Harel Insurance Investments & Financial Services Ltd. Interim Statement As at March 31, 2009

Transcription

1 Harel Insurance Investments & Financial Services Ltd. Interim Statement As at March 31, 2009 The original language of these Interim Consolidated Statements is Hebrew. The Hebrew version shall prevail over any translation thereof.

2 Contents Page Condensed Interim Financial Statements at March 31, 2009 Board of Directors' Report on the state of the Company at March 31, 2009: 1-1 Auditors' Review 2-1 Condensed Interim Consolidated Financial Statements at March 31, 2009 (Unaudited): Condensed Consolidated Balance Sheets 2-3 Condensed Statement of Income and loss 2-5 Condensed Statements of Changes Equity 2-7 Condensed Consolidated Statements of Cash Flows 2-8 Notes to the Financial Statements 2-12 Annex: Details of Assets in respect to yield dependent contracts and other financial investments. Reports concerning Embedded Value in long-term policies Report concerning Embedded Value in long-term policies issued by Harel Insurance Company Ltd. Report concerning Embedded Value in long-term policies issued by Dikla Insurance Company Ltd.

3 Board of Directors' Report

4 Board of Directors' Report Three-months period ended March 31, 2009 Harel Insurance Investments & Financial Services Ltd. Board of Directors Report For the three months ended March 31, 2009 The Board of Directors' Report for the three months ended March 31, 2009 ("the Reporting Period"), reflects the principal changes in the business situation of Harel Insurance Investments & Financial Services Ltd. ("Harel Investments" or "The Company") during this period, and it was prepared taking into account that the reader is also in possession of the Group's full Periodic Report for 2008 which was published on March 31, 2009 ("the Periodic Report"). The Company's consolidated financial statements are prepared, as of January 1, 2008, in accordance with International Financial Reporting Standards (IFRS). For details of the basis of preparing the financial statements pursuant to IFRS, see Note 2 to the Financial Statements. This Board of Directors' Report also includes forward-looking information, as defined in the Securities Law, Forward-looking information is uncertain information regarding the future, based on information in the Company's possession on the reporting date and including the Company's estimates or intentions at the time of preparing the report. Actual performance may differ substantially from the results estimated or inferred from this information. In certain instances, sections can be found that contain forward-looking information where words such as: "The Company/Group estimates", "the Company/the Group believes", "the Company/Group anticipates", and the like appear; however, such information may also be worded differently. The Company makes no undertaking to submit revisions regarding changes that may occur concerning forward-looking information. 1. Description of the Company 1.1 General Harel Insurance Investments and Financial Services Ltd. ("Harel Investments" or "The Company") is a public company whose shares have been traded on the Tel Aviv Stock Exchange since The Company, together with its subsidiaries ("the Group") operates mainly in the following areas: A. In the various areas of long-term saving, the Company operates through the following subsidiaries: Harel Insurance Company Ltd. (fully controlled) ("Harel Insurance"); Dikla Insurance Company Ltd. (65% holding) ("Dikla"); Interasco Societe Anonyme General Insurance Company S.A.G.I. (fully controlled) ("Interasco"), which operates in Greece in the general insurance sector; and through the affiliated company, Turk Nippon which operates in Turky (87% holding) (see para below) and ICIC (in which the Company has a 33.3% holding). In the area of long-term savings, the Company operates through the subsidiaries all of which are provident fund and pension funds management companies as follows: Provident funds management companies: Harel Gemel Ltd. (fully controlled) ("Harel Gemel"); Atidit Provident Funds Ltd. (fully controlled) ("Atidit Gemel"),and Tzva Hakeve (regular army) Saving Fund - a Provident Fund Management Company ("Tzva Hakeva"). 1-2

