Harel Insurance Investments & Financial Services Ltd

HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD.

Interim Statement As at September 30, 2011

The original language of these Interim Consolidated Statements is Hebrew. The Hebrew version shall prevail over any translation thereof. WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

Contents Page

Condensed Interim Financial Statements at September 30, 2011

Board of Directors' Report on the state of the Company September 30, 2011: 1-1

Auditors' Review 2-2

Condensed Interim Consolidated Financial Statements September 30, 2011 (Unaudited):

Condensed interim consolidated statements on the financial position 2-3

Condensed interim consolidated Statements of comprehensive income (loss) 2-5

Condensed interim consolidated statements of changes in capital 2-7

Condensed interim statements of cash flows 2-12

Notes to the Condensed interim consolidated Financial Statements 2-15

Annex to the Condensed Consolidated Financial Statements: 2-68

Annex A - Harel Insurance Company Ltd. - Details of Assets in respect to yield dependent contracts and other financial investments.

Annex B - Dikla Insurance Company Ltd. - Details of Assets in respect to yield dependent contracts and other financial investments.

Annex C - EMI Ezer Mortgage Insurance Company Ltd. - Details of other financial investments

Financial data from the consolidated statements relating to the Company itself 3-1

Report concerning the effectiveness of internal control 4-1 over financial reporting and disclosure

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

Board of Directors' Report

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Board of Directors'' Report nine -months period Services Ltd ended September 30, 2011

Harel Insurance Investments & Financial Services Ltd.

Board of Directors' Report For the nine months ended September 30, 2011

The Board of Directors' Report for the nine months ended September 30, 2011 ("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 2010 which was published on March 23, 2011 ("the Periodic Report").

The Board of Directors' Report in this chapter of the Periodic Report, also contains forward-looking information, as defined in the Securities Law, 5728-1968. Forward-looking information is uncertain information regarding the future, based on information that the Company has at the time of preparing the report and including the Company's estimates or intentions at the date of 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/the Group estimates", "the Company/the Group believes", "the Company/the Group anticipates", and the like appear, and such forward-looking information may also be worded differently. 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 1982. The Company, together with its subsidiaries ("the Group") operates principally in the following areas: a) In various sectors of the insurance industry, the Company operates through the subsidiaries: Harel Insurance Company Ltd.(wholly controlled) ("Harel Insurance"); Dikla Insurance Company Ltd. ("Dikla"); Interasco Societe Anonyme General Insurance Company S.A.G.I. (in which the Company owns 96.5% stake ("Interasco"), which operates in Greece in non-life insurance; Turk Nippon (in which the Company owns a 99.98% stake), which operates in Turkey; ICIC - Israel Credit Insurance Company Ltd. (ICIC) (in which the Company has a 33.3% stake); and E.M.I. - Ezer Mortgage Insurance Company Ltd. (wholly controlled), ("EMI"). In the long-term savings sector, the Company operates through subsidiaries which are provident funds and pension funds management companies, as follows: Provident funds management companies: Harel Gemel and study Ltd. (wholly controlled) ("Harel Gemel"), Atidit Provident Fund Ltd. (wholly controlled) ("Atidit Gemel"), and the Tzva Hakeva Savings Fund - Provident Funds Management Company Ltd. (wholly controlled) ("Tzva Hakeva"). Pension funds management companies: Harel Pension Funds Management Ltd. (wholly controlled) ("Harel Pension"); Manof Pension Funds Management Ltd. (wholly controlled) ("Manof"); and

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LeAtid Pension Funds Management Company Ltd. (in which the Company has a 79% stake), which manages an old pension fund ("LeAtid"). b) In the financial services and capital market sector, the Company operates through Harel Finance Ltd. ("Harel Finance") (wholly controlled by the Company) and its subsidiaries: Harel Pia Mutual Funds Ltd. ("Harel-Pia"), Harel Finance Securities and Trade Ltd. (which is a stock exchange member), Harel Finance Investments Management Ltd. (has a licensed investment advisor), Harel Financial Products Ltd. ("Harel Products") (which engages in financial products such as: ETFs, 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 ETFs) and through the subsidiary, Harel Sal Currencies Trade Ltd. (formerly: Prisma Currencies Ltd.) ("Harel Currencies"), which is a reporting corporation and issues deposit certificates on different currencies. For details concerning the acquisition of Harel Currencies, see Section 2.1.5 below. The Group has been active in the insurance industry for more than 70 years. According to the financial statements for 2010, the Group is Israel's third-largest Insurance Group, with a market share of approx. 18.5%. In health insurance the Group is the largest and most prominent in the market, in the non-life sectors the Group is the second-largest insurance group, and it holds third place regarding the volume of life-assurance premiums. The Group accounts for approximately 12.4% of the pension funds management market, 7.7% of the provident funds management market, 13.3% of the mutual funds management market and 5% of the ETF market. The Company's own operations center on the management, control and supervision of the subsidiaries, on-going planning of the Group's operations, and the initiating of activity and investments both directly and through the Group's companies.

1.2. Companies share holders The Hamburger family (Yair Hamburger, Gideon Hamburger and Nurit Manor, through a holding company) holds 49.61% of the Company's shares. 2. Financial situation and results of operations, shareholders' equity and cash flow 2.1. Material changes in the Company's business during the Reporting Period 2.1.1. Transaction to acquire real-estate in Germany On September 26, 2011, Harel Insurance together with Ashtrom Properties Ltd. ("Ashtrom"), entered into a transaction to acquire a rental property in Düsseldorf, Germany, with a built area of 19,194 sq.m., which is fully leased to the Ministry of the Environment of the German state of North Rhine, Westphalia for more than 10-years. The investment was made through a foreign partnership in which Ashtrom, through a second- tier subsidiary, holds 51%, and Harel Insurance holds 49% through a subsidiary. Total consideration for the transaction is EUR 44 million. The partnership is financing the acquisition partly from shareholders equity invested in it by Harel Insurance (about EUR 6.5 million) and Ashtrom (EUR 6.8 million), and the balance through a non-recourse bank loan. Completion of the transaction is subject to meeting suspensive conditions, including registering ownership of the property and the Düsseldorf municipality waiving the right of refusal 1- 2

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conferred upon it under German law. 2.1.2. A senior officer who resigned On February 3, 2011, Harel Insurance's Board of Directors approved the conditions of retirement for Mr. Emil Weinshel, who served as senior VP of the chairman and director of the insurance business division, including that the loan in the total amount of NIS 2,750,000 which Harel Insurance set him would repay by Harel Insurance, including the grossing up, and that Mr. Weinshel will receive NIS 1 million (9 times the current monthly salary excluding any social benefits), in return for an undertaking to refrain from competition for a period of 18 months. Subsequent to Mr. Weinshel stepping down from his position, the options he had received expired. After the reporting period Mr. Weinshel informed the company that he intends to become CEO "Ayalon Insurance".Subsequent to this announcement, the Company is expected to hold a meeting with Mr. Weinshel regarding the repercussions of the aforementioned appointment on the settlement of accounts under his retirement agreement. 2.1.3. Dividend from Dikla On March 22, 2011, the board of directors of Dikla resolved to distribute a dividend of NIS 50 million. The decision was made after Dikla's board of directors reviewed its capital surplus and capital requirements, pursuant to Dikla's equity management policy. On September 25, 2011, the board of directors of Dikla resolved to distribute a dividend of NIS 75 million. The decision was made after Dikla's board of directors reviewed its capital surplus and capital requirements, pursuant to Dikla's equity management policy. 2.1.4. Transaction to acquire rights in real-estate in Manhattan On September 21, 2011, subsidiaries of the Company that are financial institutions (hereinafter together: "the Subsidiaries"), entered into agreement to invest indirectly, for their nostro portfolio, in one third of the rights in a partnership that had acquired a commercial property in Madison Avenue, Manhattan, New York in the US. The other partners in the partnership are an American REIT fund ("the REIT fund") and another American investor, each of which will indirectly hold one third of the rights in the partnership. The total cost of acquiring the property by the partnership is USD 66 million. According to the agreements with the financing bank, the REIT fund is the guarantor towards the financing bank for the amounts specified in the financing agreement, in respect of events that are defined in the agreement. If the guarantee is exercised, the financial institutions undertook to inject a further USD 4.6 million into the partnership. 2.1.5. On September 13, 2011, a designated partnership that was established by the Israel Infrastructures Fund ("Israel Infrastructures" ["the Partnership"] and "the Infrastructures Fund", respectively), and which, at the end of 2010, acquired 50% of the shares of Derech Eretz Highways (1997) Ltd., the concessionaire for Highway 6 ("Derech Eretz") entered into agreement with Shikun & Binui Ltd. ("Property & Building") to acquire all Property & Building's holdings and rights in Derech Eretz, including in owners loans that Property & Building had extended to Derech Eretz. The general partner in the Partnership is the Infrastructures Fund's management company, in which Harel Insurance (nostro) holds 40% of the rights. Subsidiaries of the Company that are financial institutions ("the Subsidiaries") hold 28% of the capital rights in the Infrastructures Fund. As the Limited Partner, subsidiaries of the 1- 3

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Company that are financial institutions hold 47%, directly, of the rights in the Partnership. In consideration of the transaction with Property & Building, Israel Infrastructures (the Partnership) will pay Property & Building NIS 773 million, and this amount will be subject to adjustment mechanisms in respect of the period until the completion date of the transaction. Consideration for the transaction with Property & Building was determined taking note of the value of Derech Eretz as reflected in the sale process (tender) in which the State offered to sell the right to receive securities in Derech Eretz, which after exercising the option conferred on the State, will confer 49% of the capital rights in Derech Eretz, rights to a mezzanine loan that was given to Derech Eretz and rights in subordinated loans that were given to Derech Eretz by its shareholders (the "tender process" and "State's rights" respectively), taking note of the amount payable by the state and the outstanding loans extended that Property & Building extended to Derech Eretz. The transaction is subject to meeting several conditions precedent, including obtaining State approval, approval from the entities financing the Highway 6 project, and other relevant regulatory approvals. As part of the transaction, Israel Infrastructures (the Partnership) undertook to ensure that Property & Building, itself or through its associate companies, will carry out the work on future sections of the Highway 6 project, subject to the work being carried out at market prices and to a mechanism prescribed in the agreement and based on the provisions of the existing agreement with the shareholders in Derech Eretz. The subsidiaries' investment in IIF and in the Partnership (Israel Infrastructures) is mostly for their yield- dependent investment portfolios, provident funds and pension funds, and therefore no material impact is expected on the financial performance of the Company or the subsidiaries. Subsequent to the tender for the sale of the State's rights in Derech Eretz, as mentioned above, Derech Eretz announced that it would exercise the right of refusal conferred upon it to acquire the State's rights which are the subject of the tender. Following Derech Eretz's announcement that it would exercise the right of refusal, the State announced that it was rejecting the announcement of the exercising the right of refusal by Derech Eretz. In the wake of the State's announcement, an arbitration procedure was conducted between Derech Eretz, the State of Israel, and the entity that the State had announced as the winner of the tender, in the presence of retired Judge Shalom Brenner), in which Derech Eretz filed a petition to strike out the State's announcement concerning the rejection of Derech Eretz's announcement of exercising the right of refusal. On October 10, 2011, the arbitrator issued a ruling rejecting the claim by Derech Eretz and certifying the State's announcement of the dismissal of the right of refusal by Derech Eretz. Pursuant to the arbitrator's ruling, the State demanded compensation for its expenses and losses. The parties reached a compromise whereby the State would receive payment of NIS 3.5 million as final settlement of its claims for losses and expenses. 2.1.6. Acquisition of Prisma Currencies Ltd On September 11, 2011, a transaction was completed in which Harel Financial Products Ltd., a second-tier subsidiary of the company, (hereinafter in this section: ("the Acquirer") acquired all the issued share capital of Prisma Currencies Ltd. (" "Prisma Currencies"), a company wholly owned by KSM Israeli Index Certificates Ltd. ("the Seller").In consideration of the acquisition, the Acquirer paid the Seller approx. NIS 360,000.

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The following details deposit certificates that Prisma Currencies issued to and are held by the public: 1.Deposit certificates (Series A), that track the US dollar rate (Securities no.: 1111707). 2.Deposit certificate (Series B), that track the Euro rate (Securities no.: 1111715). 3.Deposit certificate (Series D), that track the Norwegian Krone (Securities no.: 1111475). 4.Deposit certificate (Series F), that track the Australian dollar (Securities no.: 1111558). The transaction was financed from independent sources. 2.1.7. Raising of liability notes by Harel Share Issues On August 30, 2011, Harel Insurance Financing and Share Issues Ltd. ("Harel Share Issues"), published a report offering liability notes with a value of NIS 200 million, to be used as complex second-tier capital by Harel Insurance. The offering report was published by virtue of a shelf prospectus published by Harel Share Issues on September 2, 2009, as amended on May 10, 2010, and by virtue of which on May 24, 2010 Series B and E were issued. The offering report was published after obtaining the Commissioner's approval to raise the liability notes as complex second-tier capital. The offering report was published subsequent to the publication by Standard & Poors Maalot ("Maalot"), on August 28, 2011, of an ilAA- rating for the expanded Series E bonds in the amount of NIS 200 million, nominal value. Maalot's rating is for the liability notes that have a delayed payment mechanism and does not refer to the liability notes of Harel Share Issues that was issued in the past and is still in circulation, and that retain an AA rating. On August 31, 2011, Harel Share Issues completed the raising of NIS 200 million nominal value bonds (Series E) by way of an expansion of the aforesaid Series E. The bonds (Series E) were offered to the public in 200,000 units, where each unit consists of NIS 1,000 nominal value bonds (Series E), and all under the conditions specified in the shelf offering and the shelf prospectus. Harel Share Issues received total consideration of NIS 207 million for the bonds (Series E). The consideration received from the issue of the said bonds was deposited with Harel Insurance, and it constitutes complex second-tier capital for Harel Insurance. On November 6, 2011, the Board of Directors of Harel Share Issues resolved to approve Harel Share Issues's intention of filing an application for permission to publish a shelf prospectus, based on the financial statements for the third quarter of 2011 and to inform the ISA in accordance with the ISA's notice concerning the treatment of prospectuses. 2.1.8. Transaction to acquire real-estate in London, UK On August 28, 2011, subsidiaries of the Company that are financial institutions (hereinafter: "the Subsidiaries") entered into agreement to acquire, indirectly, 49% of the rights in an office block in London ("the Property"). The remaining rights in the Property were acquired by another Israeli financial institution and a company specializing in real-estate investments in the UK. The rights were acquired through a corporation in which the subsidiaries hold 49% of the rights, the additional financial institution holds 49% of the rights and the other company (specializing in real estate in the UK) holds 2%.

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The total consideration to be paid by the Subsidiaries for acquiring their share of the Property is GBP 34 million. The Subsidiaries entered into the above transaction principally using funds from reserves held against yield-dependent liabilities and from the provident fund and pension fund portfolios. The transactions are therefore not expected to significantly affect the performance of the Company or the Subsidiaries. 2.1.9. From July 2011, the crisis in the capital markets in Israel and worldwide continued and further deteriorated. The crisis was reflected in a sharp drop in share and bond prices, on the background of the lowering of USA's credit rating and the ongoing crisis in the European Union. At October, 2011, Harel Insurance will be unable to collect variable management fees on yield- dependent policies issued between 1991-2003, until the investment losses in respect of these policies are covered, amount by NIS 97.6 million. In the wake of the capital market crisis in Israel and around the world, during the reporting period the volume of mutual fund assets managed by Harel Pia declined. In addition, money was diverted from the traditional funds that generate management fees, to money-market funds on which most of them do not generate management fees. These trends negatively affected the cash flows expected from mutual fund management activity as against the Company's forecasts that included work to review the value of the goodwill attributed to the activity of the mutual funds at December 31, 2010, which was carried out by an external appraiser. Pursuant to a review that the appraiser conducted after the reporting period and the management fees cash flow, these trends do not necessitate a write down of the balance of the amortized cost of the mutual funds asset presented in the company's books. 2.1.10. On August 4, 2011, Standard & Poor's Maalot announced affirmation of the ilAA (negative) rating for EMI, a wholly owned subsidiary of Harel Insurance. This affirmation is further to a rating of ilAA (negative) given to EMI on May 30, 2010. 2.1.11. Acquisition Real estate in the United States On August 3, 2011, subsidiaries of the Company that are financial institutions (hereinafter together: "the Subsidiaries"), entered into an agreement to acquire a residential project in Jackson, New Jersey (" the Project"), through a Limited Liability Company (" LLC") in which the subsidiaries hold (indirectly, through a partnership corporation), 45% of the interests. The remaining 55% of the interests in the LLC are held by an American partner (45%) and Gaia Real Estate (10%), which will manage the project . The Project is to be acquired for USD 44 million (equity and external debt ).

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The Subsidiaries' share of the aforementioned transaction was financed principally from the reserves held against yield-dependent obligations (profit-sharing policies) of Harel Insurance, from yield-dependent reserves held by Dikla, and from the provident fund and pension fund portfolios. Consequently, these agreements are not expected to significantly impact the performance of the Company and/or the Subsidiaries. 2.1.12. Acquisition Real estate in the Netanya On July 4, 2011, subsidiaries of the Company that are financial institutions (hereinafter together: ("the Subsidiaries"), entered into a transaction with Blue Square Real Estate Ltd. ("BSRE") in connection with the acquisition of BSRE's interests in a commercial center that is under construction, including office and commercial space, in the Kiryat Hasharon neighborhood in East Netanya ("the Commercial Center"). As part of the transaction, the parties signed a sale agreement and a cooperative agreement in which the Subsidiaries are to acquire from BSRE 50% of the rights in the land and in the commercial center, which as noted is under construction and will be jointly owned by BSRE and the Subsidiaries. The partnership agreement arranged the relationship between the parties as joint owners of the Project, including bearing the cost of the design, erection, marketing, management and operating costs of the commercial center, in equal parts. The Subsidiaries are expected to invest NIS 81.5 million in the project, where about half of the investment is for the nostro portfolio and the balance is for members' portfolios. 2.1.13. Pension arrangement for career soldiers serving in the IDF On June 22, 2011, the relevant IDF entities informed the Company that subsidiaries of the Company had been selected as recommended companies by the IDF in an IDF procedure (through entities acting on its behalf) to choose an entity to manage the default pension insurance plan for IDF career soldiers. Pursuant to the provisions of the law, the entity who approves the agreement is the Minister of Defense, with the consent of the Minister of Finance. According to the information received by the subsidiaries, the IDF's recommendation was approved by the Minister of Defense, and implementation is now subject to the consent of the Minister of Finance. The pension arrangement which is the subject of the procedure consists of a combination of pension and insurance products, consistent with the outline defined by the IDF. The transaction is expected to consist of a lump sum deposit of hundreds of millions of shekels as well as on-going deposits of additional hundreds of millions of shekels each year. As this is a unique pension arrangement, despite the scope of the transaction it is not expected to have a significant impact on the Company's financial results in coming years. 2.1.14. On June 12, 2011, the Commissioner informed Harel Insurance of its intention to impose a civil fine, due to an alleged violation of the Commissioner's ruling in connection with the way in which insureds are enrolled in several group policies during the period 2009-2010. This method of enrollment was practiced before the regulations concerning group health insurance took effect, regulating the way in which insureds are enrolled in group health insurance policies. At discussions held with the Commissioner, it was emphasized that this mistake was made in good faith. On August 22, 2011 Harel Insurance received the Commissioner's decision, according to which the amount of the fine imposed on Harel Insurance is NIS 1.6 million.

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2.1.15. distribution of dividend On May 26, 2011, the Company's Board of Directors decided to distribute a dividend of NIS 42.4. The decision of the board of directors was reached after the financial results of the Company for the Reporting Period was presented before it and was taken under consideration. The board of directors was presented with surpluses that were suitable for distribution by the Company as of March 31, 2011, at the sum of approx. NIS 3.6 The board of directors examined the Company's net profit criteria and the solvency criteria as prescribed in Section 203 (A) to the Companies Law and following this examination it approved the compliance of the Company with the criteria for distribution. On March 23, 2011, the Company's Board of Directors decided to distribute a dividend of NIS 64 million. The decision of the board of directors was reached after the financial results of the Company for the year 2011 was presented before it and was taken under consideration. The board of directors was presented with surpluses that were suitable for distribution by the Company as of December 31, 2010, at the sum of approx. NIS 3 billion. The board of directors examined the Company's net profit criteria and the solvency criteria as prescribed in Section 203 (A) to the Companies Law and following this examination it approved the compliance of the Company with the criteria for distribution. The distribution of dividends was carried out on April 28, 2011. 2.1.16. Approval of an internal credit rating model On May 15, 2011, the Commissioner authorized Harel Insurance's use of an internal credit rating model that was developed by Harel Insurance. This model will serve Harel Insurance's and other financial institutions in group. According to the terms of the authorization, the rating under the internal model shall be construed as a rating that corresponds with a rating company's rating from the risk perspective. At this stage, the authorization is in force until December 31, 2012. The authorization is subject to meeting the following conditions: (a) The rating is valid for evaluating credit given to companies, excluding credit given to banks, insurance companies, credit backed by an underlying asset and credit for project financing; (b) the internal model will be used within the context of the structure, methodology and procedures presented by way of the model review process; (c) any significant change in the structure of the model must be approved in advance by the Commissioner; (d) rating according to model shall not be used for determining the rate of capital required on account of a credit risk. Furthermore, the authorization prescribes provisions concerning immediate and periodic reports that Harel Insurance must submit to the Commissioner in connection with the ratings. 2.1.17. Allocation of options to Employees On April 28, 2011 the board of directors of the Company decided to publish an outline for a securities offering to employees in accordance with the Securities Regulations (outline details of securities offering to employees) 5770 - 2000 and the Securities Regulations (private offering of securities in a registered company) 5770 - 2000. The outline plan is based on the outline plan published by the Company on June 4, 2009. The outline plan is for an allocation of up to 250,000 option notes for the exercise of up to 250,000 shares par value NIS 1 each of the Company. Pursuant to the outline plan ,on May 26 2011, after first obtaining approval from the Company's Compensation Committee, the Company's Board of Directors approved an allotment of 161,924 stock options to 13 recipients, with an exercise price of 161,924 shares par value NIS 1 each.

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The options can be exercised according to the closing price of the Company's shares on the TASE, immediately prior to the Board of Directors decision, that is – NIS 172.5 per share. The fair value of the stock options allocated in the allotment is estimated at NIS 9.6, taking into account the possibility that some recipients may terminate their employment at an earlier date (excluding the Group's senior executives). The economic value of each stock option offered to the recipients, with an exercise price of 172.5 linked to the CPI, as set by the Board of Directors, is NIS 59 on the date of the allotment, May 26, 2011. The value of the stock options will be charged as an expense in the Company's financial statements, over the anticipated vesting period of the options from the year of 2011. Pursuant to the outline plan, which was published by the Company on may 25, 2010, on March 15, 2011, after first obtaining recommendation from the Company's Compensation Committee, the Company's Board of Directors approved an allotment of 47,047 stock options to 11 recipients. The options can be exercised according to the closing price of the Company's shares on the TASE, immediately prior to the Board of Directors decision, that is – NIS 191.6 per share. The fair value of the stock options allocated in the allotment is estimated at NIS 2.8 million, taking into account the possibility that some recipients may terminate their employment at an earlier date (excluding the Group's senior executives). The economic value of each stock option offered to the recipients, with an exercise price of NIS 191.6 linked to the CPI, as set by the Board of Directors, is NIS 60 on the date of the allotment, March 15, 2011. The value of the stock options will be charged as an expense in the Company's financial statements, over the anticipated vesting period of the options, from the beginning of 2011. 2.1.18. License to engage in life assurance – Dikla Insurance Company In March 2011 Dikla's insurer's license was extended to include life assurance – pure risk only. Likewise, Dikla received approval for two insurance plans in the life assurance (risk) branch . Dikla began to market these plans soon after they were approved. The premiums earned to date in respect of pure risk life insurance policies are negligible. 2.1.19. Agreement and partnership agreement to acquire land in Tel-Aviv. On January 27, 2011, subsidiaries of the Company that are financial institutions (hereinafter together:" the Subsidiaries"), together with companies that belong to the Migdal Group and other private investors ("Private Investors"), entered into an agreement to acquire the rights in respect of a plot of land with a registered area of 20,000 sq.m. located between Yigal Alon Road on the west and Hasolelim Street to the east in Tel Aviv (the Purchase Agreement and the Ha'argaz Lot), from Ha'argaz Ltd. (Ha'argaz). At the time of signing the Purchase Agreement, Migdal Group, the Subsidiaries and all the purchasers and owners of the rights in the southern tower (the "Purchase Group"), signed a cooperation agreement arranging the partnership relationship between the members of the Purchase Group (the "Partnership Agreement)". As part of the Partnership Agreement, the Subsidiaries together with the Migdal Group, acquired among themselves in equal parts, all the office space in the northern tower and the adjacent shops, the public car park, as well as the commercial section (excluding an area of 1,580 sq.m. on the eastern side) of the project. Two buildings, each with 38 floors of office space and 83,000 sq.m. of floor space, are planned for the Ha'argaz Lot, above a double commercial floor with 6,250 sq.m. of space, as well as 1- 9

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37,000 sq.m. of service areas above an underground car park with 4 or 5 levels and an area of 70,000 sq.m. for parking and other auxiliary space (the Project). The Subsidiaries intend to invest NIS 310 million in the purchase and construction of their share of the Project. The Subsidiaries will finance their share of the purchase and construction of the Project from independent sources. Period The Subsidiaries' investment is mostly for yield-dependent investment portfolios, provident funds and pension funds, and therefore the transaction is not expected to have any material impact on the financial performance of the Company or the Subsidiaries. 2.1.20. As specified in Section 1.1.5.3.21 of the Periodic Report, Chapter 1, on July 20, 2008, the Commissioner and Clalit Health Services ("Clalit") reached agreement on the sale of Clalit's holdings (35% indirectly) in Dikla. In addition, agreement was reached whereby by August 1, 2011, Clalit will hold a tender in respect of the group long-term care insurance of Clalit's customers who have been insured by Dikla since 1998. Pursuant to the aforementioned agreement between the Commissioner and Clalit regarding the tender for long-term care insurance, Clalit expects to publish a tender for the group long-term care insurance policy "Siudi Mushlam" in the near future. Due to the fact that the collective insurance agreement that was renewed in July 2010 ended on July 31, 2011, an agreement was signed between Clalit and Dikla to extend the collective insurance until January 1, 2012. Subsequently, Clalit and Dikla predicted to sign an agreement concerning an extension of the agreement until May 31, 2012, in which Clalit has the right to curtail the commitment period by giving 60 days advance notice. Likewise, an agreement is predicted to sign regulating the method of handling outstanding claims and the reserve assets for the benefit of the members, after the end of the policy period. 2.2. Material changes in the Company's business after the Reporting 2.2.1. Harel Share Issues On November 6, 2011, the Board of Directors of Harel Share Issues resolved to prepare to submit a draft shelf prospectus to the ISA, based on the financial statements at September 30, 2011. To submit this draft shelf prospectus, on November 24, 2011, the Board of Directors of Harel Insurance re-approved the financial statements of Harel Insurance at December 31, 2010, so that they could be included in the draft shelf prospectus. Likewise, the Board of Directors of Harel Share Issues re-approved the financial statements at December 31, 2010 and September 30, 2011. At the date of the report, there is no intention of raising any more money based on the shelf prospectus. 2.2.2. Transaction with syndicate Broadgate of Lloyd's On November 15, 2011, the Board of Directors of Harel Insurance approved an agreement with syndicate 1301 of Lloyd's (the Broadgate syndicate) whereby Harel Insurance will take a 10% share of Broadgate's insurance portfolio in the 2012 underwriting year. According to the business plan presented to Harel, during the 2012 underwriting year, Broadgate is expected to have premiums of NIS 600 million, and accordingly the share of Hare Insurance is expected to be NIS 60 million. As part of the transaction, Harel Insurance will be required to provide a bank guarantee of GBP 1- 10

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7 million in favor of Lloyd's. The transaction with Broadgate is not expected to significantly affect the performance of Harel Insurance or the Company. 2.2.3. Ratification rating On November 14, 2011, Maalot published a report affirming the rating of Harel Insurance and of subordinated liability notes issued by Harel Share Issues. Following are the ratings affirmed by Maalot: Rating for Harel Insurance: ilAA+ (stable) Rating for subordinated liability notes issued by Harel Share Issues in November 2006 and that serve as Tier-2 capital for Harel Insurance: ilAA Rating of subordinated liability notes, with a mechanism for postponing interest and principal, that were first issued in May 2010, were expanded in July 2010 and expanded again in September 2011, and which serve as complex Tier 2 capital by Harel Insurance. ilAA-. 2.2.4. MF Global On November 1, 2011, bankruptcy proceedings were initiated against MF Global, a company that engages, through a subsidiary, in brokerage in securities overseas. Harel Finance Securities & Trade Ltd. ("Harel Trade & Securities"), a second-tier subsidiary of the Company, acted for its customers vis-à-vis MF Global in futures contracts overseas and traded in European shares. Due to the insolvency proceedings, all of MF Global's activities have been frozen, including the withdrawing of money and securities from its accounts. Immediately before the insolvency proceedings began, at the instruction of its customers Harel Trade & Securities closed its positions on futures contracts and managed to release the collateral in respect of the positions and to withdraw most of the money from MF Global. The outstanding exposure of Harel Trade & Securities and its customers to MF Global is NIS 11 million in cash and NIS 1.7 million in shares (including amounts that Harel Trade & Securities asked to withdraw before the bankruptcy proceedings began and which it has not yet received). At this point in time, Harel Trade & Securities is unable to estimate whether these exposed amounts will be paid, when they will paid and at what rate. 2.2.5. Transaction to acquire real-estate in the US On October 2, 2011, subsidiaries of the Company that are financial institutions (hereinafter together: "the Subsidiaries"), entered into agreement together with Elco Landmark Residential ( "ELR"), a member of the Elco Holdings Group Ltd., and a foreign investor ( "the foreign investor") in a transaction to acquire real-estate assets in three stages ( "the Portfolio"). The Portfolio consists of 5,659 residential units in 18 housing clusters spread around the south-east USA . The property is being acquired through companies in which the subsidiaries hold (indirectly, through corporations that are partnerships) 39% of the interests. The rest of the interests in these companies are held by the foreign investor (39%) and ELR (22%), which will also manage the project . 1- 11

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The total cost of acquiring the portfolio is USD 340 million. The Subsidiaries are expected to invest USD 45 million . The first stage of the transaction to acquire 1,726 residential units, which include 6 of the 18 clusters, in consideration of USD 106 million, was completed on September 28, 2011. The Subsidiaries' share of the equity invested in acquiring the first stage is USD 14 million . The Subsidiaries' share of the aforementioned transaction was financed principally from the reserves held against yield-dependent obligations (profit-sharing policies) of Harel Insurance, from yield-dependent reserves held by Dikla, and from the provident fund and pension fund portfolios. Consequently, these agreements are not expected to significantly impact the performance of the Company or the Subsidiaries. 2.2.6. General meeting On November 3, 2011, the Company's Board of Directors resolved to convene a special annual general meeting (AGM) on December 8, 2011. The following items will be on the agenda: (a) discussion of the Periodic Report for 2010; (b) reappointment of the auditing CPA – Somekh Chaikin (KPMG); (c) reappointment of the directors serving the Company; (d) the appointment of Prof. Israel Gilad as an external director of the Company; (e) approval of payment of a bonus to Mr. David Granot, who serves as an external director of the Company, for his service as Chairman of the Non-yield Dependent Investments (Nostro) Committee and Chairman of the Credit Committee of the Harel Group's financial institutions; (f) amendment of the Company's articles so that they comply with the provisions of the sixteenth amendment to the Companies Law; (g) approval of revised indemnity notes for the Company's senior officers; (h) approval of the purchase of D&O insurance policies by Harel Insurance; (i) re-approval and revision of the terms of employment of Mr. Yair Hamburger, Chairman of the Company's Board of Directors, Mr. Gideon Hamburger, a Company director, and Mr. Yoav Manor, a director of the Company; (j) reappointment of Mr. David Granot, as an external director of the Company. The following details resolutions passed by the Company's Audit Committee and Board of Directors in connection with the above material issues:

2.2.6.1. Amendment of the Company's articles and revision of the indemnity notes

On March 15, 2011, the sixteenth amendment to the Companies Law was published which addresses, inter alia, various subjects relating to the corporate governance of companies, and in view of which various amendments must be made to the Company's articles so that they comply with the Companies Law .

In January 2011, the Administrative Enforcement Law was published which, inter alia, allows the Israel Securities Authority, to enforce the provisions of the Securities Law through various proceedings, including to impose various sanctions on the senior officers and directors of a company. Among other things, the Administrative Enforcement Law stipulates that despite the prohibition prescribed on insuring and indemnifying a senior officer in respect of monetary sanctions or fines that are imposed within the framework of administrative enforcement, a person can be insured or indemnified in respect of the following two categories of payment: (1) payment to compensate victims of 1- 12

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a violation of the Securities Laws imposed as part of an administrative enforcement procedure; (2) expenses incurred by a person in connection with an administrative enforcement procedure conducted in respect of his affairs, including reasonable litigation expenses and including lawyers' fees. The indemnity may also be given by way of giving an advance undertaking. To enable the Company to insure or indemnify the aforementioned senior officers, the Company's articles must be amended to include the possibility of giving such insurance and indemnity.

Pursuant to a resolution of the Company's general meeting on July 12, 2006 (after being approved by the Audit Committee and Board of Directors), from time to time the Company gave its senior officers indemnity notes according to which it undertook to provide indemnity in respect of the matters specified therein, and subject to conditions stipulated therein, where the amount of the indemnity is limited to 20% of the Company's equity according to the last financial statement published prior to the actual date of payment of the indemnity, and this to the senior officers severally and together, for an individual case and in aggregate ("the Existing Indemnity Notes").

Subject to the approval of the proposed amendments to the Company's articles, a recommendation is to be presented to the general meeting to adopt amended indemnity notes, without any change in the limit of the Company's liability, for the senior officers currently serving the Company and those who may serve the Company from time to time (including senior officers who are deemed controlling shareholders or their relatives, as well as senior officers where a controlling shareholder of the Company may be construed as having a personal interest in granting them indemnity notes), the provisions of which correspond with the subjects and matters in respect of which the Company may indemnify its senior officers in accordance with the Administrative Enforcement Law .

The conditions of the revised indemnity note were defined after discussions held during meetings of the Company's Audit Committee and Board of Directors. The revised indemnity note prescribes the maximum amount of indemnity that the Company may incur, 20% of its shareholders' equity, based on the last financial statements published prior to the actual date of payment of the indemnity, and this for the senior officers severally and together, for an individual event and in aggregate, after this maximum amount was found to be reasonable, taking into account the Company's activity, and the scope and complexity of its business. The provisions of the indemnity note the approval of which is on the agenda of the general meeting, are consistent with the voting policy of the Group's companies that hold shares in companies reported on the TASE, when voting on the indemnity notes of other companies.

2.2.6.2. Directors and Officers [D&O] liability insurance policy

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to increase the limits of cover in the policy so that the new cover will be for USD 120 million per event and in aggregate for the policy period, provided that the annual premium is up to USD 1 million, and that the policy will include cover for risks that may be insured under the enforcement powers law.

The D&O liability insurance for the Company and the other companies in the Harel Investments Group may be renewed from time to time (either by extending the validity of the insurance policy mentioned above, or by entering into agreement in another policy, or by entering into agreement with another insurer), provided that the following conditions are met:

(a) The limits of liability under the policy shall be no more than USD 150 million per event and combined per policy period, the annual premium shall be no more than one million US dollars, and the Company's Board of Directors and Audit Committee must approve the policy and determine that the annual premium is at market conditions.

(b) This resolution shall remain in force for 4 years (from the time that the policy is first renewed according to this decision).

This decision constitutes a master resolution, as defined in the Companies (Easements in Transactions with Principal Shareholders) Regulations, 5760- 2000, allowing the insurance for directors and officers who are principal shareholders in the Company to be renewed, in line with the conditions specified above.

2.2.6.3. Approval of compensation for Mr. David Granot

Mr. David Granot is an external director of the Company and also serves as Chairman of the non-yield dependent investments committee (Nostro) for the Harel Group's financial institutions and Chairman of the Credit Committee of the Harel Group's financial institutions.

For serving as an external director, Mr. David Granot is entitled to compensation based on the Companies (Rules Regarding the Remuneration and Expenses for an External Director) Regulations, 5770-2000 ("the Compensation Regulations").

For Mr. David Granot's service as Chairman of the Nostro Investments Committee and Chairman of the Credit Committee of the Harel Group's financial institutions, positions that demand many hours of work and the attending of frequent meetings, as prescribed in the provisions of law that apply to the financial institutions, the Audit Committee and Board of Directors, subject to the approval of the general meeting, approved payment of monthly remuneration of NIS 30,000. This amount is linked to the increase in the Consumer Price Index.

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2.2.6.4. Re-approval of the terms of employment of Mr. Yair Hamburger

Pursuant to the recommendations of the Compensation Committee and a resolution passed by the Audit Committee and the Board of Directors, and subject to the approval of the general meeting, as of December 1, 2011, Mr. Yair Hamburger will receive a monthly salary of NIS 145,000, index linked. Mr. Yair Hamburger committed himself to an employment period of at least 5 years. Likewise, Mr. Yair Hamburger made a no-competition undertaking for a period of 36 months from the termination of his employment by the Company.

In addition, Mr. Yair Hamburger is entitled to fringe benefits, including:

(a) provision for generally accepted social benefits; (b) education fund; (c) thirteen monthly salaries per year; (d) reimbursement of expenses; (e) phones at the Company's expense; (f) newspapers; (g) a vehicle at a cost of up to NIS 650,000, linked to the index (should he choose to buy a more expensive car, he will bear the balance of the cost). Cost of the car maintenance, including the tax charged for use of the vehicle, will be paid by the Company; (h) convalescence pay; (i) 22 vacation days a year; (j) 30 days sick leave.

