	by	the	average	equity.




                                                                                                                    1
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     Equity and Yield


                                                             Chart C-3
                                         Rate of the Yield on Accounting Equity, 2000 - 2004
                            40%
                                                                                                           35%
                            30%           19%                 24%                                                           24%
                            20%
                                                                                   15%
                            10%

                            0%
                                          2000               2001                  2002                  2003               2004


                                                                                                               	
                                                             Rate	of	the	yield	on	the	Accounting	Equity,	percent

                                                             Rate	of	the	yield	on	the		Average	Accounting	Equity,	percent




                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.

                     Note:
                     *	Based	on	data	taken	from	the	non-consolidated	Financial	Statements.



                     The	explanations	for	the	differences	in	the	yield	on	equity	may	be	twofold	-	explanations	that	
                     relate	to	profitability	and	explanations	that	relate	to	capital.
                     Profitability	factors	that	influence	the	relation	between:
                     1.	 The	difference	in	insurance	activities	pure	and	simple	-	i.e.:	successful	companies	have	
                          a	different	underwriting	profit	than	companies	with	lower	profitability;
                     2.	 The	 quality	 of	 the	 investment	 decisions	 -	 i.e.:	 one	 yield	 on	 the	 insurance	 reserves	 in	
                          non-life	insurance,	and	a	different	yield	attained	by	insurance	companies	on	the	accrued	
                          savings	 in	 the	 participating	 portfolio,	 from	 which	 companies’	 management	 fees	 are	
                          derived.	 The	 larger	 the	 companies’	 life	 insurance	 reserves	 are,	 the	 larger	 are	 their	
                          investment	profits.		
                     3.	 The	 ages	 of	 the	 insurance	 companies	 -	 the	 older	 companies	 have	 income	 from	 the	
                          interest	margins	in	“classic”	life	insurance	plans.	These	plans	were	sold	until	the	end	of	
                          1991	and	assure	a	fixed	interest	yield	to	their	insureds,	while	the	insurance	companies	
                          enjoy	government	Chetz-type	bonds	that	bear	higher	CPI-linked	interest.	The	companies	
                          do	not	have	deferred	acquisition	expenses	in	respect	of	these	plans,	and	therefore,	the	
                          capital	requirements	for	them	are	lower.	




                       1      Annual Report 2004
                                                                           Stability of Insurance Companies


Capital	factors	that	influence	the	relation	between:
1.	 The	companies’	lines	of	activity	-	the	capital	requirements	as	stipulated	in	the	Insurance	
    Business	(Control)	Regulations	(Minimum	Equity	Required	from	an	Insurer)	prescribe	
    that	equity	is	determined	according	to	the	self-retention	in	the	activity	in	the	non-life	
    insurance	 lines.	 On	 the	 other	 hand,	 due	 to	 the	 activity	 in	 the	 life	 insurance	 lines,	 the	
    minimum	equity	requirement	is	only	at	the	height	of	the	deferred	acquisition	expenses,	
    as	recorded	in	the	insurer’s	financial	statements.	Consequently,	companies	that	engage	
    extensively	in	the	life	insurance	line,	which	includes	premiums	and	reserves	at	the	scale	of	
    millions	of	shekels,	are	required	to	put	up	less	capital	relative	to	the	activity.	Companies	
    engaging	extensively	in	the	non-life	insurance	lines	must	hold	equity	according	to	the	
    reserves	net	of	reinsurance.	This	requirement	causes	the	difference	in	capital,	since	each	
    company	has	a	different	distribution	policy	(according	to	how	it	wants	to	transfer	risk)	
    in	all	matters	pertaining	to	that	portion	of	the	reserve	kept	net	of	reinsurance	and	that	
    portion	being	transferred	to	re-insurance.
2.	 The	composition	of	the	capital	that	is	recognized	for	control	purposes	-	some	companies	
    recruited	more	secondary	capital6	than	primary	capital,	while	other	companies	recruited	
    much	smaller	volumes	of	secondary	capital.	A	few	companies	do	not	hold	any	secondary	
    capital	at	all.	Understandably,	to	the	extent	that	the	equity	is	kept	low	and	replaced	by	
    secondary	 capital,	 the	 higher	 the	 potential	 for	 a	 rise	 in	 the	 yield	 on	 equity,	 since	 the	
    company’s	profitability	remains	without	any	substantive	change	when	secondary	capital	
    is	issued	(the	change	is	only	in	the	higher	financing	expenses,	net	of	a	tax	benefit).	Some	
    companies	make	it	a	practice	of	holding	capital	at	a	rate	that	is	only	a	few	percentage	
    points	higher	than	the	minimum	capital	requirement.	
3.	 Corporate	 holding	 structure	 -	 controlling	 stakes	 in	 banks	 and	 insurance	 companies	
    require	an	additional	holding	of	capital.
4.	 Dividend	distribution	policy	-	some	companies	make	it	a	practice	of	holding	capital	at	a	
    rate	that	is	only	a	few	percentage	points	higher	than	the	minimum	capital	requirement.	
    The	balance	of	the	capital	surplus	they	distribute	as	a	dividend.
                                                                                                               Annual Report 2004




6.	 Such	as	Menorah,	whose	ratio	of	secondary	to	primary	capital	is	46%.




                                                                                                      1
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                                                        Table C-7
                               Yield on Accounting Equity by Insurance Companies, 2000-2004


                                                                    Annual Yield - percent                                   Average 
                          Company                                                                                            Annual 
                                                                                                                              Yield 
                                                 2000            2001            2002           2003            2004
                     Dikla                       36%             38%              42%           59%             50%            45%
                     Harel                       52%             79%              26%           67%             47%            54%
                     IDI                         14%             24%              17%           34%             39%            26%
                     Ayalon                      41%             36%              23%           39%             36%            35%
                     Eliahu                      25%             24%             -35%           61%             33%            22%
                     Menorah                     43%             50%              28%           52%             32%            41%
                     Avner                       -9%             33%              60%           54%             32%            34%
                     Clal                        19%             22%              14%           30%             26%            22%
                     Migdal                      31%             36%              13%           33%             24%            28%
                     New	BSSCH                      	            58%             21%             8%             21%            21%
                     Clal	Credit                   1%             4%              1%            16%             20%             8%
                     Hamagen                      18%            25%              8%            32%             19%            20%
                     Hadar                        24%            12%              5%            17%             19%            15%
                     Shirbit                       9%             4%              1%            12%             18%             9%
                     Hachsharat	
                                                   9%             9%              5%            15%             16%            11%
                     Hayeshuv
                     Phoenix                     22%              8%             17%            25%             16%            18%
                     Arieh                       17%             10%              3%            21%             16%            13%
                     AIG                         -53%             5%             29%            50%             14%             9%
                     Inbal                        5%              4%              2%             5%              4%             4%
                     BSSCH                       18%             -3%              2%             7%              3%             5%
                     Shomera                      2%              3%              1%             8%              3%             3%
                     Agricultural	
                                                   0%             5%                -			         3%              1%             2%
                     Insurance
                     Ezer                        -55%            -19%            -49%           12%              0%            -22%
                     Natural		
                                                   0%             6%             -5%             4%             -1%             1%
                     Disasters	Fund
                     Ishpuz                        5%             8%             -3%               -			          -	*	           2%

                     Sahar-Zion                   20%            36%             20%               -			          -	*           15%

                     Industry	                    19%            24%             15%            35%             24%            24%
                     weighted	average

                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.
                     Notes:
                     *	 Amalgamated	into	the	Harel	Insurance	Company	in	2003
                     **	 Based	on	data	from	the	non-consolidated	financial	statements




                       1      Annual Report 2004
                                                                              Stability of Insurance Companies


Comparison of Yield on Equity in Banks and in Insurance Companies

                                    Chart C-4
 Yield on Equity in Banks* and Insurance Companies - Industry Average, 2002 - 2004
        0.4                                              0.37
       0.35
        0.3
                                                                                           0.25
       0.25
        0.2            0.17
       0.15                                                                                              0.116
        0.1                                                            0.09

       0.05                          0.03

          0
                              2002                              2003                              2004

                                                    Insurance	Companies         Banks




Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.
*		The	yield	on	equity	in	banks	for	2004	is	an	approximate	calculation	according	to	data	from	the	five	major	banks.



Chart	C-4	shows	that	the	insurance	companies’	yield	on	equity	is	far	higher	than	the	banks’	
yield	 on	 equity.	However,	 the	 volatility	in	 the	 insurance	 companies	is	 higher	 and	 derives	
from	the	dependency	on	the	yield	that	insurance	companies	attain	in	the	capital	market.	The	
insurance	companies’	yield	on	equity	in	2004	reached	about	25%	compared	to	the	banks’	
12%	yield.

We	compared	income	relative	to	capital	from	the	management	of	financial	assets	of	the	two	
largest	insurance	companies	compared	to	the	two	 largest	banks	in	the	economy.	Banking	
corporations,	like	insurance	companies	engaging	in	life	insurance,	are	not	required,	of	course,	
to	 provide	 equity	 because	 of	 operations	 in	 the	 management	 of	 their	 customers’	 financial	
assets	in	provident	funds	and	mutual	funds	(hereinafter:	Money	being	Managed	in	“Trust”),	
just	as	insurance	companies	are	not	required	to	do	so	in	a	participating	portfolio.
The	comparison	shows	that	the	yield	on	capital	in	the	Migdal	and	Clal	insurance	companies	
(9.1%	and	5.7%	respectively)	is	higher	than	the	yield	on	capital	in	the	banking	corporations	
Hapoalim	and	Leumi	(3%	and	2.2%	respectively),	as	presented	in	Table	C-8.
                                                                                                                           Annual Report 2004




                                                                                                                      1
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     A few of the reasons for the differences in the yield on capital:
                     1.	 The	equity	that	the	banks	and	insurance	companies	hold	derives	from	the	volume	of	their	
                         operations	in	other	businesses	and	sectors.	Therefore,	the	absolute	volume	of	the	banks’	
                         capital	relative	to	the	management	fees	deriving	from	Money	being	Managed	in	“Trust”	
                         is	larger.
                     2.	 Insurance	companies	purchase	re-insurance,	which	reduces	the	insurance	risk	applicable	
                         to	them.	On	the	other	hand,	the	banks	in	Israel	undertake	all	the	risks	inherent	in	their	
                         operations,	 and	 therefore,	 the	 banks’	 capital	 being	 used	 as	 a	 cushion	 to	 secure	 their	
                         liabilities	is	higher.
                     3.	 The	balance	sheets	of	the	insurance	companies	show	reserves	for	special	risks	in	life	
                         insurance	at	the	rate	of	up	of	0.2%	of	the	total	risk.	Accordingly,	part	of	the	cushion	for	
                         absorbing	losses	in	insurance	companies	is	not	a	component	of	equity,	but	rather	is	a	
                         reserve	presented	under	the	liabilities	items.


                     Furthermore,	within	the	scope	of	the	overall	global	trend,	the	international	supervisory	and	
                     standardization	bodies	are	attempting	to	institute	comprehensive	regularization	of	the	capital	
                     requirement	from	insurance	companies,	based	on	the	particular	level	of	risk	inherent	in	their	
                     operations.	This	regularization	should	eliminate	the	technical	requirements	existing	today	
                     regarding	capital	requirements	and	base	them	on	advanced	statistical	models	for	determining	
                     capital	 requirements.	 It	 can	 be	 assumed	 that	 the	 capital	 requirements	 will	 be	 increased	
                     following	the	transition	to	risk-based	capital	requirements.	This	regularization	is	expected	to	
                     be	implemented	within	the	next	three	years.




                      1     Annual Report 2004
                                                                        Stability of Insurance Companies



                                      Table C-8
                      Comparison of Revenue from Management Fees
                    between Two Major Insurance Companies and Two Major Banks
                           (in NIS billions - data as at December 31, 2004

                                       Bank 
                                                         Bank Leumi                 Clal                  Migdal
                                      Hapoalim
Equity                                 15.17                  14.99                 1.78	                    1.65	
Assets	of	provident	funds	                121.5                 62                     -			                     -			
and	mutual	funds
Assets	of	participating	life	                                                																							 																							
                                             -			                -			
insurance	portfolio                                                               						12.20	            						17.03	
Revenue	from	                                                                																							 																							
                                          0.81                 0.60
management	fees                                                                  									0.18	          									0.27	
Revenue	from	
management	fees,	net	of	                  0.45                 0.33                 0.10                     0.15
tax	(44.52%	tax	rate)
Revenue,	net	of	tax	                      3.0%	               2.2%	                 5.7%	                   9.1%	
divided	by	equity
Share	of	revenue	from	1%	
management	fees,	net	of	                  4.4%	               2.3%	                 3.8%	                   5.7%	
tax,	in	relation	to	equity
Share	of	management	fees	                 0.7%	               1.0%	                 1.5%	                   1.6%	
out	of	managed	assets
Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.