5 Board of Directors' Report Three-months period ended March 31, 2009 Pension funds management companies: Harel Pension Fund Management Ltd. (fully controlled) ("Harel Pension"); Manof Pension Funds Management Ltd. (fully controlled) ("Manof"); Gilad Comprehensive Pension Fund Ltd. (fully controlled by the Company since February 14, 2008), and Le'Atid Pension Fund Management Company Ltd. (79% holding), which manages an old pension fund ("Le'Atid"). Regarding the requirement set on the Company to merge pension funds management companies, so that it holds no more than 2 new pension-fund management companies until December 31, 2009, see para to chapter 1 to the Periodic Report for December 31, B. In the financial services and capital market sector - through the subsidiary Harel Finance Ltd. ("Harel Finance") (fully controlled by the Company), and its subsidiaries: Harel-Pia Mutual Funds Ltd. ("Harel-Pia"), Harel Finance Trade & Securities (which is a stock exchange member) and Harel Finance Investment Management Ltd. (which is a licensed investment consultant), Harel Financial Products ("Harel Products") engage in financial products, such as: basket certificates, covered warrants, and more. The products are offered to the public through the subsidiary Harel Sal Ltd. ("Harel Sal") which is a reporting corporation under the Securities Law and issues index products (covered warrants and basket certificates). The Group has been active in the insurance industry for more than 70 years. According the Financial Statements for the year 2008, the Group is the third largest insurance group in Israel with a market share of about 18. 6%. In the health insurance sector, the Group is the largest and leading group in the market; in the general insurance sectors the Group is the second largest, and it is the third largest with regard to the volume of life assurance premiums. The Group's share of the new pension fund management market is approximately 10.9% in the market, in the provident funds management sector it accounts for approximately 7.9% of the market, and in the mutual funds management sector it accounts for approximately 11% of the market. The activity of the Company itself focuses on the management, supervision and control of the subsidiaries, on-going planning of the Group's activities and initiating moves and investments both directly and through the Group's companies. 1.2 Interested parties in the Company The Company's principal shareholders are the Hamburger family (Yair Hamburger, Gideon Hamburger and Nurit Manor) ("the Hamburger Group") who hold 41.14% of the Company s shares (mainly through a holding company); Sampoerna Capital PTE (a Singapore company controlled by Mr. Peutra Sampoerna) ("Sampoerna Group") which holds 20.82% of the Company s shares; and the Israel Discount Bank Ltd, ("the Bank") which holds 5.97% of the Company s shares Concerning the shareholders' agreement between the Hamburger Group and the Sampoerna Group - see Chapter 4 of the Periodic Report, Article 24. Regarding the negotiations between the Sampoerna Group and the Hamburger family in connection with internal changes in the controlling nucleus - see par below. 1.3 Material changes in the Company's business during the Reporting Period Agreement with National Indemnity Company from Berkshire Hathaway Group On December 31, 2008, Harel Insurance entered into a special agreement for Quota Share reinsurance with National Indemnity Company (NICO), a leading company in the insurance arm of Berkshire Hathaway. Under the Quota Share reinsurance agreement, NICO insures 20% of the retention in all the general (non-life) insurance sectors, including the liability branches of the Harel Group (Harel Insurance, the company in Greece (Interasco S.A.G.I.) and in future business in Turkey (Turk Nippon Sigorta). The 1-3

6 Board of Directors' Report Three-months period ended March 31, 2009 agreement shall apply to all the insurance business recorded from January 1, 2009, and shall be in force for two years. Gross reinsurance premiums that were attributed by Harel Insurance for NICO as part of the said transaction, amounted to NIS 150 millions in the Reporting Period, of which NIS 38 millions was reinsurance premiums earned during the reporting period. The effect on Harel Insurance's performance during the reporting period is negligible Selling of Clalit Health Services holdings in Dikla On July 20, 2008, it was agreed between the Commissioner and Clalit Health Services ("Clalit"), that Clalit will sell its holdings in the subsidiary Dikla (indirect 35% of the share capital) by August 1, An agreement was also reached whereby until year 2011 Clalit will hold a tender regarding the Clalit customer's group long-term care insurance that since 1998 were insured by Dikla. The Company's management as well as Dikla's management believes that the business relationship with Clalit and providing services for Clalit customers will continue after the selling of Clalit's holdings in Dikla, as well. Consequently, the aforesaid agreements are not expected to have any significant impact on Dikla's business Write-down of cost of an office building On October 18, 2007, Harel Insurance signed an agreement with Gitam Image Promotion Systems Ltd. (Gitam) in which context Harel Insurance acquired Gitam's rights in Harel House in Ramat Gan, which consist mainly of three floors of office space ("the Offices"). Gitam had made many investments in the Offices, which affected the consideration paid for acquiring Gitam's rights. During the Reporting Period, Harel Insurance decided to adapt the Offices to the use of different entities in the Harel Group, and to this end investments are being made to adapt the Offices, while most of the investments made by Gitam are unsuitable. Consequently, Harel Insurance wrote down NIS 7.7 million in respect of the Offices in its reports at March 31, Changes after the Reporting Date Acquisition of an office block in London On May 22, 2009, Harel Insurance (for its nostro portfolio and for the portfolio of reserves against yield-dependent liabilities), Dikla (for its portfolio of reserves against yielddependent liabilities), Harel Pension, Gilad and Manof (together: the Subsidiaries), entered into agreement to acquire 49% of the shares of a foreign company, which indirectly holds all the rights in an eight-storey office block in London that is leased to the British government for a long period. A further 49% of the foreign company's share capital was acquired by financial institutions that belong to the Clal Insurance and Clal Finance Group and the remaining shares (2%) were acquired by a foreign company which specializes in real-estate management in England. The Subsidiaries paid consideration NIS million in respect of the transaction Negotiations to make internal changes in the Company's controlling nucleus As specified in an immediate report that the Company published on May 14, 2009, the Company's controlling shareholders - the Hamburger and Sampoerna Groups - informed the Company that they are negotiating an internal change in the controlling nucleus of the Company. The negotiations involve the Hamburger family acquiring 10% of the Company's shares from the Sampoerna family at NIS 112 per share. Execution of the transaction is subject to the signing of an agreement between the parties and to the meeting of conditions precedent, to be included in the said agreement, including the necessary approvals by law. 1-4

