Non-life and Health Insurance

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Non-life and

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1. Introduction

The Non-Life Insurance Department in the Capital Market, Insurance and Savings Division is responsible for policy-making, regulation and ongoing supervision of all lines of the insurance industry, with the exception of life insurance. The objective of the Department’s activities is to ensure a proper market structure, based on fair competition.

The activity in non-life insurance is divided into four main fields:

1. Property insurance – vehicle property, property loss, comprehensive residential, comprehensive business premises, engineering insurance, etc.;

2. Liability Insurance – vehicle compulsory, third party, professional liability, employers’ liability, etc.;

3. Health insurance – sickness and hospitalization and personal accident; 4. Financial insurance – credit insurance, guarantees, etc.

An analysis of the financial results in the non-life insurance lines shows a slight increase in the volume of premiums that companies collected in 2004. However, after three consecutive years during which a rise in profits was recorded, this year, profits have dropped some

13%.

The market concentration indices indicate a decrease in concentration in nearly all lines.

Notable is the decrease in the market concentration of the compulsory vehicle insurance line. The reason for this is apparently the reform in the compulsory vehicle insurance line, which

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2. General Review of the Industry

A. General

More than twenty insurance companies are engaged in the various non-life insurance lines. A majority of the premiums collected during 2004, as well as a majority of the profits, are concentrated in the vehicle insurance lines (compulsory and property). As Table D-1 shows, most insurance companies show some activity in these lines, while fewer insurance companies operate in lines generating a lower volume of premiums and profits.

Table D-1

Number of Insurance Companies Operating in Non-Life Insurance Lines

Personal accident 17

Vehicle compulsory 16

Vehicle property 16

Sickness and hospitalization 16

Comprehensive residential 15

Employers’ liability 15

Engineering insurance 14

Property loss 12

Cargo in transit 11

Comprehensive business premises 10

Aircraft and seacraft 10

Credit insurance 3

The duration of the life of the policy and the duration of the claims clarification process are the main characteristics that differentiate the various insurance lines. Thus, for example, property insurance and financial insurance policies are issued, for the most part, for a relatively short period (up to one year), while the claims in respect thereof are clarified shortly after the policies are issued. The various types of liability insurance policies are usually issued for one year, but the claims clarification process is protracted, since clarifying liability is a relatively complex process and the prescription period for a liability claim is long. Health insurance policies are issued for various periods, ranging from a few months to the entire lifetime of the insured, while claims are clarified, for the most part, within a short

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time. Due to these distinct variables, the financial results in the various insurance lines must be examined individually.

Table D-2 presents the gross premiums in the various non-life insurance lines, as well as the rate of change in each of the lines for the period 2000 through 2004. An examination of the business results in the non-life insurance lines shows that the total premiums in the non-life insurance lines reached NIS 17,552 million in 2004; i.e., growth of about 0.5% over the

previous year.

Although there was no significant change in the total premiums collected in 2004 compared to 2003, by examining the particular figures for the various lines, one can see that some lines show substantial change compared to the previous year. The most evident change is the increase in the premiums collected in the various liability insurance lines and in the sickness and hospitalization insurance line: this is the fourth consecutive year that the premium collections have risen in these lines. Also notable is the drop in the gross premiums collected in the property loss and third-party insurance lines.

In the compulsory vehicle insurance line, there was nearly a 2% decrease in total premiums collected in 2004 compared to 2003. When taking into account the fact that, this year, the number of vehicles has increased by approximately 2.8%, then this 2% decrease in total premiums means that the average premium decreased by approximately 5%. This decrease is explained, inter alia, by the improved availability of information to the public, which was obtained thanks to the implementation of the "compulsory vehicle insurance premiums calculator" by the Commissioner of Insurance. This calculator enables the public to compare the compulsory vehicle insurance rates offered by the different insurance companies. The improved availability of information has also led to more lively competition in the

compulsory vehicle insurance line1_.

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Table D-2

Gross Premiums by Non-Life Insurance Lines, 2000-2004

(NIS millions, percent)

2000 2001 2002 2003 2004 Rate of change versus 2003 Distribution by Lines Vehicle Property 4,556 4,953 5,005 4,953 5,139 3.8% 29.3% Vehicle Compulsory 3,928 4,048 4,221 4,222 4,140 -1.9% 23.6% Sickness and Hospitalization 1,103 1,263 1,460 1,607 1,807 12.5% 10.3% Comprehensive Residential 1,004 1,091 1,310 1,340 1,375 2.6% 7.8% Other Liabilities 560 639 774 862 1,143 32.5% 6.5% Property Loss 913 1,183 1,557 1,417 1,080 -23.8% 6.2% Property Other 738 839 950 1,132 1,031 -8.9% 5.9% Other 480 615 770 715 763 6.8% 4.3% Third Party 396 455 617 671 526 -21.6% 3.0% Employers' Liability 255 291 332 326 317 -2.8% 1.8% Personal Accident 219 222 225 222 231 3.8% 1.3% TOTAL 14,152 15,599 17,221 17,467 17,552 0.5% 100.0%

Source: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings

Division, on the basis of the companies’ consolidated financial statements.

Chart D-1 presents the distribution of gross premiums by the various non-life insurance lines in 2004. Approximately 53% of the total insurance premiums originated in the vehicle insurance lines (compulsory and property), in which no significant change was recorded

compared to 2003. The market shares of most of the other insurance lines also remained

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The insurance lines showing a relatively significant change in total insurance premiums are the minor lines. Thus, for example, the most significant change occurred in property loss

insurance. The market share of this line dropped from 8% in 20032_{to 6% in 2004.}

Chart D-1

Distribution of Gross Premiums by Non-Life Insurance Lines in 2004

Employers Liability 1.8% Third Party 3.0% Other 4.3% Property Other 5.9% Property Loss 6.2% Other Liabilities 6.5% Comprehensive Residential

7.8% Sickness and Hospitalization

10.3% Vehicle Compulsory 23.6% Vehicle Property 29.3% Personal Accident 1.3%

Table D-3 presents the total gross premiums in non-life insurance by insurance groups and the market shares of those groups. As is also shown in Chart D-2, this year, the five major groups collected about 70% of all premiums in the non-life insurance lines. Menorah, the smallest of them, increased its market share this year to nearly 9%. On the other hand, the four major groups collected about 61% of the total premiums this year in the non-life insurance lines – which is about a 2% drop compared to 2003. This decline, which is also reflected in the market shares of the major insurance groups (concurrently with the increase in the shares of most of the small companies), attests to the heightened competitiveness in the non-life insurance market. The decrease originates mainly in the Clal and Migdal groups. The volume of premiums that these groups collected in 2004 diminished considerably compared to the

2. The data for 2003 are taken from the Annual Report of the Commissioner of the Capital Market, Insurance and Savings for 2003.

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t 2004 previous year (together, the groups collected about NIS 290 million less than in 2003). This downtrend in the major insurance companies’ market shares is also evident in the results of the market concentration indices, which are given below (Table D-5).