The	prevalent	annual	management	fees	in	provident	funds	are	at	the	rate	of	about	1%	of	the	
value	of	the	managed	asset	portfolio.	Table	C-8	shows	that	if	management	fees	at	this	rate	
were	to	be	instituted	on	savings	amounts	in	participating	life	insurance	that	the	insurance	
companies	are	managing,	then	their	share	of	the	capital	would	be	5.7%	in	Migdal	and	3.8%	
in	Clal,	compared	to	4.4%	in	Hapoalim	and	2.2%	in	Leumi.	This	means,	the	differences	in	
the	yield	on	the	entities’	capital	would	narrow,	while	they	would	be	even	higher	in	Hapoalim	
than	in	Clal.


Profitability of the Insurance Companies
The	composition	of	the	insurance	companies’	profits	varies	greatly	from	year	to	year.	These	
differences	 derive,	 inter	 alia,	 from	 a	 difference	 in	 profitability	 -	 both	 underwriting	 profit	
and	 investment	 profits,	 which	 vary	 according	 to	 the	 behavior	 of	 the	 capital	 market	 -	 and	
                                                                                                                               Annual Report 2004




from	a	different	level	of	operating	expenses,	which	depends,	inter	alia,	on	the	size	of	the	
companies.




                                                                                                                       1
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     Table	C-9	presents	the	differences	in	the	composition	of	the	insurance	companies’	profits.	
                     For	example,	in	the	Clal	Group,	the	profit	rate	from	life	insurance	business	in	2002	was	66%,	
                     it	dropped	to	49%	in	2003	and	rose	to	59%	in	2004.	In	the	Migdal	Group,	the	profit	rate	from	
                     life	insurance	business	was	91%	in	2002,	dropped	to	85%	in	2003	and	continued	to	drop	in	
                     2004	to	73%.
                     The	surge	in	the	proportion	of	profits	from	non-life	insurance	business	in	2002	(see	Chart	
                     C-5)	derives	from	the	suspension	of	the	activity	of	the	Avner	Corporation	in	2001.

                                                         Chart C-5
                                   Composition of the Pre-tax Profit by Insurance Businesses
                                                 (Life and Non-life), percent


                              100%
                                             37%          36%            31%          48%              51%       51%
                               80%


                               60%


                               40%
                                             63%          64%            69%          52%              49%       49%

                               20%


                                0%
                                          1999         2000          2001          2002           2003        2004


                                                                 Life	Insurance   Non-life	Insurance




                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.




                       0      Annual Report 2004
                                                                            Stability of Insurance Companies



                                       Chart C-6
               Ratio of Profit from Life Insurance and Non-Life Insurance
                             Businesses to Gross Premiums
                                                            15.3%
       16.0%
                                                                                               12.9%
       14.0%
       12.0%
                         8.0%                                           8.6%
       10.0%                                                                                                7.8%
        8.0%
        6.0%                        4.2%

        4.0%
        2.0%
        0.0%
                           2002                                2003                                2004

                                                                                                                 	
                    Ratio	of	Profit	from	Non-life	Insurance	Business	to	Gross	Premiums,	excluding	Avner	and	Karnit

                    Ratio	of	Profit	from	Life	Insurance	Business	to	Gross	Premium




Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.




This	year	there	were	moderate	fluctuations	in	the	ratios	of	profit	from	insurance	businesses	to	
premiums	in	the	sector.	In	life	insurance,	this	ratio	fell	from	8.6%	last	year	to	7.8%	this	year	
(3.4%	since	2002).	In	non-life	insurance	(excluding	Avner	and	Karnit),	the	ratio	of	profit	to	
gross	premiums	dropped	to	12.9%,	compared	to	15.3%	in	2003.	In	non-life	insurance,	the	
competition	 amongst	 the	 companies	 led	 to	 a	 negative	 underwriting	 profit,	 and	 move	 to	 a	
positive	profit	due	to	the	profits	from	investments	of	the	non-life	insurance	reserves.
                                                                                                                          Annual Report 2004




                                                                                                                     1
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                                                       Table C-9
                        Aggregate Pre-tax Profits from Life and Non-life Insurance Businesses, by
                                                  Insurance Companies

                                           Profits from Life Insurance Profits from Non-life Insurance Ratio of the Profit Component
                                                    Businesses                    Businesses           from Life Insurance Businesses
                         company           2002        2003       2004     2002      2003       2004     2002       2003      2004
                     Arieh                34,264      34,101     38,614   -7,017    59,833     42,501    126%       36%        48%
                     Clal                 198,384 298,555 339,084 125,404 282,556 209,279                 61%       51%        62%
                     Clal	Credit             -			        -			       -			   2,520    6,099      10,752      0%        0%         0%
                     Clal	Group           232,648 332,656 377,698 120,907 348,488 262,532                 66%       49%        59%
                     Migdal               299,250 666,383 427,524          8,432    70,723 113,479        97%       90%        79%
                     Hamagen              18,781      70,943     26,515  19,696     56,378     51,066     49%       56%        34%
                     Migdal	Group         299,040 718,413 441,848 30,359 128,171 166,477                  91%       85%        73%
                     Hadar                74,719 106,390 123,240 14,329             37,653     35,354     84%       74%        78%
                     Phoenix              160,895 270,040 241,534 52,265            60,533 -53,974        75%       82%       129%
                     Phoenix	Group        235,613 376,430 364,774 62,863            98,186 -18,620        79%       79%       105%
                     Menorah              128,275 254,647 249,631 88,311 116,476 102,736                  59%       69%        71%
                     	Menorah             128,275 254,647 249,631 88,311 116,476 102,736                  59%       69%        71%
                     Sahar-Zion           14,769         -			       -			 113,009       -			       -			    12%         	          	
                     Harel	(formerly	
                                       114,723 349,132 321,091 39,149                   226,685     236,333      75%         61%         58%
                     Shiloah)
                     Dikla                 -			      -			      -			   53,873             75,145      88,137       0%          0%          0%
                     Harel	Group       129,492 349,132 321,091 206,188                  301,830     324,470      39%         54%         50%
                     Hachsharat	
                                        14,158    15,028     8,494     6,879             36,655      36,901      67%         29%         19%
                     Hayeshuv
                     New	BSSCH             -			      -			      -			   15,516              7,780      16,242       0%          0%         0%
                     Hachsharat	
                     Hayeshuv	Group 14,158        15,028     8,494    22,394             44,435      53,143      39%         25%         14%
                     IDI                   -			    5,981     8,642        -			           81,981     107,731        	          7%         7%
                     	Direct	IDI         3,772     5,981     8,642    58,458             81,981     107,731       6%          7%         7%
                     BSSCH                 -			      -			      -			    1,525              1,311       938         0%          0%         0%
                     Inbal                 -			      -			      -			     598                623        653         0%          0%         0%
                     Government	
                                           -			      -			      -			    2,123              1,934      1,591        0%          0%         0%
                     Group
                     AIG                  451     -2,644      965     17,920             26,354      26,609        2%        -11%         3%
                     Ezer                  -			      -			      -     -11,481             1,912        -337         0%         0%          0%
                     AIG	Group            451     -2,644      965      6,438             28,266      26,272        7%        -10%         4%
                     Shomera               -			      -			      -			    1,091             4,268        2,053        0%         0%          0%
                     Eliahu             44,653    32,045    30,396 -105,115             212,647     181,130      -74%        13%         14%
                     Ayalon             19,259    21,052    26,625    54,498             92,093     109,147       26%        19%         20%
                     Agricultural	
                                           -			      -			      -			      20               9,651      15,326       0%          0%         0%
                     Insurance
                     Avner                 -			      -			      -			  473,260            713,528     545,507       0%          0%         0%
                     Shirbit               -			      -			      -			    4,863             14,712      22,942       0%          0%         0%
                          Total	by	
                     Insurance	Groups 1,107,362 2,102,740 1,830,164 1,026,658          2,196,666 1,902,437       52%         49%         49%

                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.

                     Note:	The	table	contains	data	based	on	the	non-consolidated	financial	statements	of	the	insurance	companies.	Group	data	is	
                     also	based	on	consolidated	financial	statements.	Therefore,	totalling	of	the	data	from	non-consolidated	financial	statements	
                     of	companies	that	are	members	of	groups	might	not	add	up	to	the	data	of	the	Insurance	groups.




                                Annual Report 2004
                                                           Stability of Insurance Companies


Economies of Scale
The	 daily	 management	 operations	 of	 insurance	 companies	 and	 management	 of	 the	 asset	
portfolio	involve	current	costs	throughout	the	life	of	the	policy.
Table	C-10	provides	details	on	the	ratio	of	general	and	administrative	expenses.	The	table	
shows	the	percentage	of	net	premiums	in	the	life	insurance	line.	It	was	found	that,	amongst	
the	 major	 companies,	 there	 are	 efficient	 companies,	 such	 as	 Clal	 and	 Migdal,	 and	 other	
companies	that	have	a	percentage	of	general	and	administrative	expenses	that	is	similar	to	
the	small	companies.	In	the	Harel	Group	for	example,	its	ratio	of	general	and	administrative	
expenses	is	11.88%,	which	is	similar	to	the	percentage	in	Ayalon	-	11.70%.
	
From	reviewing	the	older	companies	appearing	in	Table	C-11	we	can	see	that	the	ratio	of	
general	 and	 administrative	 expenses	 to	 the	 life	 insurance	 reserves	 of	 Ayalon	 are	 almost	
twice	the	ratio	of	expenses	in	the	older	companies,	Migdal,	Clal,	Menorah	and	Phoenix.	It	
is	important	to	remember	that	the	age	of	the	insurance	company	has	significance	in	terms	of	
the	types	of	policies	in	respect	whereof	insurance	reserves	exist:	older	companies	have	large	
reserves	due	to	the	“classic”	life	insurance	plans.	These	plans	were	sold	until	the	end	of	1991,	
and	assure	a	fixed	interest	yield	to	the	insureds.	The	insurance	companies	are	holding	Chetz-
type	 government	 bonds,	 which	 bear	 higher	 CPI-linked	 interest.	 Management	 of	 a	 Chetz	
bond	portfolio	apparently	involves	lower	current	costs	than	management	of	a	portfolio	of	
similar	size	in	the	capital	market.	A	better	ability	to	maintain	insurance	policies	also	played	
a	role	in	the	old	plans	not	being	redeemed	or	cleared,	and	thus,	higher	reserves	were	able	to	
be	sustained.	The	ratio	of	insurance	reserves,	against	which	Chetz	bonds	are	held,	to	total	
life	insurance	reserves	at	Ayalon	was	21%,	while	in	the	old,	major	companies	-	Phoenix,	
Harel,	 Clal	 and	 Migdal	 -	 this	 ratio	 reached	 47%,	 40%,	 41%	 and	 43%	 respectively.	 One	
can	see	in	Table	C-11	that	economies	of	scale	are	in	play,	and	that	the	ratio	of	general	and	
administrative	expenses	to	life	insurance	reserves	is	lower	in	companies	with	large	insurance	
reserves;	for	example,	the	expense	ratio	of	Hachsharat	Hayeshuv	is	50%	higher	than	the	ratio	
of	the	major	companies.


The	expense	ratio	of	the	Harel	Group	is	higher	(1.6%)	than	the	average	expense	ratio	of	the	
other	four	major	insurance	companies	(average	of	1.05%),	and	is	similar	to	last	year’s	ratio.	
However,	examination	of	the	group’s	development	trend	shows	that	the	group	is	becoming	
                                                                                                       Annual Report 2004




more	efficient.	