7 Board of Directors' Report Three-months period ended March 31, Gilad As mentioned in par in Chapter 1 of the Periodic Report, the dispute between Old Gilad and the Company, in connection with the services agreement, that was signed by Gilad's former CEO, was submitted for arbitration to Vice President Emeritus, Supreme Court of Israel, Justice Theodor Or. As most of the employers whose employees are members of Gilad (since 1995) are members through the new Harel-Gilad Pension Fund and through the provident funds that Harel acquired from Gilad, the parties attribute considerable importance to continuing to maintain and develop business ties between them. The parties therefore agreed to end the dispute by a settlement, without either party agreeing to or acknowledging the allegations of the other party. Pursuant to the settlement, the parties will set up a joint team, headed by Gilad's CEO and the CEO of Harel Pension, to promote cooperation in a variety of areas. ccording to the arrangement to be submitted for the arbitrator's approval, Harel Insurance will pay Old Gilad an amount of NIS 6.4 million, of which NIS 1.4 million will be paid immediately and the balance will be paid in 5 equal, consecutive, annual installments (index linked but with no interest) Harel UK On May 6, 2009, Harel UK, a wholly owned subsidiary of the Company, received a broker's license from the English FSA. Obtaining this license enabled Harel UK to become a licensed broker by Lloyd's. This license will allow Harel UK to operate directly as a broker in transactions on London's insurance market Turk Nippon Pursuant to that mentioned in para to Chapter 1 of the Periodic Report, on April 6, 2009, Turk Nippon Sigorta A.S. ("Turk Nippon"), incorporated in Turkey, received confirmation from the Turkish Finance Ministry whereby its insurer's license had been renewed and it is now able to begin insurance activity in Turkey in all branches of general insurance Givat Shmuel shopping mall and Bilu Center Commercial Center On April 7, 2009, Harel Insurance and Dikla entered into agreement with Azo Reit Commercial Centers Ltd. ("Commercial Centers") and Azo Reit Bilu Center Ltd. ("Bilu Center"), companies that belong to British Israel Investments Ltd. ("British"), to sell half of the ownership in the Givat Shmuel shopping mall (stages 1-3), for NIS 95 million. Part of the consideration (75%) will be paid in the form of an allocation of shares in the Bilu Center Company to Harel Insurance and Dikla, so that subsequent to the allocation, Harel Insurance and Dikla will hold 28% of the issued and paid-up capital of Bilu Center (at full dilution). The balance of the consideration (25%) will be extended as a loan by Harel Insurance and Dikla to Bilu Center, concurrent with the loan, in proportion to the percentage holding of the commercial centers to Bilu Center. Completion of the transaction is contingent on meeting various suspensive conditions. Harel Insurance and Dikla acquired stages 1-3 of the Givat Shmuel shopping mall from Gindi Investments 1 Ltd., Gindi Project Investments 2006 Ltd., and Dagesh Aviv Construction Company Ltd., for NIS 184 million in a transaction that was completed on July 31, After execution of the transaction with British, Harel Insurance and Dikla will directly hold half of the ownership of the Givat Shmuel shopping mall (stages 1-3) and will also hold shares in Bilu Center, which will hold all the rights in the Bilu Center Commercial Center and half the ownership of the Givat Shmuel shopping mall. 1-5

8 Board of Directors' Report Three-months period ended March 31, 2009 In addition, Harel Insurance and Dikla will hold complete ownership of Givat Shmuel shopping mall stage 4. On March 3, 2009, the transaction to acquire stage 4 of the shopping mall was completed. NIS 13.6 million plus VAT, was paid for the acquisition of stage 4. The Givat Shmuel shopping mall was acquired mainly from reserves held against yielddependent liabilities (profit-sharing policies) of Harel Insurance, so that the sale of half of the shopping mall will not significantly affect the Company's performance or that of its' subsidiaries. 1.4 The Company's areas of activity Through subsidiaries, the Company has four key areas of activity: (A) life assurance and long-term savings; (B) health insurance; (C) general insurance, including: motor property insurance, compulsory motor insurance, other liabilities sectors and other property insurance; (D) capital market financial services sector. For details of the Company's structure of activity, see para Chapter 1 of the Periodic Report - "Description of the Company's Business". 1.5 Legislation and regulation in the Group's areas of activity The following describes material changes in the legislation and regulations in connection with the Group's areas of activity, since the Reporting Period: General Circulars On May 26, 2009, the Commissioner published a draft circular concerning publication of the yield components of the insurance companies' nostro portfolio. The circular prescribes that insurance companies shall publish the quarterly asset balances each quarter, concurrent with the publication of the list of the financial institutions' assets at individual asset level in respect of the relevant quarter, specifying the contribution made by each investment channel to the income from investments in respect of these liabilities, allocated according to non profit-sharing life insurance together and general insurance, equity, surplus capital and other liabilities together. The breakdown of the components shall be for each liability according to the investment channels specified in the circular. In addition, there shall be an allocation according to the following categories: Assets in Israel and assets abroad; marketable and liquid assets, and non-marketable assets On May 4, 2009, the Commissioner published a circular concerning the structure of the required disclosure in the insurance companies' (interim) financial statements, pursuant to IFRS. Pursuant to the provisions of IAS 1 (revised), starting with the reports for the interim periods in 2009, an insurer must present its comprehensive income, and it may present a separate statement of income and a statement of recognized income and expenses, or it may present profit or loss items as part of the statement of comprehensive income, as specified in the two options presented in the circular. The circular prescribes the following provisions: (a) everything mentioned in the circular (excluding the appendix concerning solo reports) applies only to consolidated statements; (b) the table of notes must include the information included in the comments attached to the notes that appear in the sample report included in the circular; (c) the board of directors' report must include information concerning an impairment of financial assets, as specified in FAQ