Table D-3

Premiums for Non-Life Insurance by Insurance Groups

(NIS millions, percent)

Company Premiums

Market Share (by

Premiums) Rate of Change in Premiums

2002 2003 2004 2002 2003 2004 2004-₂₀₀₃ 2004-₂₀₀₂ Clal Group 3,582 3,605 3,503 20.8% 20.6% 19.9% -2.8% -2.2% Harel Group 3,200 3,349 3,365 18.6% 19.1% 19.1% 0.5% 5.2% Phoenix Group 2,420 2,331 2,146 14.0% 13.3% 12.2% -8.0% -11.3% Migdal Group 1,769 1,748 1,740 10.3% 10.0% 9.9% -0.4% -1.6% Menorah 1,175 1,360 1,561 6.8% 7.8% 8.9% 14.8% 32.8% Ayalon 1,048 1,173 1,078 6.1% 6.7% 6.1% -8.1% 2.9% I.L.D. Group 600 760 818 3.5% 4.3% 4.7% 7.7% 36.4% Eliahu 768 845 813 4.5% 4.8% 4.6% -3.8% 5.9% IDI Direct 544 661 695 3.2% 3.8% 4.0% 5.2% 27.8% AIG 287 340 391 1.7% 1.9% 2.2% 15.1% 36.3% Agricultural Insurance 341 350 365 2.0% 2.0% 2.1% 4.3% 7.3% Shirbit 212 302 358 1.2% 1.7% 2.0% 18.7% 69.0% Shomera 99 186 247 0.6% 1.1% 1.4% 33.3% 149.5% Natural Disasters Fund 138 143 154 0.8% 0.8% 0.9% 7.6% 11.1% Ezer 76 78 88 0.4% 0.4% 0.5% 13.2% 16.7% Foreign Trade 58 59 52 0.3% 0.3% 0.3% -11.9% -10.8% Inbal 9 14 19 0.0% 0.1% 0.1% 37.0% 126.5% Avner 726 -6 1 Karnit 185 199 191 TOTAL 17,237 17,497 17,586 100.0% 100.0% 100.0% 0.5% 2.0%

Division, on the basis of the companies’ non-consolidated financial statements.

As Chart D-2 shows, the market share of the Clal Group – the largest group in the non-life insurance sector – reached 19.9% (compared to 20.6% in 2003). Despite the fact that, in general, significant changes in the companies’ market shares were not recorded this year, Menorah increased its market share by 1.1%, and now accounts for about 9% of the total

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premiums in the non-life insurance lines. The Phoenix Group is also notable: its market share decreased by 1.1% and stands at 12.2% this year, compared to 13.3% in 2003.

Chart D-2

Distribution of Gross Premiums by Companies in

Non-Life Insurance Lines in 2004 I.L.D. 4.7% Eliahu 4.6% Direct Insurance 4.0% Other 3.9% AIG 2.2% Agricultural 2.1% Government Companies 1.3% Clal Group 19.9% Harel Group 19.1% Migdal Group 9.9% Phoenix Group 12.2% Menorah 8.9% Ayalon 6.1%

1. The Clal Group – Clal, Arieh and Clal Credit Insurance; the "Harel Group" – Harel and Dikla; the Phoenix Group – Phoenix and Hadar; the Migdal Group – Migdal and Hamagen.

2. "Others" – Shirbit, Shomera and Ezer.

Upon examination of the volume of premiums in the non-life insurance lines, it can be seen that vehicle property insurance is the largest line. Approximately 29% of the total premiums in the market are collected in this line. As Table D-4 shows, the Clal, Harel and Phoenix insurance groups each hold approximately 15% of the total premiums in this line. The insurance line with the second highest volume is the compulsory vehicle insurance line. About 24% of all premiums in the market are collected in this line. The Clal Group commands 18% of this market, while the Harel, Phoenix, Migdal and Menorah groups each hold about 10% of the market.

The Clal Group commands a market share that exceeds 50% of the residential insurance

lines being sold through mortgage banks. The reason for this might be that the company serves as the primary insurer (the leader) at some of the major mortgage banks.

Ten percent of the total premiums being collected in non-life insurance are being collected in the sickness and hospitalization insurance line. The Harel Group stands out: it is leading in this insurance line, and collected approximately 50% of the premiums in this line this year.

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Annual R e por t 2004

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Mark

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emiums in the

Various Insurance Lines b

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(percent) Property Loss Comprehensive Residential Mortgage Banks Comprehensive Business Premises Vehicle Compulsory Vehicle Property Employers> Liability Other Liability Lines Personal Accident Sickness and Hospitalization Aircraft and seacraft Cargo in Transit Engineering Insurance Credit Insurance Other Risks TOT AL Clal Group 41.6% 19.6% 52.3% 4.0% 18.0% 15.3% 26.1% 21.5% 28.6% 15.7% 6.6% 27.6% 33.4% 64.2% 21.7% 20.1% Harel Group 23.6% 16.2% 20.1% 0.0% 10.6% 16.2% 14.6% 31.7% 25.3% 49.5% 7.3% 10.6% 8.1% 0.0% 3.3% 19.3% Phoenix Group 7.4% 16.3% 2.3% 21.4% 10.5% 14.4% 15.9% 10.6% 12.5% 13.1% 18.2% 22.9% 23.6% 0.0% 3.4% 12.3% Migdal Group 0.8% 10.5% 13.2% 54.1% 9.7% 6.6% 18.3% 10.0% 5.0% 10.5% 18.4% 10.9% 5.5% 0.0% 14.8% 10.0% Menorah 4.3% 12.4% 7.8% 12.7% 9.6% 9.4% 8.1% 9.1% 4.0% 9.4% 43.3% 16.5% 11.8% 0.0% 0.8% 9.0% Ayalon 7.6% 6.5% 0.0% 0.0% 8.5% 7.2% 7.0% 7.7% 2.9% 1.5% 0.0% 1.1% 9.3% 0.0% 0.5% 6.2% I.L.D. Group 1.1% 4.2% 0.0% 2.2% 8.4% 6.2% 1.3% 1.0% 0.6% 0.0% 0.0% 6.1% 2.1% 33.5% 6.9% 4.7% Eliahu 3.9% 3.2% 0.1% 0.0% 8.5% 7.2% 2.0% 1.0% 0.7% 0.0% 0.0% 4.2% 0.1% 0.0% 0.1% 4.7% IDI Direct 0.0% 5.3% 4.3% 0.6% 6.4% 7.1% 0.2% 0.1% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 4.0% AIG 0.9% 2.9% 0.0% 0.0% 2.6% 2.9% 0.8% 3.5% 16.1% 0.0% 0.0% 0.0% 0.6% 0.0% 0.1% 2.2% Agricultural 8.8% 0.0% 0.0% 0.0% 1.9% 1.9% 5.0% 3.1% 0.5% 0.0% 0.0% 0.0% 4.9% 2.4% 1.1% 2.1% Shirbit 0.0% 1.4% 0.0% 3.3% 2.6% 3.6% 0.0% 0.5% 3.6% 0.1% 6.1% 0.0% 0.6% 0.0% 2.3% 2.1% Shomera 0.0% 1.7% 0.0% 1.8% 2.6% 2.1% 0.7% 0.2% 0.2% 0.1% 0.0% 0.0% 0.0% 0.0% 0.5% 1.4% Natural Disasters Fund 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 21.8% 0.9% Ezer 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 12.6% 0.5% Foreign T rade Risks 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 7.3% 0.3% Inbal 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.7% 0.1% Total for all Companies 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Total, excluding A vner and Karnit 1,150,920 1,005,583 369,561 522,696 3,948,483 5,139,093 316,997 1,668,700 231,880 1,838,591 31,312 130,791 281,791 52,986 703,923 17,393,307 Avner + Karnit 0 0 0 0 191,807 0 0 0 0 0 0 0 0 0 0 191,807 TOT AL INCLUDING AVNER & KARNIT 1,150,920 1,005,583 369,561 522,696 4,140,290 5,139,093 316,997 1,668,700 231,880 1,838,591 31,312 130,791 281,791 52,986 703,923 17,585,1 14 Sour ce: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies’ non-consolidated financial statements.