                                                                                              
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                                                      Table C-10
                         General and Administrative Expenses, in NIS thousands, and the Ratio of
                         General and Administrative Expenses to Total net premiums in retention
                                               in Life Insurance, percent

                                               Administrative & General                                            Ratio of General & Administrative 
                                                                               Net Premiums in Retention
                                                      Expenses                                                  Expenses to Premiums net of reinsurance
                                               2002     2003      2004        2002        2003        2004       2004        2003          2002
                             Arieh            35,050 37,940 38,092           306,491     318,268     360,012      11%             12%            11%
                               Clal          171,158 198,362 192,184        2,625,155   2,700,275   2,808,289      7%              7%             7%
                           Clal	Group        206,208 236,302 230,277        2,931,646   3,018,543   3,168,301      7%              8%             7%
                             Migdal          261,878 251,665 257,326        3,902,375   3,716,397   3,869,309      7%              7%             7%
                            Hamagen           42,999 40,164 55,129           674,084     630,051     632,927       9%              6%             6%
                         Migdal	Group        316,046 299,017 312,455        4,575,502   4,348,253   4,477,183      7%              7%             7%
                             Hadar            77,199 85,565 84,141           876,865     870,551     924,895       9%             10%             9%
                            Phoenix           95,171 120,127 104,820        1,243,018   1,255,098   1,277,982      8%             10%             8%
                         Phoenix	Group       172,370 205,692 188,961        2,118,377   2,125,203   2,202,299      9%             10%             8%
                            Menorah          133,513 123,220 120,836        1,202,654   1,204,989   1,246,749     10%             10%            11%
                            Menorah          133,513 123,220 120,836        1,202,654   1,204,989   1,246,749     10%             10%            11%
                           Sahar-Zion         60,325       -			     -			     469,958        -			        	          0%         0%                 13%
                              Harel
                                             147,802 214,414 219,138 1,329,100 1,776,278 1,844,063                12%            12%            11%
                       (formerly	Shiloah)
                          Harel	Group        208,127 214,414 219,138 1,799,058 1,776,278 1,844,063                12%            12%             12%
                      Hachsharat	Hayeshuv     25,445 23,785 21,292 241,644 219,746 197,414                        11%            11%             11%
                             Eliahu           12,207 14,257 11,979 156,349 132,999 138,365                         9%            11%              8%
                             Ayalon           19,754 22,258 22,475 174,897 184,697 192,119                        12%            12%             11%
                               	IDI           15,491 20,408 29,030 28,472 39,373 59,924                           48%            52%             54%
                              	AIG            10,084  9,981   11,130   6,573     9,568    11,474                  97%           104%            153%
                          Total	for	line

                         excluding	direct	   1,078,309 1,125,141 1,117,251 12,965,056 12,800,530 13,280,553       8%              9%             8%
                       insurance	companies

                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.

                     Note:	The	table	contains	data	based	on	the	non-consolidated	financial	statements	of	the	insurance	companies.	Group	data	is	
                     also	based	on	consolidated	financial	statements.	Therefore,	totalling	of	the	data	from	non-consolidated	financial	statements	
                     of	companies	that	are	members	of	groups	might	not	add	up	to	the	data	of	the	Insurance	groups.




                              Annual Report 2004
                                                                          Stability of Insurance Companies



                                Table C-11
 General and Administrative Expenses in NIS thousands, and the Ratio of General
     and Administrative Expenses to Total Life Insurance Reserves, percent

   General and Administrative Expenses in NIS thousands, and the Ratio of General and 
               Administrative Expenses to Total Life Insurance Reserves, percent
                                                                 Ratio of General and  
                           General and Administrative 
                                                            Administrative Expenses to Life 
                                    Expenses
                                                                  Insurance Reserves
                           2002        2003        2004       2002        2003        2004
Arieh                     35,050      37,940      38,092     1.90%       1.80%       1.60%
Clal                     171,158     198,362     192,184     1.00%       1.00%       0.90%
Clal	Group               206,208     236,302     230,277     1.10%       1.10%       1.00%
Migdal                   261,878     251,665     257,326     1.00%       0.90%       0.80%
Hamagen                   42,999      40,164      55,129     1.10%       0.90%       1.10%
Migdal	Group             316,046     299,017     312,455     1.00%       0.90%       0.80%
Hadar                     77,199      85,565      84,141     1.80%       1.70%       1.50%
Phoenix                   95,171     120,127     104,820     1.00%       1.20%       1.00%
Phoenix	Group            172,370     205,692     188,961     1.30%       1.40%       1.10%
Menorah                  133,513     123,220     120,836     1.80%       1.50%       1.30%
Sahar-Zion                60,325         -			        -			    2.20%          	           	
Harel	(formerly	
                         147,802     214,414     219,138     1.80%       1.70%       1.60%
Shiloah)
Harel	Group              208,127     214,414     219,138     1.90%       1.70%       1.60%
Hachsharat	Hayeshuv       25,445      23,785      21,292     2.20%       1.90%       1.60%
Eliahu                    12,207      14,257      11,979     1.40%       1.60%       1.30%
Ayalon                    19,754      22,258      22,475     3.00%       2.80%       2.50%
IDI	Direct                15,491      20,408      29,030    43.30%      34.20%      30.50%
	AIG                      10,084      9,981       11,130    248.50%     135.60%    149.90%
Total	for	line,	
excluding	direct	       1,093,670 1,138,945 1,127,413        1.30%       1.20%       1.10%
insurance	companies
Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.

Note:	The	table	contains	data	based	on	the	non-consolidated	financial	statements	of	the	insurance	companies.	Group	data	is	
also	based	on	consolidated	financial	statements.	Therefore,	totalling	of	the	data	from	non-consolidated	financial	statements	
of	companies	that	are	members	of	groups	might	not	add	up	to	the	data	of	the	Insurance	groups.
                                                                                                                                Annual Report 2004




                                                                                                                     
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     4       Risks and an Assessment of Stability

                     The	 nature	 of	 the	 insurance	 companies’	 business	 is	 to	 assume	 their	 insureds’	 risks	 (it	 is	
                     customary	to	leave	a	bit	of	the	risk	with	the	insured	in	order	to	prevent	any	moral	hazard	
                     and	 to	 reduce	 the	 adverse	 selection)	 in	 exchange	 for	 a	 premium	 that	 the	 insureds	 pay	 in	
                     consideration	of	transfer	of	their	risk	to	the	companies.	The	salient	points	in	risk	management	
                     are	 risk	 diversification,	 control	 over	 the	 extent	 of	 the	 exposure,	 and	 the	 maintenance	 of	
                     adequate	levels	of	protection	through	re-insurance.


                     Life	insurance	products	offer	a	wide	variety	of	insurance	plans	-	from	pure	“risk”	to	products	
                     including	 only	 savings	 components.	 The	 insurance	 plans	 are	 drawn	 up	 for	 a	 long	 period	
                     (from	one	year	to	more	than	fifty	years).	The	insurance	sum	is	usually	determined	within	the	
                     framework	of	the	policy	terms.	In	some	policies,	the	lifetime	of	the	policy	and	the	height	of	
                     the	insurance	benefits	are	predetermined	(for	example,	in	assured-yield	policies),	while	in	
                     other	cases,	the	insurance	sum	is	known,	but	the	period	of	insurance	is	not,	since	it	depends	
                     on	the	lifespan	of	the	insured.


                     Non-life	insurance	products	provide	a	variety	of	insurance	covers	over	a	short	period	(usually	
                     for	 one	 year;	 for	 example	 -	 compulsory	 motor	 vehicle	 insurance	 and	 apartment	 contents	
                     insurance).	The	extent	of	a	claim	for	payment	by	the	insurer	and	the	date	for	claims	payments	
                     is	not	known	at	the	time	of	underwriting	of	the	policy.	In	some	insurance	lines,	a	maximum	
                     height	of	the	cumulative	insurance	benefits	that	the	insurer	will	pay	can	be	determined.


                     The	extent	of	the	risk	involved	in	the	insurance	activity	depends	on	the	line	of	insurance.	
                     Thus,	for	example,	the	insurance	risk	that	an	insurance	company	assumes	under	an	elementary	
                     insurance	product	is	different	from	the	insurance	risk	under	life	insurance:	for	an	elementary	
                     insurance	product,	such	as	motor	vehicle	property	damage,	the	contract	is	signed	for	one	
                     year,	and	the	claims	are	investigated	relatively	quickly.	As	opposed	to	this,	a	life	insurance	
                     contract	 remains	 in	 effect	 for	 the	 lifetime	 of	 the	 insured.	 Under	 motor	 vehicle	 property	
                     damage	insurance,	if	the	premiums	that	the	insurance	company	set	are	insufficient	to	cover	
                     the	claims,	the	company’s	expenses	and	leave	a	sufficient	profit	(premium	deficiency),	they	
                     can	be	changed	the	next	year.	In	life	insurance	at	issue	is	a	long-term	contract,	and	a	premium	
                     deficiency	will	only	be	discovered	many	years	later.




                            Annual Report 2004
                                                                                     Stability of Insurance Companies


The	risks	to	which	insurance	companies	are	exposed	can	be	classified	according	to	various	
criteria.	One	way	is	to	classify	according	to	risks	deriving	from	the	structure	and	function	
of	 the	 corporation	 itself	 and	 according	 to	 common	 risks	 that	 have	 an	 impact	 on	 all	 the	
companies.	Whether	the	risks	materialize	or	not	depends	on	a	variety	of	external	and	internal	
factors.	 The	 quality	 of	 the	 risk	 management	 at	 each	 corporation,	 as	 is	 expressed	 by	 the	
direction	and	supervision	that	the	board	of	directors	delineates,	and	by	the	functioning	of	the	
corporation’s	management,	has	an	impact	on	the	“net	risk”	-	the	risk	that	remains	even	after	
the	corporation’s	actions	to	minimize	the	company’s	risk	exposure.
		
Following  are  structural  characteristics  of  insurance  companies  that  affect  the  risks 
associated with their operations:
1.	 Business	diversification	-	major	insurers	might	have	a	reduced	level	of	risks	due	to	wider	
     risk	diversification,	since	they	are	distributed	amongst	multiple	lines.
2.	 Seniority/years	of	experience	in	the	industry	-	it	has	been	found	that	young	companies	
     in	the	United	States	were	exposed	to	greater	instability	than	senior	companies,	due	to	
     unprofessional	underwriting	management,	a	lack	of	underwriting	experience,	and	due	to	
     expansion	into	additional	insurance	lines	for	which	the	company	had	insufficient	base	
     data.	Although	it	is	true	that	older	companies	have	long	tail	claims7,	but	they	also	have	
     more	experience	in	handling	such	claims.	Furthermore,	it	is	reasonable	to	assume	that	
     older	companies	have	amassed	considerable	equity,	which	reinforces	their	stability.
3.	 The	lines	of	activity	-	the	lines	of	insurance	that	a	company	engages	in	also	have	an	
     impact.	 In	 elementary	 insurance,	 policies	 for	 individuals,	 for	 the	 most	 part,	 involve	
     a	 lower	 risk	 than	 the	 risk	 in	 corporate	 insurance	 policies.	 Moreover,	 claims	 in	 lines	
     engaging	 in	 long-term	 contracts	 involve	 a	 greater	 risk	 to	 an	 insurance	 company	 than	
     claims	in	short-term	plans,	since	the	latter	can	be	assessed	more	accurately	and	simply.
Monoline	 insurance	 companies8	 are	 more	 exposed	 to	 risk	 upon	 the	 occurrence	 of	 a	 one-
     time	event	than	are	companies	operating	in	a	few	insurance	lines,	and	diversifying	their	
     risks.
4.	 Financial	flexibility	-	companies	that	constitute	part	of	a	broad	financial	concern	have	an	



7.	 “Long	tail	claims”	–	claims	that	take	a	long	time	to	investigate,	in	relation	to	the	time	of	its	discovery,	the	nature	of	the	claim	and	the	
    assessment	of	the	claim	sum.	For	example:	in	employers’	liability	insurance,	harm	to	employees’	health	might	be	discovered	only	after	
                                                                                                                                                   Annual Report 2004




    many	years	of	employment;	Investigating	the	nature	of	such	a	claim	and	assessing	a	monetary	compensation	in	respect	thereof	take	a	
    long	time.
8.	 “Monoline	 insurance	 companies”	 –	 companies	 whose	 business	 focuses	 on	 a	 single	 insurance	 line,	 such	 as,	 foreign	 trade	 risk	
    insurance.




                                                                                                                                       
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                         advantage	since	they	are	able	to	recruit	additional	capital	if	necessary.	These	companies	
                         often	collect	higher	premiums	in	consideration	of	the	added	financial	security	that	they	
                         offer.
                     5.	 International	 companies	 -	 geographical	 dispersion	 enables	 insurance	 companies	 to	
                         reduce	 their	 risks.	 On	 the	 other	 hand,	 international	 activity	 increases	 the	 exposure	 to	
                         political	risks,	to	risks	relating	to	jurisdiction	and	to	currency	exchange	rate	risks.