9 Board of Directors' Report Three-months period ended March 31, On April 6, 2009, the Commissioner published a circular concerning the treatment of problematic debts and action to be taken by institutional entities for collecting debt. The circular prescribes provisions pertaining to the method of treating problematic debts and to the action required to collect the debt, including with respect to collaboration with other debt owners. The circular is designed to ensure that financial institutions work actively to collect debts, and it defines a framework for deployment by the financial institution to regularly monitor and control the debt that it manages, to review the status of the debt, deal with problematic debt and formulate decisions, and it specifies the entities responsible for performing such action. The circular prescribes that the board of directors must approve a framework of guidelines to ensure that the status of the debt is regularly monitored and that a structured work process is in place to identify a decline in the quality of the credit and failures in the duration of life of the credit at an early stage, and to identify and locate problematic debt, as well as to take action to deal with such debt. Management must appoint a team to be responsible for implementing the debt assessment process. This team shall submit to the proper entities in the institutional entities and to the credit committee, an immediate report concerning debt that has been identified as problematic, and its recommendations regarding further treatment of the debt and the options it has examined. The credit committee shall discuss ways and means of collecting debt that has been identified as problematic, and based on the recommendations of the credit committee, the investment committee shall decide which measures to take On March 29, 2009, the Commissioner published a circular concerning an appendix to the monthly report to be issued by financial institutions - customer's account number with a TASE member. In an effort to streamline supervision of trade on the stock exchange, including activity in securities performed by the financial institutions, the circular stipulates that an appendix shall be added to the information required in the "monthly report" circulars (Provident Fund circular , Pension Fund circular , and Insurance circular ), which contains a report on the financial institutions' account numbers managed by the stock exchange members. (The text of the appendix is included in the draft circular.) Trade shall be supervised by the Securities Authority and the information shall be transmitted to it for the purpose of the supervision. The reporting shall include details of special values that are associated with the account numbers, by the stock exchange members, for the purpose of single-value identification of the securities and options in the stock exchange computers. The accounts that must be reported are accounts in which transactions in securities or options are made or are likely to be made On March 9, 2009, the Commissioner published a circular concerning provisions for the auditor of a financial institution. The circular arranges rules to ensure the proper function of the outside auditor of a financial institution, his obligations and work methods, as well as the obligations of the financial institution in connection with an outside audit. The circular prescribes provisions concerning the auditor's appointment and ensuring the qualifications and expertise of the outside auditor, a rotation obligation among the partners responsible for the audit and for reviewing the reports, cooperation between the financial institution and the outside auditor and the circumstances in which the audited financial institution must report to the Commissioner. The circular further stipulates that the outside auditor shall submit to the financial institution's audit committee and balance-sheet committee, once a year, a detailed annual report that contains material findings and the subjects listed in the circular that are relevant to the financial report. The outside auditor shall report to the chairman of the board of directors, to the audit committee and the 1-7