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B. Market concentration

The market concentration indices help estimate the level of competition in specific market sectors. The assumption is that, usually – the higher the level of concentration, the lower the level of competitiveness: the incentive to improve efficiency diminishes, while the ability of commercial bodies to dictate the price of the product or service increases. Table D-5 presents the results of the market concentration indices in the main non-life insurance lines for 2004. The higher the indices, the higher the level of concentration.

1. The Herfindahl-Hirschman Index (HHI) is calculated by summing the squares of all the insurance companies’ market shares. The market share for each company is calculated as the ratio of gross insurance premiums collected by the company and the total insurance premiums in the line. The HHI ranges between 0 and 1. The closer the number obtained is to 1, the more concentrated the line.

2. The Concentration Ratio 3 Index (CR3) totals the market shares of the three largest insurance companies or groups in the line. The higher the percentage obtained, the more

concentrated the line.

3. The Concentration Ratio 5 Index (CR5) totals the market shares of the five largest insurance companies or groups in the line.

As can be seen, all these indices show that the most concentrated lines are sickness and hospitalization, employers’ liability and property loss. The least concentrated lines are the vehicle lines (compulsory and property).

Compared to 2003, the market concentration has decreased in all lines, with the exception of

sickness and hospitalization. The most evident decrease in concentration is in the compulsory vehicle insurance line – this is the fourth year it has shown a decrease (apparently as a

result of the reform instituted in this line, which led to heightened competition) – and in the comprehensive residential insurance line, for this, the third year.

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Table D-5

Results of the Market Concentration Indices in Non-Life Insurance Lines,

2003-2004

Herfindahl-_Hirschman CR3 CR5 2003 2004 2003 2004 2003 2004 Vehicle Compulsory 0.11 0.10 43.7% 39.1% 62.8% 58.4% Vehicle Property 0.11 0.11 47.8% 45.9% 64.0% 62.5% Comprehensive Residential 0.16 0.13 56.3% 52.0% 79.6% 74.8% Sickness & Hospitalization 0.28 0.30 76.8% 77.9% 98.3% 98.2% Property Loss 0.26 0.25 77.6% 74.0% 89.5% 89.0% Employers> Liability 0.16 0.16 61.1% 60.3% 82.4% 83.0%

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3. Characteristics and Results of Activities

A. Profitability

The method of recording results in financial statements, as well as the method of calculating reserves, vary from one insurance line to another, and these varying methods of calculating and recording reserves, of course, also affect the profits of the insurance companies.

In the various property insurance lines, income from premiums is recorded on the policy issue date: sums received in respect of the period subsequent to the date of the financial statements are allocated to a "reserve for uncancelled risks." The insurance companies

invest the monies they receive and reap yields from these investments. The income from investments is credited immediately to the Statement of Income.

In the various liability insurance lines, the method of recording premiums is the same as that customary in the property insurance lines, however, here, the company cannot recognize profits immediately (due to the length of time required in order to clarify claims in the liability insurance lines). Most of the profits are allocated to a separate reserve for a period of three to five years until the claims in these lines are clarified fully. The profit retained in this separate reserve is comprised of income recorded from premiums, less expenses, claims paid and pending claims, plus the yield earned on the investment of the funds in the reserve. The profit is released and allocated to the Statement of Income only at the end of the period. It can be deduced from this that the profits (or losses) recorded in the Statement of Income for 2004 were mainly those that accrued in the property insurance lines in respect of 2004, as well as the profits (or losses) in the liability insurance lines in respect of the 2001 underwriting year and the years preceding 2001.

Chart D-3 and Chart D-4 present various indices for examining the yields of the insurance companies. As expected, the yield varies according to the fluctuations in the capital market. Thus, record yields were recorded in 2003, while in 2004, the yields diminished (but are still quite good. For example, the Tel-Aviv 100 Index rose in 2003 by more than 60%, while in 2004 it rose by about 17%).

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Chart D-3

Ratio of Income from Investments to Investment Assets

in Non-Life Insurance

12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% 2000 2001 2002 2003 2004

Chart D-4

Ratio of Income from Investments to Net Premiums in Non-Life Insurance

2000 2001 2002 2003 2004 20.0% 15.0% 10.0% 5.0% 0.0% -5.0%

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Chart D-5 presents the profits (in NIS millions) in the non-life insurance lines for the years 1995 through 2004. After three consecutive years (2001 – 2003) during which a rise in profits was recorded in the non-life insurance lines, this year, a decrease in profits of approximately 13% was recorded. The profits in 2004 totalled approximately NIS 1,902 million, compared to about NIS 2,197 million last year. Much of the profits in 2003 derived from profits from investments. This year, on the other hand, the profits from investments plummeted by tens of percentage points, which of course, was sufficient to cause a drop in the overall profit. The drop in the investment profits derives, inter alia, from the moderate rises in the capital market during 2004 compared to 2003 – which had been a year of record yields in the Israeli

capital market.

Chart D-5

Profitability of Non-Life Insurance Lines, 1995 - 2004

(NIS millions) 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Chart D-6 presents the premiums versus the profits in the non-life insurance business. For most years, there is an evident correlation between the direction of the change in the total premiums and the direction of the change in the total profits in the non-life insurance lines. In 2004, in contrast to the correlation that had existed in previous years, the premiums rose (although slightly – 0.5%), while, as stated, the overall profits fell by approximately 13%. The data on the premiums were affected this year mainly by the financial results of the Clal Group, the Phoenix Group and Menorah. The Clal and Phoenix groups recorded a decrease

in their total premiums in 2004 of approximately NIS 100 million and NIS 185 million

(respectively). Menorah, on the other hand, recorded an increase of NIS 200 million in the

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t 2004 The decrease in the total profits in the non-life insurance lines was affected mainly by the decrease in the profits of the Clal Group and the Phoenix Group. The Phoenix Group’s profits plummeted this year by more than NIS 100 million and resulted in a loss. This sharp drop in profits is explained, inter alia, by a decrease in the premiums that the groups collected and by a decrease in the income from investments, which was characteristic of the entire market. As stated above, the main reason for the decrease in the income from investments is that the capital market rose only moderately in 2004 compared to 2003. The companies’ profits from investments decreased by about 35% in 2004 compared to their profits in 2003 (a decrease of more than NIS 1 billion).

Chart D-6

Gross Premiums in Non-Life Insurance Business versus

Profits from Non-Life Insurance Business

(NIS milllions) 2,500 2,000 1,500 1,000 500 0 Profit 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Premiums Premiums Profit 2000 2001 2002 2003 2004

Chart D-7 presents the profits (in NIS millions) in the main non-life insurance lines during the years 2000 through 2004. This chart reflects a very high level of variance in the profitability of the non-life insurance lines, and shows that different lines yielded differing rates of profit over the years. The change in the profits among the various lines between 2004 and 2003

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is substantial and reached tens of percentage points. By comparing the change in profits with the change in the premiums in the same line, one can see that there is not always a direct correlation between the two. Although the profits dropped in most lines, still, all lines presented in the chart are profitable. In all years presented in the chart, the compulsory vehicle insurance line is the most profitable, however, in 2004, the profit dropped by 12%, after a steady growth in profits during the preceding few years. This statistic also reflects the reform instituted in the compulsory vehicle insurance line, after it was opened to competition. It is also important to note that much of the profit in this line derives from income from investments of reserve funds. Other notable changes are the transition from loss to profit in the various liability insurance lines, and the growth in profits of about 40% in the vehicle

property insurance line.