Mr. Yair Hamburger will be entitled to an annual bonus for each year as of 2012 that is no more than 9.6 salaries and is calculated on the basis of the Company's performance for the last three years, with the current year given weight of 67% and the two previous years will be weighted equally (although in the first two years of applying the parameters, weight will only be given to the period commencing December 1, 2012). The parameters for calculating the bonus are based on the parameters prescribed for the CEO of Harel Insurance.

Subject to completing the 5-year employment period at least, upon terminating his employment for the Company, Mr. Yair Hamburger will be entitled to double severance pay, i.e. an additional 100% compensation (over and above the compensation stipulated by law). If the employment period is terminated before the five years end, but after May 1, 2014, the Audit Committee may approve payment of up to 50% of the additional severance pay for Mr. Yair Hamburger.

Summary of the reasons given by the Audit Committee and the Board of Directors for approving the agreement: (a) as Chairman of the Company's Board of Directors, Yair Hamburger is involved in and directs most of the Group's significant business decisions, its business development, embarking on new areas of activity, its business relations with customers and agents, and he is involved in investment activity. Thanks to Yair Hamburger's connections and central role in Israel's capital market, the Group benefits from numerous business opportunities; (b) his years of experience in this field and his acquaintance with the Company, its business and its customers are extremely valuable for the Company and its business success; (c) Mr. Yair Hamburger's terms of employment were approved by the general meeting of the Company many years ago (on July 23, 1995) and they have not been updated since. In 2010, the total cost of Yair Hamburger's employment was NIS 1.9 million, less 1- 15

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than the generally accepted amount when considering his positions in the Group and taking into account accepted standards among officeholders in corresponding positions; (d) during the course of the discussions on this subject, based on the desire to compensate Mr. Yair Hamburger and give him the incentive to continue to work for the development and dominance of the Group, to improve the Group's profits and achieve targets in this period of challenges in the insurance and finance markets, the following information and parameters were taken into account: (i) a comparison of the proposed remuneration with the generally accepted conditions of compensation for senior officers within the Harel Group; (ii) details of the conditions of the employment agreement; (iii) comparable figures for the chairmen and CEOs of other insurance companies, other financial institutions (where possible, based on their reports to the public), and other public companies, and; (iv) figures on the scope of the proposed comprehensive remuneration for the chairman and its financial repercussions, including provisions made in respect of the remuneration. Within the context of these comparative data, the bonus and other salary components were taken into account; (e) the discussions also considered the fact that the proposed employment conditions do not include a capital component, advance notice beyond that required by law, or an acclimation period, as generally accepted for senior executives. Likewise, the approval took into account the fact that the parameters for payment of the bonus are based on the compensation policy determined for the Company's senior officers, although without the discretion component, thus reducing the possibility of receiving the fullest possible bonus; (f) based on all the above, and in view of his importance and centrality to the Company, the Compensation Committee formulated the compensation proposal for Mr. Yair Hamburger. The Audit Committee and Board of Directors adopted the Compensation Committee's recommendation and determined that the remuneration is reasonable and fair, taking note of Mr. Hamburger's position in the Company and that it meets market conditions when compared with the relevant comparison group. Similarly, it was determined that the compensation is consistent with the compensation plan, it is for the Company's benefit and advances the Company's goals, achieves an appropriate balance between the bonus and fixed salary components, thus avoiding a conflict with the Company's best interests. The compensation is therefore reasonable, adequate and consistent with Mr. Yair Hamburger's contribution to the Company's performance, both in the short and longer term, and it offers Mr. Hamburger the appropriate incentive to continue to realize the ambitious goals set by the Company in its work plan in forthcoming years as well. In light of the review of the compensation paid to the chairmen and CEOs of corresponding companies, the Audit Committee and the Board of Directors determined that the proposed compensation is consistent with market conditions, as applied by prominent insurance and finance companies.

2.2.6.5. Re-approval of the terms of employment of Mr. Gideon Hamburger

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Mr. Gideon Hamburger committed himself to an employment period of at least 3 years. Likewise, Mr. Gideon Hamburger made a no-competition undertaking for a period of 36 months from the termination of his employment by the Company.

In addition, Mr. Gideon Hamburger is entitled to fringe benefits, including:

Mr. Gideon Hamburger will be entitled to an annual bonus for each year as of 2012 that is no more than 7.2 salaries and is calculated on the basis of the Company's performance for the last three years, with the current year given weight of 67% and the two previous years will be weighted equally (although in the first two years of applying the parameters, weight will only be given to the period commencing December 1, 2012). The parameters for calculating the bonus are based on the parameters prescribed for the CEO of Harel Insurance.

Subject to completing the 3-year employment period at least, upon terminating his employment for the Company, Mr. Gideon Hamburger will be entitled to double severance pay, i.e. an additional 100% compensation (over and above the compensation stipulated by law).

Summary of the reasons given by the Audit Committee and Board of Directors for approving the agreement: (a) Gideon Hamburger has knowledge, experience and unique business relationships in the reinsurance, industry and thanks to his experience and connections the Harel Group has entered into unique reinsurance arrangements and collaborates with reinsurers and multi-national insurance companies. Thanks to these ties, Harel is able to offer its business customers policies with special categories of cover and it therefore benefits from significant competitive advantages. In addition to consulting and support in forging relationships for the reinsurance sector, Gideon Hamburger has business ties with most of the Harel Group's business customers which are a key factor in the Group's reputation and growth. It is these ties that form the basis for customers maintaining long-term business relationships with Harel; (b) during the course of discussions on this subject, due to the desire to compensate Mr. Gideon Hamburger and provide him with the incentive to continue to work for and develop the Group's success, to increase the Group's profits and achieve its targets during this period of challenges in the insurance and finance markets in general, and confront a highly competitive market in which obtaining reasonable insurance cover from reinsurers directly affects the range of products, their price, and the ability to enter into significant insurance transactions, as well as to meet the Company's capital requirements and manage its risks, the following data and parameters were taken into account: (i) a 1- 17

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comparison of the proposed remuneration with the generally accepted conditions of compensation for senior officers within the Harel Group; (ii) details of the conditions of the employment agreement; (iii) a list of comparative data for senior executives in the third and fourth ranking among the five highest-paid in the corporation, with respect to other insurance companies, other financial institutions (where possible, based on their reports to the public), and other public companies, and; (iv) figures on the scope of the proposed comprehensive remuneration and its financial repercussions, including provisions made in respect of the remuneration. Within the context of these comparative data, the components of the bonus and the other salary components were also taken into account; (c) during the course of the discussions, the fact that the proposed employment conditions do not include a capital component, advance notice beyond that required by law, or an acclimation period, as generally accepted for senior executives, were taken into account. Likewise, the approval also took into account the fact that the parameters for payment of the bonus are based on the compensation policy prescribed for the Company's senior officers, but excluding the discretion component thus reducing the possibility of receiving the fullest possible bonus; (d) based on all the above, and in view of his importance and centrality to the Company, and the importance of maintaining the special business relationships and ties with the reinsurers, which are a material asset of the Group, and its ability to effectively manage capital, its ability to effectively manage risks, the Compensation Committee formulated the compensation proposal for Mr. Gideon Hamburger, as specified below, and determined that the proposed compensation is reasonable and fair taking note of Mr. Gideon Hamburger's contribution to the Group, and that it is consistent with market conditions, when compared with the relevant comparison group – mainly recipients of executive ranked in third and fourth place among recipients of the highest salaries in comparable corporations. Similarly, it was determined that the compensation is consistent with the compensation plan, it is for the Company's benefit and advances the Company's goals, achieves an appropriate balance between the bonus and fixed salary components, thus avoiding a conflict with the Company's best interests. The compensation is therefore reasonable, adequate and consistent with Mr. Gideon Hamburger's contribution to the Company's performance, both in the short and longer term, and it offers Mr. Hamburger the appropriate incentive to continue to realize the ambitious goals set by the Company in coming years as well; (e) in view of the review of the compensation paid to third and fourth ranking officeholders among the highest-paid executives in relevant, comparable companies, the Compensation Committee determined that the proposed compensation is consistent with market conditions, as generally accepted among leading insurance and finance companies.

2.2.6.6. Re-approval of the terms of employment of Mr. Yoav Manor

Pursuant to the recommendations of the Compensation Committee and a resolution passed by the Audit Committee and the Board of Directors, and subject to the approval of the general meeting, as of December 1, 2011, Mr. Yoav Manor will receive a monthly salary of NIS 115,000, index linked. Mr. Yoav Manor committed himself to an employment period of at least 3 years. 1- 18

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Likewise, Mr. Yoav Manor made a no-competition undertaking for a period of 36 months from the termination of his employment by the Company.

In addition, Mr. Yoav Manor is entitled to fringe benefits, including:

Mr. Yoav Manor will be entitled to an annual bonus for each year as of 2012 that is no more than 7.2 salaries and is calculated on the basis of Harel Hamishmar Computers L.T.D performance (70% ) and the Company's (30%) performance for the last three years, with the current year given weight of 67% and the two previous years will be weighted equally (although in the first two years of applying the parameters, weight will only be given to the period commencing December 1, 2012).

Subject to completing the 3-year employment period at least, upon terminating his employment for the Company, Mr. Yoav Manor will be entitled to double severance pay, i.e. an additional 100% compensation (over and above the compensation stipulated by law).

Summary of the reasons given by the Audit Committee and the Board of Directors for approving the agreement: (a) In addition to serving as a director, Yoav Manor deals with diverse technology and automation issues as well as areas that are not technology related, including the assimilation of advanced management processes that utilize the knowledge accumulated by the Company as an available asset for helping to make educated business decisions. This takes place at all levels of management and in all the decision-making processes at different levels of the different areas of activity; (b) In the technology field, Yoav Manor is the acting chairman of Harel Hamishmar. Although his position at Harel Hamishmar is defined as chairman as not CEO, in practice Yoav is the driving force and manager who directs Harel Hamishmar's daily operations; (c) naturally, as a large financial institution incorporating numerous institutional entities and entities involved in the capital market, and as an entity whose insurance activity is the outcome of a number of mergers that have taken place over the years, the automated systems are complex and require professional and efficient management, in part due to the high costs of this area of activity, the numerous regulations and the need to provide the Group's companies with advanced tools capable of giving it a competitive edge over other players in their markets; (d) as part of his activity in the non-technology fields, thanks to Yoav Manor's experience in the insurance industry and the senior management positions he has held in the insurance and finance industries, Yoav directs other issues in addition to those mentioned, including assimilating the use of the existing information among the Group's companies and turning it into the key 1- 19

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basis for educated decision making. Within the Group, Yoav directs the training and assimilation of the decision-making culture, utilizing data analysis capabilities among employees and the decision makers of the Company and its agents. Yoav's considerable activity in this field has helped ensure that advanced control systems and decision support systems (BI) are an inseparable part of the Group's daily business conduct and frequently provide the Harel Group with a business advantage. As the person responsible for "new world" applications – the internet (in the business as well as in the technology context), Yoav gives expression to his considerable experience in the management of agents and customers, a fact that shortens the implementation and assimilation process and focuses the development of applications for the convenience and effectiveness of customers and agents, thus supporting the attaining of the Company's goals; (e) during the discussions held on this subject, based on the desire to compensate Mr. Yoav Manor and provide him with the incentive to continue to work for the Group's development and success, to improve profits and realize goals, all during this period of challenges in the insurance and finance markets in general, and to confront the competitive market in which technological capabilities directly affect the quality of products, the quality of customer service, the quality of service to agents, and the ability to comply with the frequent changes taking place in the markets in which the Group operates, the following data and parameters were taken into account: (i) a comparison of the proposed remuneration with the generally accepted conditions of compensation for senior officers within the Harel Group; (ii) details of the conditions of the employment agreement; (iii) a list of comparative data for the 3-4 highest-ranking executives among the five highest-paid in the corporation, with respect to other insurance companies, other financial institutions (where possible, based on their reports to the public), and other public companies, and; (iv) figures on the salaries paid to CEOs and chairmen of technology companies and the most senior executives employed in the information systems of banks and financial institutions, taking note of the fact that Yoav Manor's position is not limited to the technology and computer field; (v) figures on the scope of the overall proposed remuneration and its financial repercussions, including provisions made in respect of the remuneration. Within the context of these comparative data, the bonus and other salary components were also taken into account; (f) during the course of the discussions, the fact that the proposed employment conditions do not include a capital component, advance notice beyond that required by law, or an acclimation period, as generally accepted for senior executives, were also taken into account. The fact that the parameters for paying the bonus are based on the compensation policy determined for the Company's senior officers was also taken into account; (g)based on all the above, and in view of the importance and centrality of Mr. Yoav Manor to the Group, and the importance of maintaining the special and extraordinary technical and computer capabilities and business work processes that Yoav has attained for the Group that form an important part of the Group's competitive capability among customers and agents alike, the Compensation Committee formulated the compensation proposal for Mr. Yoav Manor, as detailed below, and determined that this compensation is reasonable and fair, taking note of his positions in the Group, and that it is consistent with market conditions and when compared with the relevant comparison group which is mainly the third and 1- 20

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fourth highest-ranking officeholders among the highest-paid executives in corporations that are relevant for the comparison. Similarly, it was determined that the compensation is consistent with the compensation plan, it is for the Company's benefit and advances the Company's goals, maintains a suitable balance between the bonus and fixed salary components, thus avoiding a conflict with the Company's best interests. The compensation is therefore reasonable, adequate and consistent with Mr. Yoav Manor's special contribution to the Company's performance, both in the short and longer term, and the compensation offers Yoav Manor the appropriate to continue to realize the ambitious goals defined in the work plan set by the Company in coming years as well; (h) in view of the review of the compensation paid to third and fourth ranking officeholders among the highest-paid executives in relevant, comparable companies, the Compensation Committee determined that the proposed compensation is consistent with market conditions, as generally accepted among leading insurance and finance companies. 2.2.7. Retirement agreement for a senior officer On November 24, 2011, the Company's Board of Directors, after obtaining the approval of the Audit Committee and the Compensation Committee on November 22, 2011, approved an arrangement with Mr. Muki Abramowitz, a former senior officer of the Company and subsidiaries, in connection with the terms of his retirement ("the Retirement Arrangement"). Mr. Abramowitz has held a variety of senior positions in the Group over more than the last 30 years. Mr. Abramowitz held a variety positions including: CEO of Sahar Insurance Company Ltd., joint CEO of Harel Insurance Company Ltd., Chairman of Harel Pension, Chairman of Harel Investment House, director of the Company's subsidiaries abroad that are insurers, etc. His last position was deputy CEO and head of the Group's overseas activity. Mr. Abramowitz stepped down from office for the Group close to the time of reaching the age of retirement. Following are the details of the retirement arrangement: Mr. Abramowitz is entitled to severance pay at the amount of 200% (an additional 100% compensation above the compensation stipulated by law), an additional 6 months acclimation period, normative bonus for 2011, acclimation period pay, in lieu of leave as total amount of NIS 2.6 million and pay for trading the stock options that were given him in 2009. Mr. Abramowitz gave a non-competition and confidentiality undertaking for a period of 48 months, and in return he will be entitled to an amount of NIS 1.2 million per year for four years, without any entitlement to social or related benefits. The cost of the retirement arrangement is paid partially by the Company and in part by Harel Insurance, based on the allocation of the cost of his employment between the companies in the past. Reasons for the decision of the Company's Audit Committee and Board of Directors: The terms of Mr. Abramowitz' employment by the Company and details of the agreements with him were presented to the Audit Committee and Board of Directors. Under the circumstances, the Audit Committee and Board of Directors are of the opinion that in view of his many years of Mr. Abramowitz' employment by the Company and the numerous important positions he held 1- 21

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(including: CEO of Sahar Insurance Company Ltd., joint CEO of Harel Insurance Company Ltd., Chairman of Harel Pension, Chairman of Harel Investment House, director of the Company's subsidiaries abroad that are insurers, etc.), the retirement arrangement is reasonable and fitting and does not contravene the Company's interests. The Audit Committee and Board of Directors of the Company are of the opinion that in view of the senior positions held by Muki Abramowitz and the knowledge and connections that he has with the Company's business plans, strategic customers and agents, it is important to ensure that Mr. Abramowitz does not compete with the Company for an extended period. 2.3. Legislation and regulation regarding the Company's areas of activity The following is a description of material changes in legislation and regulation regarding the Company's areas of activity since the Periodical Report: 2.3.1. General Provisions of Law

2.3.1.1. On August 17, the Seventeenth Amendment to the Companies (Corporate Governance in Bond Companies) Law, 5771-2011, was published.

The Amendment stipulates that companies that have issued bonds to the public ("bond companies") shall be subject to the rules of corporate governance, similar to the rules applicable to public companies, the main points of which are as follows: (a) only directors with suitable qualifications may be appointed to the board of directors of bond companies, and they must make a statement to this effect. The board of directors shall be obligated to define the minimum number of directors serving on the board of directors who must have accounting and financial expertise; (b) a bond company shall be obligated to appoint a chairman of the board; (c) a bond company must appoint at least two external directors who meet all the qualifying conditions required of external directors pursuant to the Companies Law. The tenure period shall be the same as that for a director of a public company – three years, with an option for extension for two addition periods of three years each; (d) a bond company must appoint an audit committee to which all the provisions of the Companies Law applicable to public companies shall apply, concerning its composition, duties, the lawful quorum for resolutions passed by the audit committee, etc.; (e) a bond company must appoint an internal auditor to which all the provisions of the Companies Law apply with respect to the manner of appointment and termination of tenure, powers, obligation to submit a report; (f) the controlling shareholders of a bond company are obligated to disclose any personal interest in the company's existing or proposed business and shall be construed as having violated the duty of disclosure should they fail to disclose such personal interest; (g) extraordinary transactions between a bond company and its controlling shareholders, or in which the controlling shareholder has a personal interest and an agreement between a bond company and the controlling shareholder or his relative for services rendered, and if he is a senior officer of the company – in connection with the conditions of his tenure and employment, and if he is not a senior officer – in connection with his employment by the company, must be approved by the audit committee and the board of directors. Extraordinary 1- 22

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transactions between a bond company and the controlling shareholders that are not approved in the manner prescribed by law shall be invalid and the company may cancel transactions with a third party and claim compensation if a third party was aware of, or should have been aware of, the personal interest by the senior officer; (i) the holder of bonds in a bond company may file a derivative claim in the company's name due to a failure to comply with the provisions of the law regarding the approval of extraordinary transactions with controlling shareholders in bond companies; (j) the circumstances under which the Companies Registrar may impose monetary sanctions on bond companies were equalized with those applicable to publicly traded companies. The provisions of the amendment shall become applicable within six months of the publication date of the amendment, and with respect to the appointment of new directors – within 60 days of the publication date.

Pursuant to this legislation, on November 3, 2011, the Ministry of Justice published draft Companies (Easements for Certain Bond Companies and Index Products Issuance Group) Regulations, 5772-2011, stipulating, inter alia, that an insurer's subsidiary whose sole activity is the issuance of bonds that the insurer guarantees to repay, shall be exempt from the obligation to appoint external directors and an audit committee. Likewise, the draft regulations stipulate that companies engaged in the issuance of index products that belong to the same control group may appoint the same external directors for all the companies and this will not constitute an interest concerning the appointment of external directors.

In addition, on that date, draft Companies (Provisions and Conditions for the Process of Approving the Financial Statements) (Amendment) Regulations, 5772-2011 were published, stipulating that an insurer's subsidiary whose sole activity is the issuance of bonds which the insurer is responsible to repay, shall be exempt from the approval process for financial statements by the Committee to Review the Financial Statements, as defined in the Companies (Provisions and Conditions for the Process of Approving the Financial Statements) Regulations, 5770-2010.

2.3.1.2. On August 3, 2011, a Law to Increase Enforcement in the Capital Market (Legislative Amendments), 5771-2011 ("the Law") was published, which amends the Control of Financial Services (Insurance) Law, 5741-1981 ("Insurance Control Law") and the Control of Financial Services (Provident Funds) Law, 5765-2005 (hereinafter together – "the Control Law"). Within the context of the Law, the following supervisory powers were conferred on the Commissioner of Insurance and any Ministry of Finance employees he so empowers: (1) He may ask any person to provide any information or document pertaining to the business of one to whom the Insurance Control Law applies or pertaining to a violation under the Control of Insurance Law. (2) He may enter any premises that is not used exclusively as residential premises, should he have any grounds to assume that an insurer or insurance agent operates on such premises and ask for any information or document (including a computer printout) relating to his activity. (3) Where the Commissioner has reason to believe or assume that a person has committed a violation of any provision of 1- 23

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the Insurance Control Law, he has the authority (a) to apply to the Court for an order to be presented with a document or object required to investigate the violation; (b) to summon any person who may have information pertaining to the violation or to facts that may lead to revealing the violator, and to question him on this subject. (c) he may apply to the court for an order to enter any premises that is not used exclusively for residential purposes, conduct a search and seize any object required to investigate the violation, and to search and copy any computer material. (4) Where the Commissioner has reasonable grounds to assume that a person who is not licensed under the Control of Insurance Law to engage in insurance or the brokering of insurance, is engaged in or intends to engage in one of the following, the Commissioner may order that person, with the court's approval, to suspend or refrain from such activity. In addition to the aforementioned powers of control, within the framework of the Law, the Commissioner has the power to impose monetary sanctions on any person who has violated a provision in the annexes to the Law of Control, of the amount defined in the Annex to the Law. The Law further stipulates that it will only be possible to indemnify any person, directly or indirectly, against monetary sanctions or to cancel the monetary sanctions that are or will be imposed on him, as the case may be, with respect to payment to the victim of the violation or on account of legal expenses incurred in connection with the imposition of the monetary sanctions. Furthermore, the Law stipulates that the general manager of a corporation and a partner, except for a limited partner, must oversee and take any reasonable measures under the circumstances to prevent the corporation or the partnership or any of their employees from committing a violation, and that if such a violation has taken place, then the presumption is that they have violated their obligation and monetary sanctions may be imposed on them in an amount equal to half of the amount that could be imposed on them if they themselves had been the violators. This, unless they can prove that they fulfilled their aforementioned obligation. In this instance, the Law stipulates that if the corporation has instituted procedures that are adequate to prevent such violation, if it has appointed a representative to oversee that these procedures are upheld, and that he has taken reasonable measures to rectify any violation and prevent its recurrence, the presumption is that the general manager or the partner have fulfilled their aforesaid obligation. Furthermore, the provisions of the Law stipulate that instead of issuing notice of his intention to apply monetary sanctions, the Commissioner has the power to inform the violator that he may submit a letter of undertaking to the Commissioner to refrain from the violation and to determine that any monetary sanction, or part of it, that has been imposed, is conditional; provisions were also prescribed concerning the violator's right to contest the sanction; his right to receive information; the obligation to keep records during a hearing on the violation; the date for payment of the monetary sanction; the Commissioner's authority to reduce the amount of the monetary sanction and to schedule the payment; time limitation for imposition of the monetary sanction; the Commissioner's power that payment be made to the victim of the violation; publication of the imposition of the monetary sanction and the Commissioner's obligation to submit an annual report to the State Attorney. The provisions of the Law concerning the imposition of monetary sanctions will take effect one year after their publication. The other provisions of the Law will take effect immediately 1- 24

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after their publication in the Official Gazette.

In light of the above regulation, the group is operating to implement an enforcement plan and to appoint personnel that will be in charge of implementing the plan and monitoring it.

The provisions of the circular may result in the Commissioner adopting stronger enforcement measures and higher financial sanctions that the Commissioner imposes on financial institutions and insurance agencies.

2.3.1.3. On July 7, 2011 , Securities (Periodic and Immediate Reports) (Amendment no. 2) Regulations, 5711-2011, were published that prescribed, inter alia, that a corporation that consolidates or proportionately consolidates a banking corporation or financial institution may, with respect to the internal control in a financial institution or banking corporation only, apply the format for the reviewing the effectiveness of the internal control prescribed in the applicable law in this instance, provided that the conditions specified in the regulations are met. Furthermore, the changes were defined that must appear in the board of directors and management's report subsequent to the corporation's choice of the option described above.

2.3.1.4. Companies Law (Amendment no. 16), 5711-2011 – streamlining of corporate governance

On March 15, 2011 Amendment 16 of the Companies Law was published, in which prescribed, inter alia, the following provisions: (a) recommended instructions were prescribed in connection with corporate governance to be detailed in an annex to the law (such as appointing independent directors, directors who are directly accountable to the CEO shall not be officeholders , a training plan shall be prepared for directors, the work of the CEO and senior executives shall be discussed each quarter, etc.) that a company may adopt as part of its articles, and should it fail to do so – it must explain the reasons for this; (b) provisions pertaining to the board of directors and its work – a director shall apply independent discretion when voting as part of the board of directors and its committees and he shall not vote based on the instructions of another person, situations must be prevented where a person who is not a director serves as a "shadow" director, a relative of the chairman shall not be appointed as CEO; (c) provisions pertaining to the audit committee – the committee chair shall be an outside director and most of the committee's members must be independent directors; instructions concerning the legal quorum and a person who is not a committee member shall not be permitted to attend the committee's meetings as an observer; (d) the status of minority shareholders is to be strengthened – the majority required to approve an appointment and to extend the term of office of an outside director was changed as well as for approving transactions with the controlling shareholder; (e) the civil enforcement mechanism was improved by improving the mechanism in a derivative claim and the Israel Securities Authority was empowered to impose financial sanctions.

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2.3.1.5. Streamlining of Enforcement Laws by the Israel Securities Authority (Legislative Amendments) Law, 5771-2010.

On January 27, 2010, the Streamlining of Enforcement Procedures by the Israel Securities Authority Law was published in which context the Securities Law, Investment Advice Law and Joint Investment Trust Law were amended. These amendments confer on the ISA powers to impose significant sanctions in respect of violations prescribed in the legislative amendments. The principal changes are described below. (a) the ISA may impose monetary sanctions of up to NIS 500,000 on a reporting corporation or on a non-reporting corporation that offers its securities to the public, and up to NIS 1,000,000 on a corporation whose main business is the issuance of financial products; (b) the amounts of the monetary sanctions shall only be less than the amounts specified in the annex to the law, in the instances, circumstances and considerations stipulated by the Minister of Finance in respect of which the amount of the sanction may be reduced. Furthermore, the Minister of Finance may, inter alia, change by order the annex to the law and increase the amount of the monetary sanctions up to one million shekels for a reporting or non-reporting corporation that offers its securities to the public, and to up to NIS 2 million for a corporation engaged in the issuance of financial instruments; (c) for a continuing violation, two percent shall be added to the aforesaid monetary sanction for each day on which the violation continues, while for a recurring violation, an amount equal to half the aforesaid monetary sanction will be added. In addition, the ISA was granted administrative enforcement powers through an administrative enforcement committee whose task is to discuss and decide with respect to violations, as defined in the law; (d) the administrative enforcement committee was empowered to apply various enforcement measures, including: a fine that may amount to NIS 5 million for a corporation and NIS 1 million for an individual, payment to the victims of the violation, provisions concerning action to be taken to correct the violation and prevent a recurrence, prohibition on serving as a senior officer of a supervised entity, revocation or suspension of a license, authorization or permit, etc.; (e) ISA investigators were granted various powers for investigating a violation of the provisions of the law, including issuing a subpoena to give and issuing a subpoena to present an object, as well as the power to apply for a court order to enter premises, conduct a search of the premises and to seize effects that are required for investigating the violation; (g) the CEO is responsible to oversee and to take all reasonable steps under the circumstances to prevent the corporation from violating the law, and a presumption was determined that if the provisions are violated (excluding specific provisions that were defined in advance), then the CEO has violated his aforementioned obligation as a result of which one or more of the enforcement measures may be applied to him that could have been imposed on him as if he himself had been the violator. Nevertheless, the law stipulates that if the corporation established procedures that are adequate for preventing the violation, if it appointed an official to oversee the upholding of the regulations, including training and it also took reasonable steps to correct the violation and prevent a recurrence, it is presumed that the CEO or the partner fulfilled their obligations, as noted above; (h) none of the foregoing procedures can be insured directly or indirectly, and the corporation and its controlling shareholder may 1- 26

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not indemnify a corporation, senior officer or employee of the corporation in respect of a monetary sanction imposed on them. However, a person may be indemnified or insured in respect of payment to the victim of a violation and in respect of expenses incurred in connection with a proceeding conducted in his regard.

In light of the above regulation, the group is operating to implement an enforcement plan and to appoint personnel that will be in charge of implementing the plan and monitoring it. Circulars

2.3.1.6. On November 14, 2011, the Commissioner published a circular concerning information to be given to customers who wish to withdraw their money from a pension product – clarification. The circular stipulates that general information that a financial institution presents to a saver when money is withdrawn, does not fall under the category of pension marketing as defined in the Control of Financial Services (Advice, Marketing and Pension Settlement System) Law, 5765-2005, and that the financial institution may therefore submit it to the member without violating the provisions of Section 13 of the Law. Likewise, the circular stipulates that "the withdrawal of money" shall not include the transfer of money between investment tracks or insurance tracks in the same pension product and the transfer of money from one category of pension product or from one pension product to another. In this regard, "general information" is data or a fact that is not dependent on the saver's characteristics, and inter alia: (a) the conditions of entitlement to withdraw money; (b) the tax implications of withdrawing money not in accordance with the law; (c) informing the customer of the possibilities for receiving a loan from the fund and "preserving seniority", insofar as it is relevant.

2.3.1.7. On November 13, 2011, the Commissioner published a circular concerning a list of the nostro assets of financial institutions at individual asset level. The circular prescribes that an insurance company shall report a list of the assets divided into three groups: (a) non-profit sharing life assurance; (b) non-life insurance, surplus capital and other obligations; (c) all the aforementioned liabilities together. A management company shall report the list of assets without dividing them into 3 groups: (i) assets held against the required equity; (ii) the other assets of the management company; (iii) these two groups together. The report is to be submitted each quarter and up to 7 days after the last date for submitting the financial institutions in each quarter. The provisions of the circular apply to all financial institutions, excluding a sectorial provident fund management company; with respect to insurance companies – from the report for the first quarter of 2012 onwards (where regarding the first and second quarters of 2012, only the value of the asset shall be reported), and with respect to management companies - from the annual report for 2012 onwards.

2.3.1.8. On August 10, 2011, the Commissioner published circular concerning graphic signatures. The circular is regulate the use of a graphic signature – a signature saved digitally as a graphic file. The circular prescribes various provisions that

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the licensee or insurance agent must comply with when a graphic signature is used on such documents. These provisions include the following: the obligation to take reasonable measures to identify the customer and verify his signature, the obligation to allow the customer to scrutinize the document before it is signed and to give the customer a fixed layout copy of the signed document at the time of the signing, the obligation to save the signed document in a format that cannot be changed, and various obligations pertaining to the archiving of documents signed with a digital signature and the taking of various protective measures in the information systems in which they are stored. In addition, the circular prescribes an obligation for the financial institution to include an option for using a graphic signature in documents which accepting from licensee or insurance agent. The provisions of this circular shall apply from October 1, 2011.

Concurrently, an amendment to the circular was published regulating the enrollment of a member in a provident fund (replacing Circular 2005-2-5), stipulating that a document signed with a computerized graphic signature, that complies with the requirements specified in the computerized graphic signature circular, shall be deemed an original document regarding the beneficiary instruction specified in the circular. The provisions of this circular shall apply from October 1, 2011.

2.3.1.9. On August 8, 2011, the Commissioner published a circular concerning the level of service that a financial institution must provide for its customers. Among other things, the circular prescribes the following: (a) the financial institution's management must determine a service covenant to include, at the very least, reference to all the rules defined in the circular, including: customers are to be addressed fairly and respectfully, effective and available lines of communications are to be maintained with customers, full information must be provided, etc. The service covenant shall include service level agreements (LSA) to be measured methodically and continuously by the financial institution and to be reviewed by the management of the financial institution. The financial institution must publish the service covenant on its website and send a copy to any customer who requests it; (b) the financial institution must define rules for all employees who serve customers (marketing personnel, call center employees, etc.) regarding the level of service required, their qualifications, training and experience, as well as the procedures, products and provisions of law that all employees must be familiar with; (c) the financial institution must appoint a senior employee to take charge of customer service and report to the CEO; (d) the financial institution's board of directors shall approve the appointment of the head of customer service, discuss the financial institution's deployment for implementation of the circular, establish the policy for rendering service and accessibility of the service in accordance with the provisions of the circular, approve the work plan and ensure that a gap analysis is conducted of the actual level of service and the level of service defined in the board of directors' policy. The board of directors must review the service policy once a year. The provisions of the circular shall apply from January 1, 2013, except for the appointment of the head of customer service, submitting a mapping of the existing service system and a gap analysis, to commence on the publication date 1- 28

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of the circular and that will be supplemented by June 30, 2012.

2.3.1.10. On August 4, 2011, the Commissioner published a circular concerning the composition of an insurer's recognized shareholders' equity. The circular prescribes rules that apply to the structure of an insurer's recognized equity, as well a framework of principles for recognizing the various capital components and classifying them in the different layers of capital. The draft circular stipulates that the recognized equity of an insurer shall be composed of the amounts of the components and instruments included at three levels: (a) tier-one equity – the insurer's principle and highest quality equity; (b) tier-two equity – the equity that includes loss-absorbing components and instruments, repayment of which is subordinate to any other debt, excluding tier-one equity; (c) tier- three equity – consisting of loss-absorbing components and instruments (with respect to principal only), repayment of which is subordinate to any other debt excluding tier one and tier-two equity.

The circular further stipulates that an insurer's equity is the sum of the components and instruments included in the different layers, under the following conditions: with regard to tier-one equity – the comprehensive rate of the capital components and capital instruments included in the tier-one equity capital shall not fall below 60% of the insurer's total equity, and the comprehensive rate of capital components and capital instruments that are included in "basic tier-one equity" shall not fall below 70% of the total tier-one equity; regarding tier-three equity – the comprehensive rate of capital components and capital instruments included in tier-three equity shall not be more than 15% of the insurer's total equity. The circular further stipulates that the Commissioner's approval is required to include a complex primary tier-one equity instrument, a tier-two equity instrument and a tier-three equity instrument in the equity.

On May 10, 2010, the Commissioner's approval regarding the issue of complex secondary capital in the Company that will be recognized as a complex secondary equity by Harel Insurance. In this framework the composition of equity of the Company.

On March 2010, the Commissioner published criteria for approving the distribution of a dividend by insurance companies ("Criteria Document"). The criteria were published further to a letter issued by the Commissioner on March 9, 2009 in which he specified that a dividend may only be distributed after obtaining prior approval from the Commissioner.

According to the Criteria Document, an insurer may apply to the Commissioner for permission to distribute dividends subject to meeting, on the various dates listed in the document, certain rates which were also detailed in the document, of supplementing the required capital, in view of the new Capital Regulations ("Supplement Rates"). In addition, a different method of calculation was defined for existing capital with respect to the distribution of dividends, whereby secondary capital as defined immediately prior to the amendment of the regulations, will be recognized in full as long as it does not account for more 1- 29

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than 40% of the primary capital. If the secondary capital accounts for more than 40%, then half of the balance in excess of the 40% will be recognized. Complex capital instruments will be recognized in full subject to the rates permitted under the provisions of the law. For the purpose of obtaining the approval, the insurer must submit an annual profit outlook for the years 2010 and 2011, a revised debt service plan approved by the board of directors of the insurer's holding company, and the minutes of the board of directors meeting at which distribution of the dividend was discussed, including comments on the Commissioner's draft circular concerning a plan of action for managing the insurance company's shareholders equity.

The Criteria Document further stipulates that an insurer whose total shareholders' equity, after distribution of the dividend is higher than 110% of the required capital, taking into account the supplement rates, may distribute a dividend without obtaining the Commissioner's prior approval, provided that the Commissioner has been notified in advance and that the documents listed above have been submitted.

For details concerning the composition of equity for Harel Insurance and Dikla, see Note 7 to the financial statements.

On October 24, 2011, Harel Insurance received the Commissioner's approval to reduce its minimum required equity on account of the outstanding original difference attributed to the management companies and provident funds that it controls, as defined in Article 5 of the Capital Regulations, ("outstanding original difference") by 35% of the outstanding original difference, as of the financial report at December 31, 2011.

Notwithstanding the aforesaid, the approval received by Harel Insurance also stipulated that this reduced amount shall be added to the calculation of the required equity for the purpose of distributing dividends.

This approval will be cancelled when the capital requirements according to the first pillar of the Solvency II directive takes effect, which will replace the Capital Regulations.

On October 24, the Commissioner published a letter to the managers of the insurance companies, requesting that the insurance companies prepare a monthly report estimating the state of their equity, from November 17, 2011 onwards.

In addition, further to the aforementioned document on criteria for the distribution of dividends, on the same date the Commissioner published a draft letter extending the validity of the restrictions on dividend distribution, as follows: An insurer may apply to the Commissioner requesting permission to distribute a dividend provided that the ratio of the company's recognized equity to required equity is at least 105%. An insurer with a ratio of recognized equity to required equity, after distribution of the dividend, of at least 115% may distribute a dividend without first obtaining the Commissioner's approval, 1- 30

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provided that it informs the Commissioner in advance and submits the documents specified in the letter.

To obtain the approval, the insurer must submit an annual profit outlook for two consecutive years, a debt servicing plan approved by the board of directors of the company and the insurance company's holding company, a plan of action for supplementing its capital, and a copy of the minutes of the board of directors' meeting at which the distribution was approved.

2.3.1.11. On July 13, 2011, the Commissioner published a circular concerning an agreement between a financial institution and a licensee (the circular cancels Circular no. 2004/14 concerning "an agreement between an insurer and an insurance agent"). The circular prescribes provisions regulating the treatment of premiums paid to an insurer through a pension advisor or insurance agent ("licensee"). The circular stipulates that an agreement for the purpose of insurance brokerage shall include instructions with respect to the method of transferring the deposits, pursuant to the options prescribed in the circular. The licensee shall transfer the deposits to the financial institution within 3 business days, he shall not withhold these amounts and he may not offset amounts owed to him by the financial institution from these amounts. The agreement may specify that the deposits will be transferred directly from the insured to the financial institution, to the licensee who will transfer them to the financial institution or they may transferred to an escrow account belonging to the licensee in favor of the financial institution. Moreover, provisions were set concerning the method of managing the escrow account and the rules that apply to the account, as well as three options for opening an escrow account: a separate account for each financial institution, a suspense account managed by a trustee, and a suspense account managed by a licensee. The provisions of the circular shall apply to all agreements that are in force from January 1, 2012.