10 Board of Directors' Report Three-months period ended March 31, 2009 managing director (CEO), immediately depending on the circumstances, any information which in his opinion they require to fulfill their duties.the circular also prescribes provisions concerning the reports that the outside auditor must submit to the Commissioner, provisions concerning record keeping and the keeping of documents, and provisions concerning an audit of the reasonability of reporting the insurance liability sections in the financial report On March 9, 2009, the Commissioner published a circular concerning compensation for the outside directors of institutional entities. The purpose of the circular is to match the conditions of compensation for outside directors of institutional entities that are incorporated as private companies, with the conditions for compensating the outside directors of institutional entities that are incorporated as public companies, as prescribed in the Companies (Rules Concerning Compensation for and the Expenses of an Outside Director) Regulations (Amendment), , from March 6, The circular defines restrictions concerning the cumulative, maximum compensation payable to an outside director who serves a group of institutional entities On March 2, 2009, the Commissioner published a circular concerning the revaluation of a non-marketable debt asset - temporary order. The temporary order allows an institutional investor to revalue the investment in a non-marketable debt asset, made from January 1, 2009, and up to December 31, 2009, in line with the risk margin and current revaluation mechanism according to its fair value, determined by the proper organ, or alternatively to classify the investment as loans and accounts receivable and to revalue them accordingly, subject to the following conditions: (a) the mechanism will be established at the time of the transaction and may not be changed during the life of the investment until its redemption or exercise date; (b) the investment committee must, at least once a quarter, discuss changes that have occurred in the risk margins; (c) adjustments must be made when information is available indicating that the risk margin does not reflect the borrower's risk level or there is concern regarding collection of the cash flow anticipated from the asset On February 24, 2009, the Commissioner published a circular concerning the publication of financial statements by the insurance companies and pension funds. The circular stipulates that insurance companies and pension funds must publish the data from their financial statements in the press in the necessary format, according to an appendix to the circular, where the publication shall include a link to the website of the insurance company or pension fund, the font size shall be a reasonable size and the data shall be published no later than 10 days after the board of directors has published the financial statements, starting with the annual report in respect of the year ending December 31, Insurance companies must publish their annual financial statement and their interim financial statement in the press, and pension funds must publish their annual financial statements in the press On February 16, 2009, the Commissioner published a circular concerning the structure of the required disclosure in the insurance companies' financial statements, pursuant to IFRS which prescribed the following provisions: (a) starting with the financial reports for 2008, the required disclosure structure shall be in accordance with the appendix to the circular. The reports shall include, at the very least, the items listed in the detailed structure; (b) comparative numbers - to the balance sheet notes comparative numbers in respect of the previous year shall be added, and for the performance notes comparative numbers shall be added for the two previous years. Nevertheless, for the financial statements for 2008, comparative information for one year only can be included; (c) everything 1-8

11 Board of Directors' Report Three-months period ended March 31, 2009 mentioned in the circular (except the appendix regarding solo reports) applies to consolidated statements only; (d) the note tables shall include the information included in the comments attached to the notes that appear in the circular; (e) the board of directors' report shall include information concerning an impairment of financial assets, as specified in FAQ 14. Pursuant to the aforementioned circular, on May 19, 2009, the Commissioner published a circular concerning the structure of the disclosure required in the related reports published by insurance companies. One of the main changes in this circular is the method of reporting the activity of insurance companies' health insurance activity, in view of the change in the method of classifying this sector among the different sectors in the different companies. Draft circulars On May 13, 2009, the Commissioner published a draft circular concerning changes in the annual and quarterly reporting to members and policyholders, the purpose of which is to provide savers with more details in their annual reports, quarterly reports and the data retrieving service on the internet, as follows: (a) The following information shall be added in the annual report: Details about the rate of discount on management fees and the conditions under which the l institutional entity can cancel this discount, details of the benefits in the conditions or cost of the insurance cover, and the conditions under which these benefits can be cancelled by the institutional entity; (b) in the quarterly reports to holders of life-assurance that includes a savings component, to members of compensation provident funds and severance pay that are not insurance funds and members of study funds, to insureds of new comprehensive and general pension funds, the following information will be added: a list of the management fees actually collected in the insurance policies from the member/insured, the management fees will be presented on an annual basis and the amount of the management fees according to the amount actually collected up to the end of the reported quarter, and the report shall also mention to which period each figure applies. The yield attained by the fund / pension fund on its assets / the assets of its policyholders, respectively. The yield rate shall be presented gross up to the end of the reported quarter; (c) the quarterly report sent to members of benefit and severance pay provident funds that are not insurance funds, and in study funds, and to those insured through new comprehensive pension funds and general pension funds, shall include the rate of the management fees that the fund actually collected from the total assets / the principal from the total assets of policyholders and from the average contributions, up to the end of that quarter. Moreover, the circular stipulates that an institutional entity shall not be obliged to send a quarterly report to members / policyholders who did not make deposits in the fund/policy during the relevant quarter, provided that the balance of their accrued savings is less than NIS 50,000. The circular will apply to all institutional entities starting with the report for the first quarter of The Commissioner and the institutional entities are discussing the draft circular On May 12, 2009, the Commissioner published a draft circular concerning an agreement between an institutional entity and a licensee. The purpose of the draft circular is to prescribe provisions regulating the obligation to enter into agreement between an institutional entity and an agent and pension advisor ("licensee") which is prescribed in the legislative arrangement. The draft circular stipulates that an institutional entity shall enter into agreement with a licensee only by written agreement that includes provisions concerning the method of transferring the deposits according to the options set forth in the draft circular, including calculating the allocation of investment profits that are accrued in the trust 1-9