                     Activities	both	in	the	elementary	insurance	lines	and	in	the	life	insurance	line	are	affected	
                     by	opposing	risks:	on	the	one	hand,	it	is	possible	to	reduce	the	risk	by	integrating	long-term	
                     insurance	business	with	short-term	insurance	business;	on	the	other	hand,	this	might	increase	
                     the	exposure	to	risk	if	the	insurer	sells	two	types	of	plans	to	the	same	target	population,	since,	
                     should	a	catastrophe	occur,	the	insurer	would	be	exposed	both	to	life	insurance	claims	and	
                     to	claims	in	respect	of	property	damage	and	liabilities.	According	to	IMF	recommendations	
                     around	the	world,	and	according	to	regulatory	requirements	in	certain	countries,	there	must	be	
                     a	corporate	separation	between	life	insurance	companies	and	non-life	insurance	companies.


                     The	following	review	presents	definitions	of	the	risks	with	which	insurance	companies	must	
                     contend,	and	indices	for	examining	the	risk	exposure	situation	over	time	and	at	any	given	
                     time.
                     Insurance risk

                     a.	 A	 risk	 in	 the	 structure	 and	 price	 of	 the	 product	 -	 this	 risk	 derives	 from	 exposure	 to	
                         financial	loss	due	to	the	execution	of	insurance	business	(including	pension	payments),	
                         in	which	the	actual	costs	and	liabilities	might	exceed	the	expectations	when	the	line	of	
                         products	was	costed.
                     b.	 An	underwriting	and	liability	risk	-	a	risk	of	a	financial	loss	due	to	the	selection	and	
                         acceptance	of	insured	risks,	amortization,	retaining	and	transfer	of	the	risk,	maintaining	
                         of	 reserves,	 rulings	 regarding	 claims,	 as	 well	 as	 management	 of	 contractual	 and	
                         noncontractual	options	in	products.


                     Life	 insurance	 -	 for	 the	 sake	 of	 understanding	 the	 change	 in	 the	 insurance	 risk,	 we	 will	
                     examine	the	ratio	between	life	insurance	reserves	and	average	premiums	net	of	reinsurance	
                     during	the	last	three	years.	The	use	of	the	average	over	the	last	three	years	is	intended	to	
                     smooth	out	events	having	a	temporary	impact	on	the	premiums,	such	as	the	drop	in	sales	of	
                     life	insurance	products	during	2004,	subsequent	to	the	change	in	the	method	of	remunerating	




                            Annual Report 2004
                                                                      Stability of Insurance Companies


insurance	 agents	 to	 flat	 commissions	 paid	 over	 the	 lifetime	 of	 the	 policy.	 Life	 insurance	
reserves	include	the	insureds’	savings	that	are	accruing	in	participating	plans.	The	insurance	
companies’	 data	 contain	 no	 differentiation	 of	 reserves	 in	 respect	 of	 the	 risk	 component	
included	in	these	plans.
The	source	of	the	insurance	companies’	risk	is	solely	in	the	risk	component	in	the	reserve.	
Therefore,	 the	 use	 of	 a	 financial	 ratio	 that	 includes	 the	 savings	 component	 of	 insureds	
provides	 a	 poorer	 reflection	 of	 the	 insurance	 risk	 applicable	 to	 the	 company;	 it	 was	 used	
because	of	a	shortage	of	data.


Non-life	 insurance	 -	 insurance	 companies’	 assessments	 of	 their	 insurance	 risk	 are	 given	
expression	 through	 non-life	 insurance	 reserves.	 These	 reserves	 constitute	 the	 companies’	
assessment	of	future	claims,	which	 they	calculate	using	an	 actuarial	computing	tool.	The	
claims	constitute	a	demand	to	realize	payments.	The	company	plans	for	them	by	creating	
reserves.	For	the	sake	of	understanding	the	change	in	the	insurance	risk	we	will	examine	the	
ratio	of	the	average	claims	reserves	net	of	reinsurance	during	the	last	three	years.	An	average	
is	being	used	in	order	to	smooth	out	events	having	a	temporary	impact	on	the	claims,	as	well	
as	the	impact	of	statistical	deviations.

                               Table C-12
   The Ratio between Net Insurance Reserves and AveragePremiums net of
             reinsurance and Average Claims net of reinsurance
                                  (Life insurance and non-life insurance)

                                                       2000         2001         2002         2003         2004
 Life	Insurance	-	Ratio	of	Reserves	to	
 Average	Premiums	net	of	reinsurance	                   6.08          6.2         6.18         7.01            7.8
      during	the	Last	Three	Years
 Non-life	Insurance	-	Ratio	of	Reserves	
 to	Average	Claims	net	of	reinsurance	                  3.56         3.85           4          4.11            4.24
      during	the	Last	Three	Years
Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.



Table	C-12	shows	a	rise	in	the	ratio	of	reserves	to	the	average	premiums	and	the	average	
claims.	This	rise	expresses	the	conservative	approach	to	calculating	reserves	and	it	derives	
                                                                                                                      Annual Report 2004




from	 the	 use	 of	 actuarial	 calculations	 to	 assess	 reserves	 and	 pending	 claims.	 Actuarial	
calculations	 are	 being	 used	 pursuant	 to	 the	 Insurance	 Commissioner’s	 circular	 letters,	 in	




                                                                                                                 
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     which	he	requires	companies	to	strictly	assess	these	items	on	the	basis	of	statistical	data	that	
                     precisely	reflect	the	company’s	liability	to	insureds,	and	not	on	the	basis	of	assessments	made	
                     by	claims	departments	in	the	various	companies.	That	is	to	say,	the	increase	in	the	proportion	
                     of	 the	 reserves	 shown	 in	 Table	 C-12	 indicates	 that	 companies	 are	 better	 estimating	 their	
                     future	claims.	


                     Market risk
                     A	market	risk	derives	from	changes	in	the	market	ratings	or	in	market	prices.	Following	are	
                     the	components	of	the	market	risk:
                     a.	 Interest	 rate	 -	 the	 interest	 rate	 contains	 some	 risk,	 which	 derives	 from	 the	 changes	
                         effected	 in	 them;	 varying	 interest	 rates	 affect	 the	 market	 value	 of	 assets.	This	 risk	 is	
                         liable	to	increase	due	to	the	difference	between	the	average	duration	of	life	of	the	assets	
                         and	the	average	duration	of	life	of	the	liabilities,	deriving	from	the	timing	differentials	
                         between	the	date	on	which	the	assets	and	liabilities	were	measured.
                     b.	 Exchange	rate	-	the	fluctuations	occurring	in	the	exchange	rate	are	liable	to	pose	a	risk.
                     c.	 A	change	in	the	inflation	rate.
                     d.	 A	change	in	the	prices	of	goods	or	real	estate.


                     We	will	present	the	market	risk	to	which	insurance	companies	are	exposed	by	examining	the	
                     correlation	between	the	yield	in	the	financial	markets	and	the	yield	on	the	insurance	companies’	
                     equity.	This	yield	is	directly	affected	by	the	companies’	revenues	from	management	fees9.	
                     Table	C-13	makes	use	of	a	“gross	yield”	which	was	obtained	in	the	participating	portfolio.	
                     Insurance	 companies	 collect	 management	 fees	 from	 the	 accrued	 savings	 at	 varying	 rates,	
                     depending	upon	the	types	of	policies	marketed	during	the	underwriting	years.	For	example,	in	
                     respect	of	“participating’	policies,	which	had	been	issued	until	the	end	of	2003,	management	
                     fees	 at	 the	 rate	 of	 0.6%	 are	 being	 collected	 from	 the	 total	 accrued	 savings,	 as	 well	 as	 a	
                     commission	at	the	rate	of	15%	of	the	real	profit.	This	is	what	makes	the	yield	achieved	in	the	
                     capital	market	so	important	to	insurance	companies’	profitability.	




                     9.	 A	 clearly	 similarly	 connection	 was	 obtained	 between	 the	 yield	 on	 equity	 and	 the	 rate	 of	 the	 revenue	 from	 investments	 in	 non-life	
                         insurance	businesses,	and	also	between	the	yield	on	equity	and	the	rate	of	the	rise	of	the	index	of	stocks	being	traded	on	the	Tel-Aviv	
                         Stock	Exchange,	as	measured	by	the	Central	Bureau	of	Statistics.




                       0         Annual Report 2004
                                                                    Stability of Insurance Companies



                                Table C-13
          Rate of the Yield on Equity and the Correlation with the
                    Yield Attained on the Capital Market

                                      2001                2002                     2003              2004
    Yield	on	Equity                   24%                 17%                      37%               25%
   ‘Gross	Yield’	of	a	              7.20%               -6.80%                 21.00%                8.60%
‘Participating’	Portfolio



                                Chart C-7
          Rate of the Yield on Equity and the Correlation with the
                    Yield Attained on the Capital Market
               40%                                                                         25.00%

               35%                                                                         20.00%
               30%
                                                                                           15.00%
               25%
                                                                                           10.00%
               20%
                                                                                           5.00%
               15%
                                                                                           0.00%
               10%
                                                                                           -5.00%
               5%

               0%                                                                          -10.00%
                        2001                  2002        2003              2004

                            Yield	on	Equity          Gross	Yield	of	a	Participating	Portfolio


                                                                                                                  Annual Report 2004




                                                                                                             1
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     Table	C-13	and	Chart	C-7	show	that	the	rate	of	the	yield	on	the	equity	is	directly	connected	
                     to	the	profits	of	the	insurance	sector	in	the	financial	markets.	Thus,	for	example,	in	2002,	
                     the	rate	of	the	yield	on	equity	reached	17%.	The	figure	corresponds	with	the	bottom	prices	
                     of	the	stocks	and	bonds	that	were	being	traded	on	the	Tel-Aviv	Stock	Exchange.	The	yield	
                     obtains	on	assets	of	the	participating	portfolio	had	been	a	negative	yield,	of	about	-	6.8%	(the	
                     index	of	stocks	traded	that	year	on	the	Tel-Aviv	Stock	Exchange	had	dropped	by	about	20%).	
                     The	year	2003	had	been	a	record	year	in	the	capital	market,	and	accordingly,	a	record	was	
                     recorded	in	the	yield	attained	on	the	assets	of	the	participating	portfolio	-	about	21%.	The	
                     yield	on	equity	reached	about	37%.	In	2004,	the	favorable	yield	continued,	albeit	at	a	more	
                     moderate	rate.	The	yield	attained	on	the	participating	portfolio	reached	about	8.6%,	while	
                     the	yield	on	equity	reached	about	25%.


                     The	 correlation	 shown	 in	 the	 chart	 indicates	 the	 risk	 to	 which	 insurance	 companies	 are	
                     exposed	in	the	event	of	a	drop	in	rates	on	the	financial	markets.	A	drop	in	the	markets	means	
                     a	reduction	in	the	assets	of	the	nostro	portfolio	and	in	the	management	fees	collected	from	
                     the	 accrued	 savings	 of	 insureds	 under	 life	 insurance,	 and	 consequently,	 a	 decline	 in	 the	
                     companies’	overall	profitability.


                     Another	 index	 indicating	 the	 insurance	 companies’	 degree	 of	 exposure	 to	 the	 financial	
                     markets	is	the	ratio	of	negotiable	assets	to	total	assets.

                                                              Chart C-8
                                                Ratio of Negotiable Assets to Total Assets
                             40.0%
                                                                                   34.4%                        35.8%
                             35.0%
                             30.0%               29.5%

                             25.0%
                             20.0%
                             15.0%
                             10.0%
                              5.0%
                              0.0%
                                                  2002                              2003                        2004

                                                              Ratio	of	Negotiable	Assets	to	Total	Assets



                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.




                             Annual Report 2004
                                                                      Stability of Insurance Companies


Chart	 C-8	 shows	 that	 the	 insurance	 companies’	 exposure	 to	 fluctuations	 in	 the	 financial	
markets	rises	over	the	years.	The	ratio	of	negotiable	assets	rose	from	about	30%	in	2002	to	
about	36%	in	2004.
However,	 as	 of	 April	 2005,	 the	 non-negotiable	 credit	 assets	 are	 also	 being	 revaluated	
according	 to	 the	 changes	 in	 their	 interest	 rates	 and	 credit	 risks.	 In	 this	 way,	 a	 substantial	
share	of	insurance	companies’	assets	will	be	exposed	to	market	risks.
In	Table	C-14	below,	one	can	see	that	the	direct	insurance	companies	are	the	ones	investing	in	
negotiable	assets	at	the	highest	rate	-	39.1%	(ignoring	Karnit	and	Avner),	while	the	Phoenix	
Group	is	investing	at	the	lowest	rate	-	29.2%.