2.3.1.12. On March 28, 2011, the Commissioner published a circular concerning the investigation and settlement of claims and the handling of public complaints (a circular that replaces Financial Institutions Circular 2009-9-18). The circular prescribes the modus operandi of a financial institution during the process of settling claims. Among other things, the circular prescribes the following: (a) a financial institution shall establish standards for the investigation and settling of claims and for dealing with complaints from the public pursuant to provisions that appear in the circular. If the financial institution's standards do not include any of the rules that appear in the draft circular, the regulations prescribed in the draft circular shall apply. The standards shall be considered part of the policy conditions and the management companies shall include them in the management fund articles; (b) a financial institution shall verify that any person acting on its behalf in the settlement of claims must have the requisite qualifications, must be familiar with the relevant provisions of law and the financial institution's relevant products; (c) rules were set for the investigation and settlement of claims and for handling complaints from the public, stipulating the documents that a financial institution must give to any person who files a claim, the notification to be given to the claimant, within 30 days of the financial institution receiving any information and documents that are 1- 31

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required for investigating the claim, a follow-up of the investigation or termination of the investigation or notice of payment or announcement of a settlement or rejection of the claim. Furthermore, the circular prescribes rules for the submittal of notice with respect to prescription of the claim, notice concerning the right of appeal, investigation of a claim with the help of an expert, documents and information that are to be saved for at least seven years, replying in writing to any request from an insured or claimant within a reasonable period, and no later than three days from receiving the request.

The financial institution's board of directors must approve policy concerning the settlement of claims and handling of complaints by the public by April 30, 2011, and the financial institution's management must approve the standards in respect of each class of claim and any change in the standards. The circular applies to pension insurance with respect to death and disability risks, to life assurance – with respect to P.H.I. and death, to personal accident insurance, illness and hospitalization insurance (excluding dental insurance and health insurance for foreign workers foreigners residing in Israel), motor property vehicle insurance, comprehensive household insurance, cargo insurance, accidents, illness and hospitalization during overseas travel. The provisions of the circular are applicable from June 1, 2011, and with respect to third-party insurance that is part of comprehensive household and insurance according to the requirements of the Motor Vehicle Insurance Ordinance [New Version], 5730-1970 – from March 1, 2012.

2.3.1.13. On March 28, 2011, the Commissioner published a circular concerning the collection of statistical information with respect to claims settlement (the circular replaces Financial Institutions Circular 2009-9-19). The purpose of the circular is to collect statistical information that will facilitate the publication of indices with respect to the method of settling claims and the handling of requests to withdraw money, the transfer of money and receipt of old-age pensions by financial institutions, to serve as an instrument for potential policyholders and planholders in their choice of financial institution. The principal change in the circular is that in addition to claims, it also addresses requests to withdraw money, to transfer money, to transfer money between tracks and to receive an old-age pension. As a direct consequence of all this, the circular also applies to provident funds and life assurance plans that are not insurance funds. Nevertheless, the circular does not apply to central provident funds that are managed by the financial institutions. As part of the circular, a financial institution must collect and save the previous year's claims data and data on applications, it must report them to the Commissioner ever year in the format stipulated in the circular and present the information pertaining to the last 4 years on its website. The circular's general provisions will become applicable on June 1, 2011 (there are transitory provisions regarding claims in accordance with the Motor Vehicle Insurance Ordinance [New Version], 5730- 1970 and in respect of the aforementioned requests).

2.3.1.14. On March 23, 2011, the Commissioner published a circular clarifying the instructions for investments made by financial institutions in non-governmental bonds (as prescribed in Financial Institutions Circular 2010-9-3), ("The 1- 32

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circular"). The circular prescribes instructions concerning the purchase of non- marketable bonds issued as part of the extension of a series prior to October 1, 2010, they define a "reporting corporation" and a "non-reporting corporation", and they also establish which documents are included in the definition of "issuance documents".

2.3.1.15. March 16, 2011 the Commissioner published a circular concerning a model for determining the fair value of a non-marketable debt asset. Pursuant to the Control of Financial Services (Provident Funds) (Calculation of Asset Value) Regulations, 5769-2009, a financial institution must calculate the fair value of an asset that is not a marketable security according to fair value in line with the Commissioner's instructions, and the Commissioner may instruct the financial institution to enter into agreement with a company chosen through a tender, that specializes in determining the interest rates for discounting cash flows for the purpose of calculating the fair value. The Commissioner issued a tender, the results of which were published in July 2010, in which Mirvah Hogen Ltd. was chosen to provide individual price quote and interest rate services for financial institutions. The financial institutions must therefore prepare for the onset of Mirvah Hogen's activity and enter into agreement with it in accordance with the conditions of the tender.

2.3.1.16. On February 8, 2011, the Commissioner published a circular revising the instructions concerning the format for disclosure required in the financial statements of the insurance companies consistent with International Financial Reporting Standards (IFRS), further to Insurance Circular 2010-1-4 (Format for the disclosure required in the annual financial statements of the insurance companies consistent with IFRS). The circular stipulates that a company that chooses early implementation of the new international accounting standards, must inform the Commissioner to this effect before implementation and if the Commissioner has expressed no objection within 60 days, the company may introduce early implementation of the standards. Furthermore, provisions were prescribed that address the following: comprehensive profit, the company's share of the profits of investees that are treated using the accounting value method, shareholders equity and capital requirements, risk management and a summary of the data relating to the financial reports required of the company (separate reports) for the purpose of calculating the capital requirements. The provisions of the circular apply from the financial reports for 2010. Introduction of insurance plans and pension and provident articles – draft legislative memorandums and circulars

2.3.1.17. On September 6, 2011, the Commissioner published several draft memoranda of law and circulars concerning a change in the mechanism for introducing insurance plans and provident fund articles so that a financial institution will be required to inform the Commissioner of a new product (insurance plan, pension fund or provident fund) developed by the financial institution in view of the principles, guidelines, instructions and conditions to be published by the Commissioner, and which may be marketed after notice is given to the Commissioner, without the need to obtain the Commissioner's written approval

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in advance. Should he decide that his intervention is necessary, the Commissioner has the right to ask the financial institutions to make changes in their products before or after marketing begins. Following are the draft regulations that were published:

(A) Memorandum of the Control of Financial Services (Insurance) Law (...... th Amendment), 5771-2011, and Memorandum of the Control of Financial Services (Provident Funds) Law (.....th Amendment), 5771-2011, in which context the following proposals are prescribed: (1) The power to prescribe provisions concerning the conditions and wording of an insurance contract and the form and structure of the policy shall be transferred from the Ministry of Finance to the Commissioner of Insurance; (2) power was conferred on the Commissioner to issue instructions concerning members rights and obligations to be prescribed as part of the provident fund articles; (3) an insurer who wishes to introduce an insurance plan or change the conditions of the plan or the premiums or a fund manager that wishes to change a provident fund's articles, must inform the Commissioner to this effect 30 days before the change. If the Commissioner does not announce his objection within 30 days, the insurer or the financial institution, as the case may be, may make the change or introduce the plan after the said 30 days have passed; (4) the Commissioner may also announce his objection after 30 days have passed, in part for reasons pertaining to the protection of the interests of the policyholders or members and to preventing an infringement of the ability of the insurer or the fund manager to uphold their obligations; (5) the method of merging provident funds and transferring activity from one fund manager to another due to voluntary liquidation will also be changed so that instead of the need to obtain the Commissioner's approval for such activity in advance, the Commissioner will only have to be notified before the date on which the management company wishes to perform the merger or transfer management of the provident fund.

(B) Draft circular on the procedure for announcing the introduction of an insurance plan and provident fund articles prescribes the following provisions: (1) an announcement introducing a new plan shall include the information specified in the circular: (2) the effective period for changing an insurance plan as specified in the provisions of the law shall commence on the date on which the financial institution submits all the notification details and related documents that must be submitted; (3) the Commissioner must be informed of a material change that applies or of the intention to make a material change in the areas specified in the circular; (4) a group insurance plan or change in such a plan shall be introduced subject to the submittal of a master policy to the Commissioner, listing the changes, insofar as there are any, relative to the master policy. A new plan (or changes in such a plan) for group long-term care insurance in which the policyholder is a health fund, may be introduced only after obtaining the Commissioner's written approval in advance.

(C) Draft document of principles and guidelines for the introduction of an insurance plan, including proposed guidelines and principles, which in the Commissioner's view should be introduced when preparing the wording of the policy, and

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including fairness, disclosure and clarity.

(D) Draft circular – actuarial addendum, which proposes defining the level of detail required in the actuarial addendum attached to the insurance plan or provident fund articles and the manner of updating it.

(E) Draft circular-updated, on insurance premiums in the compulsory motor insurance sector, which proposes replacing and revising the existing provisions, including: (1) the method for submitting motor insurance tariffs to the Commissioner of Insurance, so that notice of the planned change is submitted to the Commissioner 14 days before the planned date for publication, instead of the current obligation to obtain the Commissioner's approval for the update; (2) to abolish the provisions stipulated in the circular from 2005 with respect to a refund of premiums due to cancellation of a policy; (3) to reduce the amounts that an insurer may collect for issuing a substitute certificate. The Commissioner and the financial institutions are discussing the memoranda of law and the circulars. Draft circulars

2.3.1.18. On November 15, 2011, the Commissioner published a draft circular concerning "instructions for investments made by financial institutions in non-governmental bonds – Amendment".The draft circular proposes defining that a financial institution must ensure that the trust deed reflects the investment policy it has determined. An appendix is attached to the draft circular that includes sample contractual conditions to be included in the trust deeds of non-governmental bonds and a sample of the structure of "condensed conditions" that a financial institution should receive from the issuing company as part of the issuance documents, to enable the financial institution to effectively estimate the extent to which the bond protects it. The Commissioner and the financial institutions are discussing the draft circular. The Commissioner and the financial institutions are discussing the draft circular.

2.3.1.19. On September 27, 2011, the Commissioner published draft circulars which include updates to the monthly reports issued by insurance companies, provident funds and pension funds (that were designed to update the provisions of Insurance Circular 2009-1-17, Provident Circular 2009-2-4, and to replace Pension Circular 2009-3-2, respectively). The provisions of the circulars will apply from the report in respect of January 2012 onwards.

2.3.1.19.1. The changes in the reports to be issued by insurance companies are: (a) additional reporting items – the addition of three sections to be reported in respect of total exposure to shares, foreign currency and activity abroad, and the addition of a TASE member account number, and a column specifying whether or not the account is a suspense account; (b) elimination of a reporting requirement, to report weekly yields and the results of the HS-STD index; (c) an additional clarification – whereby the transfer of money to and from policies that are not approved as a provident fund will no longer have to be reported. 1- 35

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2.3.1.19.2. The changes in the reports to be issued by provident funds are: (a) cancellation of a reporting requirement – of the reporting items for weekly yields and the results of the HS-STD index; (b) additional reporting items – the addition of three reporting items in respect of total exposure to shares, foreign currency and activity abroad, the addition of a reporting code for a control digit and a column specifying whether or not the account is a suspense account; (c) update of a reporting item – in Chapter C, Loans, the words "or not rated" are to be added to the section "Loans with Bank Guarantees with a Rating of less than (BBB- ); (d) correction of a clerical error and the formulae for calculating the monthly commission rate; (e) clarification – items that are non- monetary numbers hall be reported as whole numbers.

2.3.1.19.3. The changes in reports to be issued by pension funds are: (a) change in the reporting format – the monthly report will be filed for each of the pension fund's investment tracks; (b) cancellation of a reporting requirement – for reporting codes for weekly yields and in respect of the results of calculating the HS-STD index; (c) additional reporting requirements – in the report on payments and receipts from externals, reporting items were added for transfers between tracks in the same pension fund, three reporting items were added on overall exposure to shares, foreign currency and activity abroad, and reporting items were added on the number of insureds who transferred money to/from one track to another in the same pension fund, a reporting code was added in respect of a control digit and a column was added specifying whether or not the account is a suspense account; (d) update of a reporting item – in Chapter C – Loans, the words "or not rated" will be added to the section: "Loans with Bank Guarantees with a Rating of less than (BBB- )"; (e) the formula for calculating the expectation of issuing earmarked bonds will be revised; (f) correction of a clerical error and the formulae for calculating the monthly and aggregate commission rate: (g) clarifications – whereby items that are non-monetary numbers shall be reported as whole numbers and the method of reporting of a daily yield appendix; (h) the date for submitting the monthly report to the Treasury – the monthly report on an investment track in a pension fund in respect of the reporting month must be submitted by the 15th of the following month. The provisions of this circular will apply to old pension funds, new pension funds, general pension funds and central severance pay provident funds, except for certain exclusions stipulated in the circular.

The Commissioner and the financial institutions are discussing the draft circulars.

2.3.1.20. On September 6, 2011, the Commissioner published a draft circular concerning a codex of future regulations. The draft circular proposes creating a comprehensive codex of regulations, the purpose of which is: (a) to create a consistent, up-to date regulatory framework for financial institutions, insurance 1- 36

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agents, pension advisors and marketers; (b) to organize all levels of regulation in the codex, which will comprise two parts – one for financial institutions and one for insurance agents, pension advisors and marketers; (c) to formulate two master circulars, one of which will incorporate all the circulars that apply to financial institutions as noted in Appendix B ("Standard Circular for Financial Institutions"), and the second will incorporate all the circulars that apply to insurance agents, marketers and advisors. The standard circulars will replace the existing set of circulars; (d) the codex will be uploaded to the Commissioner's website in a format that facilitates cut and paste operations; (e) local regulations will be adapted to the principles of the Solvency II Directive. Each part of the codex will have four components: (a) sources of authority – all the items (laws, regulations, and orders) that empower the Commissioner to prescribe the provisions contained in the circulars that are included in the codex; (b) definitions – all the definitions pertaining to the provisions of the codex; (c) instructions – all the instructions that apply to the supervised entities; (d) appendices – the appendices that are referred to in the codex provisions. At this stage, publication of the draft codex includes provisions concerning investments and non-life (general) insurance. The Commissioner and the financial institutions are discussing the draft circular.

2.3.1.21. On August 3, 2011, the Commissioner published a draft circular revising the instructions concerning the format for disclosure required in the financial statements of the insurance companies consistent with International Financial Reporting Standards (IFRS), further to Insurance Circular 2010-1-4 (Format for the disclosure required in the annual financial statements of the insurance companies consistent with IFRS), and Insurance Circular 2011-1-1 that updates it (see Section 2.3.1.16 above). The draft circular prescribes provisions that address the following: additional information to be provided regarding the operating segments, liabilities in respect of yield-dependent investment contracts and insurance contracts, additional information about the life insurance and long-term savings segment, allocation of the data in other health insurance to short and long-term health insurance activity, the item – income from management fees, shall include management fees received from members or policyholders, disclosure concerning the amounts of participation for others in the Company's expenses between commissions, marketing expenses and other acquisition expenses, provisions for the calculation of sensitivity analyses for insurance risks, instructions for the separate financial statements of the insurance companies (solo reports). The provisions of the circular shall apply from the financial reporting for 2011. The Commissioner and the financial institutions are discussing the draft circular.

2.3.1.22. On July 13, 2011, the Commissioner published a draft circular concerning power of attorney for a licensee. The draft circular prescribes a standard format for a power of attorney form that the customer will sign, giving the licensee power of attorney to receive information or submit applications as part of one- time or on-going pension advice or pension marketing. Among other things, the draft circular prescribes the following provisions: (a) a power of attorney to receive one-time information for the provision of pension marketing or pension advice shall be in force for three months; (b) a power of attorney to handle a 1- 37

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transaction that is part of an on-going advice agreement shall be in force as long as the advice agreement in which context it was signed remains in force; (c) a power of attorney that empowers an agent to perform a transaction in a financial product shall be in force for two years: (d) a customer's signature on a power of attorney empowering a licensee to perform a transaction in his name shall nullify any previous power of attorney empowering any other licensee; (e) a licensee shall attach to each power of attorney a photocopy of an ID card to any other identifying document specified in the provisions of the Prohibition on Money Laundering Order. When receiving a power of attorney, a financial institution shall verify the customer's identifying details that appear in the power of attorney, consistent with the type of application included in the power of attorney. The Commissioner and the financial institutions are discussing the draft circular.

2.3.1.23. On July 8, the Commissioner published a draft circular concerning the risks entailed in entering into agreement with entities that are included on the international list of entities that provide assistance for Iran's nuclear and related programs. The draft circular stipulates that a financial institution's board of directors must draw up a policy for dealing with the risks entailed in entering into agreement with entities who are included on the international lists that appear in the draft circular, and must review the corporation's existing level of exposure to these entities. This policy must also include reference to reasonable controls and tests for locating such entities. In defining its policy, the board of directors must be aware of the risks entailed in entering into agreement with such entities. The Commissioner and the financial institutions are discussing the draft circular.

2.3.1.24. On March 20, 2011, the Commissioner published a second draft circular concerning data optimization of the rights of members of financial institutions. The draft circular details the activity framework that a financial institution must carry out to ensure that members' rights are reliably, and fully recorded in the information systems, and that they are available and retrievable. The financial institution must conduct a gap analysis about the existing information at product, member and employer level, it must formulate a model for mapping and rating the gaps that are found in the analysis, and it must prepare a detailed work plan to deal with any failures that are found. Likewise, the financial institution's board of directors must approve the optimization plan and discuss the subject at least once every six months. In addition, a steering committee shall be set up, that is accountable to the CEO to formulate a work plan and report on progress in the optimization project to the board of directors. The financial institution must keep documentation of the work plan and monitor progress of the optimization project, and it must also send the Commissioner reports on the subjects specified in the draft circular. The Commissioner and the financial institutions are discussing the draft circular.

2.3.1.25. On February 8, 2011, the Commissioner published a draft circular clarifying Financial Institutions Circular 2010-9-3 "Provisions concerning investments by financial institutions in non-government bonds". The draft circular prescribes provisions relating to the purchase of a marketable or non-marketable bond that 1- 38

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was issued in the context of expanding an existing series. A "reporting corporation" was defined as a corporation whose securities are offered to the public through a prospectus, a corporation whose securities are traded on the TASE or are registered on the TASE for trade, a corporation that is traded on a stock exchange outside Israel. The draft circular also stipulates that a financial institution that manages the investments of another entity by outsourcing shall regularly monitor compliance with the provisions of the circular by the outsourcing entity and shall approve the relevant policy according to the provisions of the circular that the outsourcing entity must comply with. Instruction

2.3.1.26. In December 2010, Ireland's credit rating was lowered so that it is no longer an "approved foreign country", as this term is defined in the Investment Regulations and the Provident Fund Regulations. The Company's subsidiaries that are financial institutions have investments in Ireland. On February 21, 2011, the Commissioner published a letter granting a six-month extension, from the date of the letter, for disposing of the investments in Ireland. During this period, the continuing holding of these investments will not be construed as a holding that is contrary to the Income Tax Regulations and Investment Regulations.

On August 14, 2011, the Commissioner published another letter granting a further six month extension during which further holding of investments in Ireland will not be construed as a holding that is contrary to the Income Tax Regulations and Investment Regulations. The extension was granted based on the Control of Financial Services (Provident Funds) (Rules of investment that apply to management companies and insurers) Regulations, 5771-2011. The draft regulations will allow financial institutions to invest in foreign countries that have a rating of BBB- or higher in countries that are members of the OECD. Draft memorandum of law and regulations

2.3.1.27. On August 14, 2011, the Commissioner published second draft Control of Financial Services (Provident Funds) (Rules of Investment that apply to management companies and insurers) Regulations, 5771-2011.

The draft regulations propose a standard framework for the rules of investments made by the different financial institutions (provident funds, pension funds, and yield-dependent liabilities of insurers), including nostro money, and they also propose changing some of the existing investment rules in an effort to adapt them to the modes of operation of the capital market and the activity of the institutional investors. Among other things, the regulations propose removing the currently existing quantitative restrictions and increasing the involvement of the investment committees and their external representatives. Likewise, the regulations address restrictions that will apply to transactions conducted between financial institutions and their related companies.

In addition to the draft regulations, the Commissioner published a second draft 1- 39

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circular concerning the investment rules that apply to management companies and insurers. The draft circular prescribes the following provisions: (a) provisions concerning a deviation from the investment rates – amendment to the deviation by an institutional investor in accordance with a procedure to be determined, defining the dates for amending the investment deviation, reporting to the Commissioner, refund of management fees during the deviation period, and a refund of capital gains during the deviation period; (b) appointment of a director by a financial institution – in a particular corporation by virtue of holding the means of control therein that is approved by the investment committee. Wages and other benefits to which the director is entitled, shall be transferred to the financial institution's assets; (c) an institutional investor or group of investors may invest in a partnership when the conditions prescribed in the draft circular are met (e.g. – the financial institution is a limited partner in the partnership, the partnership is registered, the rate of the investment in the partnership does not exceed 49%); (d) investing in a right to land through a corporation that is not a partnership – up to 49% of a particular category of the means of control in the corporation if the corporation engages in the holding of land or a rate of more than 49% if there is no pledge or mortgage on the corporation's assets; (e) giving loans under the conditions specified in the draft circular (e.g. – a loan rated BBB- or A-3, the loan is for housing, the amount of the loan does not exceed 10% of the estimated value of the financial institution's assets and must not be more than the amount that the insured has in the provident fund); (f) transactions with a related entity – provided that the transaction has been approved in advance and in writing by a majority of the external representatives on the investment committee and the transaction took place in accordance with a procedure prescribed by the investment committee; (g) investing in a related party – under conditions prescribed for this purpose in the draft circular, and inter alia, provided that the institutional investor's total investment in all the related entities is no more than 5% of the estimated value of its assets.

The Commissioner and the financial institutions are discussing the draft regulations and the circular.

2.3.1.28. On July 3, 2011, the Commissioner published a draft Money Laundering Prohibition (Obligation of Insurers, Management Companies, Agents and Advisors to Identify, Report and Keep Records to Prevent Money Laundering and Terror Financing) Order, 5771-2011. The purpose of the draft order is to replace the provisions of the Money Laundering Prohibition (Obligations of an Insurer and Insurance Agent to Identify, Report and Keep Records) Order, 5762-2001, and the provisions of the Money Laundering Prohibition (Obligations of a Provident Fund and Provident Fund Management Company to Identify, Report and Keep Records) Order, 5762-2001. The consolidated draft order was adapted to legislative changes and amendments made in the orders that apply to other financial institutions. Among other things, the draft order prescribes the following amendments: (1) the provisions of the money laundering prohibition will apply to pension funds, in addition to their applicability to date to life insurance and provident funds; (2) the provisions of the money laundering prohibition will also be extended to salaried employees 1- 40

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who are the controlling shareholders of a company that is controlled by five people at most: (3) an obligation was defined to initiate a "know your customer" (KYC) procedure before entering into a contract for life insurance or opening a provident fund account. As part of this procedure, the financial institution must clarify the customer's occupation, the source of the money to be deposited, purpose of drawing up the contract or opening the account and the activity planned in the account, regarding a foreign resident – the financial institution must investigate his interest in Israel and whether he is a foreign public persona, and regarding a business owner the financial institution must also investigate his category of business. Likewise, the financial institution must regularly monitor the KYC procedure based on the risk level of the policyholder or member. Should any doubt arise as to the identity of the member/policyholder or in connection with the authenticity of the identifying documents submitted, the financial institution must repeat the KYC procedure. (4) the obligations with respect to identifying the customer and verifying his details were extended; (5) financial institutions were obligated to regularly monitor transactions performed by the recipient of service in a life insurance contract or provident fund account, including to ensure that the transactions correspond with the nature of the contract or account based on their knowledge of the customer; activity in the contract or account with countries or territories listed in the fourth annex to the order must be monitored and there must be strict control of activity in a life insurance contract or account of a foreign public persona; (6) the obligations for providing reports on unusual activity were extended to apply to pension advisors as well; (7) the second annex to the draft defines a list of transactions that may be construed as unusual activities and must be reported as part of the obligation to report unusual transactions performed in a life insurance contract or provident fund account; (8) objective and irregular reporting obligations were determined with respect to loans; (9) an obligation was defined to cross reference the list of terrorist organizations and any person declared as a terrorist, who appears on the website of the Money Laundering and Terror Financing Authority website, with the details of the policyholder, insured, member, power of attorney, life beneficiary, beneficiary in the event of death, beneficiary and controlling shareholder in all insurance contracts and provident fund accounts that are managed by the financial institution; (10) an obligation was introduced to define a policy, tools and risk management regarding the money laundering and terror financing prohibition that comply with the financial institution's obligations regarding identification, reporting, and record keeping, including on the subject of Know Your Customer; (11) an obligation was introduced to establish a computerized database of all the life insurance contracts and accounts in the provident funds that shall include identifying details of the policyholders, the insureds, members, life beneficiaries, beneficiaries in the event of death, powers of attorney, beneficiaries and controlling shareholders, and various obligations were defined for saving various documents, including instructions for the performing of transactions; (12) changes were made regarding the list of instances that must be regularly reported. Likewise, the amounts for which such reports must be made were reduced, as well as other activity such as identifying and verifying the customer's details.

2.3.1.29. In June 2011, the Israel Securities Authority published an outline bill 1- 41

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concerning a report, discussion and analysis to be prepared by management (as part of the Authority's project to improve reports). Among other things, the proposed legislation contains the following amendments: (a) the present board of directors report will be replaced by a management report with a new format detailed in the proposal, the purpose of which is to provide management's perspective of the state of the corporation's affairs; (b) the management report shall be approved by the company's board of directors and signed by the chairman of the board, the CEO, chief operating officer and chairman of the committee that reviews the financial statements; (c) disclosure details that are not part of management's explanations of the state of the corporation's affairs will be transferred to other chapters in the periodic report, and correspondingly, information requirements based on management's estimates or that constitute part of the business plan, will be transferred to the management report, for example disclosure on strategy, goals, projected development in the coming year and trends and developments in the general environment; (d) a requirement for the management report to specifically include reference to forward-looking information that previously referred to the reporting year; (e) if the report included profit estimates and forecasts, this information must now be based on information that is audited by the external auditors.

2.3.1.30. In April 2011, the ISA published Draft Securities (Prospectus Details and Draft Prospectus – Structure and Form) (Amendment) Regulations, 5771-2011. The draft proposes abolishing the exclusion prescribed in the aforementioned regulations whereby supervised corporations that have an investment rating (insurance companies and banks) that raise capital through SPCs exclusively for this purpose, may refrain from providing details in a prospectus with respect to the supervised corporation The purpose of the amendment is to provide investors with full information in view of the fact these corporations may also become insolvent, the corporations essentially all have the same risk level, and also to ensure that the company's rating does not become a substitute for the investor's discretion. 2.3.2. Life assurance & long-term saving The Commissioner's plan to increase competition in the pension savings market

2.3.2.1. In November 2010, the Commissioner published a document detailing a plan prepared by the Capital Markets, Insurance and Savings Division of the Ministry of Finance to increase competition in the pension savings market, in an effort to enhance the pension market. Following are the main points of the plan.

At the level between the financial institutions and customers: a. A standard model with maximum management fees will be introduced integrating the collection of management fees from deposits and accrual management. Concerning a draft Control of Financial Services (Provident Funds) (Management Fees) Law, 5771-2011, see Section 2.3.2.31. b. A management company will be given the option of marketing insurance products related to pension savings – regulating the method of marketing the insurance coverages and the method of paying for them. 1- 42

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c. Increased transparency when management fees are changed – specific rules will be prescribed concerning notification sent to customers regarding an increase in management fees and the agent or advisor will also be advised of any change in management fees. concerning a draft circular concerning management fees on pension savings instruments, see Section 2.3.2.15 d. Management fees that are agreed with a customer may not be increased for at least two years. At the level between distributors and customers: a. Salaried employees will have the right to choose an agent. Concerning a memorandum of the Control of Financial Services (Advice, Marketing and Pension Clearing System) Law, 5771-2011, see Section 2.3.2.15 b. A standard, simple and brief wording of the documents that a pension advisor and pension agent must submit to a customer is to be determined as part of the pension advice or pension marketing process, and regulation must be introduced for direct marketing activity by financial institutions. c. A standard, binding format is to be determined of the forms used in the pension advice and pension marketing process and a procedure will be determined mandating the use of a digital signature on advice and marketing forms, so that securely signed forms can be saved and transferred between financial institutions and distributors. At the level between financial institutions and distributors: a. A financial institution shall not pay a commission to more than one distributor on a particular date, including in respect of a transfer between different distributors; payment of a commission shall only be permitted to the last distributor appointed by the customer. concerning the draft Control of Financial Services (Insurance) (Commissions) Regulations, 5771-2011, see Section 2.3.2.30 below. b. Non-monetary benefits given by financial institutions to insurance agents shall be limited to a cumulative amount of NIS 600 a year, and certain conditions were set that when met, a financial institution may compensate agents for a sales target. c. Standard distribution fees were set for pension advice in respect of advice for all pension savings products, to be collected in respect of current deposits (to the savings component and the related insurance cover) and in respect of an accrued balance. Concerning the draft amendment to the Control of Financial Services (Provident Funds) (Distribution Fees) Regulations, 5771-2011, see Section 2.3.2.30 below. Merger of provident funds

2.3.2.2. Pursuant to the provisions of the fourth amendment to the Control of Financial Services (Provident Funds) Law, 5765-2005, and the sixth amendment to the Economic Efficiency (Legislative Amendments for implementation of the Economic Plan for 2009 and 2010) Law, as amended in the eighth amendment to the Economic Efficiency (Legislative Amendment for the implementation of 1- 43

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the Economic Plan for 2009 and 2010) Law, 5771-2011, a provident fund management company shall not manage more than one provident fund in each of the categories listed in the law from January 1, 2012.

To facilitate Harel Gemel's compliance with the aforementioned provisions, on July 31, 2011, Harel Gemel applied to the Commissioner for permission to merge the provident funds that it manages. In this context, Harel-Taoz (a fund owned by Harel Insurance and managed by Harel Gemel), and Harel Provident Fund (a fund owned by Harel Gemel) (hereinafter together: "the Merging Funds") will be merged into Harel-Otzma, so that the ownership structure of the tracks in the Merging Funds will be preserved. The Merging Fund will be called Harel Otzma-Taoz. Similarly, as part of the merger, the shekel investment track that had been part of Harel-Otzma will be changed and will become a short shekel track.

On October 5, 2011, the Commissioner gave his approval for this merger .

Tender to choose a supplier for the pension clearing system

2.3.2.3. Pursuant to the MOU published by the Commissioner on July 28, 2009 for cooperation to advance a central information system and for transferring pension savings money, and to the Third Amendment to the Control of Financial Services (Pension Advice and Pension Marketing) Law, 5771-2011 (see Section 2.3.2.7 below) relating, inter alia, to the procedure for licensing a company to operate a pension clearing system and for supervising such a accompany, on July 12, 2011, the Commissioner announced the publication of a tender to select a supplier to set up and operate a central pension clearing system. The key principles on which the tender is to be based were included in the announcement, and include the following: Target dates were set for setting up the system and operating the various services; information shall be transferred from financial institutions to savers no later than 12 months from the first-time operation of the system, and money shall not be transferred during the first 12 months; operation of the system is conditional on the promulgation of regulations concerning the security of the information transferred and saved in the system, the information transferred in the system shall be saved for the period of time required for rendering the services only, financial institutions shall be obligated to be connected to the system and licensees shall be obligated to hook up to the system gradually as necessary so as to guarantee proper operation of Israel's pension savings market. Subsequently, on August 18, 2011, the Commissioner published a Request for Information (RFI) concerning a management information system for the Capital Market, Insurance & Savings Department from software suppliers. Provisions of law

2.3.2.4. In November 2011, a memorandum of law was published amending the Income Tax Ordinance (No. ....), 5772-2011, which proposes extending the tax benefits given when money is withdrawn from an annuity savings channel and amending the provisions concerning an exemption on an entitling benefit, exemption on a recognized benefit, and utilization of the exemptions on annuities (entitling and 1- 44

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recognized) when they are capitalized, as follows: (a) the rate of exemption from the annuity will be gradually increased over 15 years to 67% of the benefit. The exempt monthly amount will not be calculated as a rate of the amount of the actual annuity up to a certain maximum, but as a fixed amount forming a percentage of the maximum amount; (b) full tax exemption will be given to an individual who reaches the age of 60, when withdrawing an annuity that stems from money deposited in an annuity provident fund as of January 1, 2000, and where the money deposited did not confer any tax benefit on the depositor; (c) the maximum capitalized amount will be increased based on the increase in the exemption rates according to the memorandum of law; (d) the definition of "entitling annuity" and "recognized annuity" will be changed so that a recognized annuity will be "part of the annuity paid by an annuity provident fund that is not an old fund, and where it is proved to the satisfaction of the tax assessing officer that it arises from tax-exempt payments". Moreover, it is proposed that the Minister of Finance will have the power to prescribe rules for imposing tax liability and the rate of the tax where money is withdrawn unlawfully from a provident fund, so that the capitalization of an annuity shall be construed as a "lawful withdrawal", provided that it takes place in accordance with the conditions prescribed in the law and the regulations, and specifically – to provide a minimum annuity securing the livelihood of an individual for the rest of his life. In the event of capitalization of an annuity that constitutes a "lawful withdrawal", the tax rates on non-exempt amounts will be those prescribed in the Ordinance. When capitalizing a recognized annuity that originates in money that was not entitled to a tax benefit at the time of being deposited, tax will not be imposed on the principal component of the capitalized amount, to avoid double taxation, and the taxable component will be taxed at a rate of 20%. Further amendments proposed as part of the memorandum are designed to benefit savers in provident funds when money is deposited and withdrawn .

2.3.2.5. On September 27, 2011, an Extension Order (Consolidated Version) on compulsory pensions was published, updating and annulling the general collective agreement from November 2007 between the Coordinating Bureau of Economic Organizations and the New Labor Federation, the professional unions division and the pension division, which prescribed mandatory pension insurance for all salaried employees in the economy who do not have a beneficent arrangement (as defined in the agreement).

The extension order stipulates that the rate of provision from the salary will rise gradually each year to 17.5% in 2014, based on the following allocation: 6% - employer's provision for severance pay, 6% - employer's provision for benefits, and 5.5% - employee's provision for benefits. Likewise, from January 1, 2014, deposits paid into provident funds at a rate of less than 17.5% will not longer be considered a beneficent arrangement. If an employee has a beneficent arrangement to which the law does not apply, it will be covered by the extension order during the interim period. For employees who have a beneficent arrangement but the severance pay component that is set aside is lower than the rate stipulated in the order, the employer must set aside at least the severance pay component at the rate stipulated in the order. Furthermore, the special 1- 45

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instructions that were laid down in the agreement with respect to those aged 50 or more were eliminated so that the agreement will apply to this population group as well.

2.3.2.6. On July 20, the Economic Efficiency (Legislative Amendment for the Implementation of the Economic Plan for 2009 and 2010) Law (Seventh Amendment), 5771-2011 was published. The law amends the provisions of the Fourth Amendment to the Control of Financial Services (Provident Funds) Law, 5765-2005, such that from January 1, 2012, a provident fund management company shall no longer manage more than one of each category of the provident funds listed in the law (instead of from June 30, 2011). The Law also stipulates that the aforesaid provision shall not apply to central severance pay provident funds.

2.3.2.7. Control of Financial Services (Advice on Pensions and Pension Marketing) (Third Amendment) Law, 5771-2011

On March 10, 2011, the Control of Financial Services (Advice on Pensions and Pension Marketing) (Third Amendment) Law, 5771-2011 was published, concerning the pension clearing house. Among other things, the Amendment prescribes the permitted uses of the pension clearing system, that are: (a) to transfer information about customers, at their request, from all financial institutions to any pension advisor or pension agent for the purpose of rendering pension advice or marketing; (b) to transfer information to customers, at their request, regarding pension products or insurance plans from the financial institutions; (c) performing one of the following actions: Transferring information about a customer, at his request, from a pension advisor or agent to a financial institution for the purpose of performing a transaction for the client, transferring a customer's request to a financial institution to perform transactions for a customer, transferring a report on balances from a financial institution to an employer as per the conditions prescribed by law, transferring additional information, as prescribed by the minister, at the customer's request, about activity that is subject to the Commissioner's control, transferring money between financial institutions and transferring information about the transfer of money, depositing money with a financial institution and transferring information about the deposit by an advisor, agent or employer, additional money transfers, as prescribed by the minister, at the customer's request, regarding activity that is subject to the Commissioner's control, transferring feedback for control between the users about such transactions that have been performed. Furthermore, the Amendment prescribes rules concerning the holding of the means of control in a company that operates a pension clearing system, including that a person may not hold more than 5% of a particular class of the means of control in such a company without a permit issued by the Commissioner, and that if that person is a user (excluding an employer), permission will not be granted to hold more than 15% of a particular class of the means of control. The Amendment also states that a person shall not control such a company without a permit issued by the Commissioner, and that most of the instructions prescribed with regard to the control of and holding the means of control in an insurer shall apply, with the relevant changes, to such holding of 1- 46

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this category of company. Moreover, the law prescribes a provision whereby the Commissioner may obligate a financial institution, pension advisor, pension agent or company of this kind to receive and transmit information or money through a central pension clearing system.

Provisions were also prescribed regarding the following: conditions for obtaining a license to operate a pension clearing system; provisions concerning an application to obtain a license; provisions concerning the other organs and officeholders of a company that operates a central pension clearing system; an option to determine the minimum capital required of such a company; the company's liability, including to determine a set of rules, to maintain information security measures and to formulate back-up and continuity arrangements; obligations to provide service for any financial institution, pension advisor, pension agent, employer or other company, as well as for any customer; duties of trust and caution in operating the aforesaid system, the possibility of issuing instructions regarding a fee to use the system; confidentiality obligations; instructions concerning information security, the protection of and access to information, instructions concerning the imposition of sanctions and other enforcement measures; a prohibition on the use of the words "pension clearing system" or "pension clearing house" without a permit from the Commissioner and an indirect amendment allowing a class action to be filed against a company that operates a central pension clearing system.

The provisions of the amendment concerning the use of the central pension clearing system will become applicable on the date that the regulations to be promulgated by virtue of the law take effect (no later than December 31, 2011), and up to this date the Commissioner will also issue preliminary instructions under Section 27(B)(7) of the Law.

