In this assignment we looked at the TA 100 index and how the insurance sector compares to it.
We saw that the index is actually less volatile than the individual underlying stocks.
Also, we saw that the insurance sector is highly correlated to the TA 100 index.
Quarterly reporting are a large source of information that effects stock price compared to director and executive appointments.
Please note that the data was automatically downloaded from yahoo finance and dynamically graphed - you can zoom in the graph by selecting a part of it.
Writing a function that will let us automatically download return data:
# Loading Necessary libraries
library(quantmod)
library(zoo)
library(tseries)
library(dplyr)
library(knitr)
library(dygraphs)
# Function to calculate monthly returns on a stock
monthly_stock_returns <- function(ticker, start_year) {
# Download the data from Yahoo finance
start_year <- paste(start_year,"-01-01",collapse = "",sep="")
symbol <- getSymbols(ticker, src = 'yahoo', from = start_year,
auto.assign = FALSE, warnings = FALSE)
# Tranform it to monthly returns using the periodReturn function from quantmod
data <- periodReturn(symbol, period = 'monthly', type = 'log')
# Let's rename the column of returns to something intuitive because the column
# name is what will eventually be displayed on the time series graph
colnames(data) <- as.character(ticker)
return(data)
}Data is downloaded at a daily price rate. The log of the ratio of the adjusted closed price of each month is then used to calculate the monthly return. This function builds upon the quantmod R package.
When looking at the past month as the selected period we see that the first weeks of November showed positive returns followed by a few days of negative returns. The past few days had mixed returns. In my opinion this might be due to Pharma industry (Teva,Perrigo,Mylan), it’s of a substantial part of the index and has a had a rough last few days (and year).
Keys trends include large negative return during the 2008 sub-prime crisis. This period was followed by large positive returns. 2011 wasn’t a good year yet 2013-2014 were not bad. The period before the sub prime crisis provided good returns as well.
| 10 Year Mean return | 5 Year Mean return | 1 Year Mean return |
|---|---|---|
| 0.0032221 | 0.0005099 | -0.000624 |
We will denote the mean return as an arithmical average of monthly returns.
The mean return on the longer period is slightly better than on shorter periods. This year’s performance is not positive.
I chose the following companies:
| TA100 | Strauss | FNX | Clal-bio | EL AL |
|---|---|---|---|---|
| 0.0354098 | 0.0481206 | 0.0654205 | 0.1156183 | 0.1494594 |
WE will define volatility as the sample standard deviation of monthly returns.
The stock that showed the most volatility is EL Al. The stock with the least is Strauss. The Tel Aviv 100 index was slightly less volatile than Strauss.
This makes sense with financial theory that a diversified portfolio will be less volatile than the specific underlying stocks that it is made of. Strauss is in the consumer products industry which is considered less volatile than others. Also, strauss is a big exporter and has a large and diversified portfolio of products and projects being pursued in different markets and currencies.
El Al has had a rough time with it’s union strikes. Also it is in a seasonal industry, affected by regulation (open skies) and is effected by currency and oil price movements. I didn’t check how well they hedge this risk if at all.
I chose the insurance industry. I am especially interested in large composite (trade in both life and P&C) insurance companies that operate in Israel.
…
Main shareholders are Delek (52.3%) and Meir trucks (22.93%). The rest is held by the public and Phoenix executives. Conflicts of interest can arise here for a few reasons. Delek might just want to use phoenix as a dividend cow and not interest in it’s long term growth. Also, with solvency regulation requiring adding of more capital is might be reluctant add this additional capital or to have another rights issues which could lead to it losing control of the company. Delek is required by law to sell it shares in Phoenix, so far unsuccessfully.
49.56% is held by the Hamburger family (in one way or another) and the rest is held by the public. This could give way to conflicts of interest as the public might want to see the company ran differently than as a family business. For example the appointment of more hamburger family members to executives positions might not be in the public’s best interest.
Main shareholders are IDB development (55%) and Bank Hapoalim (9.5%). The rest is held by the public and Clal executives. IDB is required by law to sell it’s shares also. Until then they are held in a trust managed by Moshe Terry (former head of ISA). Their time to sell their shares is up and they are in a legal battle should they be sold in the open market. Clal was a dividend cow milked for cash when IDB was held by Nochy Dankner, but since then regulation and market conditions have changed.
Main shareholders are Eliyahu (69.19%). Eliyahu is a family business own by Shlomo Eliyahu and his brothers and sons. He took over Migdal from Generali and 2014. He has a great conflict on interest since he has debt to pay back on this acquisition, requiring dividends which could hurt the capital position of the company and has caused a dispute with the commissioner of insurance.
There are a few ways to solve these conflicts of interest. The first is through corporate governance, ie having a board of qualifies directors with mostly external (independent directors) on various commitees such as renumeration and audit commitees. Another, with is unique to Israel is the financial de-centralation act with states that a company in a real sector can not hold a financial company - this solves the conflicts of interest that the financial company will use policyholder’s savings to finance the mother company for cheap.
Insurance companies usually open a subsidiary for raising debt as can be seen in all the examples above. The insurance sector is a geared sector since debt is considered as solvency capital to some extent.
Features of common stock:
Features of bonds:
I would assume that the returns of the insurance sectors will be very correlated with the market. A big source of revenue is fees on funds which are invested in part in the TA 100. Also return on premium investments are a large source of profits. It can be seen that in many points the returns of all the companies are correlated with each other and with TA 100. Specific “news” affecting each company separately could be a source of a deviance from this correlation. (will be looked at in part 6.)
It can be seen in the graph above that the return do look like they move together. Also, TA100 is much less volatile and has showed much better returns. The insurance sector has had a rough few years. Mostly due to increased competition and regulation.