                                  Table C-14
          Ratio of Negotiable Assets to Total Assets, by Companies - 2004

                                                 2004
                                      Percentage of    Negotiable Assets                        Total Assets
                                     Negotiable Assets   NIS billions                           NIS billions 
Total	as	per	consolidated	
financial	statements                        35.80%                   57,426,427                 160,351,715
Direct	insurance	
                                            39.10%                     916,556                   2,342,752
companies
Clal	Group                                  38.50%                   13,251,076                  34,419,106
Migdal	Group                                38.30%                   16,664,652                  43,455,232
Harel	Group                                 34.80%                    7,854,226                  22,588,663
Menorah	Group                               32.00%                    4,196,612                  13,095,124
Phoenix	Group                               29.20%                    6,781,176                  23,210,776
Other                                       31.30%                    4,026,223                  12,871,880
Karnit	and	Avner                            44.60%                    3,735,906                   8,368,182
Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.



Sometimes	the	volatility	in	the	value	of	assets	can	be	tempered	by	diversifying	the	investment	
in	 negotiable	assets	 between	 assets	 being	 traded	 in	 the	 domestic	 market	 and	 assets	 being	
traded	in	foreign	capital	markets.
                                                                                                                    Annual Report 2004




                                                                                                               
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                                                       Chart C-9
                                 Insurance Company Assets - Ratio of Assets Traded Abroad to
                                                 Total Negotiable Assets
                              7.0%                                                                                           10.0%
                                                                                   6.5%                          9.0%
                              6.0%
                                                                                                                             8.0%
                              5.0%                                             6.5%
                              4.0%                                                                                           6.0%
                                                4.1%
                              3.0%                                                                                           4.0%
                                                                                                                 3.2%
                              2.0%
                                                                                                                             2.0%
                              1.0%                 1.2%
                              0.0%                                                                                           0.0%
                                                2002                           2003                              2004


                                                                                                                       	
                                                            Ratio	of	Negotiable	Assets	Abroad	to	Total	Negotiable	Assets

                                                            Ratio	of	Negotiable	Assets	Abroad	to	Total	Balance	Sheet




                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.



                     Chart	 C-9	 shows	 that	 there	 has	 been	 a	 substantial	 rise	 in	 the	 proportion	 of	 assets	 being	
                     traded	abroad	out	of	the	total	negotiable	assets:	from	4%	in	2001	to	9%	in	2004	(NIS	7.7	
                     billion).	The	 Migdal	 Group	 leads	 in	 risk	 diversification	 through	 investment	 in	 negotiable	
                     assets	 abroad,	 at	 an	 investment	 rate	 of	 about	 15%.	 There	 was	 a	 drop	 to	 a	 rate	 of	 about	
                     3.2%	 in	 the	 negotiable	 assets	 abroad	 out	 of	 the	 total	 Balance	 Sheet.	The	 rise	 in	 the	 total	
                     assets	 originates	 in	 the	 consolidated	 presentation	 of	 the	 insurance	 corporation’s	 financial	
                     statements.	This	presentation	includes	the	assets	of	the	new	pension	funds	that	the	insurance	
                     companies	acquired	in	October	2004,	a	rise	in	the	market	value	of	the	assets	being	traded	in	
                     shekels,	and	the	affect	of	the	drop	in	the	exchange	rate	of	the	dollar,	which	causes	the	value	
                     of	the	investments	abroad	in	shekels	to	fall.




                             Annual Report 2004
                                                             Stability of Insurance Companies



Liquidity risk
This	risk	derives	from	the	inability	of	an	entity	to	acquire	or	obtain	liquid	sources	of	funds,	
whether	in	respect	of	a	rise	in	liabilities	or	in	respect	of	a	disposal	of	assets	in	order	to	meet	
its	obligations,	without	absorbing	unacceptable	losses.


A	 sharp	 drop	 in	 the	 prices	 of	 negotiable	 assets	 in	 the	 financial	 markets	 can	 aggravate	 a	
liquidity	pinch,	because	disposal	of	those	same	assets	would	supply	insufficient	means	for	
the	insurance	companies’	needs.	A	liquidity	risk	is	examined	in	the	non-life	insurance	lines	
and	in	the	life	insurance	line	after	omitting	assets	and	liabilities	deriving	from	participating	
plans.	The	reason	for	this	is	that	inclusion	of	all	insurance	reserves	in	the	life	insurance	line	
would	cause	a	distortion,	due	to	the	inclusion	of	the	savings	component.	The	liabilities	in	
respect	of	this	component	diminish	according	to	the	decrease	in	the	value	of	the	negotiable	
assets,	and	therefore,	there	is	no	liquidity	risk	in	respect	thereof.	For	the	purpose	of	assessing	
the	liquidity	risk,	the	definition	of	“current	liabilities”	includes	pending	claims,	insurance	
company	and	broker	creditors,	credit	from	banking	corporations,	other	creditors	and	credit	
balances,	and	a	proposed	dividend	for	distribution.	


Chart	C-10	shows	that	the	ratio	of	cash	and	negotiable	assets	to	current	liabilities	is	less	than	
1	over	the	years,	which	attests	to	the	fact	that	these	assets	do	not	cover	the	current	liabilities	
by	themselves.	One	can	see	that	the	ratio	rises	over	the	years,	and	that	cash	and	negotiable	
assets	cover	much	more	of	the	current	liabilities.	The	rise	by	three	percentage	points	in	2004	
is	comprised	of	two	percentage	points	originating	in	the	rise	in	the	holding	of	cash	and	cash	
equivalents,	and	one	percentage	point	deriving	from	the	appreciation	of	the	held	assets.	This	
rise	is	a	favorable	development	in	terms	of	the	stability	of	insurance	companies,	inter	alia,	
because	the	rise	in	cash	and	cash	equivalents	is	less	exposed	to	market	risks.
                                                                                                           Annual Report 2004




                                                                                                 
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                                                     Chart C-10
                      Ratio of Cash, Cash Equivalents and Negotiable Assets to Current Liabilities
                                      (excluding Participating Life Insurance Plans)

                                                                                                                             65%
                             66%
                             64%
                                                                                        62%
                             62%
                             60%
                                                  58%
                             58%
                             56%
                             54%
                             52%
                                                  2002                                  2003                                 2004

                                     Ratio	of	Cash,	Cash	Equivalents	and	Negotiable	Assets	to	Current	Liabilities	(excludng	Participating	Plans




                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.



                     Credit risk
                     This	risk	derives	from	the	possibility	that	the	other	party	might	not	meet	all	its	contractual	
                     obligations.	This	risk	exposure	materializes	when	monetary	considerations	become	due	from	
                     a	debtor,	issuer,	borrower,	broker,	policy	owner,	re-insurer	or	guarantor.
                     Credit	is	comprised	of	loans	that	insurance	companies	give,	acquired	negotiable	and	non-
                     negotiable	bonds	of	countries	or	corporations,	deposits	in	banks,	“receivables”	from	other	
                     insurance	companies	other	than	in	respect	of	re-insurance,	premiums	for	collection,	agents’	
                     balances	and	“other	receivables.”
                     The	transfer	of	an	insurance	risk	to	re-insurers	entails	a	credit	risk.
                     Due	to	the	importance	of	re-insurance	to	insurance	operations,	we	are	addressing	this	issue	
                     separately.




                             Annual Report 2004
                                                                      Stability of Insurance Companies



                                Table C-15
    Ratio of Credit10 (Other Than Exposure to Reinsurance) to Total Assets,
                          Excluding Avner and Karnit

        Ratio of Credit (Other than Exposure to Reinsurance) to Total Assets  
                             (Excluding Avner and Karnit)
                                             2002         2003            2004
Ratio	of	Credit,	including	Government	       73%          71%             70%
Bonds	and	Deposits	in	Banks
Ratio	of	Credit,	excluding	Government	       30%          29%             30%
Bonds
Ratio	of	Credit,	excluding	Government	       16%          17%             19%
Bonds	and	Deposits	in	Banks
Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.



This	table	shows	that	the	ratio	of	credit,	inclusive	of	government	bonds	and	deposits	in	banks,	
to	total	assets,	declined	during	the	years	2002	through	2004	(from	73%	to	70%	respectively).	
Analysis	of	this	decline	shows	that	it	derives	from	a	decrease	in	bank	deposits,	from	NIS	
18.3	billion	to	about	NIS	16.6	billion.	There	was	a	rise	in	the	ratio	of	credit,	which	excludes	
government	bonds	and	deposits	in	banks,	between	the	years	2002	through	2004	(from	16%	
to	19%	respectively).	This	rise	occurred	concurrently	with	a	substantial	rise	in	the	insurance	
companies’	total	assets,	and	this	caused	the	total	credit,	excluding	government	bonds	and	
bank	deposits,	to	reach	NIS	29.5	billion	in	2004.	An	efficient	and	competitive	non-banking	
credit	market	would	help	exploit	the	real	potential	activity	in	the	market.	The	uptrend	in	the	
total	credit	that	insurance	companies	are	providing	(today,	the	non-banking	credit	market	is	
not	large	enough	to	serve	as	an	alternative	to	banking	credit)	is	in	line	with	the	economic	
policy,	and	would	require	the	creation	of	control	mechanisms	and	monitoring	of	the	growing	
credit	risk.	
Examination	of	the	negotiability	of	the	components	of	the	credit	that	insurance	companies	
provide,	excluding	government	bonds	and	deposits	in	banks	(see	Table	C-16),	shows	that	
there	was	a	rise	in	the	ratio	of	the	negotiable	credit	in	2004	by	four	percentage	points,	being	
about	NIS	2.4	billion.
                                                                                                                    Annual Report 2004




10.		Excluding	re-insurance.




                                                                                                               
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                                                  Table C-16
                       Credit Components, Excluding Government Bonds and Deposits in Banks

                                               	                                  2002                 2003                 2004
                     Negotiable	Credit                                            26%                  23%                  27%
                     Non-negotiable	Credit                                        74%                  77%                  73%
                     Total	Credit,	excluding	Government	                         100%                 100%                  100%
                     Bonds	and	Deposits	in	Banks
                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.



                     It	 is	 customary	 to	 present	 the	 credit	 risk	 by	 dividing	 the	 credit	 that	 insurance	 companies	
                     provide	according	to	a	rating	of	the	securities	provided	to	secure	the	credit,	or	according	
                     to	 a	 rating	 of	 the	 bond	 that	 the	 credit	 recipient	 issues.	 In	 2004,	 no	 rise	 in	 the	 credit	 risk	
                     occurred.	Examination	of	the	ratio	of	the	credit	given	against	negotiable	assets	with	at	least	
                     an	AA	rating	to	the	insurance	companies’	total	assets	shows	that	there	was	a	rise	to	about	
                     24.1%	in	2004,	from	about	22.4%	in	the	previous	year.	Examination	of	loans	secured	with	
                     bonds	shows	that	insurance	companies	are	willing	to	accept	this	instrument	as	a	guarantee,	
                     if	the	bond	rating	is	high.	Loans	secured	by	bonds	with	an	AA	rating	or	higher	show	a	rise	
                     of	NIS	1.8	billion,	compared	to	a	rise	of	NIS	0.8	billion	only	for	loans	secured	by	bonds	
                     with	 a	 lower	 rating.	 The	 companies	 prefer	 to	 receive	 other	 securities	 from	 the	 borrower,	
                     mainly	negotiable	stocks,	rather	than	bonds	with	a	low	rating.	The	value	of	traded	stocks	is	
                     determined	through	negotiations	between	the	parties,	so	it	may	be	higher	than	the	sum	of	
                     the	loan,	since	the	parties	take	into	account	possible	declines	in	the	capital	market;	and	the	
                     insurance	company	may	be	given	an	option	to	receive	or	acquire	a	portion	of	the	borrower’s	
                     stocks	under	certain	conditions.	In	2004,	there	was	a	rise	of	more	than	NIS	one	billion	in	
                     loans	secured	by	other	securities	(mainly	negotiable	stocks).