2.3.2.8. On February 2011, the Control of Financial Services (Provident Funds) (Partial Withdrawal of Money from a Study Fund) Regulations, 5771-2011, were published. The regulations prescribe the default order of withdrawing money from a study fund by a member who wishes to withdraw part of the money that has been accrued to his credit, as follows: (a) that part of the fund account consisting of payments made into the fund from December 21, 2002, and in a fund for the self-employed from November 30, 2002 (the "Effective Date") onwards, that are not deemed a beneficiary deposit as this term is defined in Sections 9(16A)(c) or (16B) of the Income Tax Ordinance [New Version]; (b) that part of the fund account consisting of payments made before the Effective Date; (c) that part of the fund account consisting of tax-exempt payments, in view of these being considered a beneficiary deposit, as noted above. The member may apply to the management company and ask to withdraw the money from his account in an order that differs from the aforementioned. The regulations will take effect 90 days after their publication. Circulars

2.3.2.9. On April 13, 2011, the Commissioner published a circular clarifying the circular on agreements for the rendering of services. The circular prescribes the following provisions pertaining to services that a bank with a pension advice 1- 47

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license may give on behalf of a management company: (a) receiving a request to withdraw an amount of no more than NIS 50,000 – this cannot be given if the money is to be withdrawn by a beneficiary; (b) accepting a request to deposit money from a member or employer – money may be deposited by a member in his account, including a lump-sum deposit, as long as the deposit can be made at any branch of the bank at which the member has a current account and the deposit does not involve filling out a form by the management company; (c) it must be possible to identify a member and confirm his signature for the purpose of rendering the services listed in the circular on agreements for the rendering of services (2011-10-3) only; (d) the circular on agreements for the rendering of services (2011-10-3) applies to all provident funds, including an education fund and a provident fund that does not have a distribution agreement with the bank

2.3.2.10. On March 16, 2011 the Commissioner published a circular concerning a model for determining the fair value of a non-marketable debt asset. Pursuant to the Control of Financial Services (Provident Funds) (Calculation of Asset Value) Regulations, 5769-2009, a financial institution must calculate the fair value of an asset that is not a marketable security according to fair value in line with the Commissioner's instructions, and the Commissioner may instruct the financial institution to enter into agreement with a company chosen through a tender, that specializes in determining the interest rates for discounting cash flows for the purpose of calculating the fair value.

In July 2010, Mirvah Hogen Ltd. was chosen through a tender, to provide individual price quote and interest rate services for financial institutions. Subsequent to the Supreme Court ruling instructing the tender to be cancelled, on September 14, 2011, the Commissioner published an announcement whereby the tender committee of the Ministry of Finance had decided that Mirvah Hogen Ltd. would continue to supply the database services for individual price quotes and interest rates for the financial institutions until June 1, 2012, or until the winner of the new tender published commences services, whichever is earlier.

2.3.2.11. On March 15, 2011, the Commissioner published a circular concerning compensation for a delay in withdrawing money or for a delay in transferring money between provident funds or investment tracks (hereinafter: "the decision"). The circular prescribes the following rules: (a) if there is a delay in withdrawing money from a provident fund, the management company must pay the member the following amounts: (i) money belonging to the member as credited to him on the date specified for receiving the money; (ii) the interest in arrears set in Article 41G1 of the Provident Funds Regulations. Where the amount that the member has in credit on the date on which the money was actually paid is higher than the amount payable by the company as noted above, the difference between these two amounts is also to be paid; (b) if there is a delay in transferring money between provident funds after October 1, 2008, then the management company must: (i) pay interest in arrears for the period of the delay; (ii) transfer the amount that was actually in the member's account on the date of the transfer (including any loss or profit); (iii) if the difference between the yield in the receiving fund and the yield in the transferring fund is positive, then the receiving fund shall credit the positive difference to the member's 1- 48

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account. (c) in the event of a delay in transferring money between provident funds up to October 1, 2008, and in the event of a delay in transferring money between tracks, the management company shall pay the member: (i) money belonging to the member as credited to him on the date set for transferring the money; (ii) the interest in arrears prescribed up to the date of the actual transfer; (iii) the yield obtained by the receiving fund during the overdue period (positive or negative). If the amount that the member has in credit on the date on which the money was actually transferred is more than the amount that the company must compensate the member for, the difference between these two amounts must also be paid. Likewise, if the management company is in violation of the provisions of the law concerning the transfer of money and due to the violation the transfer of the money is delayed, as a result of which the amount that the member has in credit in the fund is less than the amount he should have had if the transfer had taken place on time, the member is entitled to the difference between these two amounts. The financial institution must pay the money owed under the aforementioned provisions from the management fees insofar as the total amount owed to the member under the provision is more than the money that has accrued in the member's account. The financial institutions must implement the foregoing provisions with respect to applications that were received between June 1, 2008 and December 31, 2008 not through an operating bank, and with respect to complaints that members filed with the management company before March 15, 2011 regarding a delay in implementing their request. The unpaid money must be refunded pursuant to the aforementioned provisions in accordance with the dates specified in the circular.

The Group's management companies are in the process of reviewing historic data and computing the financial implications of the decision in principle. To implement the decision, the companies recruited manpower specially for carrying out the assignment and developed designated software to handle the matter. Based on project progress and carrying out of the required deployment, the Company (as owners of some of the provident funds managed by the Group) and the management companies made provision in the financial statements.

On August 30, 2011, the Commissioner published an update to the decision, determining that the management companies must publish a daily report on yields on their websites for each fund and track in respect of all of 2009 and up until September 5, 2011. In addition, it was stipulated that by September 8, 2011, all management companies must open a designated email box for exchanging information with the management companies as required for replying to members. The mailbox address must appear on the company's website and be reported to the Commissioner.

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that serves as the basis for calculating the compensation to which the member is entitled. As a result of this provision, implementation of the instruction in the decision on reporting the findings to the Commissioner (Section 8 C.4 of the ruling) was postponed until November 1, 2011, and the provisions concerning notice given by a recipient fund to a transferring fund on a member's entitlement to compensation (Section 8 D.3 of the ruling) was postponed until October 6, 2011.

2.3.2.12. On March 14, 2011, the Commissioner published a circular concerning the prohibition on giving a benefit to a pension advisor. The draft circular prescribes the following clarifications: (a) a financial institution or any person acting on its behalf must not give a benefit to a pension advisor, including to an entity who is able to influence the pension advice system of a corporation that has a pension advice license; (b) a pension advisor may not accept any benefit from a financial institution or any person acting on its behalf. There is no prohibition on giving a discount on management fees provided that the following conditions are met: The discount is similar to discounts that the financial institution gives to private customers or other entities that are not pension advisors, and have similar market characteristics, and with respect to a pension advisor who is a corporation – the discount proposed for pension advisors employed by the corporation, is similar to the discounts that the financial institution gives to other groups of workers in the corporation with similar characteristics. Likewise, the circular stipulates that a pension advisor may participate in activities organized by a financial institution if they meet the following conditions: (a) the activity involves the presentation of the pension products or the financial institution, including professional lectures; (b) the main content has been advertised in advance and does not include entertainment; (c) the financial institution does not pay for transportation or accommodation expenses; (d) the activity does not include any benefits other than the professional added value, excluding reasonable refreshments. A pension advisor may also attend a general event to which he is invited not in connection with his work or on account of his being a pension advisor, even if the financial institution does not share the cost of the event. The circular takes effect on its date of publication.

2.3.2.13. On March 14, 2011, the Commissioner published a circular concerning an agreement for the rendering of services – an update, the purpose of which is to revise the provisions of Circular 2006-10-2 which prescribed, inter alia, that any engagement between a pension advisor and a financial institution in the form of a management or operating agreement shall be construed as an agreement that creates a relationship prohibited under Section 19 of the Pension Advice Law, unless the conditions stipulated in the circular are met. Likewise, transitory provisions were prescribed that allow an agreement between a bank and a management company, when the conditions specified in the circular are met. This provision expired and new provisions must now be determined. The draft circular prescribes that until December 21, 2011, a management company may render the following services through a bank corporation: give information to members, including through the internet, receive information directly from members, including updating the members' details, receive information directly 1- 50

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from employers regarding money deposited in connection with their employees, receive a request from a member to withdraw money for an amount that is less than NIS 50,000, receive a request to make on-going deposits credited to a member, from a member or employer (not including enrolling a member in a pension product for the first time, making a one-time deposit or submitting an application to transfer money to a different pension product or another track in the pension product). The circular takes effect on its date of publication.

2.3.2.14. On February 28, 2011, the Commissioner published a circular concerning a standard format for the transfer of information and data in the long-term pension savings market – (the circular cancels Financial Institutions' Circular 2010-9-5). The purpose of the circular is to define the format for a "standard record" through which the financial institutions, licensees, and the consumers of information in the pension savings sector, will be able to communicate. The circular defines a standard format for the transfer of data and information, the structure of the data, diagram of the data, and the circumstances under which such information is to be transferred. The information will be transferred in a standard format as an XML file that provides flexibility regarding the content of the data. The information will be formulated in a cross section of interfaces specified in the circular. The information to be transferred shall include all the fields specified in the relevant appendix and the information shall be the most up-to date available and required in accordance with the provisions of the circular. The financial institution shall only transfer information to a licensee after a valid power of attorney has been received for accepting or submitting the information, as the case may be, by the licensee in the customer's name. The sender shall save the information to be transferred for at least 14 days from the transfer date and during this period a second request may be submitted for this information. Appendix A details the instructions concerning the holdings interface – the information that a financial institution must transfer to a licensee in order to present the current status of a customer's data correct at a particular cut-off date. Appendix B – pre-consultation interface. This details the information to be transferred for the purpose of presenting the status of the customer's data before pension advice or marketing is rendered. The provisions of the circular regarding Appendices A and B shall apply from October 1, 2011. Concurrent with the publication of the aforementioned circular, the Commissioner published a draft circular concerning Appendix C – portability interface. This interface specifies the information that managing entity of a transferring fund must send to the management entity of the receiving fund when money is transferred between provident funds. The Commissioner and the financial institutions are discussing the draft circular.

On August 18, an amendment to the circular was published updating the files attached to Appendices A and B to the circular (Holdings Interface and Pre- advice Interface). Draft Circulars

2.3.2.15. On September 19, 2011, the Commissioner published a draft circular concerning the manner of informing fund members of a provident fund merger,

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prescribing that a management company must sent each of the merging fund's members notice by ordinary mail at least 45 days and no more than six months before the date on which the merger takes place. The draft circular also stipulates that after the merger has been carried out, a management company shall send notice by ordinary mail to the merging fund's members one month after the merger has taken place or by the date on which the periodic report closest to the time of the merger is sent, all with the wording specified in the circular. The Commissioner and the financial institutions are discussing the draft circular.

In addition to the draft circular, the Commissioner published a draft procedure that the purpose of which is to regulate the way in which applications for merging provident funds and for merging investment tracks are submitted for the Commissioner's approval. The Commissioner and the financial institutions are discussing the draft procedure.

2.3.2.16. On August 24, 2011, the Commissioner published a draft circular concerning instructions about the disclosure format required in the financial reports of provident funds and pension funds, forming another layer in the project to update the provisions regarding the presentation and disclosure format in the financial statements of pension and provident fund management companies and of the pension and provident funds that they manage. The draft circular prescribes provisions that address the following: (a) the annual financial statements of a management company – shall include a management review and financial statements that include at least the information specified in the reporting format, based on the appendices to the draft circular; (b) any report or note that appears in the financial statements of a multi-track provident fund shall be given for each investment track and in aggregate, unless the appendices specify otherwise; in an annuity paying provident fund separate disclosure shall be made in respect of the assets recorded against the fund's liabilities for the payment of annuities; (c) the financial statements shall be signed by the chairman of the management company's board of directors, the management company's CEO, and a senior financial officeholder of the management company, and their names and positions in the management company shall appear next to their signatures together with the date on which the financials were approved. The provisions of the circular shall apply to all the provident funds, excluding an old fund. The provisions of the circular shall apply from the financial reports for 2011. The Commissioner and the financial institutions are discussing the draft circular.

2.3.2.17. On August 21, 2011, the Commissioner published a draft circular concerning the purchase of insurance coverage through a provident fund management company. The draft circular stipulates that a provident fund management company may apply to the Commissioner for a pension insurance agency license that is limited to the marketing of cover for death and disability risks through a personal lines policy. The insured shall bear the full premium, and the premium for insuring a party related party to the management company shall be equal to the premiums applied when the policy is drawn up for insurance marketed by the insurer with similar features. A member who ceases to be an 1- 52

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active member may retain the insurance cover independently through the insurer, or through one fund manager (provided that the insurer and the management company have agreed to broker through another management company) without changing the policy conditions, including regarding the amount of the premiums. A management company may not purchase a group health insurance policy for fund members from the management company's money and it may serve as a policyholder only for group life insurance under the provisions of the Control of Financial Services (Provident Funds) (Insurance Cover by Provident Funds) Regulations, 5771-2011. The provisions of the circular shall apply to pension fund and provident fund management companies and to insurers for brokering personal lines policies and the drawing up of group insurance contracts from the commencement date of the circular, for group insurance contracts that are drawn up before the onset of the circular, from January 1, 2014, and for group life insurance contracts in accordance with the aforementioned regulations. The Commissioner and the financial institutions are discussing the draft circular. Concurrently, draft Control of Financial Services (Provident Funds) (Insurance Cover by Provident Funds) Regulations, 5771- 2011, were published, see Section 2.3.2.24.

2.3.2.18. On August 18, 2011, the Commissioner published a draft circular concerning financial reporting provisions for new pension funds. The circular amends Pension Circular 2004/10, which does not expressly define the method of charging the actuarial surplus or deficit stemming from a deviation in the yield assumption. The circular details the method of charging the actuarial surplus or deficit to pensioners for the balance sheet year. The draft circular stipulates that an update shall be made for each group of pensioners according to the month in which they began to receive the pension, in respect of the actuarial surplus or deficit found for the balance sheet year, based on the rules listed in the appendix to the circular. The Commissioner and the financial institutions are discussing the draft circular.

2.3.2.19. On August 11, 2011, the Commissioner published a draft circular concerning direct expenses for performing transactions. The draft circular prescribes provisions relating to the draft amendment to the Control of Financial Services (Provident Funds) (Direct Expenses for Performing Transactions) Regulations, 5771-2011, pertaining to an expense arising from an investment in index-linked certificates, an expense paid for conducting class actions and derivative claims, and pertaining to issuing quarterly reports to an investment committee about the payment of direct expenses for performing transactions. Regarding the draft amendment to the Control of Financial Services (Provident Funds) (Direct Expenses for Performing Transactions) Regulations, 5771-2011 – see Section 2.3.2.19. The provisions of the circular shall take effect from January 1, 2012. The Commissioner and the financial institutions are discussing the draft circular.

2.3.2.20. On August 4, 2011, the Commissioner published a draft circular concerning instructions for managing a central, annuity provident fund. The draft circular prescribes rules for the depositing of members' contributions in a central, annuity provident fund, subject to the following principles: (a) assets accrued 1- 53

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regularly over time shall be kept separately from the member's other assets, in a manner that will ensure payment of the annuities. (b) the member's financial situation shall be taken into consideration. The circular also prescribes rules concerning preparation of the actuarial balance, the method of calculating the actuarial liability and the actuarial assumptions for estimating the fund's liabilities. Concerning the draft Control of Financial Services (Provident Funds) (Rules for the Management of a Central Annuity Provident Fund) Regulations, 5771-2011, see Section 2.3.2.26.

The Commissioner and the financial institutions are discussing the draft circular.

2.3.2.21. Further to the Commissioner's plan to increase competition for pension savings products (see Section 2.3.2.1), on March 27, 2011 the Commissioner published a draft circular concerning management fees on pension savings instruments. The draft circular stipulates that a financial institution shall be entitled to offer a member a management fee rate that is lower than the maximum rate prescribed by law, provided that the offer is valid for at least two years from the onset of the collection of the lower management fees. Moreover, a financial institution must send the member and the licensee who gives the member the pension advice or pension marketing notice of any change in the management fees collected from the member no later than two months and no earlier than four months before the expected date of the change, pursuant to the wording that that appears in the draft circular. The Commissioner and the financial institutions are discussing the draft circular.

2.3.2.22. On March 9, 2011, a second draft circular was published concerning a procedure for locating members and beneficiaries. The purpose of the circular is to create an effective mechanism which can be easily implemented by the financial institutions for locating members with whom contact has been severed and with beneficiaries after the death of the member, as well as to inform members and beneficiaries that money exists to which they are entitled. The draft circular stipulates that the financial institution must apply to the Population Registry (pursuant to the provisions of the draft regulations detailed below) and establish an internal procedure for updating the member's identifying details within 10 days of receiving information about members. In addition, the financial institution must establish detailed work procedures regarding the location of members they have lost contact with and the location of beneficiaries of deceased members. The financial institution must save documentation of any action taken to locate the members with whom contact has been severed with and to locate beneficiaries. The circular prescribes rules for informing the Administrator General of money belonging to members with whom contact has been severed and of members who have died, every quarter from nine years after the time that such contact was severed or from the date on which the financial institution is informed of the member's death and it has been unable to contact the beneficiaries, with respect to all the details that the financial institution has in its possession. In addition, the financial institution must send the Superintendent a computerized annual report concerning members with whom contact has been severed and about members who have died, as specified 1- 54

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in the draft circular. The board of directors must appoint an entity to take charge of implementing the provisions of the procedure, the circular, and the regulations, and discuss its compliance with the aforesaid provisions every two years. Likewise, it must examine compliance with the provisions as part of the annual audit plan every three years. In addition to the draft circular, draft Control of Financial Services (Provident Funds) (Finding members and beneficiaries) Regulations, 5771-2011, was published. The draft regulations prescribe that a financial institution must apply to the Ministry of the Interior's Population Registry each quarter to verify basic identification details about its members with those that appear in the Registry. In addition, every six months, a financial institution shall apply to the Population Registry for the surname, address and date of death of members and policyholders. Likewise, a financial institution shall work with reasonable diligence to locate members with whom contact has been severed, including contacting entities that may have information that can help locate such members, including – contacting contact people (the licensee that registered the member or who was appointed by the member and persons who appear in the financial institution's records as being in contact with the member when the transaction was made – the most recent of these), the employer, and in a sectoral provident fund – the entity representing the members, and applying to various databases. On its website, the financial institution must publish an interface enabling members with whom contact has been severed to check, using ID numbers or any detail instructed by the Superintendent, whether the financial institution has any money belonging to them. Regarding members for whom the financial institution has received notice of death, the financial institution must contact the beneficiaries within 90 days, and if it is unable to do so – it must send notice to the member's address, and contact the Population Registry, various databases, and concerning an address and telephone number for the beneficiary – to the licensee whose name appears in the financial institution's records as the person who enrolled the member or the licensee who was appointed by the member to handle the account – whichever is more recent. If the financial institution has no information pertaining to the deceased member's beneficiaries within 6 months, the financial institution must contact the Registrar of Inheritances and the Rabbinical Courts administration to obtain details of any person who has applied for an inheritance order or probate of the will. The regulations stipulate that management fees will be collected at a monthly rate of no more than one-twelfth of 0.2% of all the assets in the member's account or at a monthly rate that was collected from the member's account – the lower of the two, from one after the date on which contact with the member was severed. The Commissioner and the financial institutions are discussing the draft circular and regulations.

2.3.2.23. On January 12, 2011, the Commissioner published a further draft circular concerning capital requirements for management companies. Accordingly, the management company of an old fund shall reduce the minimum capital amount required of it at the reporting date by 30% of the amount prescribed in Article 3(A)(1)(b) of the Capital Regulations, a provident fund management company that guarantees a yield shall reduce the minimum capital amount it must hold at 1- 55

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the reporting date by 30% of the amount prescribed in Article 3(A)(1)(b)(1) of the Capital Regulations, the management company of a central provident fund company for annuity shall reduce the minimum equity it is required to hold at the reporting date so that it holds only the initial shareholders' equity required of it under Article 3(A) of the Capital Regulations. Moreover, a management company that draws up professional liability insurance or insurance to cover an abuse of confidence by its employees for an amount that is higher than that required in Article 41E(F1) of the Income Tax (Rules for the Approval and Management of Provident Funds) Regulations, 5724-1964, may reduce the minimum equity by 20% of the amount of surplus insurance, subject to restrictions prescribed in the draft circular. The provisions of the circular shall apply on the date on which the Capital Regulations take effect, and the provision concerning a reduction in the amount of shareholders' equity in respect of insurance that has been drawn up shall apply as of December 31, 2014, or on the day on which the management company supplements the amount of minimum shareholders' equity it is required to hold, the earlier of the two. The Commissioner and the management companies are discussing the draft circular.

Regarding the supplementary capital that the management companies in the Harel Group require as per the draft circular, see Note 7 to the Financial Statements.

Draft memorandum of law and regulations

2.3.2.24. On August 21, 2011, the Commissioner published draft Control of Financial Services (Provident Funds) (Insurance Cover by Provident Funds) Regulations, 5771-2011. Among others, the draft regulations prescribe the following provisions: (a) a management company may purchase insurance cover for longevity, for risk of death and disability only; (b) provisions concerning conditions for the insurance cover; (c) provisions concerning retaining the insurance cover once contributions are no longer paid into the provident fund; (d) conditions for the purchase of group life insurance by the provident fund management company. Concerning a draft circular on the purchase of insurance cover through a provident fund management company, see Section 2.3.2.17. The Commissioner and the financial institutions are discussing the draft regulations .

2.3.2.25. On August 11, 2011, the Commissioner published draft Control of Financial Services (Provident Funds) (Direct Expenses for Performing Transactions) Regulations, 5771-2011. Within the context of the draft regulations, the temporary provision in the regulations regarding an external management fee and the expense incurred on account of an internal rating prepared by the management company or company that it controls, that constitutes a direct expense for performing transactions in provident fund assets, will become a standing order. The regulations are to take effect on January 1, 2012. Concerning the draft circular on direct expenses for performing transactions, see Section 2.3.2.19. The Commissioner and the financial institutions are discussing the draft regulations. 1- 56

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2.3.2.26. On August 4, 2011, the Commissioner published draft Control of Financial Services (Provident Funds) (Rules for the Management of a Central Annuity Provident Fund) Regulations, 5771-2011. The draft regulations prescribe provisions concerning the management of a central annuity provident fund ("the Fund"), that, among other things, prescribe the following: (1) Instructions concerning management of the Fund: A fund manager shall manage a separate account for entitled employees who receive annuities and a separate account for entitled employees who do not receive annuities; (2) Instructions concerning the depositing of the member's contributions in the Fund: The amounts that the member deposits in the Fund shall not be less than the accrued actuarial obligation at the enrollment date, and shall not be more than the maximum depositable amount at that date; (3) Provisions concerning the method of payment from the fund: when the employee suffers an entitlement event, the eligible employee shall receive payment of the amounts due from the member in accordance with the work agreements. Regarding the draft circular of instructions for the management of a central annuity provident fund, see Section 2.3.2.20. The Commissioner and the financial institutions are discussing the draft regulations.

2.3.2.27. On August 1, 2011, a draft of the Control of Financial Services (Provident Funds) (Minimum Capital Required of a Management Company) Regulations, 5771-2011, submitted to the Knesset finance committee. The draft regulations prescribe that the initial equity required of a management company shall be NIS 10 million, and the minimum equity required of a management company at the date of the report (annual and quarterly) shall be no less than a combination of the following: (a) the higher of the following: (I) initial capital as noted, of NIS 10 million; (II) the cumulative amount of 0.1% of the assets under management to limit managed assets of NIS 15 billion, 0.05% of the assets under management to limit managed assets above and 0.25% of the managed expenses; A management company whose equity is less than that mentioned in the regulations, must increase its equity by the date of the report (transitory provisions were prescribed for a management company that received a license before the onset of the regulations). Furthermore, the regulations prescribe ways of investing shareholders equity. The Commissioner and the financial institutions are discussing the draft regulations. Concurrently, draft Income Tax (Rules to Approve and Manage a Provident Fund) Regulations (Second Amendment), 5771-2011, were published which propose: (a) abolishing the provisions in the regulations relating to the minimum equity required of a management company; (b) determining that the provision concerning a management company's obligation to operate on behalf of each of the fund's members only and not to give preference to any matter or consideration over the good of the members, will not apply to a management company that only manages sectorial provident funds; (c) determining specific provisions concerning indemnity for the senior officers of a company that only manages sectorial provident funds.

2.3.2.28. Pursuant to the Commissioner's plan to increase competition for pension savings products (see Section 2.3.2.1), on October 25, 2011, the Commissioner published second draft Control of Financial Services (Insurance) 1- 57

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(Commissions) Regulations, 5771-2011.The draft regulations propose the following: (1) commissions (that are not dependent on meeting sales targets) shall be paid directly to the insurance agent; (2) commissions for meeting sales targets are payable to the insurance agent subject to the following conditions: (a) The sales target does not relate to a particular insurance product; (b) the sales target is reviewed over a period of a year or more; (c) commissions paid to an insurance agent for a non-pension product – may be paid in any way, provided that before enrolling the insured in the insurance product, the insurance agent gives the insured a fair disclosure document about the commissions owed to him on account of or in connection with the sale of the product; (d) commissions paid to an insurance agent for a pension product – payment will be made exclusively as monetary payment directly to the insurance agent. In addition, commissions shall only be paid for an insurance product that is not for a specified period when one of the of the following conditions are met: (a) the ratio between commissions that are not in respect of meeting the sales target over 12 months for a period of 5 years from the enrollment date and the commissions for the first year of insurance shall be no less than 0.4; (b) notwithstanding the foregoing, a commission may be brought forward by a rate of 20% of the commission due for payment during the first five years so that it is paid during the first year; (c) the insurance agent will refund the financial institution with commissions that were brought forward if the insured cancels the policy during the first five years or another licensee is appointed to handle the insurance product for the insured. The draft further stipulates that commissions will not be paid for an insurance product to more than one licensee for the same period, unless the licensees handle the product jointly under an agreement that specifies the allocation of the commissions between the licensees. A commission may be paid to an agent who enrolls a customer in a particular product for the first time, even after another licensee has been appointed to replace him, for three years from the date of enrollment, provided that the total commissions payable to the insurance agent who enrolled a customer in a product for the first time, together with commissions payable to the new licensee each year, are not more than the commissions that would have been paid to the agent who originally enrolled the customer had a new licensee not been appointed. The Commissioner and the financial institutions are discussing the draft regulations and at this stage it is therefore impossible to estimate the regulations that will eventually be formulated.

2.3.2.29. Pursuant to the Commissioner's plan to intensify the competition for pension savings products (see Section 2.3.2.1), on March 27, 2011, the Commissioner published a memorandum of the Control of Financial Services (Advice, Marketing and Pension Clearing System) Law, 5771-2011, that addresses allowing the customer to choose the licensee who will recommend the pension savings plan. The memorandum of law proposes determining that an employer will not be able to make a transaction involving a pension product contingent on it being performed by a particular licensee, including a licensee who renders operating services to the employer. In addition, an employer will not be able to condition performance of the transaction upon any other service that he renders for the employee (such as the actual operating services or granting of a benefit to an employee). It is also proposed that the Commissioner shall have the 1- 58

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authority to establish criteria when giving permission to a pension advisor that is a corporation for entering into agreement with an employer or employers' organization for the rendering of pension advice to an employee of that employer or to an employee of one who is a member of the employers' organization. The memorandum of law also proposes imposing on a licensee the obligations that apply to an insurer with respect to the submission of reports to the Commissioner, and prohibiting a licensee from conditioning the purchase of one pension product on the purchase of another product. The Commissioner and the financial institutions are discussing the draft memorandum.

2.3.2.30. Pursuant to the Commissioner's plan to increase the competition for pension savings products (see Section 2.3.2.1), on March 27, 2011, the Commissioner published a draft amendment to the Control of Financial Services (Provident Funds) (Distribution Fees) Law, 5771-2011, the purpose of which is to apply a standard distribution fee model to all pension savings products. The draft regulations propose that an insurer will be able to pay a distribution fee in respect of pension products that it manages for which the customer has received pension advice. The proposed monthly rate of the maximum distribution fee is: one twelfth of 0.2% of the accrual on the last business day of each month and 2% of the deposits made each month. With respect to a customer who receives a discount on the management fees, a 40% reduction shall apply to the rate of the distribution fees actually collected from the accrual and the on-going deposits. It is proposed that the rate of the distribution fees for education funds shall remain as one-twelfth of 0.25% of the balance of the assets each month. The regulations shall become applicable on January 1, 2012, and regarding existing customers who received pension advice for which they paid a distribution fee prior to publication of the regulations – the commencement date shall be January 1, 2014. The Commissioner and the financial institutions are discussing the draft regulations.

2.3.2.31. Pursuant to the Commissioner's plan to increase the competition for pension savings products (see Section 2.3.2.1), on March 27, 2011, the Commissioner published the draft Control of Financial Services (Provident Funds) (Management Fees) Law, 5771-2011, the purpose of which is to apply a standard model to the management fees on pension savings products by collecting management fees from on-going deposits from the accrual. The draft regulations propose that the management fees on provident funds and managers insurance for the years 2012-2014 – will be at an annual rate of up to 1.5% of the accrual or up to 1.2% of the accrual and up to 5% of the deposits, from 2015 onwards –will be at an annual rate of up to 1.2% of the accrual and up to 5% of the deposits. The management fees on a pension fund will be at an annual rate of up to 0.5% of the accrual and up to 6% of the deposits. The Commissioner and the financial institutions are discussing the draft regulations. Regarding the supplementary capital that the management companies in the Harel Group require as per the draft circular see Note 7 to the Financial Statements.

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2.3.3. Health insurance circular

2.3.3.1. On August 2, 2011, the Commissioner published a circular concerning details of the insurance benefits in health insurance plans. The circular will replace Insurance Circular 2009-1-4 which stipulates that if an insurance plan states that the insured will be paid maximum insurance benefits not at face value, the insurer must present on its website the amount of the maximum insurance benefits at face value in respect of each of the insured events. The circular proposes establishing that the amount that appears on the insurer's website will be several amounts that form the variables comprising the total benefit (such as number of days of hospitalization, the surgeon's fee, and the cost of the operating theater) and that only if variables are not specified in the insurance plan will the amount appear as a lump sum. The provisions of the circular shall apply from March 1, 2012. Draft circular

2.3.3.2. On October 2, 2011, the Commissioner published a draft circular concerning the preparation of a plan for long-term care insurance. The draft circular prescribes provisions relating, inter alia, to the following: (a) the establishment of minimum standards for the definition of an "insured event"; (b) definition of an insured's minimum entitlement to insurance benefits when the insured event occurs; (c) an instruction whereby the long-term care insurance (LTC) policy shall be an all-life policy; (d) an instruction whereby the premium in the policy shall be fixed or increasing and then set at age 65 at the latest; (e) the insured is entitled to receive the paid-up value or surrender value to be calculated so that no source of surplus profit is created for the insurer in respect of a paid-up policy and there is no subsidy between paid-up policies and active policies; (f) costing of the premium shall not be based on a cross subsidy between the different age groups and between genders, and each age group shall not span more than five years; (g) an insurer may raise the premium table and adjust the table of paid-up values for existing insureds based on the Commissioner's instructions, and the insurer must suggest that the insured continues to pay premiums based on the previous table of premiums for reduced insurance benefits; (h) a waiver of premium payments during the period in which insurance benefits are paid; (i) an insurer shall not condition enrollment in a LTC policy on the purchase of other insurance cover, nor shall it condition cancellation of any insurance cover on cancellation of the cover for long-term care; (j) provisions concerning fair disclosure to be given to an insured before he enrolls in the insurance, the information to be included in the policy schedule and on the insurer's website, and the information and documents to be given to the insured in connection with a claims form as part of the policy; (k) transitional provisions concerning the possibility of moving over to an all-life personal lines policy for a person who was insured through a group policy when the circular takes effect. The draft circular stipulates that an insurer shall submit revised insurance plans to the Commissioner pursuant to the provisions of the circular by March 1, 2012, and send all persons insured by a policy that does not comply with the provisions of the circular notice offering who them the option 1- 60

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to purchase a policy that complies with the provisions of the circular. Likewise, transitional provisions were defined whereby an insurer shall allow a person insured with a group LTC policy to move over to an all-life personal lines LTC policy subject to the conditions prescribed in the circular. The provisions of the circular shall apply in respect of long-term care insurance policies that are marketed from May 1, 2012 and to policies that are renewed as of September 1, 2012. The Commissioner and the insurance companies are discussing the draft circular. At this stage, in part in view of the inability to predict the regulatory arrangement that will eventually be adopted, mainly on the subject of group LTC insurance, the Company is reviewing the possible ramifications of the proposed arrangement, although at this stage it cannot estimate the repercussions. Position papers

2.3.3.3. On August 22, 2011, the Commissioner published a draft position paper concerning group long-term care insurance. The position paper states that from the publication date of the position paper and until instructions are published regarding the pricing of group long-term care insurance plans, no new contracts shall be drawn up for group long-term care insurance plans (excluding group LTC insurance offered to health fund members) without the Commissioner's prior, written approval. Existing contracts may be renewed for group LTC insurance for a period of no more than a year. Concerning a draft position paper concerning group LTC insurance issues, see Section 2.3.3.8 below.

2.3.3.4. On August 7, 2011, the Commissioner published a position paper concerning an issue in fixed-premium personal lines policies for insurance for surgery. The Commissioner's position is that fixed-premium personal lines policies for surgery must include compensation for excess premiums paid by the insured over and above the insurance risk up to the cancellation date of the policy, by way of payment of surrender values or by providing an additional policy period free of charge, as chosen by the insured. The Commissioner will not approve fixed-premium personal lines policies for insurance for surgery that do not include compensation for excess premiums, over and above the insurance risk, paid by the insured until the policy cancellation date, and as from November 1, 2011 such policies may no longer be marketed.

2.3.3.5. On August 7, 2011, the Commissioner published a position paper concerning the cancellation of a personal accident policy. The Commissioner's position is that providing the insured with certainty for the duration of the policy period prescribed in the contract is a fundamental principle of an insurance contract. Personal accident policies must therefore under no circumstances include a condition that allows the insurer to cancel the policy during the policy period for any reason, other than the grounds prescribed by law. Circular Drafts and Bills

2.3.3.6. On February 15, 2011, the Commissioner published draft Control of Financial Services (Conditions of an Insurance Contract) (Provisions concerning limitation in an insurance contract that includes disability cover) Regulations, 1- 61

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5771-2011. The draft regulations stipulate that an insurance contract that includes insurance cover for disability shall contain a condition whereby if the date on which the disability occurred is after the date of the accident or diagnosis of illness, as the case may be, the limitation period shall not be calculated from before the date on which the disability occurred. The regulations shall apply to insurance contracts that include cover for disability, including contracts for insuring accidental disability and personal accident insurance, where the claims in respect of these events have not expired when the regulations become applicable.

2.3.3.7. In January 2011, a private bill was passed in a preliminary hearing to include long-term care hospitalization in the basket of health services, against an increase in health tax of 0.5%. Draft position paper

2.3.3.8. On April 5, 2011, the Commissioner published a draft position paper that addresses issues in long-term care insurance. The position paper presents the problems of pricing personal and group long-term care insurance, as follows: Personal-lines insurance – in personal long-term care insurance with a variable premium that is set consistent with the insured risk on the date of payment, policyholders are likely to give up the insurance at a more advanced age when the risk is high and the premium is highIf the premium is fixed at age 65, there is concern of the insurance being abandoned due to the high level of premiums paid. In group long-term care insurance – the premiums are expected to increase when the insurance is renewed until it becomes impossible to find policyholders who will agree to renew the insurance, or due to the level of the premiums insureds will simply give up the plan. In addition, there is a problem of cross- subsidization between younger and older policyholders – when there are no new applicants, the ability to subsidize is eroded so that when the policy is renewed the premiums rise significantly the position paper proposes the following solutions to resolve the pricing problem: For personal lines policies – (a) preserving the present situation – a variable premium that is fixed at the age of 65 – until the premium is fixed it is relatively low and the costs of running the policy are low; (b) fixed premium only – allows for a stable premium but may affect the availability of the insurance for younger policyholders due to a premium that is significantly higher than the risk premium (the premium is derived from the insurance risk), and high operating costs; (c) limiting the pace at which the premium is increased – the initial premium is higher than the risk premium but lower than the fixed premium (an increased premium that does not change throughout the life of the policy), the premium increases over time at a rate lower than the increase in the risk premium; (d) the marketing of policies with two components and different premium structures – policies for younger people will be priced according to the risk premium and policies for older people will be priced on a fixed premium. Group policies - (a) maintaining the present situation – pricing in the short term - allows for low cost, sometimes without underwriting, and availability for older policyholders who are unable to purchase a personal lines policy due to the high premium; (b) only "personal lines policies under group management" will be marketed - this is a policy

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covered by all the conditions of a personal lines policy and is marketed to a group of insureds through a policyholder - offers a saving on operating costs that will also affect the level of the premium. in addition, at the end of the policy period, the insured will be able to choose whether to move over to a new policy or keep the existing policy under pre-defined conditions agreed upon with the policyholder In this case, the premium level would be certain; (c) the marketing of group policies with long-term pricing only, with controlled cross subsidization – the insurer will accrue the premium surpluses accumulated from surplus collection in a special fund to be used to finance the insurance in the long term. This will facilitate certainty of the premiums in the long term and also preserve the advantage of the group policy which is low in operating costs. 2.3.4. General insurance

2.3.4.1. memorandum of law On September 25, 2011, two memoranda of law were published amending the Compensation for Road Accident Victims Law, 5735-1975. The first memorandum proposes changing the definition of a "road accident" to stipulate that a road accident is only an incident that falls under the basic definition and that a person injured in a road accident that took place with intent to injure, is not defined as a "victim" for the purpose of the law. Likewise, the definition of a "motorized vehicle" and the term "use" was amended such that persons injured in situations or due to the use of vehicles that the law does not intend to discuss, will not be considered road accident victims. The amendment also seeks to increase the amount of compensation for non-monetary damage for disabled persons whose disability due to the accident is more than 10%. The second memorandum proposes several changes in the method of determining the medical disability of a road accident victim who files a claim with the court under the law for compensation on account of physical injury: Presidents of the courts will be empowered to instruct that an action which includes an application to determine disability will be transferred to a hearing in the presence of a registrar in the appropriate instances, or in exceptional instances – with the consent of the parties, where the disability is to be determined by a committee of medical specialists. Where the committee of specialists determines that the disability rate is not more than 10%, the registrar will determine the compensation to the victim according to standards to be determined in the regulations. Where the panel of specialists determines that the disability rate is more than 10%, the case will be returned to the court. In cases that are not assigned to a registrar, the disability will be determined by a specialist acting on behalf of the court and appointed by the presiding judge, as is the case today. Proposals were also put forward for regulating the manner of appointing medical specialists to determine the disability, from a list of specialists to be defined according to criteria to be decided upon by the Minister of Justice, based on the recommendations of a public advisory committee.

