Phoenix : Midroog Monitoring Report - November 2021

The Phoenix Insurance Company Ltd.

Monitoring Report | November 2021

This credit rating report is a translation of a report that was written in Hebrew for a debt issued in

Israel. The binding version is the Hebrew.

Contacts:

Nil Harel

Senior - Analyst, Lead Rating Analyst

[e-mail]

Itay Navarra, Vice President

Head of Financial Institutions

[e-mail]

Midroog

The Phoenix Insurance Company Ltd.

Insurer financial strength	Aa1.il	Rating outlook: Stable
(IFS) rating
Hybrid Tier III capital	Aa2.il (hyb)	Rating outlook: Stable
Hybrid Tier II capital and Tier	Aa3.il (hyb)	Rating outlook: Stable
II capital instrument

Midroog affirms the Insurer Financial Strength (IFS) rating of The Phoenix Insurance Company Ltd. (hereinafter: "The Phoenix " or "the Company") and affirms the ratings of Aa2.il(hyb) for subordinated notes (Hybrid Tier III capital) and of Aa3.il(hyb) for subordinated notes (Hybrid Tier II capital and Tier II capital instruments) issued by the subsidiary The Phoenix Capital Issuance (2009) Ltd. Rating outlook - Stable.

These subordinate debt ratings reflect the legal-contractual subordination of this debt relative to the IFS rating, the seniority ranking among subordinated debt instruments, as well as the effect of their loss-absorption provisions. Considering the Company's IFS, its current and expected economic solvency as we estimate it, while maintaining sufficient margin from the effective regulatory economic solvency requirement for the instrument, we believe that the uncertainty associated with the likelihood of reaching "suspensive circumstances"1 is low, and therefore was not reflected by a further lowering of one notch for Tier II capital instruments.

Outstanding debentures rated by Midroog:

Debenture	Securities	Rating	Rating	Type of regulatory approved	Final maturity
series	ID	outlook	capital
D	1133529	Aa2.il(hyb)	Stable	Tier II capital [1]	January 31, 2026
E	1135417	Aa3.il(hyb)	Stable	Tier II capital [2]	October 31, 2029
F	1136696	Aa3.il(hyb)	Stable	Tier II capital [2]	January 31, 2026
H	1139815	Aa3.il(hyb)	Stable	Tier II capital [2]	July 31, 2028
I	1155522	Aa3.il(hyb)	Stable	Tier II capital	August 31, 2029
J	1155530	Aa3.il(hyb)	Stable	Tier II capital	January 31, 2028
K	1159359	Aa3.il(hyb)	Stable	Tier II capital	April 30, 2032

[1] Hybrid Tier III; [2] Hybrid Tier II

Key Rating Considerations

1 Capital requirement for "suspensive circumstances" are defined as 80% of the solvency ratio required over the phase-out period after adjustment for the equity scenario pursuant to the Solvency circular ("Required solvency ratio").

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The Company rating reflects a strong business profile, with significant size, relatively good diversification of business lines and substantial distribution capacity that support revenue generation across the cycle. The rating also reflects the risk profile, that is appropriate for the rating, and is supported by relatively low product risk and relatively low exposure to large customers. The Company's financial profile includes asset quality that is appropriate for the rating, but is negatively impacted by higher exposure to "risk assets" compared to the absorption cushion. However, Company profitability is outstandingly positive compared to the peer group2 and is supported by excess underwriting profitability, which are also reflected by implementation of the strategic plan and by streamlining measures applied in 2020. This profitability is supportive of creating the capital cushion, which absorbs losses in a manner appropriate for the rating, but it is expected to be created at a more moderate pace than in recent years, given our assessment of further dividend distribution within the forecast period, if possible. The Company has a liquidity profile supported by long duration of liabilities, but the financial flexibility is not favorable for the rating, due to the relatively high financial leverage (debt to CAP, excluding VIF), but good compared to the peer group.

According to Midroog's capital model, the Company has appropriate risk adjusted capital surplus for the current rating, and the Company is in compliance with the second stress scenario out of five by severity, based on data as of June 30, 2021. The main risks to which the Company is exposed, as perceived in the model, derive from non-life insurance risks and in particular life expectancy risks in policies with guaranteed annuity and from market risks in the nostro portfolio (guaranteed-return life insurance, P&C and equity), with diversification of operations and correlations between operations reducing the required capital. The Company's solvency ratio, in conformity with Solvency II provisions (excluding the phase-out provisions) was 116% as of December 31, 2020 and 192% of required capital for the phase- out period as of said date, including a NIS 200 million dividend distribution in the first quarter of 2021. We should note that through June 2021 there were other equity transactions, including a further NIS 200 million dividend distribution, and a distribution of dividend in kind by The Phoenix Excellence Pension and Provident Funds Ltd. (both in June 2021). The Company believes, after the aforementioned equity transactions, that the solvency ratios would be at 110% (excluding the phase-out provisions and including the effect of equity transactions) and 186% during the phase-out period. Moreover, on August 5, 2021, a Tier I capital instrument was issued, valued at NIS 200 million; this issuance should increase the solvency ratio, according to the Company, by 3% (taking into account the phase-out period). These ratios provide an appropriate margin from the regulatory requirement, and are good by comparison to the peer group of companies with similar operations. We should note that spin-off of the management company should also support the solvency ratio over time, due to

2Harel Insurance Company, Migdal Insurance Company, Clal Insurance Company and Menorah Mivtachim Insurance.