Chart D-7

Profits by Main Non-Life Insurance Lines, 2000 - 2004

(NIS millions)

Vehicle Compulsory Vehicle Property

Sickness and Hospitalization Property Loss Comprehensive ResidentialVarious Liabilities (excluding Vehicle Compulsory)

1400 1200 1000 800 600 400 200 0 -200 2000 2001 2002 2003 2004

Table D-6 presents the profit rates from gross premiums in the non-life insurance lines from 2000 through 2004. This table shows that, except for the personal accident insurance line, all other lines presented were profitable in 2004. Table D-8 shows that most of the losses in the personal accident line derive from the losses of AIG and from the losses of the Clal Group, although most of the other insurance companies also recorded losses in this line.

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t 2004 In the various liability insurance lines, a relatively high variance is evident. In the various types of property insurance, the profit rate from premiums has been more or less stable over the years. The comprehensive residential insurance line is the line with the highest profit to premiums ratio, which might be due to the lack of competition in this line. This lack of competitiveness enables the mortgage banks (which centralize most of the activity of this line) to collect high premiums.

Table D-6

Profit Rates from Gross Premiums in Various Insurance Lines 2000-2004

(percent)

2000 2001 2002 2003 2004

Comprehensive Residential 9.8% 8.5% 5.2% 8.6% 7.8%

Property Other 5.0% 3.5% 6.2% 4.1% 7.1%

Sickness and Hospitalization 6.3% 8.6% 3.9% 7.9% 5.0%

Vehicle Property 0.9% 4.2% 5.1% 3.7% 4.9%

Third Party 2.2% -1.5% -5.3% 10.2% 3.5%

Property Loss 1.0% 2.4% 3.5% 4.8% 3.3%

Personal Accident 2.7% -8.3% -4.9% 4.4% -9.6%

TOTAL 3.2% 5.3% 6.0% 12.6% 10.8%

Chart D-8 presents data on the percentage of insurance premiums collected by the various non-life insurance lines out of the total premiums in non-life insurance, as well as data on the profit rate in the various non-life insurance lines out of the total profits in non-life insurance for 2004 (including Avner and Karnit). As is quite evident, the most notable lines are the vehicle insurance lines (compulsory and property). The vehicle insurance lines’ share of the total premiums in the non-life insurance lines reached about 53%, while their share of the total profits reached about 76%. The compulsory vehicle insurance line achieved the highest profits of all lines and reached approximately 62% of all profits in the non-life insurance

lines. The premiums in compulsory vehicle insurance reached approximately 24% of all

gross premiums. As Table D-8 shows, the Clal Group achieved the highest profits in the compulsory vehicle insurance line, followed by Eliahu. In 2004, Eliahu earned almost the same as the Clal Group, and more than all other groups and companies. Despite the decrease

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in profits this year in the compulsory vehicle insurance line, its relative share of all profits in the various non-life insurance lines increased, due to the sharper drop in the profits of the

other lines.

In terms of volume of premiums, the largest line was the vehicle property insurance line, and this was the case for the vast majority of companies. The Harel Group collected approximately 15% of the premiums in this line (approximately NIS 830 million), followed by the Clal and Phoenix insurance groups.

Chart D-8

Market Share Comparison - Premiums versus Profits

Market Share - Profits

Market Share - Premiums 70% 60% 50% 40% 30% 20% 10% 0% -10% Vehicle

Compulsory Property Vehicle ComprehensiveResidential Hospitalization Sickness & PropertyOther Liabilities Other Employers'Liability PropertyLoss ThirdParty PersonalAccident

Chart D-9 compares the companies, both on the basis of the premiums collected and on the basis the profits from the non-life insurance business. As a rule, to the extent that the company’s share in the line’s total profits is higher than its share in the total premiums, this indicates that the company is more efficient than the other companies.

As the chart shows, the profits of the Harel Group, Eliahu, the Migdal Group, Ayalon and IDI Direct exceeded their shares in the premiums. Eliahu is the most notable: its market share of the profitability is nearly three times higher than its market share of the premiums that it collected in non-life insurance. A majority of Eliahu’s profits originated in the compulsory

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t 2004 vehicle insurance line: the company recorded profits in this line of more than NIS 130 million (the second most profitable line was vehicle property – in which profits of about NIS 30 million were recorded). In 2004, Eliahu also showed high profits from investments (approximately NIS 110 million), which also contributed to the overall profits.

On the other end of this spectrum, among the companies whose market shares of the profits were lower than their market shares of the premiums were Clal, Menorah, I.L.D. Insurance Company, AIG and Shirbit. The Phoenix Group should be noted in particular: despite its being one of the major players in the line, in 2004, the company recorded a loss of 1.4%, notwithstanding its investment profits of some NIS 160 million. Most of the Phoenix Group’s

losses were recorded in the sickness and hospitalization insurance line – more than NIS 80

million – and in the vehicle property insurance line – about NIS 25 million.

Chart D-9

Market Share Comparison - Premiums versus Profits

in Non-Life Insurance Business

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Harel Group Clal Group Eliahu Migdal Group Ayalon IDI Direct Menorah I.L.D.

Group AIG Shirbit

Agricultura l Insurance Shomera Foreign T rade _Inbal Natural Disasters Fund Ezer Phoenix Group Market Share by Premiums

Market Share by Profits

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Table D-7 presents details about the profits of the insurance companies and about the companies’ market shares in the non-life insurance lines, by profits.

In 2004, the companies’ profits totalled about NIS 1,355 million – excluding Avner, and about NIS 1,900 million – including Avner. After a rise in profitability in 2003, this year, the profitability of the non-life insurance lines decreased by about 8%.

Unlike in 2003, when nearly all companies showed a relatively high level of profits – 2004 was characterized by a mixed trend in the level of profitability of all non-life insurance companies, both large and small.

The Harel Group’s profits rose by 7.5% compared to 2003. Today, this is the insurance group generating the highest profits of all insurance companies. Last year, the Clal Group was in first place in terms of volume of profits. This year, it lost about 25% of its profits compared to last year, and in 2004, its profits reached approximately NIS 263 million, i.e., about 13.8% of the total profits in the market.

The Migdal Group and other companies, including Shirbit, Agricultural Insurance and IDI Direct also showed growth in profits this year.