2.3.4.2. Directives of the Supervisor of Banks: The subject of rising housing prices and the increase in the volume of residential real estate purchases has been at forefront of the economic agenda since the second half of 2010. Consequently, the Supervisor of Banks issued a series of 1- 63

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directives designed to reduce demand and put an end to rising real-estate prices. Most of the directives last year that are listed below were directed towards lowering the demand for variable rate mortgages.

Furthermore, during the Reporting Period, there was a wave of social protests against the cost of living and the cost of housing, that has created expectations for lower prices and resulted in a drop in the number of transactions and a further decline in demand for housing loans in general, and for highly financed housing loans in particular.

The impact of the factors listed above is a decline in EMI's revenues from premiums in the third quarter of 2011, and a reduction in the forecast for premiums in the fourth quarter of the year.

A. On May 3, 2011, the Supervisor of Banks published an instruction concerning housing loans with variable interest that will apply to loans that are approved in principle from May 5, 2011 onwards.

The instruction restricts the part of the loan (mortgage) with variable interest to one third of the total amount of the housing loan given to a borrower by a bank. The restriction applies to new mortgages on all the variable interest tracks in which the interest may change during a period of less than five years.

The instruction also regulates the disclosure obligation for customers who previously took mortgages on an unlinked, variable interest track based on prime, where the component taken on this track is one third or more of the loan. The purpose of the disclosure is to increase the awareness of these borrowers to the possible repercussions of an increase in the rate of interest on the monthly repayments they have undertaken, and to enable them to sensibly examine this risk and the possibilities for minimizing it.

B. On February 27, 2011, the Bank of Israel published a clarification for the banking system (questions and answers file relating to proper banking management practice that addresses the capital adequacy requirements).

According to the clarification, an agreement to insure a housing loan, in which the insurance company undertakes to pay the sum assured only after the property has been sold, may be recognized as an appropriate credit risk mitigate if a mechanism is established for advance payments to be made on account of the insurance benefits that meets the three conditions specified in the clarification.

EMI received a letter from the Bank of Israel confirming that it finds the mechanism for advance payments it put forward acceptable, which includes a clear definition of those instances in which the recipient of protection loses his right to receive the insurance benefits. This mechanism will be a substitute for the requirement to receive "the full sum assured" on time.

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C. An instruction from July 11, 2010 stipulating that a bank shall hold additional provision of at least 0.75% in respect of the balance of the housing loans that were given as of July 1, 2010, and for which the rate of financing when the loans were extended is higher than 60%.

D. An instruction from October 28, 2010, whereby the banks are required to increase the allocation of capital for variable-interest mortgages that were approved from October 26, 2010, for loans with more than 60% financing when the loan was extended, and the ratio between the part of the housing loan extended at variable interest and the total loan is 25% or more. The variable interest part of the loans that meet such conditions and that were weighted at 35% or at 75% will, for the purpose of the capital allocation requirements, be weighted at 100% from this date. 2.3.5. Financial Services and the Capital Market Provisions of law

2.3.5.1. Regulations for activity in index-linked certificates

In recent years the Israel Securities Authority has been working to map the principal risks entailed in activity in index-linked certificates (ETFs) – operating risks, credit risks, market risks, and liquidity risks, and to establish provisions and standards in an effort to address these risks.

On November 16, 2010, a memorandum of the Joint Investment in Trust Law (Amendment No. 16), 5770-2010, was published ( "Sixteenth Amendment"), the main purpose of which is to regulate activity in index-linked certificates and by the issuers of index-linked certificates, and to place such activity under the oversight of the Israel Securities Authority, similar to mutual fund activity

In August 2011, the Israel Securities Authority published draft Joint Investment in Trust (Backing Account) Regulations, 5771-2011, to be implemented as part of the sixteenth amendment to the Joint Investment in Trust Law. The regulations determine a model for the allocation of capital by an index-linked certificates manager, based on the risks inherent in his activity - operating risks, credit risks, market risks. On November 13, 2011, a revised draft of these regulations was published.

On August 17, the Seventeenth Amendment to the Companies Law, 5771-2011, was published that applies the provisions of corporate governance on companies that issue index-linked certificates.

On November 13, 2011, the ISA published a document "principles of the model for the supervising index-linked certificates" that reviews the supervisory model put forward by the ISA with respect to the method in which index-linked certificate companies manage their risks and the implications of the various risks for the allocation of capital required of the company. According to the document, in addition to the impact of the different risks present in the Company's operations on the allocation of the capital it is required to hold, 1- 65

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investment standards will also be established (as part of the regulations to be promulgated in the sixteenth amendment) for the index-linked certificates, that will limit the existing risks in this regard. After the supervisory model has been approved, and until the subject is regulated as part of the sixteenth amendment, the ISA intends to instruct the issuers of index-linked certificates to report their capital allocation to investors according to the parameters in the capital allocation model, by way of applying an "adopt or disclose" obligation.

2.3.5.2. In April 2011, the ISA published Draft Securities (Prospectus Details and Draft Prospectus – Structure and Form) Regulations, 5771-2011. The draft proposes abolishing the exclusion prescribed in Article 51(B) that allow supervised corporations with an investment rating to raise capital through SPCs for this purpose, to avoid providing details in a prospectus with respect to the supervised corporation.

2.3.5.3. On January 31, 2011, the Securities Authority published a proposal to amend the Joint Investment Trust Law and the Joint Investment Trust (Distribution Fee) Regulations, 5766-2006. Among other things, the amendment proposes canceling the classification in respect of the units in a share-based fund and determining that units in a share-based fund as well as units in a foreign fund shall be classified as units of another fund, and that the rate of distribution fees payable in respect of the units of other said fund shall be 0.45% (instead of: 4%). Likewise, a distributor may determine different rates of distribution fees for the same category of fund, based on characteristics relating to their investment policy or classify them under a particular classification heading, subject to obtaining the approval of the Securities Authority and informing all the fund managers to this effect. A distributor may also collect a fee from the manager of a foreign fund that is higher than the permitted fee, provided that the distributor pays the surplus fee to the unit owners.

2.3.5.4. On August 5, 2010, the Board of Directors of the TASE approved a proposed amendment to the TASE Articles pertaining to the application of a new model for capital requirements of nonbanking TASE members (NBMs).Within the context of this model, the requirements for equity and liquidity and the rules for extending credit to customers by NBMs will be revised.

According to an estimate prepared by a subsidiary, that is a non-bank TASE member, based on data for its activity during the Reporting Period and correct for the existing balances at September 30, 2011, the subsidiary is in compliance with the minimum capital requirements (tiers one and two together, as defined in the amended regulations)

The new model was approved by the Knesset Finance Committee on May 31, 2011 and has been implemented from June 30, 2011. For companies that were not in compliance with the capital requirements at June 30, 2011, the requirement to supplement the equity is determined gradually until June 30, 2012. In view of the fact that the subsidiary was in compliance with the requirements at June 30, 2011, the schedule for supplementing the equity is irrelevant and it must comply with the requirements of the new model from June 1- 66

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30, 2011.

The capital requirement under the new model may change significantly and is noticeably affected by the volume of activity and seasonality, as well as by credit and the manner of the liquid asset investments at the date of the review. As a result, a line of credit for the subsidiary was approved by the parent company to be used where necessary.

2.4. Capital market developments A. General During the third quarter of 2011, fears intensified that the eurozone crisis would spread to larger member countries, Italy in particular, and would affect the banking system in Europe. In addition, the US and Europe published weak macroeconomic figures. Consequently, during the third quarter of 2011 share prices fell sharply all over the world. The rating companies announced that they were lowering the rating for Greece, Ireland, Portugal, Italy and Spain. In July 2011, agreement was reached on a plan to provide further assistance to Greece and other countries. The plan brought about partial relief, which soon dissipated when investors realized that it was inadequate to resolve all of Europe's problems. Following growing fears that several eurozone countries (Greece in particular) would default, CDS premiums and yields on government bonds of the problematic countries, rose. The IMF published its forecast for global growth – 4% for each of the years 2011-2012. The main points of the forecast: extremely low growth (although not a recession) in the developed countries, alongside fair growth in the developing nations, assuming that the economic situation in the eurozone does not spiral out of control and that economic activity in the US suffers no further shocks. Initial estimates for growth in the third quarter indicate an increase in output at an annual rate of 2.5% in the US, 9.5% in China, 0.8% in the eurozone, 2.0% in the UK, and 3.4% in South Korea. B. Economic Developments The Group operates in the Israeli economy, where the political, security and economic situation affect its activity in various sectors. Changes in the state of the Israeli economy may lead to changes in the volume of premiums and other revenues and to a change in the operating costs of the Group's companies. A change in employment levels in the Israeli economy may affect the volume of activity in life insurance and long-term savings. According to the CBS initial indicator in the third quarter of 2011 the product rose at an annual rate of 3.4%, a fair rate of growth although somewhat lower than previous quarters. Business output was up by an impressive 5.3%. During the course of July 2011, a social outcry and demonstrations against the cost of living began all over the country. In the capital market, fears grew over the loss of budgetary control and a sharp increase in the budget and deficit income tax rates, particularly corporate tax, compared with the planned rates. Following the protests, the government resolved to set up a committee headed by Prof. Manuel Trajtenberg. The Trajtenberg Committee submitted its recommendations, including 1- 67

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significant benefits to parents (who are part of the workforce) of children under the age of 6 and a substantial increase in the tax rates on high income earners and companies. The Committee on Increasing Competitiveness in the Economy (the Committee on the Concentration of Capital, headed by Chaim Shani) also submitted its recommendations, which include the separation of significant holdings in real and finance companies, and placing restrictions on directors who serve on the boards of significant financial institutions and significant real entities simultaneously. S&P upgraded Israel's credit rating C. Stock markets Shares on Israel's stock market fell sharply in the third quarter of 2011 at levels not seen since 2008, fuelled by the deepening debt crisis in Europe and signs of slower growth in the US. The TA- 100 index fell 13% during the third quarter and 21% during the first three quarters of 2011. The MSCI world index fell 17% during the third quarter, and by 12% during the first three quarters of 2011. The MSCI emerging markets index was down 22% during the third quarter, and by a similar rate for the first three quarters of 2011. Performance of the leading indices

Change during Change during Change during Change during 7-9/2011 7-9/2010 1-9/2011 1-9/2010 General shares index (15.7%) 10.8% (24.9%) 5.4% TA 100 (12.9%) 14.0% (20.8%) 6.0% TA 25 (11.9%) 15.4% (18.7%) 7.1% Yeter shares (16.5%) 10.2% (27.7%) 20.5% MCSI World index (16.5%) 13.9% (11.8%) 3.0% MCSI Emerging (22.5%) 18.2% (21.7%) 11.0% Markets index

The average daily volume of trade in shares on the TASE was NIS 1.6 billion in Q3 2011 (similar to previous quarter), and NIS 1.8 billion in the first nine months of 2011 (compared with NIS 2 billion in 2010). D. Bonds Market The general bond market rose 0.8% in Q3 2011 and 1.4% in the first nine months of 2011. The government bond index rose 3.1% in Q3 2011, and 3.4% in the first nine months of 2011. The corporate bond index decreased significantly 2.6% in Q3 2011 and 1.6% in the first nine months of 2011.

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Performance of leading indices:

Change during Change during Change during Change during 7-9/2011 7-9/2010 1-9/2011 1-9/2010 Bonds - general index 0.8% 2.1% 1.4% 7.5% Government bonds 3.1% 1.1% 3.4% 6.3% index Corporate bonds index (2.6%) 3.6% (1.6%) 9.4% Index linked 2.8% 1.9% 3.2% 8.2% government bonds Index linked corporate (2.9%) 3.9% (1.8%) 11.2% bonds Non-linked government 3.1% 0.8% 3.5% 4.9% bonds index F/C indexed 3.8% 0.9% 4.6% 1.1% government bonds index

The business sector raised NIS 10 billion through bonds in the third quarter of 2011, after raising NIS 12 billion in the second quarter of the year. In the first nine months of 2011, the business sector raised NIS 34 billion, compared with NIS 43 billion in 2010. The average daily volume of trade in bonds was NIS 4.2 billion in Q3 2011 (up 20% compared with the second quarter) and NIS 3.8 billion in the first nine months of 2011 (up 16% compared with the average for 2010). E. Foreign Currency Market During the third quarter of 2011, the shekel weakened 8.7% against the dollar and 2% against the euro. During the first nine months of 2011, the shekel weakened by 4.6% against the dollar (to NIS 3.712 / 1 USD) and was 6.5% weaker against the Euro (to NIS 5.0437/ 1 Euro). F. Inflation The CPI remained unchanged during the third quarter of 2011, and rose 2.2% over the first three quarters of 2011. Inflation for the 12 months from September 2011 was 2.9%, close to the upper limit of the inflation target (1%-3%).Following are figures on changes in the CPI:

Change during Change during Change during Change during 7-9/2011 7-9/2010 1-9/2011 1-9/2010 Change in CPI increase 0.6% 1.2% 2.7% 1.6% (known index) Change in CPI increase - 1.2% 2.2% 1.9% (applicable index)

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G. Bank of Israel Interest The Bank of Israel left the interest rate unchanged at 3.25% in the third quarter of 2011. During the first three quarters of 2011, the Bank of Israel raised the interest rate by 1.25%, continuing the process that had begun last year. In the interest announcement at the end of September 2011, the Bank reduced the interest rate for October by 0.25% to 3%, in the wake of fears of a negative shift in the global economy and its repercussions on the domestic economy and on Israel's capital market. H. Material market events after the reporting date At the end of October 2011, The Bank of Israel left interest rate for November unchanged at 3%. Consumer price index for October 2011, that published in November 15, 2011 rose in 0.1%. The Inflation for the last 12 months was 2.7%, On October 27, 2011, leaders of the euro bloc presented a new plan in an effort to resolve the crisis. The plan consists of an agreement to wipe out 50% of Greece's public debt which is held by private investors, at the same time continuing and even increasing the assistance offered to Greece by the eurozone countries and continuing the Greek austerity plan, increasing the power of the EFSF fund through leverage so that it can provide guarantees for all the bonds to be issued by Spain and Italy and increase the capital adequacy of Europe's 70 largest banks to 9%.

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2.5. Summary of data from the consolidated financial statements of Harel Investments 2.5.1. Summary of data from the consolidated performance reports of Harel Investments (in NIS thousands): For the Nine For the three for the year months ended months ended ended September 30 % September 30 December 31 2011 2010 2011 2010 2010 Life assurance and long-term savings segment Gross premiums earned 2,269,326 2,150,215 6 745,428 794,240 2,965,671 Income from management fees 405,884 431,303 (6) 136,642 189,662 619,159 Profit (loss) from life assurance business (11,828) 199,190 - (98,338) 146,380 314,917 Profit from provident fund management 46,837 52,867 (11) 13,679 18,775 68,936 Profit from pension fund management 35,858 20,902 72 14,696 7,157 28,703 Total profit from life assurance and long-term savings 70,867 272,959 (74) (69,963) 172,312 412,556 Total comprehensive income from life assurance and long-term savings (53,076) 328,914 - (136,847) 209,151 449,344 Non-life insurance segment ------Gross premiums earned 2,089,335 2,134,658 (2) 701,555 713,544 2,852,243 Premiums earned on retention 1,224,464 1,213,637 1 413,327 415,844 1,632,909 Total profit from non-lie insurance 87,399 98,388 (11) 9,758 12,725 141,685 Comprehensive income from non-life insurance (17,789) 110,270 - (32,197) 7,378 130,035 Health insurance segment Gross premiums earned 1,820,988 1,504,669 21 662,103 556,810 2,061,432 Premiums earned on retention 1,680,072 1,364,383 23 609,742 503,876 1,875,266 Total profit from health insurance 140,219 169,239 (17) 37,080 72,012 220,368 Comprehensive income from health insurance 104,789 179,856 (42) 20,102 76,298 227,183 Insurance companies overseas segment Gross premiums earned 110,286 67,777 63 41,686 25,722 95,925 Premiums earned on retention 73,538 43,076 71 28,277 16,684 60,818 Total profit (loss) from insurance companies overseas (26,693) (27,636) - (13,178) (8,574) (31,910) Total comprehensive profit (loss) from insurance companies overseas (26,931) (22,753) - (12,867) (4,315) (33,212)

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For the Nine % For the three for the year months ended months ended ended September 30 September 30 December 31 2011 2010 2011 2010 2010 Capital market and financial services segment Revenues from capital market and financial services 175,117 172,407 2 51,653 60,320 238,858 Total expenses from capital market and financial services 151,168 148,083 2 46,005 51,769 204,285 Total profit (loss) from capital market and financial services 23,949 24,159 (1) 5,648 8,551 34,408 Total comprehensive profit (loss) from capital market and financial services 23,834 24,367 (2) 5,735 8,626 34,516 Items not included in operating segments Net profit from investments and financing income 45,401 145,040 (69) (29,686) 55,246 194,520 Income from commissions 50,594 41,857 21 17,037 14,622 57,863 Other income 7,547 3,140 140 830 1,344 3,498 General & administrative expenses not charged to reports for operating segments 72,504 71,035 2 25,799 25,088 92,304 Financing expenses 123,430 78,126 - 39,669 36,100 113,412 Pre-tax profit 215,439 581,463 (63) (100,445) 265,862 830,183 Net profit for the period 143,495 369,362 (61) (61,108) 168,440 534,930 Other comprehensive profit for the period (213,392) 58,897 - (100,876) 53,052 27,118 Total comprehensive profit for the period (69,897) 428,259 - (161,984) 221,492 562,048 Net profit for the period attributed to the Company's shareholders 143,358 366,244 (61) (61,137) 169,868 529,825 Net profit attributed to non-controlling interests 137 3,118 (96) 29 (1,428) 5,105 Return on equity in terms of annual comprehensive income in percent (3%) 17% - (19%) 26% 16%

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Summary of data from the consolidated balance sheets of Harel Investments (in NIS millions): at Septmber at Dcember 30 31 2011 2010 % 2010 Total balance sheet 53,718 49,626 8.2 52,312 Assets for yield-dependent contracts 20,249 18,937 6.9 19,946 Other financial investments 17,249 16,636 3.7 16,903 Intangible assets 1,499 1,517 (1.2) 1,515 Reinsurance assets 5,113 5,103 0.2 5,105 Insurance liabilities (insurance reserves and outastanding claims) in life assurance for yield-dependent investment contracts and insurance contracts 18,197 17,213 5.7 18,211 for insurance contracts that are not yield dependent 9,387 8,946 4.9 9,070 In non-life insurance 9,616 9,396 2.3 9,397 In health insurance (yield dependent and non-yield dependent) 3,700 3,190 16.0 3,302 Foreign insurance companies (yield dependent and non-yield dependent) 197 164 19.8 158 Total insurance liabilities 41,096 38,909 5.6 40,138

Equity attributedt to holders of the Company's equity 3,408 3,507 (2.8) 3,578

Assets managed for the Group's members and policyholders (NIS millions) :

at September at Dcember 30 31 2011 2010 % 2010 For yield dependent invetsment contracts and insurance contracts 20,249 18,937 6.9 19,946 For members of provident funds and pension funds * 34,732 33,530 3.6 35,161 For mutual fund customers * 18,262 19,794 (7.7) 20,754 For customers portfolios * 2,658 ** 2,315 14.8 2,283 Index linked certificates (ETFs) 3,308 2,424 36.5 3,037 Total assets under management for the Group's policyholders and members 79,209 77,000 2.9 81,181

* Total assets managed by provident fund, pension funds, mutual funds and in portfolio management. Are not included in the Company's consolidated financial statements 1-55

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** reclassified 2.6. Additional figures regarding outcomes of activity The total amount of the premium earned from insurance business during the Reporting Period amounted to NIS 6.3 billion compared with NIS 5.9 billion during the corresponding period last year, a growth of approx. 7% compared with the corresponding period last year.

The total premium earned from insurance business in the Q3 2011 was NIS 2.1 billion, compared with similar profits during the corresponding period last year.

Comprehensive loss, consisting of profit after tax for the Reporting Period plus the net change in a capital fund in respect of available-for-sale financial assets and other changes in shareholders' equity, amounted to NIS 70 million loss for the Reporting Period, compared with comprehensive profit of NIS 428 million for the corresponding period last year. The transition between Comprehensive profit at the corresponding period last year to Comprehensive loss at the Reporting Period stems mostly from the influence of the capital markets in which the yields were negative compared with the positive yields during the corresponding period last year and increase in inflation in relation to the corresponding period last year.

Comprehensive loss in Q3 2011 was NIS 162 million, compared with a profit of NIS 221 million in the corresponding quarter last year. The transition between Comprehensive profit at the corresponding period last year to Comprehensive loss in Q3 2011 stems mostly from the influence of the capital market in which the yields during the Reporting Period were negative compared with the positive yields during the corresponding period last year And due to the fact that during the corresponding period last year collected NIS 65 million variable management fees compared with no collect variable management during Q3 2011.

The net profit at the Reporting Period amounted to NIS 143 million compared with a profit of NIS 369 million during the corresponding period last year. A 61% decrease at the net profit.

The net loss at the third Period of 2011 amounted to NIS 61 million compared with a net profit of NIS 168 million during the corresponding period last year.

Pre-tax profit during the Reporting Period amounted to NIS 215 million compared with a pre-tax profit that amounted to NIS 581 million during the corresponding period last year, a 63% decrease at the Pre-tax profit.

The Pre-tax loss at the second Period of 2011 amounted to NIS 100 million compared with Pre-tax profit of NIS 266 million during the corresponding period last year.

During the Reporting Period income from net investments and funding income amounted to NIS 248 million losses compared with profit of NIS 1,983 million during the corresponding period last year. The decrease compared with corresponding period last year stems mostly from the influence of the capital markets in which the yields during the Reporting Period were negative compared with the positive yields during the corresponding period last year.

The Group's funding expenses, not attributed to the branches of activity during the Reporting Period amounted to NIS 112 million compared with NIS 67 million during the corresponding period last year. The increase in financing expenses during the Reporting Period can be attributed mostly to the 1 -56

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issuance of deferred liability notes, that Harel Insurance uses as complex, second-tier capital that was done in May 2010, and therefore made only limited affection during the corresponding period last year and increase in inflation during the Reporting Period in relation to the corresponding period last year.

The Company's equity as of September 30, 2011, relating to the Group shareholders amounts to NIS 3,408 million in compared to equity of NIS 3,578 million as of December 31, 2010. The increase in equity stems from: (a) loss attributed to the Group shareholders of NIS 70 million; (b) distribute a dividend of NIS 106 million (c) additional influences in immaterial amounts for translation fund of external activities, holding company shares by a subsidiary running an exchange traded note and issue of options to employees.

For details concerning the regulatory capital requirements from the group's insurance companies, based on the Commissioner's circular on the subject of capital requirements for insurance companies, see Note 7 to the financial statements.

For details concerning an increase in the regulatory capital requirements for the Group's management companies, based on the draft Control of Financial Services (Provident Funds) (Minimum Equity Required of a Provident Fund or Pension Fund Management Company) Regulations, 5771-2011, see Note 7 to the financial statements. 2.7. Life Assurance and Long Term Savings Gross loss in life assurance and long term savings during the Reporting Period amounted to NIS 53 million compared to gross profit of approximately NIS 329 million during the corresponding period last year. The transition between Comprehensive profit at the corresponding period last year to Comprehensive loss at the Reporting Period stems mostly from the influence of the capital market in which the yields were negative compared with the positive yields during the corresponding period last year, increase in inflation during the Reporting Period in relation to the corresponding period last year, And due to the fact that during the corresponding period last year were collected NIS 65 million variable management fees compared with no collect variable management during the Reporting Period.

Due to the negative yields during the Reporting Period Harel Insurance did not collect variable management during the Reporting Period. Pursuant to the mechanism for collecting the variable management fees prescribed in the legislative arrangement, variable management fees will not be collected in respect of yield-dependent policies that were sold between 1991 and 2003, until investment profits are attained in respect of assets held against yield-dependent liabilities, which will cover the accrued investment losses. The real investment losses accumulated during the Reporting Period in respect of yield-dependent policies, less the investment profits attained during the Reporting Period, that relate to these policies, amount to NIS 1,153 million. Accordingly, at September 30, 2011, Harel Insurance will not collect variable management fees in line with the aforementioned mechanism in the amount of NIS 173 million. accordantly At October 30, 2011, the variable management fees that Harel Insurance will not collect on yield-dependent policies that were issued from 1991-2003, until the investment losses in respect of these policies are covered, amounts to NIS 97.6 million. Comprehensive loss in Q3 2011 in the life insurance long-term savings sector was NIS 137 million, compared with a profit of NIS 209 million in the corresponding quarter last year. The transition between Comprehensive profit at the corresponding period last year to Comprehensive loss at the 1 -57

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Reporting Period stems mostly from the influence of the capital market in which the yields were negative compared with the positive yields during the corresponding period last year And due to the fact that during the corresponding period last year were collected NIS 65 million variable management fees compared with no collect variable management during the Reporting Period.

Pre-tax profit in life assurance branch and long term savings during the Reporting Period amounted to NIS 71 million compared to pre-tax profit of NIS 273 million during the corresponding period last year, a 74% decrease.

Pre-tax loss in life assurance branch and long term savings during the third Period of 2011 amounted to NIS 70 million compared to pre-tax profit of NIS 172 million profits during the corresponding period last year.

Life assurance Total premiums earned during the Reporting Period amounted to NIS 2,269 million compared with NIS 2,150 million during the corresponding period last year, a 6% increase compared to the corresponding period last year. Premiums earned during the Reporting Period constituted 36% from the total premiums earned in the Group during the Reporting Period. Single premiums were recorded during the Reporting Period in a total amount of NIS 46 million, received from the employees who retired from Bezeq, as opposed to single premiums at the amount of NIS 124 million during the corresponding period last year. Neutralizing the influence of single premiums from Bezeq there is a 10% increase in the premiums earned in life assurance.

Total premiums earned in life assurance during the third Period amounted to NIS 745 million compared with NIS 794 million during the corresponding period last year, a 6% decrease compared to the corresponding period last year. During the corresponding period last year premiums were recorded in a total amount of NIS 105.4 million, received from the employees who retired from Bezeq as opposed to no premiums received from the employees who retired from Bezeq during the third Period 2011. Neutralizing the influence of single premiums from Bezeq there is an 8% increase in the premiums earned in life assurance during the third Period 2011comperd with the corresponding period last year.

The total loss of the premium earned from life assurance during the Reporting Period amounted to NIS 135 million compared with NIS 254 million profits during the corresponding period last year. The transition between Comprehensive profit at the corresponding period last year to Comprehensive loss at the Reporting Period stems mostly from the influence of the capital market in which the yields were negative compared with the positive yields during the corresponding period last year, due to increase in inflation in relation to the corresponding period last year, and due to the fact that during the corresponding period last year were collected NIS 65 million variable management fees compared with no collect variable management during the Reporting Period.

Pre-tax loss in life assurance during the Reporting Period amounted to NIS 12 million compared with pre-tax profit of NIS 199 million during the corresponding period last year. Pre-tax loss in life assurance during the third Period amounted to NIS 98 million compared with pre- tax profit of NIS 146 million profits during the corresponding period last year. During the Reporting Period revenues amounted to NIS 503 million and constituted approximately 2.59% of the average reserve in life assurance, compared to revenues for the amount of approximately

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NIS 443 million during the corresponding period last year that constituted 2.47% from the average reserve in 2010. The total amount of life assurance reserves as of September 30, 2011, amounted to NIS 28 billion. 2.7.1. Yield-dependent policies: Policies issued between 1992-2003

1-9.2011 1-9.2010 7-9.2011 7-9.2010 (in percent) (in percent) (in percent) (in percent) Real yield before payment of management fees (8.50) 4.81 (6.27) 4.09 Real yield after payment of management fees (8.88) 3.83 (6.40) 3.43 Nominal yield before payment of management fees (5.98) 6.50 (5.72) 5.37 Nominal yield after payment of management fees (6.38) 5.51 (5.86) 4.70 Following are the yield rates for yield-dependent policies - General Track

Policies issued after 2004

1-9.2011 1-9.2010 7-9.2011 7-9.2010 (in percent) (in percent) (in percent) (in percent) Real yield before payment of management fees (8.97) 5.54 (6.53) 4.41 Real yield after payment of management fees (9.78) 4.62 (6.82) 4.10 Nominal yield before payment of management fees (6.47) 7.24 (5.99) 5.70 Nominal yield after payment of management fees (7.30) 6.31 (6.28) 5.38

The estimated amount of investment profit (loss) and management fees included in the consolidated income statement, which were credited to or debited from insureds in yield-dependent policies, and which are calculated according to the instructions prescribed by the Commissioner, on the basis of the quarterly yield and balances of the average insurance reserves, is (in NIS millions):

1-9.2011 1-9.2010 7-9.2011 7-9.2010 Profit (loss) after management fees (1,064) 864 (940) 730 Total management fees 102 152 34 93 Pension funds 2.7.2. The number of members in the pension funds managed by the Group as of September 30, 2011, is 563,685 members, 331,292 of which are active members, a 4% increase in the number of active members compared with December 31, 2010. The extent of assets managed by pension funds as of September 30, 2011, amounted to NIS 12.8 billion compared with NIS 10.9 billion on September 30, 2010, a 18% increase and compared with the extent of assets of NIS 11.8 billion as of December 31, 2010, an increase of 9%. The increase stems from, inter alia, an 1 -59

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increase in the number of active members and increase in members' provisions to their compulsory pension. Contribution fees that were collected by the Group's pension funds during the Reporting Period amounted to NIS 1,782 million compared with NIS 1,367 million on September 30 2010, a 30% increase. The total amount of the assets of the pension funds and the contribution fees deposited therein are not included in the consolidated financial statements of the Group . The total amount from management fees collected from pension funds managed in the Group and operating an old pension fund during the Reporting Period amounted to NIS 132 million compared with NIS 106 million in the corresponding period last year, a 24% increase. Total amount from management fees collected from pension funds managed in the Group during the third Period of 2011 amounted to NIS 47 million compared with NIS 38 million in the corresponding period last year. Expenses in the pension activity during the Reporting Period amounted to NIS 99 million compared to NIS 87 million in the corresponding period last year. Total Expenses in the pension funds during the third Period of 2011 amounted to NIS 34 million compared to NIS 32 million in the corresponding period last year. Total pre-tax profit from management of pension funds and operating an old pension fund during the Reporting Period amounted to NIS 36 million compared with pre-tax profit of NIS 21 million during the corresponding period last year. Pre-tax profit from management of pension funds and operating an old pension fund during the third Period of 2011 amounted to NIS 15 million compared with pre-tax profit of NIS 7 million during the corresponding period last year. The rates of the nominal yields obtained by the new pension funds managed by the Group are as follows:

or the Nine months ended September 30, 2011

Comprehensive Investment Demographic yield (in yield (in yield (in Name of fund percent) percent) percent)

(3.71) (4.25) 0.54 Harel Pension (2.87) (4.31) 1.44 Harel – Manof

For the three months ended September 30, 2010 Comprehensive Investment Demographic yield (in yield (in yield (in percent) percent) percent) Name of fund (4.52) (4.91) 0.39 Harel Pension (4.38) (4.88) 0.50 Harel - Manof

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Provident funds 2.7.3. As of the Reporting Date the Group manages 16 provident funds (provident funds, education funds, central and personal severance pay funds, and a provident fund for sick pay and budgetary pension fund). Some of the provident funds have several investments tracks of which the members can choose. The volume of assets in the provident funds managed by the Group as of September 30, 2011, amounted to NIS 21.9 billion compared with NIS 22.7 billion as of September 30, 2010, and compared with NIS 23.4 billion as of December 31, 2010, a 3.4% decrease in relation to September 30, 2010, and an decrease at the rate of 6.4% compared to 31 December 2010 . The provident funds' assets and benefit contributions are not included in the Company's consolidated statements. Income from management fees collected from the provident funds managed by the Group during the Reporting Period amounted to NIS 172.4 million, compared with NIS 173 million for the corresponding period last year, a 0.3% decrease that stems from decrease in the average management fees. Total income from management fees collected from the provident funds managed by the Group during the third Period of 2011 amounted to NIS 55 million, compared with NIS 57.7 million for the corresponding period last year. Expenses in provident funds amounted to NIS 126.4 million compared with NIS 120.6 million during the corresponding period last year. Total Expenses in provident funds during the third Period of 2011 amounted to NIS 42 million compared with NIS 39 million during the corresponding period last year. The total pre-tax profit of the provident funds management companies included in the consolidated profit and loss statement in the life assurance and long term savings branch during the Reporting Period amounted to NIS 47 million compared with NIS 53 million during the corresponding period last year. Pre-tax profit of the provident funds management companies during the third Period of 2011 amounted to NIS 14 million compared with NIS 19 million during the corresponding period last year. During the Reporting Period, provident fund activity was affected by the implementation of the Commissioner's decision concerning compensation for delays in transferring money. For further details, see Section 2.3.2.11 above. The provident funds' net accumulation (excluding profits from investments) during the Reporting Period was negative and amounted to NIS 256 million compared with negative accrual of NIS 52 million for the corresponding quarter last year. For details about provident funds' merger, see Section 2.3.2.2 above.

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2.8. Health Insurance Premiums earned in the health insurance sector totaled NIS 1,821 million for the Reporting Period, compared with NIS 1,505 million for the corresponding period last year, a 21% increase. The increase is mainly due to an increase in the volume of activity in this sector by Harel Insurance and an update of tariffs for a group long-term care insurance transaction by Dikla. Total premiums earned in health insurance during the Reporting Period, accounted for 29% of all premiums earned by the Group . During the Reporting Period the health insurance sector posted comprehensive profit of NIS 105 million compared with a comprehensive profit of NIS 180 million in the corresponding period last year, a 42% decrease. The decrease in comprehensive profit during the Reporting Period compared with the comprehensive profit in the corresponding period last year stems mostly from the influence of the capital market in which yields were negative compared with the positive yields during the corresponding period last year and due to increase in inflation in relation to the corresponding period last year and due to a deterioration of the underwriting results in group long-term care insurance. During the third Period of 2011 the health insurance sector posted comprehensive profit of NIS 20 million compared with a comprehensive profit of NIS 76 million in the corresponding period last year. Pre-tax profit in health insurance sector totaled NIS 140 million for the Reporting Period, compared with NIS 169 million in the corresponding period last year, a 17% decrease. Pre-tax profit in health insurance sector during the rhird Period of 2011 totaled NIS 37 million, compared with NIS 72 million in the corresponding period last year, a 49% decrease in Pre-tax profit. Total payments and change in gross liabilities in respect of insurance contracts in the health insurance sector during the Reporting Period amounted to NIS 1,337 million, compared with NIS 1,120 million in the corresponding period last year. This change is due, in part, to group long-term care insurance plans for members of Clalit Health Services in which the insurance cover was extended leading to an increase in premiums and the reserve for the plan, as well as to a deterioration of the underwriting results in group long-term care insurance.