12 Board of Directors' Report Three-months period ended March 31, 2009 accounts. The deposits that the licensee collects, including investment profit earned on the deposits in the trust account, belong in full to the institutional entity and the deposits shall be deemed to have been received directly in the account of the institutional entity's insurer. The licensee shall not delay these amounts nor shall he deduct from them amounts that he is entitled to receive from the institutional entity. The agreement may specify that the deposits will be transferred directly from the insured to the institutional entity, or they may be transferred to a trust account of the licensee in favor of the institutional entity. Moreover, provisions were set concerning the method of managing the trust account and the rules that apply to the account, as well as three alternatives for opening a trust account: a separate trust account for each institutional entity, a suspense account managed by a trustee, and a suspense account managed by the licensee. The Commissioner and the institutional entities are discussing the draft circular On April 5, 2009, the Commissioner published a second draft of a circular concerning the collection of statistical information that is incidental to the settlement of claims. According to the draft circular, an institutional entity shall collect and save data on claims for the previous year (in the format prescribed in the draft circular) and it shall report the claims data to the Commissioner. An institutional entity shall also publish on its website the claims data for the last four years. The circular shall apply to data for claims from 2010 onwards. The Commissioner and the l institutional entities are discussing the draft circular On March 30, 2009, the Commissioner published a second draft circular concerning a declaration of anticipated investment policy by the institutional entities. Accordingly, once a year, in the last quarter, an institutional entity must declare its projected investment policy for the coming calendar year. In its statement, the institutional entity shall address the main investment channels and specify the rate of exposure and relevant benchmark indices for the coming year in each investment channel. If the board of directors or investment committees change all or part of the investment policy during the year, a report shall be published about the change on the company's website, within 30 business days of the change, and members shall be informed of this change in the annual report. The provisions of the circular shall apply to insurance companies - regarding their yield-depended liabilities, and to management companies - with respect to the provident funds and pension funds that they manage, as well as to the old pension funds. The Commissioner and the financial institutions are discussing the draft circular Life assurance and long-term savings The Commissioner's policy in the wake of the crisis in the capital market On March 24, 2009, the Commissioner published a document detailing a series of measures that he intends to introduce in the pension savings market, following events in the global crisis. The following details the main points of these measures: A. The investment risk will be correlated with the customer's characteristics (implementation of the Chilean model): (I) the entities will be obliged to establish investment tracks that are a default option and will correspond with the saver's characteristics; (II) the general tracks will be cancelled. B. The number of investment tracks in pension savings products will be reduced: (I) the general tracks will be eliminated; (II) tracks with a similar mix will be merged. 1-10

13 Board of Directors' Report Three-months period ended March 31, 2009 C. There will be a shift to publishing the annual yield for pension savings products: (I) yields for a period of less than 12 months shall not be published; (II) data on Gemel Net, Pension Net and Insurance Net will be revised accordingly. D. Companies will be obligated to report management fees in the quarterly report sent to members, similar to the reporting that now exists in the annual report. E. Standards will be set for the financial institutions' customer service systems: (I) timetables will be defined for replying to savers' requests; (II) policyholders will receive written confirmation that transactions have been performed; (III) information must be saved and documented. F. The projected investment policy must be publicized, including benchmark indices that the institutions wish to attain. A change of policy must be updated in the quarterly reporting to members. G. Individually managed retirement accounts (IRA) will be introduced. H. Compensation paid to investment managers shall be commensurate with the long-term performance of the financial institutions: (I) a compensation policy for investment managers and those engaged in investments must be established, based on long-term performance; (II) the audit committee shall ensure that the compensation policy is appropriate for the type of investment; I. The decision making process must be improved regarding investments in corporate bonds: (I) subjects shall be determined that the financial institution must discuss before making the investment; (II) the data and information that the issuing company must provide, for private issues as well, is to be determined; (III) the investment shall be made based on an internal analysis prepared by the financial institution, without relying exclusively on the rating; (IV) a deed of trust must be formulated to include qualitative and quantitative parameters; (V) the ability to repay marketable bonds must be constantly monitored. J. The control and monitoring mechanisms for investment management and risk management are to be strengthened: (I) the investment committees' obligation to supervise the investment managers shall be expanded; (II) the professional qualifications required of investment committee members shall be increased as well as the number of committee members; (III) the requirement for independence and an absence of a conflict of interest by members of the investment committee shall be tightened. K. The equity requirements for insurance companies shall be increased 30% over the next four years, and the ability to distribute dividends to controlling shareholders shall be severely curtailed over the next two years. L. The requirements for shareholders' equity for provident and pension fund management companies will be raised, in line with the volume of assets under management. Subsequently, in May 2009, the Commissioner published a proposed model for increasing the requirement for shareholders' equity for the management companies of provident and pension funds. According to the proposed model, the required minimum shareholders' equity shall be the higher of the minimum shareholders' equity (NIS 10 million) or a requirement rated according to the value of the assets under management: 3 per mille of the amount of the assets under management up to NIS 10 billion, 2 per mille of the assets under 1-11