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Table D-7

Profits from Non-Life Insurance Business by Insurance Companies

(Non-consolidated Balance Sheet Data)

(NIS thousands, percent)

Company

Profits from Non-Life Insurance Business (NIS

thousands) Market Share (by Profit)

Rate of Change in Profits 2002 2003 2004 2002 2003 2004 2003-2004 2002-2004 Harel 39,149 226,685 236,333 7.0% 15.3% 17.4% 4.3% 503.7% Dikla 53,871 75,145 88,137 9.7% 5.1% 6.5% 17.3% 63.6% Sahar - Zion 112,994 0 0 20.3% 0.0% 0.0% 0.0% -100.0% Harel Group 206,014 301,830 324,470 36.9% 20.4% 23.9% 7.5% 57.5% Clal 125,387 282,556 209,281 22.5% 19.1% 15.4% -25.9% 66.9%

Arieh -7,017 59,833 42,501 -1.3% 4.0% 3.1% -29.0% See note 2

Clal Credit Insurance 2,519 6,099 10,752 0.5% 0.4% 0.8% 76.3% 326.8% Clal Group 120,889 348,488 262,534 21.7% 23.5% 19.4% -24.7% 117.2% Eliahu -105,115 212,647 181,130 -18.8% 14.3% 13.4% -14.8% See note 2

Migdal 8,432 70,723 113,479 1.5% 4.8% 8.4% 60.5% 1245.8% Hamagen 19,696 56,378 51,066 3.5% 3.8% 3.8% -9.4% 159.3% Migdal Group 28,128 127,101 164,545 5.0% 8.6% 12.1% 29.5% 485.0% Ayalon 54,498 92,093 109,147 9.8% 6.2% 8.1% 18.5% 100.3% IDI Direct 58,450 81,981 107,731 10.5% 5.5% 8.0% 31.4% 84.3% Menorah 88,299 116,476 102,736 15.8% 7.9% 7.6% -11.8% 16.4% I.L.D. 9,301 36,654 36,900 1.7% 2.5% 2.7% 0.7% 296.7% BSSCH 15,516 7,780 16,242 2.8% 0.5% 1.2% 108.8% 4.7% I.L.D. Group 24,817 44,434 53,142 4.5% 3.0% 3.9% 19.6% 114.1% AIG 17,920 26,354 26,609 3.2% 1.8% 2.0% 1.0% 48.5% Shirbit 4,862 14,712 22,942 0.9% 1.0% 1.7% 55.9% 371.9% Agricultural Insurance 20 9,651 15,326 0.0% 0.7% 1.1% 58.8% Shomera 1,093 4,268 2,053 0.2% 0.3% 0.2% -51.9% 87.8% Foreign Trade 2,073 1,311 938 0.4% 0.1% 0.1% -28.5% -54.8% Inbal 598 623 653 0.1% 0.0% 0.0% 4.8% 9.2% Ezer -11,481 1,912 -337 -2.1% 0.1% 0.0% -117.6% Phoenix 52,265 60,533 -53,974 9.4% 4.1% -4.0% -189.2% -203.3% Hadar 14,329 37,653 35,354 2.6% 2.5% 2.6% -6.1% 146.7% Phoenix Group 66,594 98,186 -18,620 11.9% 6.6% -1.4% -119.0% -128.0% TOTAL 557,659 1,482,067 1,354,999 100.0% 100.0% 100.0% -8.6% 143.0%

1. The Clal Group – Clal, Arieh and Clal Credit Insurance; the Harel Group – Harel and Dikla; the Phoenix Group – Phoenix and Hadar; the Migdal Group – Migdal and Hamagen.

Other – Shirbit, Shomera and Ezer.

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In 2004, the Harel Group’s profits totalled about NIS 325 million – i.e., 17.1% of the total profits in the market. Most of the group’s profits were generated in sickness and hospitalization insurance (about NIS 145 million) and in compulsory vehicle insurance (about NIS 105 million). Most of the profits in compulsory vehicle insurance originated in investment profits.

The Phoenix Group recorded a sharp drop of 119% in its profits, and closed the year with a loss of about NIS 18.5 million. As stated above, most of the company’s losses originated in

sickness and hospitalization insurance and in vehicle property insurance.

Table D-8 shows that about 63% of all profits in the market were generated in the compulsory vehicle insurance line, which is the largest of the non-life insurance lines in terms of profits. The Clal Group earned 21.5% of this profit, while 20.4% were earned by Eliahu and 16.5% by the Harel Group.

Profits in the vehicle property insurance line constitute 13.3% of the total profits in the non-life insurance market. 19.6% of the profits belong to IDI Direct, while about 16% of the profits belong to the Clal Group. The Phoenix Group is the only group that showed a loss in this line, despite the relatively high investment profits that it reaped.

Ten percent of the total profits in non-life insurance are in the sickness and hospitalization insurance line. The business results of this line were affected almost entirely by the results of the Harel and Phoenix groups. Almost all the profits in this line (about NIS 140 million) were generated by the Harel Group. The Phoenix Group recorded the highest losses of all companies in this line (a loss exceeding NIS 80 million). Of all the insurance lines in which the Phoenix Group engaged, the highest loss it suffered was in the sickness and hospitalization

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T

a

b

le D-8

Mark

et Shar

e b

y Pr

ofits in Non-Lif

e Insurance Lines b

y Insurance Gr

oups

Final Table Property Loss Comprehensive Residential Mortgage Banks

Comprehensive Business Premises

Vehicle

Compulsory

Vehicle Property Employers' Liability Other _Liability Lines

Personal Accident Sickness and Hospitalizati on Aircraft and Seacraft Car go in Transit Engineering Insurance Credit _Insurance Other Risks Clal Group 72.1% 15.6% 56.5% 11.8% 21.5% 15.8% 15.7% -0.2% Since a loss was recorded _inthis line, the figure _has no significance -11.7% Since a loss was recorded _inthis line, the figure _has no significance 42.4% 30.2% 78.4% 33.7% Harel Group 29.1% 7.3% 7.3% 0.0% 16.5% 5.5% 8.7% 20.3% 159.0% 6.7% 6.9% 0.0% 1.9% Phoenix Group 20.4% 2.1% 1.4% -23.4% 5.5% -9.6% 52.7% 26.9% -92.6% 34.1% 23.8% 0.0% 4.6% Migdal Group -1.4% 8.7% 12.7% 67.9% 11.1% 9.9% 9.7% 11.7% 31.8% 4.3% -3.2% 0.0% 16.0% Menorah -0.2% 18.7% 13.6% 10.1% 3.8% 10.6% 12.0% 14.7% 8.6% 0.1% 27.2% 0.0% 0.8% Ayalon 19.5% 3.8% 0.0% 0.0% 7.9% 11.7% 0.7% 8.6% 4.5% 2.0% 12.1% 0.0% -0.7% I.L.D. Group 1.8% 0.1% 0.0% 2.4% 3.9% 4.9% -2.7% -1.0% -0.2% -3.8% 2.8% 22.3% 28.1% Eliahu 1.3% 9.2% 0.1% 0.0% 20.4% 13.0% -2.7% 12.4% 0.0% 14.1% 0.2% 0.0% 0.1% IDI Direct 0.0% 17.6% 8.3% -4.8% 6.5% 19.6% 0.3% 1.2% 0.0% 0.0% 0.0% 0.0% 0.0% AIG 1.0% 10.7% 0.0% 0.0% 1.1% 12.6% -0.4% -2.4% -0.1% 0.0% -0.1% 0.0% 0.0% Agricultural Insurance -43.6% 0.0% 0.0% 0.0% 1.8% 4.1% 6.8% 10.4% 0.2% 0.0% -0.8% -0.6% 4.9% Shirbit 0.0% 4.6% 0.0% 32.9% 0.0% 1.7% 0.0% -2.0% 0.0% 0.0% 1.0% 0.0% 8.4% Shomera 0.0% 1.6% 0.0% 3.1% 0.0% 0.2% -0.8% -0.6% 0.3% 0.0% 0.0% 0.0% -0.1% Natural Disasters 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ezer 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.7% Foreign T rade Risks 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.9% Inbal 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.2% Total excl. A vner 43,075 81,036 25,829 20,371 642,928 252,1 16 43,297 70,378 -22,152 90,081 -233 10,625 35,104 10,663 50,683 Avner 0 0 0 0 545,507 0 0 0 0 0 0 0 0 0 0 TOT AL INCLUDING AVNER 43,075 81,036 25,829 20,371 1,188,435 252,1 16 43,297 70,378 -22,152 90,081 -233 10,625 35,104 10,663 50,683 Market Share by Lines 2.3% 4.3% 1.4% 1.1% 62.6% 13.3% 2.3% 3.7% -1.2% 4.7% 0.0% 0.6% 1.8% 0.6% 2.7% Sour ce: Data from the annual reports of the insurance companies processed by the Capital Market, Insurance and Savings Division, on the basis of the companies’ non-consolidated financial statements.