                             Annual Report 2004
                                                                      Stability of Insurance Companies



                                      Table C-17
                   Total Credit by Rating (excluding Avner and Karnit),
                                        in current prices, NIS billions

                                                               2004                              2003
                                                                      Percent                           Percent 
               Type of Asset                        Balance           of Total        Balance           of Total 
                                                                       Assets                            Assets
Negotiable Securities
Government	bonds                                    							27.4	        21%           										24	       20%
Corporate	bonds	with	at	least	an	AA	                									4.1	       3.1%          									2.9	      2.4%
rating
Corporate	bonds	with	a	rating	lower	                							0.95	        0.7%          									1.1	      0.9%
than	AA
Non-negotiable bonds
Earmarked	bonds                                     							26.7	        20%           							26.4	        22%
Loans
Secured	with	bonds	with	at	least	an	                									6.9	        5%           									5.1	        4%
AA	rating
Secured	with	bonds	with	a	rating	                   									2.6	        2%           									1.8	      1.5%
lower	than	AA
Secured	with	other	securities	with	at	              							0.23	        0.2%          							0.03	         0%
least	an	AA	rating
Secured	with	other	securities	with	a	               							1.16	        0.9%          							0.15	       0.1%
rating	lower	than	AA
Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.



Re-insurance
Insurance	companies	in	Israel	customarily	transfer	a	material	portion	of	the	insurance	risk	
that	 they	 accept	 to	 re-insurers	 (mostly	 foreign	 entities),	 in	 order	 to	 cover	 their	 insurance	
liabilities.	Transfer	of	a	portion	or	all	of	the	insurance	risk	to	re-insurers	exposes	insurance	
companies	to	a	double	risk:	the	credit	risk	and	the	insurance	risk	(the	company	would	be	
forced	to	pay	the	insurance	benefits	out	of	its	own	pocket).	It	is	for	this	reason	that	setting	
policy	 and	 control	 procedures	 are	 important	 for	 assessing	 and	 managing	 the	 insurance	
companies’	exposure	opposite	the	various	re-insurers.
Re-insurance	 agreements	 are	 contracts	 signed	 between	 an	 insurer	 and	 a	 re-insurer.	These	
contracts	do	not	change	the	original	insurance	contract	between	the	insurer	and	the	insured,	
                                                                                                                    Annual Report 2004




and	usually,	they	rely	on	the	coverage	provided	pursuant	to	the	original	contract.	Reinsurance	
contracts	rely	on	bona	fides,	on	honesty	and	on	a	shared	fate.




                                                                                                               
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     Engagements with re-insurers have advantages in terms of stability:
                     1.	 They	provide	Israeli	insurers	with	a	higher	capacity	of	means	to	contend	with	catastrophic	
                         damages.
                     2.	 They	protect	against	particularly	high	amounts	of	exposure,	which	are	liable	to	erode	the	
                         insurer’s	capital.


                     Reinsurance	 can	 be	 either	 proportional	 re-insurance	 or	 non-proportional	 reinsurance.	
                     The	 engagement	 can	 be	 contracted	 within	 the	 framework	 of	 a	 contract	 or	 as	 facultative	
                     re-insurance	 (this	 type	 of	 framework	 requires	 the	 re-insurer’s	 consent	 to	 each	 transaction	
                     separately).
                     In	proportional	re-insurance,	the	risk	is	transferred	on	a	pro	rata	basis	to	the	re-insurer.	Against	
                     the	risk,	the	insurer	pays	the	premium	that	it	collected	proportionately	to	the	risk	component	
                     being	transferred.	For	example,	in	a	contract	in	which	the	re-insurer	assumes	the	payment	
                     of	75%	of	any	claim	in	the	vehicle	property	line,	then	its	share	in	the	premiums	in	respect	
                     of	the	vehicle	property	line	(excluding	the	fees	component11)	is	also	75%.	In	consideration,	
                     the	insurer	receives	a	commission	from	the	re-insurer	for	transferring	the	business	to	it.	The	
                     rate	of	the	commission	is	determined	within	the	scope	of	the	commercial	relations	between	
                     the	insurer	and	the	re-insurer.	Furthermore,	the	insurer	retains	the	fees	component	attributed	
                     to	the	risk	being	transferred	to	the	re-insurer.	The	main	reason	for	this	is	that	usually,	the	
                     local	insurer	is	the	party	handling	clearance	of	the	claim,	and	therefore,	the	insurer	incurs	
                     expenses	throughout	the	life	of	the	contract	during	the	investigation	of	the	claim.
                     Non-proportional	reinsurance	is	based	mainly	on	layers	of	excess	of	loss	in	insurance.	Insurers	
                     in	 Israel	 are	 exposed	 to	 a	 risk	 up	 to	 a	 certain	 maximum	 (as	 well	 as	 above	 the	 maximum	
                     coverage	in	a	contract	with	re-insurers).	For	example,	in	a	contract	in	which	the	re-insurer’s	
                     share	 of	 every	 claim	 in	 the	 compulsory	 motor	 vehicle	 insurance	 line	 will	 be	 that	 portion	
                     exceeding	one	hundred	thousand	dollars	and	below	one	million	dollars,	the	insurer	will	pay	
                     the	claim	sums	that	are	below	one	hundred	thousand	dollars,	as	well	as	the	sums	exceeding	
                     one	million	dollars.


                     Once	 a	 year,	 the	 board	 of	 directors	 of	 the	 insurance	 company	 is	 obligated	 to	 discuss	 its	
                     policy	with	respect	to	exposure	to	re-insurers,	the	insurer’s	arrangements	for	managing	and	
                     controlling	the	exposure,	and	to	determine	them,	both	for	a	single	re-insurer,	and	for	a	group	


                     11.	The	fees	component	is	comprised	of	sums	that	are	added	to	the	policy	to	cover	administrative	expenses	and	other	expenses	of	the	
                         insurer,	such	as	registration	fees	and	policy	fees,	which	are	imposed	on	the	insurer	pursuant	to	various	tax	and	levies	laws.




                       0       Annual Report 2004
                                                                                      Stability of Insurance Companies


of	re-insurers	having	an	economic	affiliation.	The	board	of	directors	must	hold	this	discussion	
after	having	evaluated	the	quality	of	the	tools	that	the	insurer	possesses	for	managing	and	
controlling	the	exposure	vis-à-vis	the	re-insurers.	
The	policy	with	respect	to	exposure	to	re-insurers	should	include,	inter	alia,	the	exposure	
management	policy	vis-à-vis	re-insurers	in	a	variety	of	lines	-	life,	non-life	and	health,	as	well	
as	a	definition	of	the	maximum	exposure	to	re-insurers,	according	to	parameters	determined	
by	the	board	of	directors.	Such	parameter	could	be	based	on	quality,	such	as	the	international	
rating	of	the	re-insurer.
“Exposure”	means:	debit	balances	of	the	re-insurer	at	the	insurer,	including	the	re-insurer’s	
share	 in	 the	 insurer’s	 pending	 claims	 and	 in	 the	 reserve	 for	 unexpired	 risks	 (hereinafter	
“Gross	Debit	Balances’),	less	the	re-insurer’s	deposits	with	the	insurer,	and	less	the	total	of	
the	letters	of	credit	given	against	the	re-insurer’s	debt.
It	is	also	important	to	take	into	account	the	re-insurer’s	share	in	the	insurer’s	total	insurance	
risk	in	case	of	earthquakes12.

This	definition	of	exposure	indicates	the	expected	credit	risk	if	the	re-insurer	does	not	remit	
the	payments	of	his	share	in	claims:	if	the	re-insurer	makes	deposits	at	the	full	extent	of	his	
share	in	the	pending	claims	and	in	the	reserve	for	unexpired	risks,	then	this	re-insurer	would	
not	appear	in	the	exposure	calculation.


As	 can	 be	 seen	 in	 Chart	 C-11,	 34.4%	 of	 the	 total	 exposure	 of	 the	 insurance	 companies	
operating	in	Israel	is	to	Munich	Re.	The	credit	rating	of	this	company	is	A+	(the	credit	rating	
of	the	external	debt	of	the	State	of	Israel	is	A-).




                                                                                                                                              Annual Report 2004




12.	Data	is	still	unavailable	with	respect	to	the	re-insurer’s	share	in	the	insurance	risk	of	the	insurer	in	the	event	of	earthquakes.




                                                                                                                                         1
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                                                               Chart C-11
                                                   Distribution of the Risk by Reinsurers

                                             Zurich (Alpina) 3.7%
                                             Others 29.8%
                                             Munich Re 34.4%
                                             Swiss Re 15.4%
                                             Generali 5.1%
                                             Lloyd's 4.0%
                                             Frankona 3.9%
                                             Partner 3.7%




                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.



                     The	insurance	companies	in	every	insurance	line	customarily	purchase	a	variety	of	types	of	
                     re-insurance,	at	varying	rates.	The	distribution	of	the	premiums	amongst	the	lines	differs	from	
                     company	to	company,	and	therefore,	the	proportions	of	the	premiums	net	of	reinsurance	also	
                     differ	from	company	to	company.	Table	C-18	presents	the	proportion	of	premiums	retained	
                     by	the	insurance	companies	over	a	few	years.
                     The	reason	for	the	low	proportion	of	premiums	retained	by	the	AIG	Group	and	the	Direct	
                     Insurance	Group	is	that	the	life	insurance	premiums	of	AIG	are	in	respect	of	risk	only,	and	
                     contain	no	savings	component	whatsoever.	Consequently,	a	significant	percentage	thereof	
                     is	used	to	purchase	re-insurance.	Opposite	this,	in	the	Direct	Insurance	Company,	there	are	
                     premiums	that	do	contain	a	savings	component,	yet	their	proportion	out	of	the	company’s	
                     total	premiums	is	lower	than	the	same	proportion	at	other	companies.	The	existence	of	the	
                     savings	component	is	one	of	the	reasons	for	the	higher	proportion	of	retained	premiums	in	
                     Direct	Insurance	compared	to	the	AIG	Group.




                             Annual Report 2004
                                                                      Stability of Insurance Companies



                                        Table C-18
                          Percentage of Premiums net of reinsurance

                               Non-life Insurance                                  Life Insurance
         
                     2001       2002       2003           2004         2001        2002      2003              2004
AIG	Group            95%        86%        86%            84%          72%         68%       73%               71%
Direct	
Insurance	           97%          94%         94%          95%         85%         76%          82%            84%
Group
Hachsharat	
Hayeshuv	            75%          72%         72%          73%         85%         80%          79%            82%
Group
Phoenix	
                     64%          78%         82%          81%         95%         93%          94%            94%
Group
Harel	Group          74%          70%         69%          70%         94%         93%          94%            94%
Clal	Group           67%          66%         68%          68%         94%         92%          94%            95%
Migdal	Group         64%          66%         70%          72%         97%         96%          97%            98%
Menorah	
                     55%          65%         71%          76%         94%         91%          92%            93%
Group
Ayalon               76%          88%         90%          91%         93%         91%          94%            94%
Eliahu               93%          91%         93%          93%         90%         89%          90%            91%
Agricultural	
                     32%          31%         51%          54%           0           0            0             0
Insurance
Shomera              36%          54%         82%          85%           0           0            0             0
Shirbit              97%          87%         93%          94%           0           0            0             0
Government	
                     72%          65%         64%          68%           0           0            0             0
groups*
Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.
*The	government	group	includes	the	Natural	Disasters	Fund,	BSSCH	and	Inbal.