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the decrease in intangible assets (DAC and goodwill), which would support the reduced capital requirements.

In our baseline scenario for 2021-2022 for the entire insurance sector, we expect the challenging business environment to continue casting shadows over the sector, and in particular over revenue growth potential. We further believe that the sector would continue to be impacted by the low interest rate environment and by inflationary pressures, along with continued volatility in the capital market and exposure to regulatory load, which promotes competition and creates additional costs in some segments, with continued competitive pressures for some of the products. On the other hand, these effects would be offset to some extent by high growth rates over the next two years; According to the Bank of Israel forecast, GDP growth is expected to reach 7.0% and 5.5% in 2021 and 2022, respectively.

Under this scenario, we expect the Company to maintain its business positioning, while increasing earned premiums at an annual rate of 1.5%-3.5% in 2021-2022; the growth engines would be life and non-life insurance, in accordance with the Company's strategic plan focused on growth and profitable products in terms of return on equity. Under this scenario, we expect the Company to maintain good profitability for the sector; this assumption is based on our assessment whereby the Company would continue to operate in conformity with the strategic plan, with obvious results, and should also be supported by improved operating efficiency and re-organization of the Company in 2020. Moreover, in view of the COVID crisis and the global climate crisis, which negatively impact global re-insurers, there may be adjustments made to agreements with those re-insurers, which may result in stricter policy in the market and in higher tariffs. In view of the foregoing, Company margins are expected to be appropriate for the rating and favorable compared to the peer group, with ROC and ROA ratios expected to range between 7.0%-11.0% and between 0.6%-1.0%, respectively, within the forecast range. This forecast still includes an element of uncertainty, due to materialization of a risk event, such as the COVID outbreak in Israel in 2020, the long-term efficacy of vaccinations against this virus, its impact on economic activity in the local market and increased volatility in capital markets.

Rating outlook

The Stable rating outlook reflects our assessment, whereby the Company's financial profile and key data would be maintained within the range of Midroog's baseline scenario. The forecast range still includes an element of uncertainty, due to materialization of a risk event, such as the COVID outbreak in Israel in 2020, the long-term efficacy of vaccinations against this virus, its impact on economic activity in the local market and increased volatility in capital markets.

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Factors which may result in a rating upgrade:

• Significant improvement in retained earnings according to Midroog's capital model
• Significant improvement in business scope and diversification
• Significant improvement and stability over time in underwriting earnings cushion

Factors which may result in a rating downgrade:

• Continued erosion of retained earnings according to Midroog's capital model
• Continued deterioration in underwriting results in core segments and/or significant, prolonged erosion in overall earnings
• Dividend distributions which may impact the Company's financial robustness
  The Phoenix Insurance Company Ltd. - Key Financial Indicators (NIS millions)

	June 30,	June 30,	December	December	December	December
NIS in millions	2021	2020	31, 2020	31, 2019	31, 2018	31, 2017
Total assets on balance sheet	124,498	104,627	115,498	107,177	88,839	81,497
Total equity attributable to equity holders of
the Company	5,942	5,139	6,192	5,128	5,336	4,142
Total comprehensive income (loss)
attributable to equity holders of the Company	791	18	1,060	412	376	711
Total Earned premiums, gross	5,361	5,248	10,383	11,325	10,104	9,691
Of which: life insurance and long-term
savings	2,596	2,393	4,766	5,209	5,082	5,059
Of which: healthcare insurance	1,332	1,449	2,782	3,257	2,231	2,042
Of which: non-life insurance	1,434	1,405	2,835	2,859	2,790	2,590
Total premiums earned in residual	4,714	4,570	9,054	9,923	8,926	8,801
Total investment gain(loss) (including Other
Comprehensive Income)	8,476	(4,349)	5,743	9,710	812	5,041
Solvency ratio [1]	N/R	N/R	192%	165%	195%	187%
Solvency ratio excluding implementation of	N/R	N/R	116%	105%	134%	105%
transition provisions for phase-out period [2]
Midroog's adjusted ratios
Intangible assets and long-term savings DAC
as percentage of shareholder equity	26%	41%	35%	41%	43%	54%
Return on capital (ROC) [3]	15.2%	0.4%	10.8%	4.6%	4.9%	12.1%
Return on assets (ROA) [4]	1.3%	0.0%	1.0%	0.4%	0.4%	0.9%
Adjusted debt to adjusted debt and
shareholder equity [5]	43%	46%	41%	44%	38%	38%
Earnings Before Interest and Tax (EBIT) and	x16.3	x1.0	13.9%	5.9%	x6.3	x12.3

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