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2.9. Non-life insurance The composition of gross premiums and profit in non-life insurance activity for the report period, before tax, according to the insurance sectors included in non-life insurance, is as follows (in NIS thousands):

Gross premiums 1-9/2011 1-9/2010 % 7-9/2011 7-9/2010 2010 Compulsory Motor 448,128 467,672 (4) 120,776 128,140 572,141 Motor property 722,900 748,252 (3) 189,818 183,096 894,028

Property and other branches 539,241 503,544 7 144,712 141,219 641,467 Other liabilities branches: 445,084 491,208 (9) 142,585 160,036 695,107

Credit 40,242 44,668 (10) 11,342 15,802 59,545 Total 2,195,595 2,255,344 (3) 609,233 628,293 2,862,288

Pre-tax profit 1-9/2011 1-9/2010 % 7-9/2011 7-9/2010 2010 Compulsory Motor (5,597) 39,444 - (20,987) (755) 44,165 Motor property (24,989) 21,881 - (12,262) 3,431 24,178 Property and other branches 31,906 33,903 (6) 7,270 11,331 41,786

Other liabilities branches: (7,734) 3,882 - (1,055) (7,026) 7,432 Credit (11,375) 11,160 - (5,163) 397 12,474

Total (17,789) 110,270 - (32,197) 7,378 130,035

Gross premiums during the Reporting Period totaled to approx. NIS 2,196 million compared with NIS 2,255 million during the corresponding period last year, a 3% decrease. The decrease mostly stem from a decline in Harel Insurance's share of the insurance of state employees' motor vehicles (see Section 2.9.1 below) and to the effect of non-recurring premiums which received during the corresponding period last year in the liabilities and other operations branch. Gross premiums during third Period of 2011 totaled to approx. NIS 609 million compared with NIS 628 million during the corresponding period last year, a 3% decrease. Premiums in retention during the Reporting Period totaled to approx. NIS 1,300 million compared with NIS 1,294 million in the corresponding period last year, Total Premiums in retention during third of 2011 totaled to approx. NIS 356 million compared with NIS 349 million in the corresponding period last year, a 2% increase. Comprehensive loss in general (non-life) insurance during the Reporting Period, amounted to NIS 18 1 -63

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million compared with comprehensive profit of NIS 110 million in the corresponding period last year. The transition between Comprehensive profit at the corresponding period last year to Comprehensive loss at the Reporting Period stems mostly from the influence of the capital market in which the yields were negative compared with the positive yields during the corresponding period last year and increase in inflation in relation to the corresponding period last year. Comprehensive loss in general (non-life) insurance during third Period of 2011, amounted to NIS 32 million compared with comprehensive profit of NIS 7 million in the corresponding period last year. The transition between Comprehensive profit at the corresponding period last year to Comprehensive loss at the Reporting Period stems mostly from the influence of the capital market in which the yields were negative compared with the positive yields during the corresponding period last year. Pre-tax profit in general (non-life) insurance during the Reporting Period amounted to NIS 87 million compared with NIS 98 million in the corresponding period last year, a 11% decrease. Pre-tax profit in general (non-life) insurance during third Period of 2011 amounted to NIS 10 million compared with NIS 13 million in the corresponding period last year, a 23% decrease in Pre-tax profit. 2.9.1. Motor property In motor-vehicle property insurance gross premiums during the Reporting Period amounted to NIS 723 million compared with gross premiums of NIS 748 million during the corresponding period last year, a 3% decrease. Decrease in premiums stems mostly from a decline in the share held by Harel Insurance of the insurance for state employees' motor vehicles and an erosion of the average premium due to severe competition in this sub-sector of activity. Total gross premiums in motor-vehicle property insurance during third Period of 2011 amounted to NIS 190 million compared with gross premiums of NIS 183 million during the corresponding period last year, a 4% increase. During the Reporting Period, premiums in retention amounted to NIS 571 million compared with NIS 592 million in the corresponding period last year, a 3% decrease. Total premiums in retention during third Period of 2011 amounted to NIS 150 million compared with NIS 145 million in the corresponding period last year, a 4% increase. Comprehensive loss in motor-vehicle property insurance in the Reporting Period amounted to NIS 25 million compared with NIS 22 million profit in the corresponding period last year. Decrease stems mostly from influence of the capital market in which the yields were negative compared with the positive yields during the corresponding period last year, an erosion of the average premium due to severe competition in this sub-sector of activity and increase in prevalent claim. Comprehensive loss in motor-vehicle property insurance during third Period of 2011 amounted to NIS 12 million compared with NIS 3 million profits in the corresponding period last year. Decrease stems mostly from influence of the capital market in which the yields were negative compared with the positive yields during the corresponding period last year, an erosion of the average premium due to severe competition in this sub-sector of activity and increase in prevalent claim.Pre-tax loss in motor-vehicle property insurance in the Reporting Period amounted to NIS 16 million compared with NIS 20 million in the corresponding period last 1 -64

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year. Pre-tax loss in motor-vehicle property insurance during third Period of 2011 amounted to NIS 9 million compared with NIS 4 million profits in the corresponding period last year. In November 2011, the Accountant General announced the results of the tender to insure the vehicles of state employees for 2012. Accordingly, the tender for 2012 was divided among three insurers And Harel Insurance's share of the insurance for state employees' vehicles is expected to fall to 10% in 2012, compared with 33% in 2011. This decline in the number of state employees' vehicles that Harel insurance's will insure in 2012 is not expected to significantly affect Harel Insurance's performance. 2.9.2. Compulsory motor During the Reporting Period, gross premiums in compulsory motor vehicle insurance sector amounted to NIS 448 million compared with gross premiums of NIS 468 million during the corresponding period last year. Decrease in Compulsory motor premiums stems mostly from decrease a decline in the share held by Harel Insurance of the insurance for state employees' motor vehicles. Total gross premiums in compulsory motor vehicle insurance sector during third Period of 2011 amounted to NIS 121 million compared with gross premiums of NIS 128 million during the corresponding period last year, a 6% decrease. As to compulsory motor insurance for vehicles owned by state employees - see Par 2.9.1 above regarding motor-vehicle property. During the Reporting Period, premiums in retention amounted to NIS 356 million compared with NIS 372 million in the corresponding period last year. Premiums in retention during third Period of 2011 amounted to NIS 96 million compared with NIS 102 million in the corresponding period last year, a 6% decrease. Comprehensive loss in Compulsory motor insurance in the Reporting Period amounted to NIS 6 million compared with NIS 39 million profits in the corresponding period last year. The transition between Comprehensive profit at the corresponding period last year to Comprehensive loss at the Reporting Period stems mostly from the influence of the capital market in which the yields were negative compared with the positive yields during the corresponding period last year and increase in inflation in relation to the corresponding period last year. Comprehensive loss in Compulsory motor insurance during third Period of 2011 amounted to NIS 21 million compared with NIS 1 million loss during the corresponding period last year. Decrease in Comprehensive profit stems mostly from the influence of the capital market. Pre-tax profit for compulsory motor insurance during the Reporting Period amounted to NIS 49 million compared with NIS 32 million during the corresponding period last year, a 52% increase. Pre-tax profit for compulsory motor insurance during third Period of 2011 amounted to NIS 1 million compared with similar profits during the corresponding period last year. 1 -65

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2.9.3. Liabilities branches and others During the Reporting Period gross premiums in liabilities insurance and others amounted to NIS 445 million compared with NIS 491 million during the corresponding period last year, a 9% decrease. Decrease in gross premiums stems mostly from single premiums received during the corresponding period last year. Gross premiums in liabilities insurance and others during third Period of 2011 amounted to NIS 143 million compared with NIS 160 million during the corresponding period last year, an 11% decrease. Premiums in retention in the Reporting Period amounted to NIS 206 million compared with NIS 166 million during the corresponding period last year, a 25% increase. Increase in retention stems mostly from increasing the share of the Company in professional liability insurance. Total premiums in retention in liabilities insurance and others during third Period of 2011 amounted to NIS 65 million compared with NIS 54 million during the corresponding period last year, a 20% increase. Comprehensive loss in Liabilities insurance and others in the Reporting Period amounted to NIS 8 million compared with NIS 4 million profits in the corresponding period last year. The transition between profit at the corresponding period last year to Comprehensive loss at the Reporting Period stems mostly from the influence of the capital market in which the yields were negative compared with the positive yields during the corresponding period last year and increase in inflation in relation to the corresponding period last year. Comprehensive loss in Liabilities insurance and others during third Period amounted to NIS 1 million compared with NIS 7 million loss in the corresponding period last year. Pre-tax profit in others liabilities insurance in the Reporting Period amounted to NIS 15 million compared with NIS 1 million profits in the corresponding period last year. Pre-tax profit in others liabilities insurance during third Period of 2011 amounted to NIS 9 million compared with NIS 6 million loss during the corresponding period last year. 2.9.4. Property and other branches Premiums in property and other branches during the Reporting Period amounted to NIS 539 million compared with NIS 504 million during the corresponding period last year, an 7% increase. Total premiums in property and other branches during third Period of 2011 amounted to NIS 145 million compared with NIS 141 million during the corresponding period last year, a 2% increase. Premiums in retention during the Reporting Period amounted to NIS 126 million compared with NIS 121 million during the corresponding period last year, a 4% increase. Total premiums in retention in property and other branches during third Period of 2011 amounted to NIS 34 million compared with NIS 33 million during the corresponding period last year, a 3% increase.

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Comprehensive profit in property and other branches in the Reporting Period amounted to NIS 32 million compared with NIS 34 million profit in the corresponding period last year. Comprehensive profit in property and other branches during third Period of 2011 amounted to NIS 7 million compared with NIS 11 million profits in the corresponding period last year. Pre-tax profit in property insurance and other branches during the Reporting Period amounted to NIS 34 million compared with similar profits in the corresponding period last year. Pre-tax profit in property insurance and other branches during third Period of 2011 amounted to NIS 8 million compared with NIS 11 million profit in the corresponding period last year, a 28% decrease in Pre-tax profit. 2.9.5. Credit risks inherent in mortgage assets Gross premiums in credit risks inherent in mortgage assets during the Reporting Period amounted to NIS 40 million compared with NIS 45 million in the corresponding period last year, a 10% decrease. Total gross premiums on mortgage insured credit insurance for residential purposes was NIS 11 million in Q3 2011, compared with NIS 16 million in the corresponding quarter last year, a decline of 31% relative to the corresponding quarter last year. The decline in premiums is mainly due to a decline in demand for insurance for highly-financed loans. Most of this decline can be attributed to restrictions imposed on banks about housing loans by the Supervisor of Banks. The Company has no reinsurance agreements in this branch of insurance. Comprehensive loss in credit risks inherent in mortgage assets during the Reporting Period amounted to NIS 11 million compared with NIS 11 million profits in the corresponding period last year. The transition between profit at the corresponding period last year to Comprehensive loss at the Reporting Period stems mostly from the influence of the capital market in which the yields were negative compared with the positive yields during the corresponding period last year and increase in inflation in relation to the corresponding period last year. Comprehensive loss in credit risks inherent in mortgage assets during third Period of 2011 amounted to NIS 5 million compared with NIS 0.4 million profit in the corresponding period last year. Pre-tax profit in credit risks inherent in mortgage assets during the Reporting Period amounted to NIS 5 million compared with NIS 11 million profits in the corresponding period last year. Pre-tax profit in credit risks inherent in mortgage assets during third Period of 2011 amounted to NIS 0.2 million compared with NIS 3 million profits in the corresponding period last year. 2.10. Insurance companies overseas The Company is the owner of Interasco Societe Anonyme General Insurance Company S.A.G.I (Interasco) (96.5%), an insurance company operating in Greece in the health and non-life insurance sectors, and holds the controlling interest in Turk Nippon (99.98%) which operates in Turkey. On April 6 2009, Turk Nippon received a license to issue insurance policies in Turkey in all branches of non-life insurance, and it commenced its insurance activity a short time later. 1 -67

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On July 20, 2011, the Company acquired 10% of the share capital of Turk Nippon from Turk Nippon's minority shareholder, in consideration of TL 750,000 (about NIS 1.65 million).

According to an agreement from December 2010 (see Section 1.1.5.3.3 in Chapter 1 of the Periodic Report – "Description of the Corporation's Business"), on July 18, 2011, the CEO of Interasco acquired 0.75% of the issued shared capital of Interasco. Accordingly, at the reporting date, the Company holds 96.5% of Interasco's share capital.

During the Reporting Period, the operating segment for insurance companies overseas earned premiums of NIS 110 million, compared with NIS 68 million for the corresponding period last year, an increase of 62%. Total premiums earned by the insurance companies operating overseas segment for the Reporting Period account for 2% of all premiums earned by the Group.

The insurance companies in the overseas operating segment posted a comprehensive loss of NIS 27 million for the Reporting Period, compared with a comprehensive loss of NIS 23 million for the corresponding period last year. The increased loss is due mainly to the holding of Greek government bonds by Interasco in its investment portfolio.

The insurance companies in the overseas operating segment posted a comprehensive loss of NIS 13 million during third Period of 2011, compared with a comprehensive loss of NIS 4 million for the corresponding period last year. The increased loss is due mainly to the holding of Greek government bonds by Interasco in its investment portfolio.

During the Reporting Period, the insurance companies abroad posted a pre-tax loss of NIS 27 million, compared with similar pre-tax loss of NIS 28 million for the corresponding period last year.

During third Period of 2011, the insurance companies abroad posted a pre-tax loss of NIS 13 million, compared a pre-tax loss of NIS 9 million for the corresponding period last year.

In accordance with Turk Nippon's business plan and in an effort to meet the capital requirements that apply to Turk Nippon as an insurer operating in Turkey. Subject to further growth of Turk Nippon's activity, the Company expects that by the end of 2011 it will be required to invest NIS 16 million in Turk Nippon's equity.

The Company's management believes that since the holding of Greek government bonds is insignificant, the crisis in Greece will not essential affect the Group's performance. 2.11. Capital market and financial services During the Reporting Period, revenues in the capital market and financial services sector amounted to NIS 175 million, compared with NIS 172 million for the corresponding period last year, a 2% increase compared with the corresponding period last year.

During third Period of 2011, revenues in the capital market and financial services sector amounted to NIS 52 million, compared with NIS 60 million for the corresponding period last year. Total Management fees from the mutual funds and Managed Cases during the Reporting Period totaled NIS 132 million, compared with NIS 130 million for the corresponding period last year.

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In addition to a decline in the total volume of assets under management in the mutual funds, during the Reporting Period money was also diverted from traditional funds that generate management fees to money market funds on which management fees were not collected for most of the period. Activity in index-linked certificates and related activity carried out by Harel Sal and Harel Financial Products continued to expand, generating revenues of NIS 9 million for the period, compared with NIS 4 million for the corresponding period last year.

The volume of assets under management in the capital market and financial services, neutralization assets under management of other companies in the Group, segment at September 30, 2011, was NIS 24.2 billion, compared with NIS 24.5 billion at September 30, 2010, and compared with NIS 26.1 billion at December 31, 2010. a 1% decrease at September 30, 2011 and a 7% decrease at December 31, 2010.

These amounts include mutual fund assets in the amount of NIS 18.3 billion at September 30, 2011, compared with NIS 19.8 billion at September 30, 2010 and compared with NIS 20.8 billion at December 31, 2010 as well as ETF assets, which at September 30, 2011 amounted to NIS 3.3billion compared with NIS 2.4 billion at September 30, 2010 and compared with NIS 3 billion at December 31, 2010. The assets under management, excluding the assets of the ETF company, are not included in the Company's consolidated balance sheets.

During the Reporting Period, the capital market and financial services sector recorded pre-tax profit of NIS 23.9 million, as against a pre-tax loss of NIS 24.2 million for the corresponding period last year.

During third Period of 2011, the capital market and financial services sector recorded pre-tax profit of NIS 6 million, as against a pre-tax loss of NIS 8.6 million for the corresponding period last year.

During the second quarter of 2011, Harel Sal, a subsidiary of Harel Products (wholly owned, indirectly), entered into a deposit agreement with Mizrahi-Tefahot Bank Ltd. (UMTB) whereby Harel Sal will deposit NIS 440 million with the UMTB for a 12-month period. The deposit will be used to cover Harel Sal's obligations to owners of the units of ETFs Series B on the TA-100 index and Series G on the TA-25 index. The agreement period is for 12 months.

Should Harel Sal choose to terminate the transaction before 12 months have elapsed from the commencement of the agreement, Harel Sal will be charged interest at a rate of 1.12% of the sum of the deposit Distribution of dividends.

In October 2011, the Israel Securities Authority published an instruction whereby agreements that are similar to the agreement described above are subject to certain conditions and restrictions, among others the scope will be limited to 25% (30% in the transition period) of the volume of each series excluding the actual transaction. At the publication date of the financial statements, Harel Sal is in compliance with the requirements in the instruction.

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2.12. Income tax Income tax During the Reporting Period amounted to an expense of NIS 72 million, compared with revenues under the income tax item of NIS 212 million compared with the corresponding period last year. Income tax during third Period of 2011amounted to revenues of NIS 39 million, compared with expense under the income tax item of NIS 97 million compared with the corresponding period last year.

Concerning a change in the rate of corporate tax following the adoption of the recommendations of the taxation chapter of the committee's report on changes in the socioeconomic agenda headed by Prof. Manuel Trajtenberg, see Note 5. 2.13. Sources of finance and liquidity 2.13.1. Cash flows During the Reporting Period total net cash flows used for on-going activity amounted to NIS 1,115 million. Net cash flows used for investment activity amounted to NIS 153 million. Net cash flows used to activity and Fluctuations in exchange rate amounted to NIS 1,098 million. The result of all the aforesaid activity is reflected in an increase in cash balances in the amount of NIS 169 million. 2.13.2. Financing of operations For details concerning the issuance of subordinated deferred liability notes that are recognized as second-tier capital and/or complex second-tier capital by Harel Insurance – in 2010, see Section 2.12.2 in Chapter 2 – Board of Directors' Report in the Periodic Report. For details concerning the issuance of subordinated liability notes in 2011, see Section 2.1.7 above. In addition to the aforementioned loan, at September 30, 2011 the Company and companies in the Group have a short-term loan in the amount of NIS 33 million. The subsidiary Harel Insurance has long-term subordinated liability notes the balance of which at September 30, 2011 is NIS 1,869 million. The subordinated liability notes that were recruited in 2006 have an AA rating from Maalot, and the subordinated liability notes who were recruited in May 2010 and used as secondary capital by Harel Insurance have an AA rating from Maalot. The subsidiary Dikla has long-term subordinated liability notes the balance of which at September 30, 2011 is NIS 101 million.

In February 2011, Dikla raised a capital note from a bank in the amount of NIS 100 million to be used as complex secondary capital by Dikla. The capital note was raised subsequent to obtaining the Commissioner's approval, including so that the capital note will be recognized as second-tier capital for Dikla, consistent with its conditions. The capital note bears variable shekel interest, based on prime plus a margin. The principal of the capital note will be repaid as a lump sum after 11 years ("original repayment date"). The interest will be paid every 6 months. The capital note includes certain circumstances that when met, payment of the principal or the interest will be suspended ("delaying circumstances"). Payment of the principal may be suspended for a maximum period of three years from the original repayment date. If payment of 1 -70

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the interest is suspended, the Company undertook to pay the bank the delayed interest against assigning the right to receive the said interest from Dikla, when the delaying circumstances are released.

The delaying circumstances are the presence of one or more of the following: (1) a decision passed by Dikla's board of directors to the effect that Dikla has no profits worthy of distribution, as referred to in the Companies Law, 5759-1999, and this in accordance with the last financial statements (annual or quarterly) preceding the relevant repayment date for the interest and/or principal; (2) in accordance with a decision made by Dikla's board of directors, Dikla's recognized shareholders' equity has fallen below the capital it is required to hold (pursuant to the provisions of law applicable to Dikla and as per the instructions of the Commissioner of Insurance), and this according to the last financial statements (annual or quarterly) preceding the relevant repayment date for the interest and/or principal; (3) Dikla's board of directors issues an instruction to delay payment of the interest and/or principal, should it determine that there is genuine concern over Dikla's ability to comply with capital it is required to hold (pursuant to the provisions of law applicable to Dikla and/or as per the instructions of the Commissioner of Insurance), provided that the Commissioner of Insurance approves such action in advance; (4) Dikla's board of directors issues an instruction to delay payment of the of the interest and/or principal should it determine that there is immediate genuine concern for Dikla's ability to repay on time obligations that take precedence over that of the debt that is the subject of this liability, provided that the Commissioner of Insurance has approved such action in advance; (5) the Commissioner of Insurance has issued an instruction concerning a delay in payment of the principal and/or interest due to significant impairment to Dikla's shareholders' equity or if he considers that there is genuine, immediate concern over Dikla's ability to comply with the capital it is required to hold (pursuant to the provisions of law applicable to Dikla and/or as per the instructions of the Commissioner of Insurance).

According to the capital note, when delaying circumstances are present with regard to the payment of interest, the Company will repay the interest against an assignment to the Company of the bank's right to receive payment of the interest, when the delaying circumstances have passed.

Dikla has the right to make an early repayment of the capital note, without incurring an early repayment charge, 3 years before the original repayment date ("early repayment date"), and this subject to obtaining the Commissioner's approval or to Dikla holding a capital surplus at the rates prescribed in the capital note. If Dikla does not make an early repayment of the capital note, in respect of the period commencing on the early repayment date and ending on the original repayment date, supplementary interest shall be paid at a rate of 50% of the original interest margin ("the increased interest").

If the principal is suspended (as noted, for a maximum period of 3 years from the original repayment date), supplementary interest shall be paid to the bank for the period of the delay at a rate of 50% of the increased interest margin.

On February 1, 2011, Dikla received the Commissioner's approval to issue liability notes that will be recognized as complex, second-tier capital. In this context, the composition of the company's capital was also approved. For details concerning the composition of Dikla's capital, see Note 7 to the financial statements.

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A loan taken by Harel-Pia

In February 2011, Harel Pia raised a loan of NIS 80 million from a bank. The loan is for a 5- year period, where the principal and interest are to be repaid in quarterly installments, as of June 2011. The loan was taken to repay a loan that Harel Pia took from the Company. To obtain the credit, Harel Pia and Harel Finance gave liens to the bank. Moreover, the loan agreement prescribes financial criteria, which if violated, entitle the bank to demand immediate repayment of the loan. These financial criteria mostly address the volume of revenues from management fees and the rate of available cash flow relative to repayment of the loan.

Concerning a line of credit from a bank that was given to Harel Products – see Note 5.8. 3. Market Risk Exposure and Management There were no material changes during the Reporting Period in the exposure to the Company's market risks and their management compared with the periodical report. 4. Corporate governance 4.1. Details concerning the process for approving the Company's financial statements The Companies (Provisions and conditions concerning the procedure for approval of the financial statements) Regulations, 5770-2010, include mandatory rules that public companies must apply in the process of approving financial statements. The provisions of the regulations apply from the financial statements at December 31, 2010. The regulations stipulate that before the annual financial statements are presented for the approval of the company's board of directors, the reports are to be discussed and approved by a special committee known as "the Committee for the Review of the Financial Statements" ("the Committee"). The Committee is responsible for discussing the financial statements and formulating a recommendation to the board of directors regarding those matters prescribed in the regulations. The regulations prescribe several conditions with respect to the composition of the Committee and its discussions: (a) The Committee shall consist of at least 3 members; (b) Members of the Committee shall not be employees of the company, permanent service providers of the company, a controlling shareholder or relative of such a person (like the audit committee); (c) The Committee's chair shall be an outside director; (d) Only directors shall be members of the Committee; (e) A majority of the Committee's members shall be independent directors; (f) All members of the Committee must have the ability to read and understand financial statements; (g) At least one of the independent directors shall have accounting and finance expertise;

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(h) The Committee members have declared that they are capable of reading and understanding financial statements and a director who has accounting and finance expertise must give a declaration in accordance with the Companies (Conditions and tests for a director with accounting and finance expertise and a director with professional qualifications) Regulations, 5765-2005. (i) The quorum required for discussing and passing resolutions by the Committee is a majority of its members, provided that most of those present are independent directors and that at least one outside director is present. Until these regulations took effect, the Company had a balance sheet committee whose functions were similar to those prescribed in the regulations for the "Committee for the review of the financial statements". In view of the restrictions prescribed in the regulations with respect to the composition of the Committee, at a meeting on February 3, 2011, the Board of Directors resolved that the members of the Committee for the review of the financial statements shall be: (a) David Granot, Chairman (b) Doron Cohen (c) Liora Kavoras-Hadar 4.1.1. As noted above, the Committee is a special purpose committee appointed for the purpose of approving the financial statements and the Audit Committee will not serve as the Committee for the approval of the financial statements. 4.1.2. Following are details concerning the members of the Committee for the review of the financial statements:

Name : David Granot I.D. no.:045333739 External Director: Yes Independent Director As an outside director of the Company, Mr. David Granot also meets the criteria for recognition as an independent director. Chairman of the committee: Yes Has accounting and financial expertise Yes Education: BA in Economics, MA in Business Management, Hebrew University of Jerusalem Occupation over the last five years: Chairman of the nostro investment committee of Harel Insurance and Dikla, Chairman of the nostro investment committee of E.M.I. (as of March 16, 2011) Chairman of the Credit committee of the institutional entities in Harel Group, external Director and audit committee member in Harel Insurance and Dikla, Director in EMI (as of March 3, 2011), member of the Credit Committee of the Group's company and in Harel Insurance, CEO of HaBank HabeinLeumi Harishon, chairman of subsidiaries of HaBank HabeinLeumi Harishon (Fibi London, Fibi Swiss, Bank Otsar Ha-Hayal Ltd.) (until June, 2007), Director in Batmen litwin company (End of 31 of January,2010) and Chairman in companies of BSG Group (until 2011).

Corporations in which he serves as director Chairman of Scorpio Real-Estate, Director of the board of BSG and 1 -73

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(excluding the Group's companies): Elrov Israel (Real-Estate), HAM-LET L.T.D. Has provided a statement in accordance with the Yes. regulations prior to his appointment: The Company's Board of Directors was previously acquainted with Mr. Granot as a director with accounting and financial expertise – see Section 4.2 above, and this based on his extensive professional experience and qualifications. In any event, based on the aforementioned resolution of the Board of Directors, and based Mr. Granot's qualifications, experience and knowledge as noted above, the Company regards Mr. Granot as being capable of reading and understanding financial statements.

Name : Liora Kavoras Hadar I.D. no.: 55600159 External Director: No. Independent Director Mrs. Liora Kavoras Hadar eligible to serve as an independent director. Chairman of the committee: No. Has accounting and financial expertise Was recognized as a director with expertise Education: LL.B. Faculty of Law, Hebrew University, Jerusalem Occupation over the last five years: Director of Harel Insurance, Harel Gemel, Harel Atidit Gemel, Tzva Hakeva, Harel Pension, Manof, Gilad Pension. CEO of Antal Management & Commerce Ltd., Director, Telad Jerusalem Studios Ltd. and Telad Broadcasting Channels Ltd. until August 2006, director at Natour until November 2005. Corporations in which she serves as director Antal Management & Commerce Ltd. (excluding the Group's companies): Has provided a statement in accordance with the Yes. regulations prior to his appointment: The Company's Board of Directors was previously acquainted with Mrs. Liora Kavoras Hadar as a director with accounting and financial expertise – see Section 4.2 above, and this based on his extensive professional experience and qualifications. In any event, based on the aforementioned resolution of the Board of Directors, and based Mrs. Liora Kavoras Hadar's qualifications, experience and knowledge as noted above, the Company regards Mrs. Liora Kavoras Hadar as being capable of reading and understanding financial statements.

Name : Doron Cohen I.D. no.: 069418945 Outside Director: No Independent Director: Mr. Doron Cohen eligible to serve as an independent director Chairman of the board: No. Has accounting and financial expertise: Yes. Education: BA in Economics and Business Management, MA in Business Management (majored in financing), Hebrew University of Jerusalem. Occupation over the last five years: CEO Blue Square Co-op Ltd. Services Association Ltd. (in Liquidation), Business and economic consultant, Permanent observer nostro Investment Committee of Harel Insurance, Director of TAMY - SECURED YIELD ISRAEL LTD (until March 2007), Chairman of the board of directors of H.A.L Tshura Ltd (a company owned by Histadrut Haovdim Hleumit) and its' subsidiaries (Until July 2010).

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Corporations in which he serves as director Bank Leumi LeIsrael Ltd., Consumer Cooperation Fund Ltd., Trigger (excluding the Group's companies): D.C. Ltd., Trigger D.C. Holdings Ltd. Has provided a statement in accordance with the Yes. regulations prior to his appointment: The Company's Board of Directors was previously acquainted with Mr. Doron Cohen as a director with accounting and financial expertise – see Section 4.2 above, and this based on his extensive professional experience and qualifications. In any event, based on the aforementioned resolution of the Board of Directors, and based Mr. Doron Cohen's qualifications, experience and knowledge as noted above, the Company regards Mr. Doron Cohen as being capable of reading and understanding financial statements. 4.1.3. Procedure for approval of the financial statements: To approve the financial statements at September 30, 2011, the Committee convened on November 20, 2011. In addition, the Company's CPA are invited to and attend meetings of the Committee and Board of Directors' meetings that discuss and approve the financial statements, and they present the principal findings, if there are such, that emerged during the course of the audit or the review. The meeting was also attended by the Company's CFO, Ronen Agassi CPA, and legal advisor, Adv. Hanan Fridman. A meeting of the Committee held on November 22, 2011 was attended by Avraham Fruchtman CPA together with Dvora Wiesel CPA and the internal auditor was also invited to the meeting. At the committee meeting, information relating to the data included in the financial reports was reviewed, including information pertaining to the Company's financial and operating situation, and the actuaries' statements on the different insurance sectors. The Committee also reviews various aspects of risk management and control, those that are reflected in the financial statements, as well as those that affect the credibility of the financial statements. In addition, the Committee may request that other subjects are also reviewed, at the discretion of the committee's members. The Committee is also advised of the results of the SOX procedure implemented by the Company and its subsidiaries that are financial institutions, and it reviews the effectiveness of the internal control. To formulate its recommendations to the Board of Directors, the draft financial statements are submitted to the members of the Committee several days before the meeting scheduled to discuss them. The Committee meets prior to the Board of Directors' meeting which discusses and approves the Financial Statements. The Committee's recommendations are submitted to the Board of Directors as soon as the Committee's meeting is over. At a meeting of the committee held on August 21, 2011, the committee members held a detailed discussion of the Company's estimates and assessments on which the financial reports were based, addressing the discretion applied by management on various issues. Furthermore, the committee members were given a study conducted by the appointed actuaries on the various areas of activity of the subsidiaries that are insurers. The committee's members were also advised regarding the internal control process, they examined material issues in the financial reports, the completeness and reasonability of the financial reporting, the accounting policy and figures in the financial statements.

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During the meeting of the Company's Board of Directors which approves the financial statements, the Committee's recommendations, insofar as there are any, are reviewed, in connection with the approval of the financial statements, the Company's financial performance is reviewed and the changes that have occurred during the reported period are presented. During the course of the deliberations of the Company's Board of Directors, questions are raised by the members of the board on issues that arose during the audit and whether the financial statements faithfully reflect the Company's financial position. The questions and issues discussed are answered by management. After the discussion, the Chairman of the Board calls for a vote to approve the financial statements. 4.2. Independent directors At the reporting date, other than the outside directors who serve in the Company (Mssrs. David Granot and Dr. Eliezer Wolf), the following directors are in office who have the qualifications to serve as independent directors: Joseph Ciechanover, Doron Cohen, and Liora Kavoras Hadar. 4.3. Non-extraordinary transactions Pursuant to the provisions of Section 117 of the Companies Law, 5759-1999 ("Companies Law"), on November 22, 2011, the Company's Audit Committee passed a resolution concerning the classification of transactions under Section 270 of the Companies Law, as extraordinary transactions or non-extraordinary transactions, consistent with criteria to be prescribed once a year. This resolution was approved by the Company's Board of Directors in a decision from November 24, 2011. The Audit Committee determined that the following transactions with the Company's controlling shareholder or with companies that it controls or transactions with senior officers of the Company or with companies in which senior officers of the Company serve as directors or senior officers ("the principal shareholders"), shall not be deemed an "extraordinary transaction" as this term is defined in the Companies Law, and this – subject to a combination of the conditions listed below: (1) Class of transaction: (a) engagements with the principal shareholders for the issue of insurance policies, in any of the policy categories offered by the Company, through the Company's subsidiaries, except for business insurance policies; (2b) engagements with interested parties for the purchase of long-term savings products, including pension funds and provident funds; (3c) the opening of accounts for the principal shareholders in a TASE member and with a portfolio management company that is part of the Group's companies; (4d) the purchase by principal shareholders of index-linked certificates and deposit certificates issued by the Group's companies; (2) the scope of any such transaction is insignificant for the Company, and the combined scope of such transactions is also insignificant for the Company ("a significant amount for the Company" shall be 5% of the annual profit after tax presented by the Company – i.e. NIS 20 million or more); (3) the transaction must take place at market conditions. Non-extraordinary transactions will not require approval by the Board of Directors, and this for a limited period until the end of the year from the date of this approval. It was also determined that the payment of bonuses according to the compensation plan approved by the Company's Board of Directors and the Board of Directors of Harel Insurance, does not constitute an extraordinary transaction, and that on-going salary revisions at a real rate of up to 5% per annum do not constitute an extraordinary transaction.

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5. Disclosure instructions in connection with financial reporting by the Corporation 5.1. Events after the reporting date on the financial situation Regarding changes that took place after the Reporting Period - see par. 2.2 above.

The Board of Directors wishes to express its thanks to the Group's employees and agents

Y. Hamburger M. Siboni S. Alkabetz Chairman of the Board Company's joint Company's joint of Directors CEO CEO

November 24, 2011

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HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS As at September 30, 2011

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Somekh Chaikin KPMG Millennium Tower Telephone: 03-684 8000 17 Ha'arbaa Street, P.O. Box 609 Fax: 03-684 8444 Tel-Aviv 61006 Internet: www.kpmg.co.il

Auditors' review report to the shareholders of Harel Insurance Investments and Financial Services Ltd.

Introduction

We reviewed the attached financial information of Harel Investments in Insurance and Financial Services Ltd. and its subsidiaries (hereinafter - “the Group”) which include the condensed interim consolidated statement of position as at September 30, 2011 and the condensed interim consolidated statements of income, comprehensive income, changes in capital and cash flows for the nine and three months then ended. The Board of Directors and management are responsible for the preparation and presentation of the financial information for this interim period in accordance with international accounting standard IAS 34 “Financial reporting for interim periods”, and they are responsible for the preparation for the preparation of financial information for this interim period under Chapter D of the Securities Regulations (Periodic and Immediate Reports) - 1970. To the extent that these regulations apply to insurance companies, according to the disclosure requirements issued by the Supervisor of Insurance according to the Law for the Supervision of Financial Services (Insurance) - 1981 and according to the Regulations issued in accordance therewith. Our responsibility is to express a conclusion on the financial information for the interim period, based on our review.

We did not review the condensed financial information for the interim period of consolidated companies whose assets included in the consolidation comprise 8.80% of all the consolidated assets as at September 30, 2011 and whose revenues included in the consolidation comprise 3.82% and 5.88% of all the consolidated revenues for the period of nine months and three months then ended, respectively. Moreover, we did not review the condensed financial information for the interim period of investee companies presented by the equity method in which the investment in them is NIS 77,581 thousand as at September 30, 2011, and the Group’s shares of their profit aggregated NIS 6,860 thousand and NIS 2,066 thousand for the periods of three and nine months then ended, respectively. The condensed financial information for the interim period of those companies were reviewed by other auditors whose review reports were furnished to us and our conclusions, to the extent that they relate to financial information for those companies, are based on the review reports of the other auditors.

Scope of the review

We prepared our review in accordance with Review Standard 1 of the Institute of Certified Public Accountants in Israel “Review of financial information for interim periods prepared by the entity’s auditor”. The review of the financial information for interim periods comprises clarifications, mainly with the people responsible for financial and accounting matters, and from adopting analytical and other review procedures. A review is considerably more limited in scope than an audit performed in accordance with generally accepted auditing standards in Israel, and therefore does not enable us to be certain that we will know of all the significant matters which could have been identified in an audit. Consequently, we are not issuing an opinion of an audit.

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Somekh Chaikin KPMG Millennium Tower Telephone: 03-684 8000 17 Ha'arbaa Street, P.O. Box 609 Fax: 03-684 8444 Tel-Aviv 61006 Internet: www.kpmg.co.il

Conclusion

Based on our review, nothing came to our notice which would cause us to think that the above financial information is not prepared, in all significant aspects, in accordance with International Accounting Standard IAS34.

In addition to the remark in the previous paragraph, based on our review, nothing came to our attention which cause us to think that the above financial information does not meet, from all significant aspects, the provisions of the Pronouncement under Chapter D of the Securities Regulations (Periodic and Immediate Reports) - 1970 to the extent that the regulations apply to insurance companies, and according to the disclosure requirements issued by the Supervisor of Insurance according to the Law for the Supervision of Financial Services (Insurance) - 1981 and according to the Regulations issued in accordance therewith.

Without qualifying our above conclusions we direct attention to Note 6A to the interim condensed consolidated financial statements regarding exposure to class actions and applications to approve class actions.

Somekh Chaikin Certified Public Accountants (Isr) November 24, 2011

KPMG Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is the Israeli member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements on the financial position

September 30 December 31 2011 2010 2010 (Unaudited) (Unaudited) (Audited) NIS Thousands NIS Thousands NIS Thousands

Assets

Intangible assets 1,498,866 1,516,539 1,514,636 Deferred tax assets 10,594 11,114 7,073 Deferred acquisition costs 1,277,573 1,205,926 1,197,798 Fixed assets 636,750 410,981 618,345 Investments in investees treated using the balance sheet value method 280,046 156,169 200,288 Real estate investments - yield dependent contracts 827,287 631,119 711,327 Other real estate investments 1,147,990 1,072,300 963,791 Reinsurance assets 5,113,316 5,102,996 5,104,877 Current tax assets 93,921 14,090 11,844 Other receivables 657,188 286,726 263,752 Outstanding premiums 1,028,086 954,585 918,677 Financial assets – yield dependent contracts 18,267,726 17,509,032 18,142,365 Financial investments for holding ETFs 3,197,245 2,261,047* 3,490,140* Other financial investments: Marketable debt assets 6,219,387 6,814,473* 6,537,267* Non-marketable debt assets 8,786,116 7,548,385 7,869,270 Shares 540,601 551,270* 612,466* Other investments 1,702,983 1,721,671* 1,883,877* Total other financial investments 17,249,087 16,635,799 16,902,880 Cash and cash equivalents pledged for ETFs holders 659,835 243,371 321,915 Cash and cash equivalents - yield dependent contracts 555,439 437,610 746,829 Other cash and cash equivalents 1,217,494 1,176,575 1,195,354 Total assets 53,718,443 49,625,979 52,311,891 Total assets - yield dependent contracts 20,249,490 18,936,983 19,946,196

* Regarding reclassification see Note 2 (c).

The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.

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Harel Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements on the financial position September 30 December 31 2011 2010 2010 (Unaudited) (Unaudited) (Audited) NIS Thousands NIS Thousands NIS Thousands

Equity and liabilities Equity

Share capital and share premium 306,830 306,224 306,691 Treasury stock (139,608) (137,753) (138,625) Capital reserves 21,865 257,480* 229,126 Retained earnings 3,218,536 3,081,196* 3,181,178 Total equity attributed to company shareholders 3,407,623 3,507,147 3,578,370 Minority rights 3,814 (4,098) 1,675 Total equity 3,411,437 3,503,049 3,580,045 Liabilities

Liabilities in respect of non-yield dependent insurance and investment contracts 21,312,137 20,320,358 20,475,319 Liabilities in respect of yield dependent insurance and investment contracts 19,776,700 18,584,605 19,657,706 Deferred tax liabilities 208,059 340,779 325,144 Net liabilities for employee benefits 229,210 221,223 230,474 Current tax liabilities 9,760 23,958 29,085 Creditors and credit balances 2,104,155 2,000,874* 2,125,775* ETF's liabilities 3,290,994 2,402,155 3,024,819 Financial liabilities 3,375,991 2,228,978* 2,863,524* Total liabilities 50,307,006 46,122,930 48,731,846 Total equity and liabilities 53,718,443 49,625,979 52,311,891

Y. Hamburger M. Siboni S. Alkabetz R. Agassi Chairman of the Board of Company's joint CEO Company's joint CEO Deputy Chief Executive Directors Officer and Chief Financial Officer Date of approval of the financial statements: November 24, 2011 * Regarding reclassification see Note 2 (c). The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.