Capital Adequacy
In	 order	 to	 ensure	 that	 the	 insurance	 companies	 will	 be	 able	 to	 fulfill	 their	 liabilities	 to	
insureds	at	all	times,	even	if	they	suffer	losses	during	their	operations	due	to	the	realization	of	
the	risks	discussed	in	this	section,	the	Minister	of	Finance	prescribed	the	Insurance	Business	
Control	Regulations	(Minimum	Equity	Required	from	Insurers),	5758	-	1998	(hereinafter:	
“the	Capital	Regulations.”).
                                                                                                                      Annual Report 2004




                                                                                                                
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                                                    Table C-19
                       Composition of the Recognized Equity and the Reserve for Special Risks in
                           Life Insurance in Insurance Companies in 2004, NIS thousands

                                                                                                                                               Ratio of 
                                                                                                                                                              Reserve 
                                     Recognized  Recognized                                                                          Equity    surplus/
                                                             Recognized                                         Require                                     for special 
                       Company        primary    secondary                                                                          surplus/   deficit to
                                                             equity (1+2)                                        equity                                     risks in life 
                                     capital (1) capital (2)                                                                         deficit   required 
                                                                                                                                                             insurance
                                                                                                                                                equity
                     Clal            1,780,942	 600,000	 2,380,942	                                           1,521,662	            859,280	    56.5%	       212,168	
                                    																				
                     Migdal                                       47,652	 1,695,171	                          1,350,224	            344,947	   25.5%	        416,706	
                                     1,647,519	
                     Phoenix         1,200,456	 130,856	 1,331,312	                                           1,065,762	            265,550	   24.9%	        111,000	
                                    																								 																								 																				   																				
                     Menorah                                                                                                        43,591	     3.5%	         84,116	
                                       880,334	 402,903	 1,283,237	                                           1,239,646	
                     Harel	
                     (formerly	     674,049	 265,285	 939,334	 847,820	          91,514	                                                       10.8%	        214,650	
                     Shiloah)
                     Hadar          535,839	       -			   535,839	 418,914	      116,925	                                                      27.9%	        44,000	
                     Eliahu         436,274	       -			   436,274	 222,422	 213,852	                                                           96.1%	        46,944	
                     Arieh          279,394	       -			   279,394	 279,394	          0	                                                           -			       44,533	
                     Ayalon         247,404	   37,406	    284,810	 247,360	      37,450	                                                       15.1%	        12,213	
                     Hamagen        220,478	       -			   220,478	 212,513	        7,965	                                                       3.7%	        41,123	
                     IDI            184,823	       -			   184,823	 155,362	       29,461	                                                      19.0%	        17,534	
                     Hachsharat	
                                    174,237	    87,119	   261,356	 246,567	       14,788	                                                       6.0%	        12,680	
                     Hayeshuv
                     AIG            143,013	       -			   143,013	     91,692	    51,321	                                                      56.0%	         3,712	
                     Agricultural	
                                    118,000	       -			   118,000	     76,050	    41,950	                                                      55.2%	             -			
                     insurance
                     Dikla           88,312	    3,214	     91,526	    76,457	    15,069	                                                       19.7%	             -			
                     Shirbit         77,481	       -			    77,481	     54,323	    23,158	                                                      42.6%	             -			
                     Inbal           55,390	       -			    55,390	     48,655	     6,735	                                                      13.8%	             -			
                     Shomera         53,241	       -			    53,241	     48,901	     4,340	                                                       8.9%	             -			
                     New	
                                     46,185	    11,000	    57,185	     44,348	    12,837	                                                      28.9%	             -			
                     BSSCH
                     Illit              -			       -			       -			        -			       -			                                                        	                -			
                     Clal	Credit 36,657	           -			    36,657	     24,367	    12,290	                                                      50.4%	             -			
                     Ezer            27,149	   10,835	     83,789	    80,397	     3,392	                                                       4.2%	              -			
                     BSSCH           15,062	       -			    15,062	     12,148	     2,914	                                                      24.0%	             -			
                     Natural	
                     Disasters	       6,758	       -			     6,758	      6,081	      677	                                                       11.1%	             -			
                     Fund
                     Total         8,928,997	 1,596,270	 10,571,072	 8,371,065	 2,200,006	                                                     26.3%	       1,261,379	
                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.




                             Annual Report 2004
                                                                 Stability of Insurance Companies


The	data	in	Table	C-19	give	an	indication	of	the	capital	structure	of	the	insurance	companies.	
The	 data	 show	 which	 companies	 chose	 to	 recruit	 money	 from	 outside	 sources	 through	
secondary	capital,	and	which	companies	base	themselves	on	equity.
The	recognized	secondary	capital	in	insurance	companies	is	on	average	15%	(compared	to	about	
10%	in	2003)	of	the	total	recognized	capital,	compared	to	about	44.8%	in	banking	corporations	
(in	2003).	However,	here	is	the	place	to	note	that,	pursuant	to	the	amendment	to	the	Capital	
Regulations,	since	the	beginning	of	2004,	we	have	seen	extensive	capital	recruitment	by	some	
insurance	companies	(as	well	as	by	holding	companies	of	insurance	companies)	via	secondary	
capital.	Within	the	scope	of	this	change,	the	minimum	equity	required	from	companies	increased	
according	 to	 the	 expansion	 of	 their	 activities	 in	 the	 field	 of	 pensions	 and	 according	 to	 their	
acquisition	of	the	companies	managing	the	new	pension	funds	that	were	put	up	for	sale.
Following	are	the	capital	increments,	correct	to	December	31,	2004,	following	acquisition	
of	companies	managing	pension	funds	that	were	sold	by	the	managers	of	the	pension	funds	
under	arrangement.
Clal	was	required	to	put	up	a	capital	increment	at	the	sum	of	NIS	122,872	thousand,	following	
its	acquisition	of	the	Meitavit	Pension	Fund.	
Migdal	 was	 required	 to	 put	 up	 a	 capital	 increment	 at	 the	 sum	 of	 NIS	 100,659	 thousand,	
following	its	acquisition	of	the	New	Makefet	Pension	Fund.
Menorah	was	required	to	put	up	a	capital	increment	at	the	sum	of	NIS	200,919	thousand,	
following	its	acquisition	of	Mivtahim	Pension	Funds.
An	increase	in	the	equity	of	the	insurance	companies,	at	a	rate	exceeding	the	expansion	of	
their	operations,	reflects	their	improved	stability;	A	rise	in	capital	means	an	increase	in	the	
existing	 monetary	 sources	 in	 the	 companies,	 which	 enables	 them	 to	 make	 payments	 that	
exceed	the	reserves	that	the	companies	maintained.
The	increase	in	the	activity	may	be	measured,	inter	alia,	by	the	increase	in	the	premiums	or	by	the	
increase	in	the	insurance	reserves.	If	the	rate	of	the	rise	in	capital	is	higher	than	the	rate	of	the	rise	in	
the	premiums,	then	in	exchange	for	the	rise	in	the	risk	that	the	premiums	represent,	there	is	a	greater	
rise	in	the	level	of	capital.	When	measuring	risk	via	the	premiums,	there	is	an	inherent	assumption	
that	the	ratio	between	a	risk	unit	added	to	a	company	and	an	intake	unit	does	not	change.
By	reviewing	Table	C-20,	one	can	see	that	the	equity	of	the	companies	grew	during	the	past	five	
years	 by	 about	 93%	 compared	 to	 a	 rise	 of	 only	 about	 13.4%	 in	 premiums	 during	 those	 same	
years.	That	being	the	case,	this	index	indicates	that	their	stability	has	improved.	From	amongst	
                                                                                                                 Annual Report 2004




the	companies,	Harel,	Menorah	and	AIG	are	noteworthy	-	their	equity	grew	substantially	during	
the	last	five	years,	and	reflects	the	companies’	rapid	development,	mainly	in	their	operations	in	
the	non-life	insurance	lines.	Also	the	major	insurance	groups,	Migdal,	Clal	and	Phoenix	showed	




                                                                                                       
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     equity	growth	rates	of	tens	of	percentage	points.	These	are	extremely	high	growth	rates	compared	
                     to	other	companies	operating	in	the	capital	market,	like,	for	example,	banking	corporations.


                                                      Table C-20
                          Indices for Examining Capital Adequacy - Equity Development in Active
                      Insurance Companies (Non-consolidated Equity)13 during the years 2000-2004,
                                                                                      NIS thousands
                              Company                               2000                   2001                   2002                  2003                   2004
                      Clal                                       1,033,393              1,195,977              1,348,759             1,456,011              1,780,942
                      Migdal                                     1,082,502              1,126,609              1,306,768             1,527,828              1,647,519
                      Phoenix                                     577,044                641,541                819,558              1,026,322              1,200,456
                      Menorah                                     157,613                322,811                380,481               529,374                880,334
                      Harel	(formerly	Shiloah)                    105,824                244,174                299,588               742,046                674,049
                      Hadar                                       380,488                439,895                510,789               444,051                535,839
                      Eliahu                                      182,084                198,013                175,297               314,133                436,273
                      Arieh                                       198,943                268,910                294,256               356,280                416,879
                      Hamagen                                     147,464                191,228                220,652               280,890                263,192
                      Ayalon                                       93,747                125,042                155,208               203,785                247,404
                      IDI	Direct	*                                135,319                133,369                163,246               172,157                184,823
                      Hachsharat	Hayeshuv                          93,399                113,919                127,737               146,362                174,237
                      AIG                                          37,413                 49,063                 69,057               124,476                143,013
                      Dikla                                        55,761                 61,714                 70,473                93,651                123,169
                      Agricultural	Insurance                       80,226                 92,913                105,987               106,607                118,000
                      BSSCH                                        99,774                101,847                 96,033                94,325                 94,893
                      Shirbit                                      52,257                 55,346                 59,361                62,870                 77,481
                      Inbal                                        44,850                 47,521                 51,727                53,432                 55,390
                      Shomera                                      46,941                 54,553                 56,212                55,762                 53,241
                      New	BSSCH                                       -			                21,493                 47,958                48,134                 46,185
                      Clal	Credit                                  23,234                 24,403                 26,197                30,126                 36,657
                      Ezer                                         28,943                 28,539                 24,591                27,174                 27,149
                      Natural	Disasters	Fund                        6,185                  6,625                  6,717                 6,848                  6,758
                      Sahar-Zion	**                               120,710                225,814                290,951                   -			                   -			
                      Avner                                       214,793                303,732                593,859               985,093               1,168,756
                      Total	Equity	of	Active	                    4,784,114              5,771,319              6,707,603             7,902,644              9,223,883
                      Companies
                     Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.

                     Notes:
                     *	 IDI	Direct	Insurance	Company	-	in	2000,	data	of	the	Direct	Insurance	Company	are	presented.
                     **	 Amalgamated	into	the	Harel	Insurance	Company	in	2003.




                     13.		The	Avner	corporation	stopped	selling	new	compulsory	motor	vehicle	insurance	policies	in	2002,	and	is	under	liquidation	proceedings.	A	few	companies,	
                         which	had	once	been	active	but	are	no	longer	active	in	2004,	are	not	presented	in	the	table,	but	are	included	in	the	total	equity	of	active	companies.	




                                Annual Report 2004
                                                                            Stability of Insurance Companies



                                 Chart C-12
    Indices for Examining Capital Adequacy - Ratio of Equity to Total Assets,
      Ratio of Equity to Reserves in Life Insurance and Non-life Insurance
       11.0%

        9.0%

        7.0%

        5.0%

        3.0%

        1.0%

      -1.0%
                    1999             2000               2001              2002              2003               2004

                        Equity	to	Total	Balance	Sheet          Equity	to	Reserves	in	Life	Insurance	and	Non-life	Insurance




Source:		Insurance	company	reports	and	data	processed	by	the	Capital	Market,	Insurance	and	Savings	Division.



Chart	C-12	clearly	shows	the	development	of	the	ratio	of	equity	to	total	assets	and	to	total	
reserves	 in	 life	 insurance	 and	 non-life	 insurance.	 It	 is	 important	 to	 remember	 that	 life	
insurance	 reserves	 include	 insureds’	 savings	 accruing	 in	 participating	 plans.	 The	 data	 of	
the	 insurance	 companies	 do	 not	 isolate	 the	 risk	 component	 including	 in	 these	 plans	 from	
the	reserves.	That	part	of	the	reserve	constituting	the	insureds’	savings	causes	the	capital	
adequacy	to	be	less	distinguishable,	since	the	risk	applies	to	the	insureds.	If	losses	occur,	
they	will	diminish	the	insureds’	savings.	The	risk	component	in	that	portion	of	the	reserve	
applies	to	the	insurance	company.	The	better	the	capital	adequacy,	the	less	the	chances	that	
the	company	will	be	unable	to	fulfill	its	obligations	should	the	insurance	risk	occur.	Over	the	
years	one	can	see	significant	improvement	in	the	capital	adequacy:	the	ratio	of	equity	to	life	
insurance	and	non-life	insurance	reserves	rises	from	5.9%	in	1999	to	7.3%	in	2004,	and	its	
ratio	to	the	balance	sheet	rose	from	5.2%	to	6.4%	respectively.
                                                                                                                                  Annual Report 2004




                                                                                                                             
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     Appendix A: Holding Structures of the Principal Stockholders
                     in Israeli Insurance Companies
                     (fully	diluted)	correct	to	June	30,	2004


                     AIG Group


                                                        American	International	Group,	Inc.	(USA)
                                                       (directly	and	through	companies	it	controls)




                         Aurec	Gold	Investments	Ltd.             51%	preference	stock               Chaim	Kippel
                                                                 50%	ordinary	stock

                                     49%	preference	stock                                    80%           20%
                                     50%	ordinary	stock


                                          AIG	–	Gold	Insurance	Ltd.                 AIG	–	Israel	Mortgage	Holdings	Ltd.