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Text Box A

The Reform in the Compulsory Vehicle Insurance Line

The average insurance rates in the compulsory vehicle insurance line continued to drop this year as well, and the use of differential rates became more prevalent. These changes are the outcome of the reform instituted in this insurance line in recent years. During this reform, the market was opened to competition. Today, the insurance companies set the insurance rates, based on the recommendations of the database operator3_{, and subject to}

the authorization of the Commissioner of Insurance.

In February 2004, the supplementary fee for financing the activities geared to prevent traffic accidents was cancelled. Cancellation of the supplementary fee led to a further 3% reduction in the rate, in the wake of other price reductions of more than 35% since 1998, as shown in Chart D-10.

Chart D-10

Cumulative Change in the Average Compulsory Vehicle Insurance Rate

for Private Vehicles

Dec 97 Jan 98 Sep 98 Jul 99 Sep 00 Apr 01 Jul 03 Nov 03 Feb 04 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50%

3. The database operator is an independent body that collects and analyzes statistical data from the insurance companies and, according to its analysis, recommends a compulsory vehicle insurance rate to them.

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In addition to the basic rate, the database operator also recommends coefficients for the parameters being used in pricing each insured’s risk. When determining rates, the

insurance companies also take into account the characteristics of the vehicle and its

drivers. Thus, a differential rate is set, whereby "careful insureds" pay less than "careless insureds."

Table D-9 shows the parameters used by each company when they determined the compulsory vehicle insurance rates in December 2004. As of November 2004, all insurance companies, without exception, have been using at least one parameter when setting their rates.

Table D-9

Use of Parameters in Setting "Compulsory Vehicle Insurance" Rates for

Private Vehicles

(Correct to 31.12.04) Engine Capaci ty Gender of Driver Age of Driver Years Holding Driver's License Prior Claim s Driver's License Revocatio ns Air Bags in Vehicl e AIG √ √ √ √ √ √ Ayalon √ √ √ √ Eliahu √ √ Arieh √ √ √ Agricultural Insurance √ √ √ √ √ √ Direct Insurance √ √ √ √ √ √ √ I.L.D. √ Migdal/ Hamagen √ √ Phoenix / Hadar √ √ Harel √ √ √ √ Clal √ √ √ Menorah √ √ Shomera √ √ √ √ Shirbit √

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Publication of the "Compulsory Vehicle Insurance Calculator4_{"and the improved}

availability of information to the public have also contributed to promoting competition, reducing rates and expanding the use of differential rates, which take into account a variety of characteristics of both the vehicle and the driver.

Table D-10 presents the rates that the insurance companies charged according to various categories of insureds, correct to December 31, 2004.

Table D-10

Minimum and Maximum Rates in the Privately-Owned Private Vehicle Market

(correct to 31.12.04)

Parameters Example 1 Example 2 Example 3 Example 4 Example 5 Example 6

Engine capacity 1600 1300 1300 1600 1800 4000

Gender of driver Male Male Female Male Female Female

Age of driver 18 22 26 35 55 70

Years driving 0 2 6 16 20 30

History of accidents 0 0 1 0 1 0

History of offenses 0 0 0 1 0 0

Air bags Yes Yes No Yes Yes No

Minimum rate on market

(NIS) 1,843 1,760 1,706 1,438 1,367 1,367

Maximum rate on market

(NIS) 2,177 2,177 2,177 2,038 1,731 1,763

Difference (in NIS) 334 417 471 600 364 396

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B. Reserves

The reserve funds that insurance companies allocate (according to the assessments of the companies’ actuarial departments) are invested in the capital market, subject to restrictions that the Commissioner of Insurance has prescribed in the investment regulations. Insurance companies’ profits in the capital market constitute a part of their revenues, and they derive both from the size of the reserves that they allocate and invest in the capital market and from

the outcome of their investments.

The ratio between the income from investments and the insurance reserves in non-life insurance expresses the yield on the funds retained in reserves in the non-life insurance

sector.

Due to the size of the reserves, fluctuations in the yields in the capital market have a significant impact on the insurance companies’ total profits.

Table D-11 shows that, in nearly all insurance companies, the total reserves rose from 2003 to 2004. On the other hand, the total profits from investments fell by 3% on average in every line, and totalled approximately NIS 1,388 million (excluding Avner and Karnit). The yield on reserves in 2004 was 4.9%, compared to a yield of 8.2% in 2003. This drop derives, inter alia, from the moderate rises in the capital market in 2004 compared to 2003, which had been

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Table D-11

Ratio of Income from Investments in Non-Life Insurance Reserves

(NIS thousands, percent)

Company Income from Investments

Insurance Reserves in Non-Life Insurance,Gross Market Share Reserves Ratio of Income from Investments in an Average Reserve 2003 2004 2003 2004 2004 2003 2004 AIG 30,639 27,147 482,755 631,566 2.0% 7.4% 4.9% Ayalon 104,456 90,814 1,775,303 1,975,788 6.2% 6.6% 4.8% Eliahu 284,902 110,087 1,663,429 1,741,213 5.5% 18.9% 6.5% Arieh 115,350 83,350 1,657,231 1,741,529 5.5% 7.4% 4.9% New BSSCH 2,031 1,488 104,882 70,315 0.2% 2.0% 1.7% Agricultural Insurance 40,981 25,939 529,177 619,771 1.9% 8.2% 4.5% Direct Insurance 61,428 42,192 933,727 1,060,590 3.3% 7.5% 4.2% Dikla 76,286 49,661 712,780 819,671 2.6% 12.0% 6.5% BSSCH 3,481 2,711 21,930 24,582 0.1% 17.1% 11.7% Hadar 105,676 86,419 1,681,337 1,770,948 5.5% 6.6% 5.0% I.L.D. 62,430 50,924 1,031,156 1,190,945 3.7% 6.8% 4.6% Hamagen 60,797 40,636 835,129 833,497 2.6% 7.4% 4.9% Phoenix 95,470 75,719 2,312,585 2,408,597 7.5% 4.3% 3.2% Harel 326,841 202,219 5,089,702 5,602,417 17.6% 9.9% 3.8% Clal 310,389 222,414 4,712,982 5,158,519 16.2% 7.1% 4.5% Clal Credit 2,265 1,440 41,637 44,441 0.1% 5.4% 3.3% Migdal 141,455 102,424 2,227,086 2,632,471 8.2% 6.8% 4.2% Menorah 130,076 111,697 1,886,264 2,201,610 6.9% 7.5% 5.5% Ezer 14,557 13,381 184,352 267,864 0.8% 9.8% 5.9% Inbal 1,279 1,336 52,796 51,427 0.2% 3.0% 2.6% Natural Disasters Fund 40,594 21,385 369,717 392,069 1.2% 10.8% 5.6% Shomera 3,286 6,725 154,868 256,886 0.8% 2.9% 3.3% Shirbit 16,862 17,880 306,457 424,196 1.3% 6.8% 4.9% Total excluding