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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements of income For the nine months ended For the three months ended for the year ended September 30 September 30 December 31 2011 2010 2011 2010 2010 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS NIS Thousands NIS Thousands NIS Thousands Thousands NIS Thousands Premiums earned, gross 6,284,382 5,853,648 2,148,692 2,089,172 7,969,707 Premiums earned by reinsurers 1,126,486 1,164,297 381,892 386,080 1,547,748 Premiums earned in retention 5,157,896 4,689,351 1,766,800 1,703,092 6,421,959 Net profit (loss) from investments and financial income (247,605) 1,983,264* (905,436) 1,250,021* 3,036,950 Income from management fees 549,543 570,313 178,651 238,935* 812,583 Income from commissions 309,449 323,137 103,773 96,968 421,515 Other income 5,575 1,803* 137 702* 1,573 Total income 5,774,858 7,567,868 1,143,925 3,289,718 10,694,580

Payments and changes in liabilities for insurance and investment contracts, gross 4,446,634 6,407,031 846,148 2,749,599 8,987,422

Reinsurers' share in payments and changes for insurance contracts liabilities 784,401 1,128,987 287,357 320,769 1,439,826

Payments and changes in liabilities for insurance and investment contracts, in retention 3,662,233 5,278,044 558,791 2,428,830 7,547,596 Commission, marketing and other acquisition expenses 1,096,405 999,147* 394,617 351,612* 1,358,486 General and administrative expenses 619,091 594,723* 214,684 200,967* 809,167 Other expenses 41,295 37,266 12,105 12,556 48,396 Financing expenses 161,276 85,154 69,706 31,773 117,406 Total expenses 5,580,300 6,994,334 1,249,903 3,025,738 9,881,051

Company share of profit (loss) of investee companies recorded by the equity method 20,881 7,929 5,533 1,882 16,654 Profit (loss) before income taxes 215,439 581,463 (100,445) 265,862 830,183 Income taxes (benefits) 71,944 212,101 (39,337) 97,422 295,253

Net profit (loss) for the year 143,495 369,362 (61,108) 168,440 534,930 Attributed to: Company shareholders 143,358 366,244 (61,137) 169,868 529,825 Minority interests 137 3,118 29 (1,428) 5,105

Net profit (loss) for the year 143,495 369,362 (61,108) 168,440 534,930

Basic profit (loss) per share attributed to the Company's shareholders (in NIS) 7.07 17.89 (3.01) 8.26 25.95

Diluted profit (loss) per share attributed to the Company's shareholders (in NIS) 7.07 17.89 (3.01) 8.26 25.48 * Regarding reclassification see Note 2 (c). The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.

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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statement of comprehensive income

For the nine months ended For the three months ended for the year ended

September 30 September 30 December 31 2011 2010 2011 2010 2010 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands

Profit (loss) for the year 143,495 369,362 (61,108) 168,440 534,930 Other comprehensive incomes: Revaluation of fixed assets, net 3,289 3,231 - - 2,601 Net changes in fair value of financial assets available for sale (317,351) 98,254 (188,252) 67,216 102,002 Net changes in fair value of financial assets available for sale transferred to statement of income (99,952) (55,482) (27,219) (12,054) (90,695) Loss from impairment in value of financial assets available for sale transferred to statement of income 74,452 37,843 53,373 21,229 37,048 Foreign currency transaction's difference in respect of overseas operations 8,722 (2,794) 7,020 2,121 (10,531) Taxes on income for other components of comprehensive profit (loss) 117,447 (22,155) 54,201 (25,460) (13,307)

Other comprehensive incomes, net of income tax (213,392) 58,897 (100,876) 53,052 27,118

Total comprehensive profit (loss) for the year (69,897) 428,259 (161,984) 221,492 562,048 Attributed to: Company shareholders (70,061) 423,830 (162,039) 222,893 555,649 Minority rights 164 4,429 55 (1,401) 6,399

Total comprehensive profit (loss) for the year (69,897) 428,259 (161,984) 221,492 562,048

The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.

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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements of changes in capital

Capital Capital Capital reserve in reserve in fund for Share respect of Translation respect of revaluation Transactions capital assets of foreign share with of non- and available operations based Treasury controlling investment Retained Minority Total premium for sale fund payment stock interests real estate earnings Total rights equity NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands

Balance as at January 1, 2011 306,691 263,835 (14,240) 18,810 (138,625) (45,660) 6,381 3,181,178 3,578,370 1,675 3,580,045 Comprehensive income for year Profit for year ------143,358 143,358 137 143,495 Total other comprehensive income (loss) - (224,838) 8,722 - - - 2,697 - (213,419) 27 (213,392) Total comprehensive income for year - (224,838) 8,722 - - - 2,697 143,358 (70,061) 164 (69,897)

Transactions with owners recognized directly in equity

Dividends paid ------(106,000) (106,000) - (106,000) Share based payment - - - 9,406 - - - - 9,406 - 9,406 Purchase of treasury stock - - - - (7,172) - - - (7,172) - (7,172) Reissuing of treasury stock 139 - - - 6,189 - - - 6,328 - 6,328 Sale of rights do not grant control - - - - - (12) - - (12) 307 295 Acquisition of rights do not grant control - - - - - (3,236) - - (3,236) 1,668 (1,568)

Balance as at September 30, 2011 306,830 38,997 (5,518) 28,216 (139,608) (48,908) 9,078 3,218,536 3,407,623 3,814 3,411,437

The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.

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Harel Insurance Investments & Financial Services Ltd. Condensed interim and consolidated statements of changes in capital - (contd.)

Balance as at July 1, 2011 307,649 146,962 (12,581) 24,790 (139,446) (45,660) 9,078 3,279,673 3,570,465 1,784 3,572,249 Comprehensive income for year ------Profit for year ------(61,137) (61,137) 29 (61,108) Total other comprehensive income (loss) - (107,965) 7,063 - - - - - (100,902) 26 (100,876) Total comprehensive income for year - (107,965) 7,063 - - - - (61,137) (162,039) 55 (161,984)

Transactions with owners recognized directly in equity Share based payment - - - 3,426 - - - - 3,426 - 3,426 Purchase of treasury stock - - - - (1,072) - - - (1,072) - (1,072) Reissuing of treasury stock (819) - - - 910 - - - 91 - 91 Sale of rights do not grant control - - - - - (12) - - (12) 307 295 Acquisition of rights do not grant control - - - - - (3,236) - - (3,236) 1,668 (1,568)

Balance as at September 30, 2011 306,830 38,999 (5,158) 28,216 (139,608) (48,908) 9,078 3,218,536 3,407,623 3,814 3,411,437

The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.

2-9 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

Harel Insurance Investments & Financial Services Ltd. Condensed interim and consolidated statements of changes in capital - (contd.)

Balance as at January 1, 2011 140,196 229,645 (3,741) 4,329 (90,231) - 4,248* 2,822,005* 3,106,451 111,409 3,217,860 Comprehensive income for year Profit for year ------366,244 366,244 3,118 369,362 Total other comprehensive income (loss) - 57,949 (2,786) - - - 2,423* - 57,586 1,311 58,897 Total comprehensive income for year - 57,949 (2,786) - - - 2,423 366,244 423,830 4,429 428,259

Transactions with owners recognized directly in equity

Dividends paid ------(107,053) (107,053) - (107,053) Share based payment - - - 11,073 - - - - 11,073 104 11,177 Purchase of treasury stock - - - - (58,574) - - - (58,574) - (58,574) Reissuing of treasury stock 328 - - - 11,052 - - - 11,380 - 11,380 Acquisition of rights do not grant control 165,700 - - - - (45,660) - - 120,040 (120,040) -

Balance as at September 30, 2010 306,224 287,594 (6,527) 15,402 (137,753) (45,660) 6,671 3,081,196 3,507,147 (4,098) 3,503,049

* Regarding reclassification see Note 2 (c). The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.

2-01 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

Harel Insurance Investments & Financial Services Ltd. Condensed interim and consolidated statements of changes in capital - (contd.)

Capital Capital Capital reserve in reserve in fund for Share respect of Translation respect of revaluation Transactions capital assets of foreign share with of non- and available operations based Treasury controlling investment Retained Minority Total premium for sale fund payment stock interests real estate* Earnings* Total rights equity NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands

Balance as at July 1, 2010 306,236 236,729 (8,687) 10,666 (100,375) (45,660) 6,671* 2,911,328* 3,316,908 (2,697) 3,314,211 Comprehensive income for year Profit for year ------169,868 169,868 (1,428) 168,440 Total other comprehensive income (loss) - 50,865 2,160 - - - - - 53,025 27 53,052 Total comprehensive income for year - 50,865 2,160 - - - - 169,868 222,893 (1,401) 221,492

Transactions with owners recognized directly in equity Share based payment - - - 4,736 - - - - 4,736 - 4,736 Purchase of treasury stock - - - - (43,883) - - - (43,883) - (43,883) Reissuing of treasury stock (12) - - - 6,505 - - - 6,493 - 6,493

Balance as at September 30, 2010 306,224 287,594 (6,527) 15,402 (137,753) (45,660) 6,671 3,081,196 3,507,147 (4,098) 3,503,049

* Regarding reclassification see Note 2 (c). The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.

2-00 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

Harel Insurance Investments & Financial Services Ltd. Condensed interim and consolidated statements of changes in capital - (contd.)

Balance as at January 1, 2010 140,196 229,645 (3,741) 4,329 (90,231) - 4,248 2,822,005 3,106,451 111,409 3,217,860

Comprehensive income for the year Profit (loss) for period ------529,825 529,825 5,105 534,930 Other comprehensive income (loss) - 34,190 (10,499) - - - 2,133 - 25,824 1,294 27,118

Total comprehensive income for the year - 34,190 (10,499) - - - 2,133 529,825 555,649 6,399 562,048

Transactions with owners recognized directly in equity Dividends paid ------(170,652) (170,652) - (170,652) Share based payment - - - 14,481 - - - - 14,481 104 14,585 Purchase of treasury stock - - - - (60,534) - - - (60,534) - (60,534) Reissuing of treasury stock 795 - - - 12,140 - - - 12,935 - 12,935

Sale of rights do not grant control ------1,058 1,058 Acquisition of rights do not grant control 165,700 - - - - (45,660) - - 120,040 (117,295) 2,745

Balance as at December 31, 2010 306,691 263,835 (14,240) 18,810 (138,625) (45,660) 6,381 3,181,178 3,578,370 1,675 3,580,045

The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.

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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements cash flow For the nine months ended For the three months ended for the year ended December September 30 September 30 31' 2011 2010 2011 2010 2010 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS Appendix Thousands Thousands Thousands Thousands Thousands

Cash flows from operating activities before taxes on income A (993,149) (1,488,201) (499,453) (416,670) (1,741,359) Income tax paid (121,783) (125,625) (45,748) 5,290 (125,625)

Net cash provided by (used for) current activities (1,114,932) (1,613,826) (545,201) (411,380) (1,866,984)

Cash flows from investing activities Investment in investee companies (58,886) - (56,404) - (66,532) Proceeds from sale of investment in a company treated using the balance sheet value method - (839) - (19,589) 18,750 Cash used for the acquisition of a consolidated company, consolidated for the first time D - (125,387) - - (125,387) Cash Used for the acquisition of a consolidated company, consolidated by the proportional consolidation method E - (3,141) - 20 (3,161) Loan given to an investee company - (1,575) - - (1,575) Payment of loan given to an investee company - 10,000 - 10,000 10,000 Investment of fixed assets (52,739) (23,962) (11,777) (11,945) (38,203) Investment in intangible assets (54,151) (55,225) (21,156) (28,126) (73,953) Dividends from investee company 11,843 4,375 7,923 2,500 4,375

Proceeds from sale of fixed assets 1,427 1,814 170 1,219 1,235 Net cash used for investing activities (152,506) (193,940) (81,244) (45,921) (274,451)

Cash flows for financing activities Proceeds from issue of liability notes - 691,538 - 71,466 691,538 Acquisition of Treasury stock (844) (47,194) (981) (37,390) (47,599) Proceeds from issue of ETF's 841,010 1,111,356 (14,079) 212,487 1,522,746 Short-term Loans from banks 16,356 36,445 10,349 35,671 357,473 Repayments of loans from banks and others 180,000 - - - - payments of loans from banks and others 171,831 (25,165) 201,175 (22,918) (29,816)

Dividends paid (106,000) (107,053) - - (170,652) Net cash provided by (used for) financing activities 1,102,353 1,659,927 196,464 259,316 2,323,690

Effect of fluctuations in currency exchange rate on balances of cash and cash equivalents (4,165) 3,355 (1,897) 1,395 1,259 Increase (decrease) in cash and cash equivalents B (169,250) (144,484) (431,878) (196,590) 183,514 Cash and cash equivalents, beginning of the year C 1,942,183 1,758,669 2,204,811 1,810,775 1,758,669 Cash and cash equivalents, end of the year 1,772,933 1,614,185 1,772,933 1,614,185 1,942,183

2-01 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements cash flows (contd.)

Appendix A' - Cash flows from operating activities before taxes on income (1)

For the nine months ended For the three months ended for the year ended September 30 September 30 December 31 2011 2010 2011 2010 2010 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS NIS Thousands NIS Thousands NIS Thousands Thousands NIS Thousands Appendix A - Cash flows from operating activities before taxes on income (1) Profit (loss) for period 143,495 369,362 (61,108) 168,440 534,930 Items not involving cash flows Company’s share of loss (profit) of investee companies recorded on the equity basis (25,781) (7,929) (10,433) (1,882) (16,654) Losses (profit) - financial investments - yield dependent insurance policies and investment contracts, net 1,675,785 (566,272)* 1,245,332 (689,966) (1,044,451) Net losses (profits) from other financial investments Marketable debt assets (170,832) (135,369) (59,625) (75,703) (167,685) Non-marketable debt assets (197,286) (98,991) (58,306) (77,408) (147,648) Shares 3,652 (24,262) 2,484 (162,198)* (6,351) Other investments 202,956 (102,471) 243,890 (57,625) (182,185) Financing expenses for financial liabilities (366,078) 101,911 (97,770) 201,999 352,544 Net losses (profits) from realizations Fixed assets (279) (340) (250) 107 (185) Changes in fair value of real estate for investment - for yield dependent contracts (4,471) (3,725) (4,046) (5,217) (20,103) Changes in fair value of other real estate investment (19,617) 2,885 (22,746) 657 (25,071) Depreciation and amortization Fixed assets 26,191 24,265 1,723 9,006 34,677 Intangible assets 69,974 72,515 25,047 25,402 95,385 Change in liabilities for non yield dependent insurance and investment contracts 836,102 1,391,614 148,085 479,742 1,552,594 Change in liabilities for yield dependent insurance and investment contracts 118,994 1,985,255 (644,371) 1,128,827 3,062,659 Change in reinsurance assets (8,503) (498,931) 6,379 (115,468) (503,008) Change in deferred acquisition costs (80,127) (81,458) (5,604) (13,578) (74,143) Share based payment 9,406 11,177 3,426 4,736 14,585 Income taxes 71,944 212,101 (39,337) 97,422 295,253 Changes in other balance sheet items: Financial investments and real estate for investment for yield dependent - insurance policies and investment contracts Acquisition of real estate for investment (111,489) (190,745) (76,121) (2,457) (254,602) Net acquisitions of financial investments (1,863,094) (1,204,321)* (908,625) (329,478) (1,387,060) Other financial investments and real estate for investment Acquisition of real estate for investment (177,427) (230,298) (70,351) (104,134) (305,323) Proceeds from the sale of real estate for investment 22,845 1,180 - - 9,280 Acquisitions net, of financial investments (467,636) (1,285,117)* (224,805) 716,410* (1,140,950)* Outstanding premiums (109,051) (32,013) 44,434 86,867 2,350 Other receivables (424,342) 24,387 (370,447) 28,833 55,149 investment for ETF's holders 292,895 1,075,834* 343,833 443,826* (2,293,557)* Cash and cash equivalents pledged for ETFs holders (337,920) (191,718) 207,544 16,067 (270,262) Other payables 9,055 9,189 (78,134) (72,980) 150,527 Changes in other tax items (111,245) (4,751) (54,229) 8,971 (100,211) Liabilities for employee benefits, net (1,267) 29,133 14,678 14,410 38,157 Total adjustments required to present cash flows from operating activities (1,136,644) 282,735 (438,345) 1,555,188 (2,276,289) Total cash flows from operating activities, before taxes on income (993,149) 652,097 (499,453) 1,723,628 (1,741,359) (1) Cash flows from operating activities include net purchases and sales of financial and real-estate investments and resulting from activities in insurance contracts and investment contracts. (2) In the framework of operating activities, interest received was presented of NIS 851 million (for the 9 months ended September 30, 2010 an amount of NIS 873 million and for 2010 an amount of NIS 1,160 million) and the interest paid of NIS 74 million (for the 9 months ended September 30, 2010 an amount of NIS 16 million and for 2010 an amount of NIS 72 million). (3) In the framework of operating activities a dividend was presented which was received from other financial investments of NIS 851 million (for the period of 9 months ended September 30, 2010 of NIS 159 million and for 2010 an amount of NIS 223 million).

* Regarding reclassification, see Note 2 c. The notes accompanying the condensed interim consolidated financial statements are an integral part thereof WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

Harel Investments in Insurance & Financial Services Ltd. Condensed interim consolidated statements cash flows - (contd.) For the nine months ended For the three months ended for the year ended December September 30 September 30 31 2011 2010 2011 2010 2010 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands

Appendix B - Cash and cash equivalents, beginning of the period Cash and cash equivalents for yield dependent contracts 746,829 472,674 987,339 416,896 472,674 Other cash and cash equivalents 1,195,354 1,285,995 1,163,220 1,393,879 1,285,995 Cash and cash equivalents, beginning of year 1,942,183 1,758,669 2,150,559 1,810,775 1,758,669

Appendix C - Cash and cash equivalents, end of the period Cash and cash equivalents for yield dependent contracts 555,439 437,610 555,439 473,016 746,829 Other cash and cash equivalents 1,217,494 1,176,575 1,217,494 1,016,181 1,195,354 Cash and cash equivalents, end of the period 1,772,933 1,614,185 1,772,933 1,614,181 1,942,183

Appendix D - Cash used on acquisition of consolidated companies Assets and Liabilities, at the time of control: Intangible assets - (28,614) - - (28,614) Fixed assets - (1,071) - - (1,071) Other receivable - (1,958) - - (1,958) Outstanding premiums - (4,697) - - (4,697) Other financial investments - (709,904) - - (709,904) Liabilities in respect of non-yield dependent insurance and investment contracts - 583,321 - - 583,321 Deferred tax assets - 27,055 - - 27,055 Net liabilities for employee benefits - 25 - - 25 Other payables - 10,456 - - 10,456 - (125,387) - - (125,387)

Appendix E - Cash withdrawn due to the acquisition of subsidiary consolidated in the past by proportional consolidation Assets and Liabilities, at the time of control: Intangible assets - (7,880) - - (7,880) Fixed assets - (104) - - (104) Current tax assets - (84) - - (84) Other receivable - (345) - - (345) Loans from related companies - 3,731 - - 3,731 Net liabilities for employee benefits - 359 - - 359 Other payables - 1,162 - - 1,162 - (3,161) - - (3,161)

The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.

2-05 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 1 - General a. The reporting entity Harel Investments in Insurance and Financial Services Ltd. (hereinafter: "the Company") is an Israeli resident company, which was incorporated in Israel, and whose shares are traded on the Tel Aviv Stock Exchange. Its official address is 3 Abba Hillel Silver Street, Ramat Gan. The Company is a holding company whose main holdings are in subsidiaries comprising insurance and financial companies. The condensed interim consolidated financial statements, as at September 30, 2011, include those of the Company and of its subsidiaries, and the Group's rights in affiliated companies and entities with joint control (hereinafter: "the Group"). The condensed interim consolidated financial statements mainly reflect assets and liabilities and operations of the subsidiary insurance companies and, therefore, were prepared in a similar format.

Note 2 - Basis for preparing the financial statements a. Declaration on compliance with International Financial Reporting Standards The condensed interim consolidated financial statements were prepared in accordance with IAS 34 - Financial Reporting for Interim Periods and in accordance with the requirements of the Pronouncements issued by the Supervisor of Insurance and in accordance with the Law for the Supervision of Financial Services (Insurance) - 1981, and does not include all of the information required in full annual financial statements. One must read them together with the financial statements as at and for the year ended December 31, 2010 (hereinafter: "the Annual Statements"). Moreover, these statements were prepared in accordance with the provisions of Chapter D of the Securities Regulations (Periodic and Immediate Reports) - 1970. The condensed interim consolidated financial statements were approved for publication by the Company's Board of Directors on November 24, 2011. b. Use of estimates and discretion In the preparation of the condensed interim financial statements in accordance with IFRS and in accordance with the Supervision Law and the Regulations issued under it, the Group's management is required to use its discretion in evaluations, estimates and assumptions, including actuarial assumptions and estimates (hereinafter: "Estimates") which affect the implementation of the accounting policy and the value of assets and liabilities, and of amounts of revenues and expenses. It should be clarified that actual results are liable to be different from these estimates. The main estimates included in the financial statements are based on actuarial evaluations and on external evaluations. On formulating these accounting estimates used in the preparation of the Group's financial statements, the Company's management is required to assume assumptions regarding circumstances and events which are connected with considerable uncertainty. When using their discretion in determining the estimates, the Company's management bases itself on past experience, various factors, external factors, and reasonable assumptions in accordance with the relevant circumstances for every estimate. The estimates are reviewed on a current basis. Changes in accounting estimates are recognized during the period in which the estimates were amended and in every future affected period. The evaluations and discretion that management uses in order to implement the accounting policy and prepare the condensed consolidated interim financial statements are mainly consistent with those used in the preparation of the consolidated financial statements as at December 31, 2010, except as described below: Interest Rates Used for Determining the Fair Value of Non marketable Debt Assets The fair value of non marketable assets measured at fair value through the income statement, and of non-marketable financial assets for which information regarding their fair value is presented for the purposes only is determined through a discounting of their expected cash flows. Invert rates used for discounting are based on government bond yields and margins on corporate bonds as measured on the Tel Aviv Stock Exchange plus a premium for non- marketability. The interest rates used for discounting the cash flows are determined by a certain company that provides interest rate quotes for various risk ratings.

2-06 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 2 - Basis for preparing the financial statements (cont'd) b. Use of estimates and discretion (cont'd) On February 24, 2011, the Ministry of Finance published a press release announcing that the Mirvah Hogen Group (Fair Margin) had won a tender to set up and operate a price quote and interest rates database for financial institutions. As of March 20, 2011 (the "transition date"), the Mirvah Hogen Group will provide price and capitalized interest rate quotes for financial institutions for revaluing their non-marketable debt assets (here and after "the new model"). From that date, Shaarey Ribit will no longer provide these quotes for financial institutions. In principle, the new model is not based on a credit rating of the asset, but on an allocation of the negotiable market into deciles consistent with the yield to maturity of the debt asset, and determining the position of the non-marketable asset according to the deciles, and this in accordance with the risk premium stemming from the prices of transactions/issues on the non-negotiable market. The new model is more up-to date expression of changes in the debt assets risk premium, as such changes are reflected in the negotiable market in line with changes in that decile. Company's opinion, the new model meets the Commissioner of Insurance accounting rules on fair value measurement of financial assets. Transition to the new model will be applied as a change in estimate. Implementation of the new model first time on the transition is not expected to have a significant effect on the financial statements. On September 14, 2011, the Commissioner published an announcement, pursuant to the ruling of the Supreme Court dated September 6, 2011 which cancelled the tender. According to the announcement, the tender committee of the Ministry of Finance had decided that Mirvah Hogen Ltd. would continue to supply the database services for individual price quotes and interest rates for the financial institutions until June 1, 2012, or until the winner of the new tender published commences services, whichever is earlier. c. Reclassification 1. Assets held for the ETF holders. During the Reporting Period, the Company changed the method of classifying the assets held against liabilities for the holders of ETF units, that were issued by a subsidiary (hereinafter – EFT assets), in the interim consolidated reports on the financial situation. ETF assets that were presented under "other financial investments" were reclassified under "financial investments for the bearers of ETFs", and this in an effort to provide a fairer presentation of the ETF assets held against liabilities for the bearers of the ETFs. The comparative figures were reclassified for consistency purposes:

at 30 September, at 31 December 2011 2010 NIS thousands NIS thousands Other financial investments: Tradable debt asset 863,100 1,6,7,7,8 Shares 1,781,111 ,,7,0,786 Other 7,,7,0 36,70, Total assets held for the ETF holders ,,,01,663 7,6,6,166 2. Other Classifications In addition, reclassifications were included in respect of the nine and three-month period ended September 30, 2010. The principal classifications refer to the reclassification of deferred tax assets and liabilities and to the classification of other comprehensive profit before income tax in the note on segments, from the health insurance segment and to a segment not attributed to operating segments, the cancellation of revenues from management fees against general and administrative expenses in the gemel segment, classification of other revenues to income from investments in the pension sector, classification of commissions to general and administrative expenses that are not attributed to the operating segments, and reclassification of a reserve fund for the revaluation of fixed assets that was classified from the surpluses to a separate fund in the Statement of Changes in Equity, and classification of payable interest to financial liabilities. The reclassification had no effect on the Group's equity or profit. In addition to the described classifications, a one-time expense was reclassified from "G&A" expenses to "other expenses" during the period of six months ended on June 30, 2011.

2-07 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 3 – Significant accounting principles Excluding those details in clause a. above, the Group's accounting principles in these condensed interim consolidated financial statements is the policy which is applied in the annual statements. The following is a description of the nature of the changes made in the accounting policies in these condensed interim consolidated financial statements and their effect. The implementation of the below principles will not have a significant effect on these condensed interim consolidated financial statements. a. First implementation of new standards

Financial reporting in interim periods

On January 1, 2011, the Group introduced implementation of the amendment to IAS 34, financial reporting for interim periods, significant events and transactions ("the Amendment"), which was published as part of the improvements project for 2010. Accordingly, the list of events and transactions that must be disclosed in the financial reports for interim periods was expanded. In addition, the materiality threshold that existed prior to the amendment was removed from the minimum disclosure requirements. The disclosures required due to the amendment are expressed in these concise interim financial statements.

Related party disclosures

From January 1, 2011, the Group has implemented IAS 24 (2009) – Related party disclosures ("the Standard").The Standard was implemented retrospectively. b. New standards and interpretations not yet adopted

1. IFRS 9 (2010) – Financial Instruments ("the Standard")

Pursuant to that mentioned in the Note on Principal Accounting Policies in the annual reports, with respect to new standards and interpretations that have yet to be adopted, the Group has begun to review the possibility of early adoption of the Standard and the expected repercussions of its adoption on the financial statements.

2. Amendment to IAS 12, Tax on Income, Deferred Taxes in respect of Investment Property ("the Amendment")

According to the Amendment, a rebuttable presumption was prescribed whereby deferred taxes in respect of investment property assets that are measured using the fair value model pursuant to the provisions of IAS 40 Investment Property will be calculated under the assumption that the carrying amount of the underlying asset will be recovered solely through a sale. Nevertheless, the presumption is rebutted in those instances where the investment property is depreciable and the purpose of the Company's business model in holding the asset is to consume substantially all the economic benefits inherent in the investment property over time. The Amendment shall also apply to deferred tax calculated in respect of investment property acquired as part of a business combination that is treated according to IFRS 3 Business Combinations, if the entity uses the fair value method when subsequently measuring that investment property. The Amendment is to be implemented retrospectively, from January 1, 2012 onwards. Early adoption is permitted, with disclosure. The amendment is not expected to have a significant effect on the financial statements.

3. a new set of accounting standards concerning the consolidation of financial statements, joint arrangements and disclosures with respect to interests in other entities

The new set of standards replaces the existing standards on the consolidation of financial statements and joint arrangements and also includes several changes with respect to associates. The following details the new standards that have been published:

2-08 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 3 - Significant accounting principles (cont'd) b. New standards and interpretations not yet adopted (cont'd)

IFRS 10, Consolidated Financial Statements ("the Standard")

The Standard replaces IAS 27, Consolidated and Separate Financial Statements, and instructions of SIC 12, Consolidation - Special Purpose Entities (SPEs) concerning the consolidation of financial statements, such that the instructions of IAS 27 will remain in force only with respect to separate financial statements.

The Standard sets forth a new control model for the purpose of determining whether an investor controls an SPE so that the entity should be included within the consolidated financial statements of the parent company. This model is to be implemented with respect to all SPEs. According to the model, an investor controls an SPE where it is exposed or entitled to variability of returns stemming from its involvement in the SPE, and it has the ability to influence these returns through its power in that entity, and there is a connection between the power and the returns.

Following are several key changes:

- The Standard presents a model that requires discretion to be exercised and all the relevant facts and circumstances to be analyzed in an effort to determine who is the controller and whether it is required to consolidate an SPE.

- The Standard presents a single control model to be applied with respect to all the SPEs, both SPEs that are currently governed by IAS 27 and those currently governed by SIC 12.

- De facto circumstances will be taken into account for the purpose of assessing control. Thus, if there is a substance of effective control of a SPE, reports must be consolidated.

- In assessing the substance of control, all significant, potential voting rights will be taken into account. With respect to potential voting rights, their structure, the reasons they are in place and the conditions of those potential voting rights, must be examined.

- The Standard includes instructions for application and a list of indicators for the purpose of reviewing whether the decision maker acts as a manager or agent when examining whether an investor is controlling a SPE.

- The Standard provides guidelines for those instances in which an investor reviews control with respect to silos (specific assets) instead of reviewing control with respect to legal entitles.

- The Standard defines protective rights, whereas the existing standard did not address this issue.

- The exposure to risks and benefits from an investee does not in itself determine that the investor controls the investee, and it is only one of the factors to be reviewed when estimating control.

The Standard will be applied retrospectively to annual periods commencing on or after January 1, 2013. Early implementation is possible, subject to providing disclosure and subject to the early adoption of the entire new standards.

IFRS 11, Joint Arrangements ("the Standard")

The Standard replaces IAS 31, Interests in Joint Ventures ("IAS 31"), and amends some of the instructions in IAS 28, Investments in Associates (Equity Method). The standard defines Joint Arrangements as arrangements in which two parties or more have joint control (as defined above in IFRS 10), and divides them into two categories: joint operations and joint ventures.

Following are the principal changes:

- Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

2-09 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 3 - Significant accounting principles (cont'd) b. New standards and interpretations not yet adopted (contd.)

- Joint operations - the parties that have joint control of the arrangement have rights to the assets and an obligation to commit the obligations related to the arrangement, regardless of whether the joint arrangement is not incorporated in a separate structure, or it is incorporated as a separate structure but the parties have joint control, the parties have rights to the assets, and obligations for the liabilities relating to the arrangement.

- The accounting for joint operations is similar to the accounting under IAS 31 in jointly controlled assets and jointly controlled ventures, i.e. – the recognition of assets ,liabilities and transactions, and their treatment under the relevant standards.

- Joint ventures - All the joint arrangements that are incorporated as a separate entity and in which the parties that have joint control have rights to the net assets of the arrangement. Joint ventures shall be accounted for using the equity method only (the option to apply the proportionate consolidation method has been eliminated).

- Accounting in the shift from significant influence to joint control, or the reverse – IAS 28 (Amended) eliminates the existing provision to revalue to fair value the joint venture's existing or remaining interests in the investment.

- IAS 28 (Amended) determines that IFRS 5 applies to an investment, or part thereof, in an associate or joint venture that meets the criteria for classification as held-for-sale. Any remaining part is accounted for using the equity method, until the time of disposal.

The standard is applicable retrospectively for annual periods commencing on or after January 1, 2013, although there are separate instructions regarding retrospective application in certain instances. Early application is possible, subject to providing disclosure and subject to the early adoption of the entire standards.

IFRS 12, Disclosure of Interests in Other Entities ("the Standard")

The Standard contains comprehensive disclosure requirements with respect to interests in subsidiaries, in joint arrangements (Jointly controlled entities and Joint Ventures), in associate companies and structured entities.

The Standard is applicable to annual reporting periods beginning on or after January 1, 2013. Early application is possible subject to the early adoption of the entire standards, including the two other standards that were published concurrently – IFRS 11, Joint Arrangements, and IFRS 10 – Consolidated Financial Statements. Nevertheless, the additional disclosure requirements required under IFRS 12 can be included early without the early adoption of the other standards.

The Group has not yet begun to examine the impact of the adoption of the standards on the financial statements.

4. IFRS 13, Fair Value Measurement ("the Standard")

This Standard replaces the instructions regarding the method of measuring fair value that appear in various IFRS standards so that it will constitute the sole source of instructions regarding the measurement of fair value under IFRS. To this end, the Standard defines fair value, determines a framework of guidelines for measuring fair value, and determines disclosure requirements relating to fair value measurement. The Standard does not determine new current requirements for measuring assets or liabilities at fair value.

The Standard applies to the assets, liabilities and capital instruments of entities when another IFRS requires or may choose fair value measurements or disclosures about fair value measurements. Nevertheless, the Standard will not apply to share-based payments covered by IFRS 2 – Share-based Payment, and to leasing transactions that are part of the scope of IAS 17, Leases. Likewise, the Standard does not apply to measurements that have some similarities to fair value but that are not fair value (such as: measurement of the net realizable value of inventory and the measurement of value-in-use under IAS 36, Impairment of Assets).

2-21 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 3 - Significant accounting principles (cont'd) b. New standards and interpretations not yet adopted (contd.)

The Standard is applicable to annual reporting periods commencing January 1, 2013. Early application is possible subject to disclosure. The Standard is applicable retrospectively, although the disclosure requirements do not apply to comparative information for periods preceding first-time application of the Standard.

The Group has not yet begun to examine the effects of adopting the Standard on the financial statements.

5. IAS-1 (Amended) – Presentation of financial statements concerning the presentation of components of other comprehensive income ("the Amendment")

The Amendment changes the method of presenting components of other comprehensive income in the financial statements, so that subsequent to initial recognition as part of comprehensive income, components of other comprehensive income will appear in profit or loss, and will be presented separately from other components of comprehensive income that are always to be excluded from profit or loss. The Amendment also changes the name of the statement from "Statement of Comprehensive Income" to "Statement of Other Comprehensive Income", although companies may use other names. The Standard will apply retrospectively to annual periods commencing on or after July 1, 2012. Early application is permitted, with disclosure.

The Group has not yet begun to examine the effects of adopting the Standard on the financial statements.

6. IAS 19 (Amended) – Employee Benefits ("the Amendment")

The Amendment comprises several changes in connection with the accounting for employee benefits:

Following are the principal changes:

- The Amendment eliminates the option to postpone recognition of actuarial gains or losses, known as the corridor method, and also eliminates the option to recognize actuarial gains or losses directly in profit or loss. Consequently, all actuarial gains and losses will be recognized immediately in equity via other comprehensive income.

- The Amendment requires immediate recognition of costs in respect of past services, regardless of whether or not these benefits have vested.

- Net financing income (expenses) will be computed by multiplying the obligation (asset) for a net defined benefit by the discounting rate used to measure the obligation for a defined benefit. Accordingly, the calculation of actuarial gains or losses also changed.

- The Amendment changes the definition of short-term employee benefits and other long-term employee benefits, so that instead of defining the classification of long-term or short-tem by the date of entitlement, the classification will depend on the entity's expectation for full utilization of the benefits.

- Disclosure requirements were added for defined benefit plans designed, in part, to provide improved disclosures about the characteristics of the defined benefit plans and the risks arising from these plans.

- The definition of termination benefits was clarified so that they will be recognized on the earlier of: the date on which, under IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, the entity also recognizes costs in respect of a structural change that also includes payment of termination benefits costs, or the date on which the entity is no longer able to withdraw its offer to pay termination benefits.

The Amendment will apply retrospectively to annual periods commencing on or after January 1, 2013 (with certain exceptions listed in the Amendment). Early application is permitted, with disclosure.

The Group has not yet begun to examine the effects of adopting the Amendment on the financial statements. 2-20 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 3 - Significant accounting principles (cont'd) c. Seasonality 1. Life and health insurance The revenues from life and health insurance premiums are not characterized by seasonality. Nevertheless, due to the fact that the provisions for life assurance enjoy tax benefits, a considerable part of new sales is affected mainly at the end of the year.

2. General insurance The turnover of the gross premium revenues in general insurance is characterized by seasonality, resulting mainly from vehicle insurance of various groups of employees and vehicle fleets of businesses, where the date of their renewal are generally in January and from various policies of businesses where the renewal dates are generally in January or in April. The effect of this seasonality on the reported profits is neutralized through the provisions of premiums not yet earned. The components of other expenses such as claims, and the components of other revenues such as revenues from investments do not have a definite seasonality and, therefore, also there is no definite seasonality in profits. d. Deferred tax expenses in respect of the inclusion of members in the provident and education funds

Additional acquisition expenses (commissions paid to agents, acquisition supervisors and marketing agents), that are attributed directly to the inclusion of members in the provident and education funds, are recorded as Deferred Acquisition Costs (DAC) if they can be identified separately and measured reliably and if they are expected to be repaid.

From 2011, the subsidiary has started to record DAC. These expenses are amortized at equal annual rates over the period in which the Company will generate revenues from the members who have joined, but no more than 5 years. In previous periods, the Company had no additional DAC, or their amounts were negligible, in respect of members who had joined the provident and education funds.

Note 4 - Operating segments

The performances of the segments are measured based on the profits of the segments before taxes on income. Inter- company transactions results are cancelled in the framework of the adjustments so as to prepare condensed interim consolidated financial statements.

The Group operates in the following segments: 1. Life assurance and long-term savings segment

This field includes the Group's insurance activities in the life assurance branches and the Group's operations in managing pension and provident funds. 2. Health insurance segment

This field includes the Group's insurance activities in illness and hospitalization branches, personal accidents and nursing. The policies sold in the framework of these insurance branches cover the range of damages caused to the insured as a result of illness and/or accidents, including a situation of nursing and dental treatments. The health insurance policy are offered both individuals and to groups. 3. General insurance segment This segment comprises five sub-fields: Vehicle property: includes the Group's activities in the sale of insurance policies in the motor vehicle insurance branch ("the vehicle property"), which covers damages caused to the vehicle owner as a result of an accident, and/or theft and/or the liability of the vehicle owner or the driver for property damage caused to a third party in an accident.