                                                                                                        100%

                                                                              EMI	–	Ezer	Mortgage	Insurance	Company	Ltd.




                     Ayalon Insurance Company Ltd.

                                                                  Rachmani	Family

                                                                             86.74%

                                                                Ayalon	Holdings	Ltd.

                                                                             100%

                                                            Ayalon	Insurance	Company	Ltd.




                           Annual Report 2004
                                                                              Stability of Insurance Companies


Eliahu Insurance Company Ltd.



                                               Shlomo	and	Haya	Eliahu

                                                    100%

                                             Shlomo	Eliahu	Holdings	Ltd.
                                                                                         75%	management	stock
                              100%
                                                                                         25.2%	ordinary	stock

                                                                  15%	management	stock
                     Eliahu	Bros.	Investments	
                                                                  61.7%	ordinary	stock
                      &	Trust	Company	Ltd.
         10%	management	stock
         13.14%	ordinary	stock
                                        Eliahu	Insurance	Company	Ltd.




Agricultural Insurance - Central Cooperative Society Ltd.


                                    Consumer	Organization	of	the	United	Kibbutz	
                                   Movement	Agricultural	Cooperative	Society	Ltd.	
                                  (controlled	by	the	Shomer	Haza’ir	&	by	the	United	
   Mishkey	Kibbutzim	–	                           Kibbutz	Movement)                      Consumer	Organization	of	the	United	
  Agricultural	Cooperative	                                                                Kibbutz	Movement	Agricultural	
        Society	Ltd.                               90%                                        Cooperative	Society	Ltd.	



        5%                                                                                     5%
                              Agricultural	Insurance	Central	Cooperative	Society	Ltd.
                                                                                                                                Annual Report 2004




                                                                                                                         
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     Hachsharat Hayeshuv Group Insurance Company Ltd.

                                                                      Jacob	Nimrodi
                                                         (directly	and	through	companies	wholly	
                                                                   controlled	by	him)


                                        Ofer	Nimrodi                           33.88%	of	the	equity
                            (directly	and	through	companies	wholly	            66.44%	of	the	voting	rights
                                       controlled	by	him)

                            14.86%	of	the	equity
                            7.43%	of	the	voting	rights
                                         Hachsharat	Hayeshuv	Israel	Ltd.                                           Yarden	Investments	Ltd.
                                                                                           19.44%		equity
                                                 52.9%                                     9.72%	voting	
                                                                                 0.98%
                            1.02%
                                       Hachsharat	Hayeshuv	Insurance	                       Ron	Weissberg               Jacob	Luxenburg
                                               Holdings	Ltd.
                                                                                      76.15%               1.36%                   4.56%
                                     86.48%


                           BSSCH	Israel	Credit	Insurance	Company	Ltd.                          Hachsharat	Hayeshuv	Insurance	Company	Ltd.




                     The Israel Phoenix Group Insurance Company Ltd.


                                              Jacob	and	Nili	Shachar                                  Irael	and	Penina	Kaz
                                       (directly	and	through	companies	under	                  (directly	and	through	companies	under	
                                                    their	control) 50%                            50%       their	control)




                                                               Mayer	Automobiles	and	Trucks	Ltd.
                           Shlomo	Eliahu	
                                                                                                                    32.65%	of	the	equity
                           Holdings	Ltd.                                100%
                                                                                                                    33.79%	of	the	voting	rights
                        (directly	and	through	
                                                               Mayer	Holdings	(The	Phoenix)	Ltd.
                        companies	under	his	
                               control)                                 25%

                                                              The	Phoenix	Insurance	Company	Ltd.                                Public
                              33.05%	of	the	equity
                              31.33%	of	the	voting	rights               100%                                   9.3%	of	the	equity
                                                                                                               9.88%	of	the	voting	rights
                                                                 Hadar	Insurance	Company	Ltd.




                      0      Annual Report 2004
                                                                                    Stability of Insurance Companies


Harel Group


                                                         Hamburger	Family
                                              (through	GIN	Economic	Consulting	and	
                                                        Management	Ltd.)

                                                                        50.01%


                                5.51%                                                            18.2%
          Bank	Leumi		                                                                                       Israel	Discount	
                                                Harel	Insurance	Investments	Ltd.
          Le-Israel	Ltd.                                                                                        Bank	Ltd.

                                                          100%



                     Harel	Insurance	Company	Ltd.                                          General	Health	Services

                                                                             65%                  35%



                                                                     Dikla	Insurance	Company	Ltd.




IDI Direct Insurance Company Ltd.

																										                       Schneidman	Family

                                                                  59.89%	of	the	equity
																								                                          75.64%	of	the	voting	rights


         0.64%                              Zur	Shamir	Holdings	Ltd.                            Bank	Leumi	Le-Israel	Ltd.

																																																															   47.11%
                                                                                                        19.71%
                                  Direct	Insurance	Financial	Investments	Ltd.

         0.07%                                                    75%

                                                                                                         7.63%
                                        IDI	Direct	Insurance	Company	Ltd.
                                                                                                                                     Annual Report 2004




                                                                                                                                1
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     Clal Insurance Group


                       Abraham	Livnat	Family                      Nochi	Dankner	and	Shelly	                   Ruth	and	Isaac	Manor
                      (directly	and	through	family-                 (Dankner)	Bergman                          (directly	and	through	
                          controlled	companies)                 (directly	and	through	companies	            companies	under	their	control)
                                                                       under	their	control)

                                                                        46.65%


                                     10.38%                                                                         10.37%
                                                                      IDB	Holdings	Ltd.
                                                                        66.98%


                                                              IDB	Development	Company	Ltd.

                                                                        48.76%


                                                             Clal	Insurance	Business	Holdings	Ltd.
                                                                         100%


                                                                Clal	Insurance	Company	Ltd.
                                                      100%                                           100%


                               Arieh	Insurance	Company	Ltd.                                  Clal	Credit	Insurance	Ltd.




                     Migdal Group


                                                                                          Generali	Group



                                    Bank	Leumi	Le-Israel	Ltd.               Migdal	Financial	and	Insurance	Holdings	Ltd.
                                                                                                      59%
                                                             21.42%
                                                                                  Migdal	Insurance	Company	Ltd.

                                                                                                     100%

                                                                                 Hamagen	Insurance	Company	Ltd.




                           Annual Report 2004
                                                                        Stability of Insurance Companies


Menorah Insurance Company Ltd.

                                                    Menachem	Gurewitz	Gurewitz



            Delek	Group              Nayden	&	P.L.M.S.                                    Public
                                                                1.24%




            9.63%           67.91%                                                      19.4%
                                                Menorah	Holdings	Ltd.

                                                       100%


                                          Menorah	Insurance	Company	Ltd.



*	Holding	in	trust	for	Menachem	Gurewitz



Shomera Insurance Company Ltd.

                                      Ben	Zion	Weinstock	&	Yossi	Weinstock
                                 (directly	and	through	companies	under	their	control)
         Hadar	Insurance	                                                                   Shlomo	Eliahu	
          Company	Ltd.        7.49%
                                                              56.94%
                                                                                  6.32%     Holdings	Ltd.


          Yossi	Gabai                   Sinai	Insurance	Holdings	Ltd.
                        1.44%
                                                              100%


                                       Shomera	Insurance	Company	Ltd.



Shirbit Insurance Company Ltd.


                                                 Yigal	Rav	Nof
                               (directly	and	through	companies	under	his	control)

                                                   100%
                                                                                                                  Annual Report 2004




                                       Shirbit	Insurance	Company	Ltd.




                                                                                                             
                     The Capital Market, Insurance and Saving Division
Annual Report 2004




                     Appendix B: Active Insurance Companies and Licensing
                     Activities in 2004


                     Israeli companies
                     Avner	Association	for	Motor	Vehicle	Accident	Victims	Insurance	Ltd.
                     EMI	Ezer	-	Mortgage	Insurance	Ltd.	
                     AIG	-	Gold	Insurance	Ltd.
                     Ayalon	-	Insurance	Company	Ltd.
                     Eliahu	-	Insurance	Company	Ltd.
                     Arieh	-	Israeli	Insurance	Company	Ltd.
                     BSSCH	-	Israel	Credit	Insurance	Company	Ltd.
                     Agricultural	Insurance	-	Central	Cooperative	Society	Ltd.
                     Dikla	-	Insurance	Company	Ltd.
                     Hadar	-	Insurance	Company	Ltd.
                     The	Israel	Foreign	Trade	Risk	Insurance	Company	Ltd.
                     Hachsharat	Hayeshuv	-	Insurance	Company	Ltd.
                     Hamagen	-	Insurance	Company	Ltd.
                     The	Israel	Phoenix	-	Insurance	Company	Ltd.
                     Harel	-	Insurance	Company	Ltd.
                     Administrative	Corporation	of	the	Insurance	Pool	
                     IDI	Direct	-	Insurance	Company	Ltd.
                     Clal	-	Credit	Insurance	Ltd.
                     Clal	-	Insurance	Company	Ltd.
                     Migdal	-	Insurance	Company	Ltd.
                     Menorah	-	Insurance	Company	Ltd.
                     Omer	-	Mutual	Insurance	Fund
                     Inbal	-	Insurance	Company	Ltd.
                     Continental	-	Marine	Insurance	Company	Ltd.
                     Natural	Disasters	Insurance	Fund	in	Agriculture
                     Karnit	-	Road	Accident	Victims	Compensation	Fund
                     Shomera	-	Insurance	Company	Ltd.
                     Shirbit	-	Insurance	Company	Ltd.




                          Annual Report 2004
                                                          Stability of Insurance Companies


Foreign companies
Alpina	-	Insurance	Company	Ltd.
Delvag	Insurance	Company	Ltd.
Zurich	Insurance	Company
Compagnie	Francaise	d’Assurance	pour	le	Commerce	Exterier


A.  Granting of licenses
Israeli insurer
1.	 Menorah	-	Insurance	Company	Ltd.
	 On	September	27,	2004,	a	license	was	arranged	for	Menorah	-	Insurance	Company	Ltd.,	
    to	operate	in	the	insurance	lines	of	seacraft,	including	third-party	liability	insurance,	and	
    aircraft,	including	third-party	liability	insurance.
2.	 Halman-Aldubi	-	Pension	Funds	Ltd.
	 On	August	18,	2004,	the	license	was	granted	to	Halman-Aldubi	-	Pension	Funds	Ltd.	in	
    the	pension	insurance	line.
3.	 CFI	-	the	Israeli	Company	for	Management	of	Israel	Electric	Corporation	Employees’	Rights	Ltd.	
	 On	 December	 30,	 2004	 the	 license	 was	 granted	 to	 CFI	 -	 the	 Israeli	 Company	 for	
    Management	 of	 Israel	 Electric	 Corporation	 Employees’	 Rights	 Ltd.	 	 -	 in	 the	 pension	
    insurance	line.


B. License Revocations 
1.	 Cornhill	-	Insurance	Company	Ltd.,	being	represented	by	Record	(Insurance	Agencies)	Ltd.
	 On	 May	 3,	 2004,	 the	 license	 granted	 to	 Cornhill	 Insurance	 Company	 Ltd.,	 being	
    represented	 by	 Record	 (Insurance	Agencies)	 Ltd.,	 to	 operate	 insurance	 businesses	 in	
    Israel	was	revoked,	in	respect	of	all	lines	that	had	been	recorded	in	its	license.	
2.	 Abbey	Assurance,	being	represented	by	El-Tal	International	Underwriters	-	Insurance	
    Agency	(1988)	Ltd.
	 On	 January	 1,	 2004,	 the	 license	 to	 Abbey	 Assurance,	 being	 represented	 by	 El-Tal	
    International	Underwriters	-	Insurance	Agency	(1988)	Ltd.,	to	operate	insurance	businesses	
    in	Israel,	was	revoked,	in	respect	of	all	lines	that	had	been	recorded	in	its	license.
3.	 Lloyds	Authorized	Underwriters
	 Sinai	-	Authorized	Underwriters	Insurance	Agency	(1989)	Ltd.
                                                                                                      Annual Report 2004




	 On	September	1,	2004,	the	license	to	Sinai	-	Authorized	Underwriters	Insurance	Agency	
    (1989)	Ltd.	to	operate	insurance	businesses	in	Israel	as	Lloyds’	Authorized	Underwriters	
    was	revoked,	in	respect	of	all	lines	that	had	been	recorded	in	its	license.




                                                                                             

								
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