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Migdal Insurance actually met the aforementioned forecast, since the return on capital it presented in the last quarter reached 35% – and this is even after a negative effect of the interest rate curve falling. Were it not for the same effect, which led to an increase in exceptional reserves, then the return on capital in the fourth quarter would have been close to 40%.
Unlike other insurance companies, Migdal posted a comprehensive loss in the first nine months of the year. However, the profit in the fourth quarter was so high that it “dragged” the return on capital throughout the year beyond the company’s historical average.
The return on capital in 2020 was a handsome rate of 8.5%, compared to an average historical return of 7.2% (based on the last five years).
It has already been said that a capital return of 8.5% is, in our estimation, a better approximation to the representative level of the company, since the total profit in recent years has been affected exceptionally and significantly by the continuing decline in the yield curve.
Recall that we estimate the representative capital return of an insurance tower at an order of magnitude of 8% per year, which is more or less the return reported in 2020 as a whole.
Bottom line, Debbie notes, “It’s clear that total earnings in the last quarter are irrelevant to stock pricing, but the results for the entire year reflect the current profitability of Insurance Tower quite faithfully.