14 Board of Directors' Report Three-months period ended March 31, 2009 management between NIS billion, and one per mille of the assets under management above NIS 20 million. M. Amalgamation and tightening of the investment regulations that apply to institutional entities: (I) the regulations shall be amalgamated in one collection; (II) quantitative restrictions shall be added regarding investment in different sectors of the economy and in companies under the same control; (III) the restrictions that apply to transactions with associates shall be tightened. N. Tightening of the investment rules for the insurance companies nostro money: the average duration of life for assets shall correspond with the average duration of life for the liabilities, and maximum rates of exposure shall be set for investing in shares or assets that do not correspond with the nature of insurance companies' liabilities held against those assets. Other provisions of law On March 2, 2009, Control of Financial Services (Provident Funds) (Sale and acquisition of securities) Regulations, , were published. The Regulations place restrictions on the acquisition of securities by institutional investors whose related parties market the securities issue or serve as an underwriter or distributor participating in the issue. Accordingly, the institutional investors are entitled to acquire up to 5% of the quantity of the securities sold in the offering, or up to 10% if the value of the assets managed by the institutional investors together is more than NIS 10 billion. The acquisitions are subject to obtaining the advance approval of two thirds of the outside representatives on the investment committee (until December 31, 2009, these rates are 7.5% and 15% respectively). Moreover, the Regulations prescribe that securities shall be acquired and sold according to a competitive process to take place at least once every three years among at least four participants, and that at an institutional investor may not acquire or sell securities through a related party (until December 31, 2009, an institutional investor may acquire or sell through a related party, provided that the commissions are no more than 20% of all the commissions that the institutional investor paid during the course of the year) On February 25, 2009, the Control of Financial Services (Provident funds) (Government protection for pension savings) Regulations (Temporary Order), were published. The Regulations are designed to protect the money of insureds close to retirement age against investment losses from their savings, against the background of the capital market crisis in Israel and worldwide in 2008, and based on a government decision on this subject from December 14, According to the Regulations, the entitlement to protection is contingent on the following conditions: (1) the member has reached the age of retirement and at least 3 years have elapsed since ("date of the onset of the arrangement"); (2) the member's total pension savings, from all the capital pension sources on the date of the onset of the arrangement, is no more than NIS 1.5 millions; (3) the protected savings (money accrued to the member's credit in an annuity provident fund and in a pension provident fund, excluding a central annuity provident fund, an old fund, and a guaranteed yield provident fund, and from which immediately prior to the effective date he began to receive an annuity) shall be transferred to an annuity paying provident fund or shall remain in an annuity paying provident fund, as the case may be, and shall be used by the member immediately after the date of exercising the arrangement to receive an annuity only; (4) the member has submitted an application and proved his entitlement according to the Regulations. 1-12

15 Board of Directors' Report Three-months period ended March 31, 2009 The protection shall be in the amount of the positive difference, insofar as such exists, on the dates of exercising the arrangement, between the protected amount, linked to the Consumer Price Index known at November 30, 2008 ("the Effective Date"), and the higher of the following (and under no circumstances shall it be higher than the ceiling prescribed in this instance): (a) the protected amount, plus or minus the gross yield credited to the member for the period commencing on the effective date and up to the date of exercising the arrangement; (b) the protected amount plus or minus the difference between indicator index (an index to be published by the Commissioner, based on the weighted average of the gross yields attained by all the annuity provident funds and the pension provident funds in the track in which most of the money is managed), on the date of exercising the arrangement and the indicator index on the effective date. Furthermore, the following conditions were also prescribed: No protection shall be given for money that was withdrawn before the arrangement's exercise date, for money on account of which the member began to receive an annuity before the arrangement's exercise date, or for money that was withdrawn not by way of an annuity after the arrangement exercise date, however it shall be taken into account for the purpose of calculating the pension savings. Exceptions were defined with respect to a person who reaches retirement age before three years have elapsed from the onset of the arrangement and when present such a person shall be entitled to benefit from protection for the money that was withdrawn. One who has reached retirement age and started receiving an annuity from an annuity provident fund after the effective date, and before three years have elapsed from the onset of the arrangement, shall be entitled to protection, with certain changes mandated by the fact that he has already started to receive an annuity on the arrangement's exercise date. No protection shall be given for money that was deposited after the effective date, however it shall be taken into account for the purpose of calculating the total pension savings. Conditions were prescribed, which when met, the arrangement shall apply to a person who reached the age of 67 before the effective date. A management company of provident fund for pension or for annuity shall save the data on the amount accrued in the fund to the credit of each member, at the effective date, for members who by December 13, 2011 are 60 years old, as well as data on the gross yield credited or debited to members, from November 30, The Regulations will be in force until December 13, At this stage it is impossible to estimate the effect of the safety net on the public's behavior or on the Company. The safety net may lower the amount of protected money withdrawn by those entitled to protection, and this should the capital market crisis continue in a manner that the yields actually attained are lower than the minimum yield guaranteed by the safety net. 1-13