Avner & Karnit 2,031,531 1,387,988 28,767,282 31,920,912 100.0% 7.6% 4.6%

Avner 564,396 283,813 5,207,974 4,008,774 9.6% 6.2%

Karnit 272,748 176,239 2,721,040 2,979,242 10.8% 6.2%

TOTAL INCLUDING

AVNER & KARNIT 2,868,675 1,848,040 36,696,296 38,908,928 8.2% 4.9%

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C. Commissions

Another factor affecting the profits in the insurance business is the volume of commissions being paid to insurance agents – the insurance companies’ marketing channels – and the volume of the administrative and general expenses – expenses that reflect the company’s management expenses and overhead, and the degree of its efficiency. Table D-12 presents the ratio of insurance agents’ commissions to gross premiums, by insurance companies. This table shows that on average, the commissions remained almost without change. As expected, the direct insurance companies are the companies that paid the lowest commissions to agents. The few payments being rendered to agents originate in commercial insurance policies, for example, which were marketed through agents. AIG, Ayalon and the Phoenix are notable, due to the increase in the commission rates that they are paying. The insurance companies whose commission rates were the highest in 2003 (above 18%) – Menorah and Shomera – despite the fact that they reduced their commission rates, they are paying relative high commissions.

This year, too, the Clal Group paid insurance agents the highest total commissions of all insurance companies. However, if one examines the relative percentage of agents’ commissions in relation to the total premiums, the Clal Group (which collected the highest premiums this year in the non-life insurance lines, about NIS 3.5 billion), is only in fourth

place.

The major groups – Clal, Harel, the Phoenix and Migdal – together are paying about NIS 1.3 billion – nearly 70% of the commissions to agents in the non-life insurance lines. They hold about 60% of the market share of premiums. Three of these groups reduced the rate of the commissions they are paying to agents. The Phoenix Group, on the other hand, indeed paid less commissions, but the rate of the commission that it paid relative to its gross premiums, rose significantly (from 17.4% to 18.3%) – the highest commission rate in the sector. It could be that this is another factor that contributed to the Phoenix Group’s losses in 2004.

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Table D-12

Ratio of Insurance Agents' Commissions to Gross Premiums

(percent)

Company Commissions Paid (in NIS thousands) Rate of Commissions from Premiums Rate of Change in Commissions

2002 2003 2004 2002 2003 2004 2002-2003 2003-2004 Clal 399,466 383,872 378,003 14.9% 14.1% 13.9% -3.9% -1.5% Arieh 147,365 138,830 126,905 17.2% 16.7% 17.5% -5.8% -8.6% Clal Credit Insurance 129 98 100 0.3% 0.2% 0.2% -24.0% 2.0% Clal Group 546,960 522,800 505,008 15.3% 14.5% 14.4% -4.4% -3.4% Harel 132,749 436,107 430,825 18.1% 14.3% 14.3% 228.5% -1.2% Dikla 5,250 6,935 6,844 2.0% 2.3% 1.9% 32.1% -1.3% Sahar-Zion 291,903 0 0 13.2% Harel Group 429,902 443,042 437,669 13.4% 13.2% 13.0% 3.1% -1.2% Phoenix 216,340 213,068 223,898 16.1% 16.6% 19.8% -1.5% 5.1% Hadar 205,598 192,240 168,709 19.1% 18.3% 16.6% -6.5% -12.2% Phoenix Group 421,938 405,308 392,607 17.4% 17.4% 18.3% -3.9% -3.1% Menorah 231,593 254,241 264,743 19.7% 18.7% 17.0% 9.8% 4.1% Migdal 207,905 197,240 188,810 15.3% 14.6% 13.9% -5.1% -4.3% Hamagen 61,018 58,389 57,550 15.0% 14.9% 15.1% -4.3% -1.4% Migdal Group 268,923 255,629 246,360 15.2% 14.6% 14.2% -4.9% -3.6% Ayalon 132,120 135,246 132,362 12.6% 11.5% 12.3% 2.4% -2.1% I.L.D. 75,494 99,545 107,504 13.8% 14.2% 14.3% 31.9% 8.0% Eliahu 93,420 94,773 94,631 12.2% 11.2% 11.6% 1.4% -0.1% Agricultural Insurance 32,754 46,024 44,013 9.6% 13.1% 12.0% 40.5% -4.4% Shomera 20,368 33,558 38,890 20.6% 18.1% 15.7% 64.8% 15.9% Shirbit 19,601 25,714 35,335 9.2% 8.5% 9.9% 31.2% 37.4% AIG 9,850 13,289 17,094 3.4% 3.9% 4.4% 34.9% 28.6% IDI Direct 8,535 8,582 6,857 1.6% 1.3% 1.0% 0.6% -20.1% Inbal -116 -72 0 -1.4% -0.5% 0.0% -37.9% -100.0% TOTAL 2,291,342 2,337,679 2,323,073 14.0% 13.5% 13.4% 2.0% -0.6%

2. Other – Shirbit, Shomera and Ezer.

D. General and administrative expenses

The general and administrative expenses in an insurance company include all indirect expenses of the insurers, the payments of salaries to the insurers’ employees, the insurer’s holdings of assets and those marketing expenses that cannot be attributed to commissions

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t 2004 being paid to agents. These expenses are likely to give some indication as to the degree of the company’s efficiency.

The data presented in Table D-13 show that also here, the major groups are leading in the volume of expenses they are incurring. The Harel Group’s expenses increased by 4.5% compared to last year, and they are the highest expenses of all the groups. On the other hand, there is almost no change in the total premiums that the Harel Group collected compared to the preceding year. This increase in expenses derived mainly from nearly a 55% rise in the volume of expenses on the part of Dikla, while the premiums that it collected rose only by 16%. The Clal Group also showed an increase in the volume of its expenses, despite a

decrease in the total premiums it collected.

Of all the companies, Shomera showed the sharpest rise in expenses. The volume of its expenses increased by 61% compared to the preceding year, while its total premiums rose by about 30% during this period.

The direct insurance companies and the credit insurance companies are notable for the high ratio between their administrative expenses and the premiums they collected. This ratio does not necessary indicate that these companies are inefficiently run. It could be that it stems from a different expense structure, due to the unique nature of their operations. The credit insurance companies (as well as Menorah), indeed recorded an increase in their administrative expenses this year, but, at the same time, there was a far more significant increase in the total gross premiums they collected. Actually, one may conclude that these companies improved their efficiency. Opposite this, the direct insurance companies, AIG and "Direct Insurance" recorded a sharp rise in expenses, this for the second consecutive year.