16 Board of Directors' Report Three-months period ended March 31, 2009 The information concerning all aspects of the possible repercussions of the safety net on the Company is forward looking information, based on the Group's estimates and assumptions at the date of publishing the report. Actual implementation may differ substantially from the forecast, and this, in part, in view of the changing situation in the markets, choices made by members and policyholders, their conduct, and the supplementary arrangements prescribed in this instance On February 25, 2009, Control of Financial Services (Provident Funds) (Calculating the value of assets) Regulations, , were published. The Regulations prescribe that a financial institution shall calculate the value of the provident fund assets that it manages and of the assets that it manages to cover yield-dependent assets on each business day for the previous day's business, according to the method for calculating the value of the assets defined in the Regulations. Furthermore, it was determined that the value of the assets shall be calculated less a reserve for tax, and for other assets that are not marketable securities - less estimated realization expenses as well. The value of assets from overseas shall be translated into shekels at the representative exchange rate. Assets whose value is to be calculated at the last day of each month were also prescribed. Moreover, the Commissioner may instruct an institutional entity to calculate the value of assets regarding which he believes that a transaction was performed based on non-economic considerations in an effort to improve performance, in a manner that cancels out such improved performance On February 11, 2009, Income Tax (Extension of the payment period to provident funds) (Temporary Order) Regulations, , were published. Pursuant to the Regulations, the date for self-employed members to make deposits in respect of the 2008 tax year for provident funds (including education funds) and life assurance, was extended until the end of February 2009, provided that the member submits an application to this effect to the institutional entity by April 1, Circulars On May 7, 2009, the Commissioner published a circular concerning the transfer of members non-cash rights. Pursuant to the circular, members' non-cash rights may be transferred only if the total assets transferred on that business day from one provident fund to another or from one investment track to another, in a multi-track provident funds, are more than NIS 5 million or more than 1% of the assets of the transferring fund or the transferring track, whichever is lower. The institutional entities' investment committee must establish a detailed work procedure of the way and conditions in which it will transfer members' non-cash rights. The principles of the procedure shall be published on the institution's website. Moreover, before any transfer of members' non-cash rights, the institutional entity's investment manager shall submit a detailed, written proposal to the investment committee regarding the intention to transfer the non-cash rights of members. Within the context of the annual audit plan, the internal auditor shall review the transfer of members' noncash rights On April 5, 2009, the Commissioner published a circular concerning principles for dealing with members who joined the new pension fund management companies during the January - March According to the circular, before May 31, 2009, the new pension fund management companies must contact all the Interim Period Members whose money is managed in a new pension fund without them having chosen this option, and allow them to choose to be insured in the old pension fund that they joined in 1995 or the new fund that manages their money. Any member whose explicit choice is not received at the offices of the new pension fund 1-14

17 Board of Directors' Report Three-months period ended March 31, 2009 management company by June 30, 2009, shall be considered as wishing to be insured in the old pension fund. The circular regulates the dates on which the money is to be transferred, the method of transferring the data and reporting to the members who are to be associated to an old pension fund On February 17, 2009, the Commissioner published a circular concerning an annual report regarding upholding the provisions of the law by a provident fund (formerly Form no.15) - clarification. The circular prescribes that a management company shall submit the report as required in the provisions of the circular, in concentrated form for each class of provident fund that it manages (pension provident funds, severance pay provident funds, education funds, and provident funds for any other purpose). This is in contrast with current practice where the report is submitted for each provident fund separately. Where the management company is required to address a specific fund in the report, its name and number must be included in each relevant clause On February 9, 2009, the Commissioner published a circular concerning the contents of an explanatory document and submitting the document to the customer. The Pension Advice and Marketing Law requires a licensee to tailor the pension advice or marketing to the needs of each customer and to choose the type of pension product, the pension product and the institutional entity most suited to the customer, and this after clarifying with the customer the goals of his savings through the pension product, his general financial situation, his existing savings through pension products and any other circumstances that should be of interest, inasmuch as the customer agrees to provide such information. Moreover, when making the recommendation the law requires the licensee to give the customer, a written document specifying the reasons for its recommendation concerning the reasonability of his savings or those of his relative through a pension product. The draft circular includes details of the method of preparing the explanatory document, the minimum information that it must contain, the time period in which the licensee must keep a copy of the explanatory document and the institutional entity's obligation to receive a copy of the explanatory document that is signed by the customer before he enrolls in the pension product. Moreover, the financial institution must perform random checks regarding customers that have been enrolled by a licensee who is an insurance agent and whether the recruiting process was performed in accordance with the provisions of the circular. The circular will take effect on August 1, Draft circulars On May 13, 2009, the Commissioner published a draft circular concerning a mechanism for collecting management fees. The draft circular prescribes that an institutional entity may collect management fees in consecutive payments at the end of each month or at the end of each business day, as the institution chooses, in line with the current rate of management fees agreed with the member of the insured. For the avoidance of doubt, an institutional entity shall not use a mechanism that is based on a refund of management fees at the end of a period that is longer than a month. The Commissioner and the institutional entities are discussing the draft circular. 1-15