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Table D-13

General and Administrative Expenses in Non-Life Insurance

Company

General and Administrative

Expenses Expenses (percent)Rate of Change in Ratio of Gen. _& Admin. Expenses to Premiums 2002 2003 2004 2003-2002 2004-2003 Harel 89,741 345,875 347,258 285.4% 0.4% 11.5% Dikla 27,752 28,147 43,651 1.4% 55.1% 12.2% Sahar-Zion 206,372 0 0 -100.0% Harel Group 323,865 374,022 390,909 15.5% 4.5% 11.6% Clal 252,800 269,476 277,101 6.6% 2.8% 10.2% Arieh 58,026 66,276 66,193 14.2% -0.1% 9.1% Clal Credit Insurance 15,438 15,947 16,426 3.3% 3.0% 33.4% Clal Group 326,264 351,699 359,720 7.8% 2.3% 10.3% Phoenix 127,835 127,438 126,230 -0.3% -0.9% 11.2% Hadar 103,451 108,208 108,313 4.6% 0.1% 10.7% Phoenix Group 231,286 235,646 234,543 1.9% -0.5% 10.9% Migdal 128,515 133,987 137,817 4.3% 2.9% 10.1% Hamagen 47,964 47,055 45,221 -1.9% -3.9% 11.9% Migdal Group 176,479 181,042 183,038 2.6% 1.1% 10.5% IDI Direct 108,117 132,108 152,997 22.2% 15.8% 22.0% Menorah 107,597 131,398 134,990 22.1% 2.7% 8.6% Ayalon 94,058 101,631 107,045 8.1% 5.3% 9.9% I.L.D. 58,657 64,936 72,784 10.7% 12.1% 9.7% BSSCH 20,082 21,979 22,173 9.4% 0.9% 34.1% I.L.D. Group 78,739 86,915 94,957 10.4% 9.3% 11.6% AIG 68,484 78,067 89,838 14.0% 15.1% 23.0% Eliahu 82,059 77,342 76,214 -5.7% -1.5% 9.4% Shirbit 31,039 32,285 38,521 4.0% 19.3% 10.7% Avner 35,878 30,805 24,272 -14.1% -21.2% Shemora 7,863 14,998 24,174 90.7% 61.2% 9.8% Agricultural Insurance 19,851 21,058 22,209 6.1% 5.5% 6.1% Natural Disasters 17,660 19,332 21,799 9.5% 12.8% 14.2% Karnit 16,155 14,889 15,862 -7.8% 6.5% 8.3% Ezer 15,592 16,646 13,524 6.8% -18.8% 15.3% Foreign Trade 9,585 9,246 8,778 -3.5% -5.1% 17.0% Inbal 25 19 21 -24.0% 10.5% 0.1% TOTAL 1,750,596 1,909,148 1,993,411 9.1% 4.4% 11.3%

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t 2004 Examination of the general and administrative expenses in relation to net premiums is also likely to give some indication as to a company’s degree of efficiency. Increasing premiums, while sustaining the same level of administrative expenses, would lead to a reduction in the ratio being measured, and is likely to indicate that the company is being efficiently managed. By examining the data in Chart D-11, one can see that during the years 2000 through 2002, a decrease in the ratio of general and administrative expenses to net premiums was recorded. This decrease indicates efficiency and streamlining of the volume of costs. However, in the past two years, a rise in this ratio has actually been recorded. Compared to 2003, the net premiums increased by about 2% in the non-life insurance lines, while the general and administrative expenses rose at the rate of about 5%, which receives expression as a higher

ratio.

Chart D-11

Ratio of General and Administrative Expenses to Net Premiums

20.0% 15.0% 10.0% 5.0% 0.0% 2000 2001 2002 2003 2004

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t 2004

4. Business Results in Health Insurance

A. General

The growth trend in the private health insurance market began, inter alia, following the legislation of the State Health Insurance Law in 1995. This trend led to the creation of a wide variety of products in the health insurance field. This field has increasingly developed over the years, particularly during recent years, both in terms of the variety of products and in terms of the total premiums being paid in this field.

The activity in the health field is reported under non-life insurance (sickness and hospitalization line), and under life insurance. For example: the majority of the activity in the medical expenses sub-line is reported under non-life insurance; while the majority of the activity in the work disability sub-line is reported under life insurance.

In this section, we will present the business results in health insurance for 2004 according to the results in the sickness and hospitalization insurance line, as reported under non-life insurance, and the results of a few sub-lines in health insurance, as reported under non-life

insurance and under life insurance.

B. The sickness and hospitalization insurance line – activities

in the health field being reported under non-life insurance

The volume of activities in the sickness and hospitalization insurance line in 2004 reflects an ongoing growth trend. Chart D-12 shows an increase in the parameters in this line, with the exception of profits. Thus, the total premiums in 2004 totalled about NIS 1,807 million; i.e., growth of 12.5% over the corresponding period last year. As for the profits of the insurance companies, on the other hand, profits dropped 28.6% compared to the previous year – NIS 90 million in 2004, compared to NIS 127 million in 2003. This decline in profitability derives mainly from a decline at a similar rate in the investment profits in 2004.

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Chart D-12

Business Results in the"Sickness and Hospitalization" Line, 2002 - 2004

(NIS millions, December 31st 2004 prices)

Premiums Claims Expenses* Profits

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

Division, on the basis of the companies’ consolidated financial statements. * The expenses include commissions and administrative expenses.

The loss ratio – the loss ratio is the ratio between gross claims (claims paid and changes in pending claims) and the premiums earned. The loss ratio in the sickness and hospitalization insurance line in 2004 showed nearly no change compared to 2003, and stands at about

63%.

Market shares in the sickness and hospitalization insurance line – Chart D-13 presents the distribution of gross premiums in the sickness and hospitalization insurance line in 2004, by insurance companies. Chart D-14 presents the distribution of premiums for each insurance company for the years 2001 through 2004.

Approximately 48% of the premiums originated in the Harel Group, while the rest of the premiums concentrated mainly in the Clal Group, the Phoenix Group, the Migdal Group and in Menorah. Comparing these figures with the results obtained in 2003 shows that, in 2004, the Harel Group’s market share in this line increased by 5%, while, on the other hand, the market shares of the Clal Group and the Phoenix Group decreased by about 3%.

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Chart D-13

Distribution of Gross Premiums by Companies in the "Sickness and

Hospitalization" Line in 2004

(percent) Phoenix Group 13% menorah 10% Other 2% Clal Group _16% Harel Group 48% Migdal Group 11%

Division, on the basis of the companies’ consolidated financial statements. 1. The Harel Group – Harel and Dikla

2. The Phoenix Group – Phoenix and Hadar 3. The Clal Group – Clal and Arieh

4. The Migdal Group – Migdal and Hamagen.

5. Other – Ayalon, AIG, Direct Insurance, Agricultural Insurance, Shirbit, Shomera and I.L.D. Insurance Company.

Chart D-14

Distribution of Gross Premiums by Companies in the "Sickness and

Hospitalization" Line, 2001 - 2004

(percent) 50%

Non-life and Health Insurance

Non-life and

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Contents

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1. Introduction

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2. General Review of the Industry

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Table D-2

Chart D-1

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Table D-3

Company Premiums

Chart D-2

Annual R e por t 2004

et Shar

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Table D-5

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Chart D-3

Chart D-5

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Chart D-6

Chart D-7

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Table D-6

TOTAL 3.2% 5.3% 6.0% 12.6% 10.8%

Chart D-8

Market Share - Profits

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Chart D-9

Market Share by Profits

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Table D-7

Company

Annual R e por t 2004

et Shar

Text Box A

Chart D-10

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Table D-9

Table D-10

Parameters Example 1 Example 2 Example 3 Example 4 Example 5 Example 6

B. Reserves

Table D-11

Company Income from Investments

TOTAL INCLUDING

C. Commissions

Table D-12

Company Commissions Paid (in NIS thousands) Rate of Commissions from Premiums Rate of Change in Commissions

D. General and administrative expenses

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Table D-13

Company

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Chart D-11

B. The sickness and hospitalization insurance line – activities

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Chart D-12

Chart D-13

Chart D-14