2-22 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) Vehicle compulsory: includes the Group's activities in the insurance branch according to the requirements of the Vehicle Insurance Ordinance (New Version) - 1970 (hereinafter: "compulsory vehicle"), which covers corporal damage as a result of the use of a motor vehicle according to the Compensation Law to Injured in Road Accidents - 1975. Other liability branches: including the Group's activities in the sale of policies covering the insured liability to a third party (excluding cover for liabilities in the compulsory vehicle field, as described above). This framework includes, inter alia, the following insurance branches: imposed liability insurance, third-party liability insurance, professional liability insurance, directors and officers' liability insurance, and insurance against liability for defective products. Property and other branches: this field includes the Group's insurance activities in all property branches (excluding vehicle property) detailed in the insurance branches notice. Mortgage insurance business: this field includes the Group's insurance activities in the liability insurance branch for homes insured in a mortgage (as a single branch - MONOLINE). This insurance is intended to give indemnity for damage caused as a result of non -payment of loans given against a first mortgage on a single real estate property for residential purposes only, and after realizing the property serving as collateral for such loans. 4. Insurance companies overseas operating segment The overseas segment consists of the activity of Interasco Societe Anonyme General Insurance Company S.A.G.I ("Interasco"), and Turk Nippon, an insurance company wholly owned by the Company. 5. Financial services segment The Group's activities in the capital and financial market are carried out in Harel Finance. Harel Finance is engaged through companies controlled by it in the following activities: - Managing mutual funds; - Managing securities for private customers, corporations, and institutional customers in capital markets in Israel and abroad; - Dividing securities trading services (brokerage) in Israel and abroad, in various field, mainly in the Maof market, in shares market and in future contracts and options; - Issue to the public of index products; - Exchange traded notes; Regarding reclassification of this segment see section 7 below. 6. Not allocated to operating segments Activities relating to the operating segment include mainly activities of insurance agencies and of capital activities in consolidated insurance companies. 7. Restatement A subsidiary of the Company engaged in ETFs (Harel Sal) holds, as part of its obligations towards the bearers of the ETFs, shares of the Company and bonds that were issued by Harel Finance and Issues. The profits or losses stemming from these holdings were set off against the results of the financial services segment. In view of the ever increasing volume of ETFs in which the Company's securities are held, the Company's management re-examined the method of offsetting this profit (or loss) and has concluded that in order to better reflect performance in the financial services sector, this set off (in respect of the effect of the holding of the Company's securities) should be performed in the column "adjustments and set off" in the Note on segments. This form of statement more correctly reflects performance in the finance segment. This restatement does not affect the Company's overall financial performance (including no effect on the Company's equity).

2-21 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) a. Information regarding reporting segments A. Information regarding segment reporting (Unaudited)For the nine months ended September 30, 2011 Life Insurance Not Allocated and Long- Insurance To Any Term Health General companies Financial Specific Adjustments Savings Insurance Insurance overseas Services Segment and Offsets Total NIS NIS NIS NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands Premiums earned, gross 2,269,326 1,820,988 2,089,335 110,286 - - (5,553) 6,284,382 Premiums earned by reinsurers 89,504 140,916 864,871 36,748 - - (5,553) 1,126,486 Premiums earned in retention 2,179,822 1,680,072 1,224,464 73,538 - - - 5,157,896 Net profit (loss) from investments and financial income (601,581) 61,210 239,016 (2,749) 14,629 45,401 (3,531) (247,605) Income from management fees 405,884 7,613 - - 132,169 3,877 - 549,543 Income from commissions 16,099 58,120 173,016 12,688 28,309 50,594 (29,377) 309,449 Other income - - - - 10 7,547 (1,982) 5,575 Total income 2,000,224 1,807,015 1,636,496 83,477 175,117 107,419 (34,890) 5,774,858 Payments and changes in liabilities for insurance and investment contracts, gross 1,306,945 1,337,187 1,734,442 72,278 - - (4,218) 4,446,634 Reinsurers' share in payments and changes for insurance contracts liabilities 63,968 87,213 622,391 15,047 - - (4,218) 784,401 Payments and changes in liabilities for insurance and investment contracts, in retention 1,242,977 1,249,974 1,112,051 57,231 - - - 3,662,233 Commission, marketing and other acquisition expenses 398,005 285,474 398,638 42,043 - 1,622 (29,377) 1,096,405 Management and general expenses 243,316 125,138 23,222 10,896 145,997 72,504 (1,982) 619,091 Other expenses 33,414 - 722 - - 7,159 - 41,295 Financing expenses 13,739 7,370 22,891 - 5,171 123,430 (11,325) 161,276 Total expenses 1,931,451 1,667,956 1,557,524 110,170 151,168 204,715 (42,684) 5,580,300 Part of the profits (losses) of investee companies treated by the equity method 2,094 1,160 8,427 - - 9,200 - 20,881 Profit (loss) before income taxes 70,867 140,219 87,399 (26,693) 23,949 (88,096) 7,794 215,439 Other comprehensive incomes, before income tax (123,943) (35,430) (105,188) (238) (115) (65,925) - (330,839) Total comprehensive incomes, before income tax (53,076) 104,789 (17,789) (26,931) 23,834 (154,021) 7,794 (115,400) Liabilities in respect of non-yield dependent insurance and investment contracts 9,386,841 2,119,839 9,615,913 196,652 - - (7,108) 21,312,137 Liabilities in respect of yield dependent insurance and investment contracts 18,196,701 1,579,999 - - - - - 19,776,700

2-24 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) a. Information regarding reporting segments (contd.) (Unaudited)For the three months ended September 30, 2011 Life Insurance Not Allocated and Long- Insurance To Any Term Health General companies Financial Specific Adjustments Savings Insurance Insurance overseas Services Segment and Offsets Total NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands Premiums earned, gross 745,428 662,103 701,555 41,686 - - (2,080) 2,148,692 Premiums earned by reinsurers 29,974 52,361 288,228 13,409 - - (2,080) 381,892 Premiums earned in retention 715,454 609,742 413,327 28,277 - - - 1,766,800 Net profit (loss) from investments and financial income (927,747) (19,422) 71,386 (5,212) 4,445 (29,686) 800 (905,436) Income from management fees 136,642 2,430 - - 37,876 1,703 - 178,651 Income from commissions 1,730 20,854 59,988 4,487 9,332 17,037 (9,655) 103,773 Other income - - - - - 830 (693) 137 Total income (73,921) 613,604 544,701 27,552 51,653 (10,116) (9,548) 1,143,925 Payments and changes in liabilities for insurance and investment contracts, gross (219,168) 454,033 584,878 28,204 - - (1,799) 846,148 Reinsurers' share in payments and changes for insurance contracts liabilities 22,860 33,840 226,614 5,842 - - (1,799) 287,357 Payments and changes in liabilities for insurance and investment contracts, in retention (242,028) 420,193 358,264 22,362 - - - 558,791 Commission, marketing and other acquisition expenses 138,989 107,044 142,025 15,708 - 506 (9,655) 394,617 Management and general expenses 86,299 47,519 8,952 2,660 44,148 25,799 (693) 214,684 Other expenses 11,149 - 243 - - 713 - 12,105 Financing expenses 2,331 2,092 27,587 - 1,857 39,669 (3,830) 69,706 Total expenses (3,260) 576,848 537,071 40,730 46,005 66,687 (14,178) 1,249,903 Part of the profits (losses) of investee companies treated by the equity method 698 324 2,128 - - 2,383 - 5,533 Profit (loss) before income taxes (69,963) 37,080 9,758 (13,178) 5,648 (74,420) 4,630 (100,445) Other comprehensive incomes, before income tax (66,884) (16,978) (41,955) 311 87 (29,658) - (155,077) Total comprehensive incomes, before income tax (136,847) 20,102 (32,197) (12,867) 5,735 (104,078) 4,630 (255,522) Liabilities in respect of non-yield dependent insurance and investment contracts 9,386,841 2,119,839 9,615,913 196,652 - - (7,108) 21,312,137 Liabilities in respect of yield dependent insurance and investment contracts 18,196,701 1,579,999 - - - - - 19,776,700

2-25 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) a. Information regarding reporting segments (contd.) (Unaudited)For the nine months ended September 30, 2010 A. Information regarding segment reporting (Cont'd) Life Insurance Not Allocated Insurance To Any and Long-Term Health General companies Financial Specific Adjustments Savings Insurance Insurance overseas Services** Segment and Offsets** Total

NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands Premiums earned, gross 2,150,215 1,504,669 2,134,658 67,777 - - (3,671) 5,853,648 Premiums earned by reinsurers 81,960 140,286 921,021 24,701 - - (3,671) 1,164,297 Premiums earned in retention 2,068,255 1,364,383 1,213,637 43,076 - - - 4,689,351 Net profit (loss) from investments and financial income 1,540,231* 145,844 156,121 (1,784) 9,367 145,040 (11,555) 1,983,264 Income from management fees 431,303 5,777 - - 129,959 3,282 (8) 570,313 Income from commissions 29,076 60,117 170,772 9,143 32,508 41,857 (20,336) 323,137 Other income - - - - 573 3,140 (1,910) 1,803 Total income 4,068,865 1,576,121 1,540,530 50,435 172,407 193,319 (33,809) 7,567,868 Payments and changes in liabilities for insurance and investment contracts, gross 3,196,335 1,120,231 2,048,199 45,037 - - (2,771) 6,407,031 Reinsurers' share in payments and changes for insurance contracts liabilities 45,287 73,397 1,001,932 11,142 - - (2,771) 1,128,987 Payments and changes in liabilities for insurance and investment contracts, in retention 3,151,048 1,046,834 1,046,267 33,895 - - - 5,278,044 Commission, marketing and other acquisition expenses 366,040 245,269 375,049 31,668 - 1,457* (20,336) 999,147 Management and general expenses 236,795 109,909 26,250 12,508 140,144 71,035* (1,918) 594,723 Other expenses 32,627 - 726 - 2,111 1,802 - 37,266 Financing expenses 9,396 4,870 (2,146) - 5,828 78,126 (10,920) 85,154 Total expenses 3,795,906 1,406,882 1,446,146 78,071 148,083 152,420 (33,174) 6,994,334 Part of the profits (losses) of investee companies treated by the equity method - - 4,004 - (165) 4,090 - 7,929 Profit (loss) before income taxes 272,959 169,239 98,388 (27,636) 24,159 44,989 (635) 581,463 Other comprehensive incomes, before income tax 55,955 10,617* 11,882 4,883 208 (2,493)* - 81,052 Total comprehensive incomes, before income tax 328,914 179,856 110,270 (22,753) 24,367 42,496 (635) 662,515 Liabilities in respect of non-yield dependent insurance and investment contracts 8,946,068 1,818,223 9,395,537 164,125 - - (3,595) 20,320,358 Liabilities in respect of yield dependent insurance and investment contracts 17,212,663 1,371,942 - - - - - 18,584,605 * Regarding reclassification see Note 2(C). ** Regarding restatement see Note 4 (7). 2-26 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) a. Information regarding reporting segments (contd.) (Unaudited)For the three months ended September 30, 2010

Life Insurance Not Allocated and Long- Insurance To Any Term Health General companies Financial Specific Adjustments Savings Insurance Insurance overseas Services** Segment and Offsets** Total NIS NIS NIS NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands Premiums earned, gross 794,240 556,810 713,544 25,722 - - (1,144) 2,089,172 Premiums earned by reinsurers 27,552 52,934 297,700 9,038 - - (1,144) 386,080 Premiums earned in retention 766,688 503,876 415,844 16,684 - - - 1,703,092 Net profit (loss) from investments and financial income 1,057,002* 82,772 50,376 887 5,689 55,246 (1,951) 1,250,021 Income from management fees 189,662* 2,159 - - 46,265 857 (8) 238,935 Income from commissions 11,287 22,058 46,459 3,226 8,308 14,622 (8,992) 96,968 Other income -* - - - 58 1,344 (700) 702 Total income 2,024,639 610,865 512,679 20,797 60,320 72,069 (11,651) 3,289,718 Payments and changes in liabilities for insurance and investment contracts, gross 1,645,331 430,966 655,713 18,870 - - (1,281) 2,749,599 Reinsurers' share in payments and changes for insurance contracts liabilities 11,569 26,984 279,072 4,425 - - (1,281) 320,769 Payments and changes in liabilities for insurance and investment contracts, in retention 1,633,762 403,982 376,641 14,445 - - - 2,428,830 Commission, marketing and other acquisition expenses 129,614 92,298 128,009 10,631 - 52* (8,992) 351,612 Management and general expenses 74,123* 38,179 10,925 4,295 49,065 25,088* (708) 200,967 Other expenses 10,875 - 242 - 734 705 - 12,556 Financing expenses 3,953 4,394 (12,988) - 1,970 36,100 (1,656) 31,773 Total expenses 1,852,327 538,853 502,829 29,371 51,769 61,945 (11,356) 3,025,738 Part of the profits (losses) of investee companies treated by the equity method - - 2,875 - - (993) - 1,882 Profit (loss) before income taxes 172,312 72,012 12,725 (8,574) 8,551 9,131 (295) 265,862 Other comprehensive incomes, before income tax 36,839 4,286* (5,347)* 4,259 75 38,400* - 78,512 Total comprehensive incomes, before income tax 209,151 76,298 7,378 (4,315) 8,626 47,531 (295) 344,374 Liabilities in respect of non-yield dependent insurance and investment contracts 8,946,068 1,818,223 9,395,537 164,125 - - (3,595) 20,320,358 Liabilities in respect of yield dependent insurance and investment contracts 17,212,663 1,371,942 - - - - - 18,584,605 * Regarding reclassification see Note 2(C). ** Regarding restatement see Note 4 (7). 2-27 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) a. Information regarding segment reporting (Cont'd) A. Information regarding segment reporting (Cont'd) for the year ended December 31, 2010 Life Insurance Not Allocated and Long- Insurance To Any Term Health General companies Financial Specific Adjustments Savings Insurance Insurance overseas Services* Segment and Offsets* Total NIS NIS NIS NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands Premiums earned, gross 2,965,671 2,061,432 2,852,243 95,925 - - (5,564) 7,969,707 Premiums earned by reinsurers 112,705 186,166 1,219,334 35,107 - - (5,564) 1,547,748 Premiums earned in retention 2,852,966 1,875,266 1,632,909 60,818 - - - 6,421,959 Net profit (loss) from investments and financial income 2,381,576 213,085 249,582 1,944 15,173 194,520 (18,930) 3,036,950 Income from management fees 619,159 7,872 - - 181,095 4,457 - 812,583 Income from commissions 27,740 78,933 232,495 12,893 42,017 57,863 (30,426) 421,515 Other income - - - - 573 3,498 (2,498) 1,573 Total income 5,881,441 2,175,156 2,114,986 75,655 238,858 260,338 (51,854) 10,694,580 Payments and changes in liabilities for insurance and investment contracts, gross 4,680,941 1,573,420 2,672,958 63,952 - - (3,849) 8,987,422 Reinsurers' share in payments and changes for insurance contracts liabilities 78,710 105,583 1,242,189 17,193 - - (3,849) 1,439,826 Payments and changes in liabilities for insurance and investment contracts, in retention 4,602,231 1,467,837 1,430,769 46,759 - - - 7,547,596 Commission, marketing and other acquisition expenses 487,303 332,386 522,538 44,797 - 1,888 (30,426) 1,358,486 Management and general expenses 323,139 149,291 35,563 15,490 195,878 92,304 (2,498) 809,167 Other expenses 43,890 - 965 519 710 2,312 - 48,396 Financing expenses 12,986 5,274 (7,417) - 7,697 113,412 (14,546) 117,406 Total expenses 5,469,549 1,954,788 1,982,418 107,565 204,285 209,916 (47,470) 9,881,051 Part of the profits (losses) of investee companies treated by the equity method 664 - 9,117 - (165) 7,038 - 16,654 Profit (loss) before income taxes 412,556 220,368 141,685 (31,910) 34,408 57,460 (4,384) 830,183 Other comprehensive incomes, before income tax 36,788 6,815 (11,650) (1,302) 108 9,666 - 40,425 Total comprehensive incomes, before income tax 449,344 227,183 130,035 (33,212) 34,516 67,126 (4,384) 870,608 Liabilities in respect of non-yield dependent insurance and investment contracts 9,069,866 1,855,053 9,396,990 158,046 - - (4,636) 20,475,319 Liabilities in respect of yield dependent insurance and investment contracts 18,211,153 1,446,553 - - - - - 19,657,706 * Regarding restatement see Note 4 (7). 2-28 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment (Unaudited)For the nine months ended September 30, 2011 Compulsory Motor Property and Other Liability Mortgage Other Motor Property Segments* Segments** insurance Total NIS thousands NIS thousands NIS thousands NIS thousands NIS Thousands NIS Thousands Premiums earned, gross 448,128 722,900 539,241 445,084 40,242 2,195,595 Premiums earned by reinsurers 91,976 151,819 413,364 238,918 - 896,077 Retention premiums earned 356,152 571,081 125,877 206,166 40,242 1,299,518 Changes in premium balances that have not yet been earned, retention 27,624 60,053 3,122 (9,554) (6,191) 75,054 Retention premiums earned 328,528 511,028 122,755 215,720 46,433 1,224,464 Profits from investments, net, and financing income 126,429 25,405 14,122 57,503 15,557 239,016 Commission income 15,453 37,355 81,148 39,060 - 173,016 Total income 470,410 573,788 218,025 312,283 61,990 1,636,496 Payments and changes in liabilities for insurance contracts, gross 443,950 554,237 215,306 481,378 39,571 1,734,442 Reinsurer's share of payments and changes in liabilities for insurance contracts 76,397 106,882 164,184 274,928 - 622,391 Payments and changes in liabilities for insurance contracts, retention 367,553 447,355 51,122 206,450 39,571 1,112,051 Commission, marketing expenses and other acquisition costs 52,448 134,866 121,306 85,370 4,648 398,638 Management and general expenses 3,002 3,805 2,471 1,924 12,020 23,222 Other expenses - - - - 722 722 Financing expenses 3,861 4,280 9,277 5,363 110 22,891 Total expenses 426,864 590,306 184,176 299,107 57,071 1,557,524 Company share of profit (loss) of investee companies recorded by the equity method 5,147 887 203 2,190 - 8,427 Profit (loss) before income taxes 48,693 (15,631) 34,052 15,366 4,919 87,399 Other comprehensive incomes, before income tax (54,290) (9,358) (2,146) (23,100) (16,294) (105,188) Total comprehensive profit (loss) before income tax (5,597) (24,989) 31,906 (7,734) (11,375) (17,789)

Liabilities for insurance policies, gross, as at June 30 2011 2,849,635 676,069 562,703 4,878,023 649,483 9,615,913

* Property braches and others include mainly results from property loss insurance and comprehensive apartments insurance, whose activities comprise 86% of total premiums in these branches. ** Other liabilities branches include mainly results from third-party insurance and professional liability whose activities comprise 79% of total premiums in these branches.

2-29 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment (contd.)

(Unaudited)For the three months ended September 30, 2011 Compulsory Motor Property and Other Liability Mortgage Other Motor Property Segments* Segments** insurance Total NIS thousands NIS thousands NIS thousands NIS thousands NIS Thousands NIS Thousands Premiums earned, gross 120,776 189,818 144,712 142,585 11,342 609,233 Premiums earned by reinsurers 24,816 39,747 110,775 78,063 - 253,401 Retention premiums earned 95,960 150,071 33,937 64,522 11,342 355,832 Changes in premium balances that have not yet been earned, retention (11,744) (23,653) (5,203) (12,097) (4,798) (57,495) Retention premiums earned 107,704 173,724 39,140 76,619 16,140 413,327 Profits from investments, net, and financing income 29,464 8,879 12,798 18,499 1,746 71,386 Commission income 5,582 13,582 28,931 11,893 - 59,988 Total income 142,750 196,185 80,869 107,011 17,886 544,701 Payments and changes in liabilities for insurance contracts, gross 134,655 183,362 76,177 179,092 11,592 584,878 Reinsurer's share of payments and changes in liabilities for insurance contracts 16,762 35,659 58,467 115,726 - 226,614 Payments and changes in liabilities for insurance contracts, retention 117,893 147,703 17,710 63,366 11,592 358,264 Commission, marketing expenses and other acquisition costs 19,663 50,386 42,346 28,035 1,595 142,025 Management and general expenses 1,288 1,931 978 582 4,173 8,952 Other expenses - - - - 243 243 Financing expenses 3,916 4,947 11,715 6,960 49 27,587 Total expenses 142,760 204,967 72,749 98,943 17,652 537,071 Company share of profit (loss) of investee companies recorded by the equity method 1,293 204 54 577 - 2,128 Profit (loss) before income taxes 1,283 (8,578) 8,174 8,645 234 9,758 Other comprehensive incomes, before income tax (22,270) (3,684) (904) (9,700) (5,397) (41,955) Total comprehensive profit (loss) before income tax (20,987) (12,262) 7,270 (1,055) (5,163) (32,197)

Liabilities for insurance policies, gross, as at September 30, 2011 2,849,635 676,069 562,703 4,878,023 649,483 9,615,913

* Property braches and others include mainly results from property loss insurance and comprehensive apartments insurance, whose activities comprise 85% of total premiums in these branches. ** Other liabilities branches include mainly results from third-party insurance and professional liability whose activities comprise 80% of total premiums in these branches.

2-11 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment (contd.) (Unaudited)For the nine months ended September 30, 2010

Compulsory Motor Property and Other Liability Mortgage Motor Property Other Segments* Segments** insurance Total NIS thousands NIS thousands NIS thousands NIS thousands NIS Thousands NIS Thousands Premiums earned, gross 467,672 748,252 503,544 491,208 44,668 2,255,344 Premiums earned by reinsurers 95,812 156,486 383,031 325,659 - 960,988 Retention premiums earned 371,860 591,766 120,513 165,549 44,668 1,294,356 Changes in premium balances that have not yet been earned, retention 9,955 69,487 6,749 2,035 (7,507) 80,719 Retention premiums earned 361,905 522,279 113,764 163,514 52,175 1,213,637 Profits from investments, net, and financing income 87,636 16,368 1,345 33,522 17,250 156,121 Commission income 15,632 34,342 73,822 46,976 - 170,772 Total income 465,173 572,989 188,931 244,012 69,425 1,540,530 Payments and changes in liabilities for insurance contracts, gross 455,676 535,089 260,554 756,305 40,575 2,048,199 Reinsurer's share of payments and changes in liabilities for insurance contracts 76,786 107,207 218,967 598,972 - 1,001,932 Payments and changes in liabilities for insurance contracts, retention 378,890 427,882 41,587 157,333 40,575 1,046,267 Commission, marketing expenses and other acquisition costs 53,457 121,046 113,334 83,984 3,228 375,049 Management and general expenses 3,284 4,295 2,610 2,403 13,658 26,250 Other expenses - - - - 726 726 Financing expenses 48 (147) (1,304) (743) - (2,146) Total expenses 435,679 553,076 156,227 242,977 58,187 1,446,146 Company share of profit (loss) of investee companies recorded by the equity method 2,527 472 941 64 - 4,004 Profit (loss) before income taxes 32,021 20,385 33,645 1,099 11,238 98,388 Other comprehensive incomes, before income tax 7,423 1,496 258 2,783 (78) 11,882 Total comprehensive profit (loss) before income tax 39,444 21,881 33,903 3,882 11,160 110,270

Liabilities for insurance policies, gross, as at September 30, 2011 2,686,790 674,377 543,649 4,880,553 610,168 9,395,537 * Property braches and others include mainly results from property loss insurance and comprehensive apartments insurance, whose activities comprise 84% of total premiums in these branches. ** Other liabilities branches include mainly results from third-party insurance and professional liability whose activities comprise 61% of total premiums in these branches.

2-10 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment (contd.) (Unaudited)For the three months ended September 30, 2010

Compulsory Motor Property and Other Liability Mortgage Motor Property Other Segments* Segments** insurance Total NIS thousands NIS thousands NIS thousands NIS thousands NIS Thousands NIS Thousands Premiums earned, gross 128,140 183,096 141,219 160,036 15,802 628,293 Premiums earned by reinsurers 26,555 38,138 108,116 106,172 - 278,981 Retention premiums earned 101,585 144,958 33,103 53,864 15,802 349,312 Changes in premium balances that have not yet been earned, retention (19,676) (32,353) (4,718) (10,512) 727 (66,532) Retention premiums earned 121,261 177,311 37,821 64,376 15,075 415,844 Profits from investments, net, and financing income 33,025 3,838 (3,588) 8,508 8,593 50,376 Commission income 5,573 13,515 25,823 1,548 - 46,459 Total income 159,859 194,664 60,056 74,432 23,668 512,679 Payments and changes in liabilities for insurance contracts, gross 165,486 177,290 54,566 243,591 14,780 655,713 Reinsurer's share of payments and changes in liabilities for insurance contracts 25,360 36,512 40,774 176,426 - 279,072 Payments and changes in liabilities for insurance contracts, retention 140,126 140,778 13,792 67,165 14,780 376,641 Commission, marketing expenses and other acquisition costs 20,077 50,533 39,713 16,530 1,156 128,009 Management and general expenses 1,521 2,227 1,330 1,209 4,638 10,925 Other expenses - - - - 242 242 Financing expenses (1,112) (2,299) (5,267) (4,355) 45 (12,988) Total expenses 160,612 191,239 49,568 80,549 20,861 502,829 Company share of profit (loss) of investee companies recorded by the equity method 1,827 336 917 (205) - 2,875 Profit (loss) before income taxes 1,074 3,761 11,405 (6,322) 2,807 12,725 Other comprehensive incomes, before income tax (1,829) (330) (74) (704) (2,410) (5,347) Total comprehensive profit (loss) before income tax (755) 3,431 11,331 (7,026) 397 7,378

Liabilities for insurance policies, gross, as at September 30, 2011 2,686,790 674,377 543,649 4,880,553 610,168 9,395,537

2-12 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment (contd.) for the year ended December 31, 2010 Compulsory Motor Property and Other Liability Mortgage Other Motor Property Segments* Segments** insurance Total NIS thousands NIS thousands NIS thousands NIS thousands NIS Thousands NIS Thousands Premiums earned, gross 572,141 894,028 641,467 695,107 59,545 2,862,288 Premiums earned by reinsurers 116,744 187,423 486,067 425,160 - 1,215,394 Retention premiums earned 455,397 706,605 155,400 269,947 59,545 1,646,894 Changes in premium balances that have not yet been earned, retention (21,051) 2,755 4,628 37,043 (9,390) 13,985 Retention premiums earned 476,448 703,850 150,772 232,904 68,935 1,632,909 Profits from investments, net, and financing income 144,186 24,434 3,097 53,639 24,226 249,582 Commission income 21,165 49,058 104,256 58,016 - 232,495 Total income 641,799 777,342 258,125 344,559 93,161 2,114,986 Payments and changes in liabilities for insurance contracts, gross 625,299 712,910 353,943 927,126 53,680 2,672,958 Reinsurer's share of payments and changes in liabilities for insurance contracts 105,013 141,121 294,920 701,135 - 1,242,189 Payments and changes in liabilities for insurance contracts, retention 520,286 571,789 59,023 225,991 53,680 1,430,769 Commission, marketing expenses and other acquisition costs 73,668 176,802 156,713 110,695 4,660 522,538 Management and general expenses 4,435 5,883 3,487 3,452 18,306 35,563 Other expenses - - - - 965 965 Financing expenses (268) (769) (2,961) (3,317) (102) (7,417) Total expenses 598,121 753,705 216,262 336,821 77,509 1,982,418 Company share of profit (loss) of investee companies recorded by the equity method 5,833 988 125 2,171 - 9,117 Profit (loss) before income taxes 49,511 24,625 41,988 9,909 15,652 141,685 Other comprehensive incomes, before income tax (5,346) (447) (202) (2,477) (3,178) (11,650) Total comprehensive profit (loss) before income tax 44,165 24,178 41,786 7,432 12,474 130,035 ------

Liabilities for insurance policies, gross, as at December 31 2010 2,722,806 579,186 543,909 4,931,625 619,464 9,396,990

2-11 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) c. Additional information regarding life assurance and long-term savings segment

For the nine months ended For the nine months ended

September 30, 2011 (Unaudited) September 30, 2010 (Unaudited)

Provident Pension Life-assurance Total Provident Pension Life-assurance Total NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Premiums earned, gross - - 2,269,326 2,269,326 - - 2,150,215 2,150,215 Premiums earned by reinsures - - 89,504 89,504 - - 81,960 81,960 Retention premiums earned - - 2,179,822 2,179,822 - - 2,068,255 2,068,255 Profits from investments, net, and financing income 788 3,294 (605,663) (601,581) 454 2,334* 1,537,443 1,540,231 Management fee income 172,444 131,624 101,816 405,884 173,008 105,829 152,466 431,303 Commission income - - 16,099 16,099 - - 29,076 29,076 Total income 173,232 134,918 1,692,074 2,000,224 173,462 108,163 3,787,240 4,068,865 Payments and changes in liabilities for insurance contracts and investment contracts, gross 1,514 4,627 1,300,804 1,306,945 1,549 4,149 3,190,637 3,196,335 Reinsurer's share of payments and changes in liabilities for insurance contracts - - 63,968 63,968 - - 45,287 45,287 Payments and changes in liabilities for insurance contracts and investment contracts, retention 1,514 4,627 1,236,836 1,242,977 1,549 4,149 3,145,350 3,151,048

Commission, marketing expenses and other acquisition costs 42,783 58,615 296,607 398,005 39,529 51,859 274,652 366,040 Management and general expenses 68,080 29,922 145,314 243,316 65,456 25,938 145,401 236,795 Other expenses 13,941 3,532 15,941 33,414 13,982 2,703 15,942 32,627 Financing expenses (income), net 77 2,364 11,298 13,739 79 2,612 6,705 9,396 Total expenses 126,395 99,060 1,705,996 1,931,451 120,595 87,261 3,588,050 3,795,906 Company share of profit (loss) of investee companies recorded by the equity method - - 2,094 2,094 - - - - Profit (loss) before income taxes 46,837 35,858 (11,828) 70,867 52,867 20,902 199,190 272,959 Other comprehensive incomes, before income tax 44 (1,268) (122,719) (123,943) 119 959 54,877 55,955 Total comprehensive profit (loss) before income tax 46,881 34,590 (134,547) (53,076) 52,986 21,861 254,067 328,914

* Regarding reclassification see Note 2(C).

2-14 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) c. Additional information regarding life assurance and long-term savings segment (cont'd) For the three months ended For the three months ended

September 30, 2011 (Unaudited) September 30, 2010 (Unaudited)

Provident Pension Life-assurance Total Provident Pension Life-assurance Total

NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Premiums earned, gross - - 745,428 745,428 - - 794,240 794,240 Premiums earned by reinsures - - 29,974 29,974 - - 27,552 27,552 Retention premiums earned - - 715,454 715,454 - - 766,688 766,688 Profits from investments, net, and financing income 318 1,555 (929,620) (927,747) 172 998* 1,055,832 1,057,002 Management fee income 55,077 47,446 34,119 136,642 57,707* 38,263 93,692 189,662 Commission income - - 1,730 1,730 - - 11,287 11,287 Total income 55,395 49,001 (178,317) (73,921) 57,879 39,261 1,927,499 2,024,639 Payments and changes in liabilities for insurance contracts and investment contracts, gross 483 1,526 (221,177) (219,168) 515 1,552 1,643,264 1,645,331 Reinsurer's share of payments and changes in liabilities for insurance contracts - - 22,860 22,860 - - 11,569 11,569 Payments and changes in liabilities for insurance contracts and investment contracts, retention 483 1,526 (244,037) (242,028) 515 1,552 1,631,695 1,633,762 Commission, marketing expenses and other acquisition costs 14,062 21,019 103,908 138,989 12,816 20,070 96,728 129,614 Management and general expenses 22,531 10,070 53,698 86,299 21,098* 9,490 43,535 74,123 Other expenses 4,698 1,138 5,313 11,149 4,662 899 5,314 10,875 Financing expenses (income), net (58) 552 1,837 2,331 13 93 3,847 3,953 Total expenses 41,716 34,305 (79,281) (3,260) 39,104 32,104 1,781,119 1,852,327 Company share of profit (loss) of investee companies recorded by the equity method - - 698 698 - - - - Profit (loss) before income taxes 13,679 14,696 (98,338) (69,963) 18,775 7,157 146,380 172,312 Other comprehensive incomes, before income tax 194 (268) (66,810) (66,884) - - 36,839 36,839 Total comprehensive profit (loss) before income tax 13,873 14,428 (165,148) (136,847) 18,775 7,157 183,219 209,151

*Regarding reclassification see Note 2(C). 2-15 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 4 - Operating segments (contd.) c. Additional information regarding life assurance and long-term savings segment (cont'd)

for the year ended December 31, 2010

Provident Pension Life-assurance Total NIS thousands NIS thousands NIS thousands NIS thousands Premiums earned, gross - - 2,965,671 2,965,671 Premiums earned by reinsures - - 112,705 112,705 Retention premiums earned - - 2,852,966 2,852,966 Profits from investments, net, and financing income 648 3,217 2,377,711 2,381,576 Management fee income 230,708 146,388 242,063 619,159 Commission income - - 27,740 27,740 Total income 231,356 149,605 5,500,480 5,881,441 Payments and changes in liabilities for insurance contracts and investment contracts, gross 1,938 5,962 4,673,041 4,680,941 Reinsurer's share of payments and changes in liabilities for insurance contracts - - 78,710 78,710 Payments and changes in liabilities for insurance contracts and investment contracts, retention 1,938 5,962 4,594,331 4,602,231 Commission, marketing expenses and other acquisition costs 53,468 63,166 370,669 487,303 Management and general expenses 88,228 44,866 190,045 323,139 Other expenses 18,727 3,908 21,255 43,890 Financing expenses (income), net 59 3,000 9,927 12,986 Total expenses 162,420 120,902 5,186,227 5,469,549 Company share of profit (loss) of investee companies recorded by the equity method - - 664 664 Profit (loss) before income taxes 68,936 28,703 314,917 412,556 Other comprehensive incomes, before income tax 51 684 36,053 36,788 Total comprehensive profit (loss) before income tax 68,987 29,387 350,970 449,344

2-16 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 5 - Taxes on income Agreement with the Tax Authorities In March 2011, an agreement was signed between the Association of Insurance Companies and the Tax Authority for the years 2009 and 2010. The agreement was an extension of the 2008 agreement for an additional two year period. The consolidated financial statements for 2009 and 2010 and the condensed consolidated financial statements at September 30, 2011, were prepared in accordance with the principles of the 2008 agreement. Bill to extend the temporary provision concerning the non-application of IFRS for tax purposes in the 2010 tax year as well On May 30, 2011, a bill was published to amend the Income Tax Ordinance (no. 185) (non-application of International Financial Reporting Standards – extension of the temporary provision in respect of the 2010 tax year), 5771-2011, and to amend Section 87A of the Income Tax Ordinance. The implication of the bill is that Standard 29, prescribed by the Israel Accounting Standards Board (IFRS rules), will not apply in the 2010 tax year when determining the tax liable income for that year. The Company is of the opinion that the amendment to the Ordinance will not significantly affect the tax expenses reported in the financial statements. Approved pre-rulings On September 21, 2011, the Tax Authority approved a restructuring, as follows:

a. Approval of a merger the purpose of which is to merge the real-estate holding activity carried out through Shiloah Assets Ltd. (wholly owned by Harel Insurance) and Sahar Properties Ltd. (wholly owned by Harel Insurance) into Harel Insurance. This restructuring was approved under Section 103 of the Ordinance and its validation was certified retroactively from December 31, 2010. As part of the Tax Authority's approval, provisions under Section 103 of the Income Tax Ordinance were prescribed in connection with the manner of performing the merger.

b. Approval of a merger of Yeelim Insurance Agency (1993) Ltd., a wholly owned subsidiary of Harel Insurance, into Veritas Insurance Agency Ltd., which is also wholly owned by Harel Insurance. The merger is designed to streamline the operations of Yeelim Agency by integrating it into the Veritas Agency. Within the context of the Tax Authority's approval, by virtue of Sections 103 and 104 of the Income Tax Ordinance, provisions were prescribed concerning the method of transferring the assets and liabilities of Yeelim and the method of recording them for tax purposes. Tax rates applicable to the revenues of the Group's companies On October 30, 2011, the Israeli government approved the recommendations of the taxation chapter of the committee's report on changes in the socioeconomic agenda headed by Prof. Manuel Trajtenberg. In this context, corporate tax was raised to 25% from 2012, and the tax on interest, real capital gains and real betterment was increased to 25% from 2012. The government also resolved that the continued implementation of the plan to reduce the corporate tax rate would be reconsidered by 2014. So that the changes in the tax rate approved by the government can take effect, the legislative procedure must be completed. This had not yet been the case at the date of approving the financial statements and at September 30, 2011. Consequently, the changes in the tax rates as approved in the aforementioned government resolution have no immediate impact on the measurement of deferred tax assets and liabilities in the financial statements at September 30, 2011, given that the legislation had not been completed at that date. Had the legislation of the new tax rates been completed by September 30, 2011, the effect on the financial statements at September 30, 2011 would reflect a decrease in the deferred tax balances in the amount of NIS 32,101 thousand. The revised deferred tax balances would be recognized against deferred tax expenses in the amount of NIS 30,696 thousand, against other comprehensive profit in the amount of NIS 1,405 thousand.

2-17 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments a. Class actions and applications to approve class actions

There is a general exposure which cannot be evaluated and/or quantified resulting, inter alia, from the complexity of the services provided by the Group to its insured and its clients. The complexity of these arrangements conceal, inter alia, potential of allegations, interpretations and others, due to the differences in information between the Group and other parties to the insurance contacts, and the other products relating to the long series of commercial and regulatory conditions. It is not possible to anticipate in advance the types of allegations, which will be raised in this field, and the exposure resulting from these and other allegations in connection with the insurance contract and other products raised, inter alia, through a mechanism of hearings set forth in the Class Actions Law. New interpretations of the information in insurance policies and long-term term pension products may, in some instances, affect the Group's future profits in respect of the existing portfolio, in addition to the exposure inherent in requirements to compensate customers for past activity. Likewise, there is an element of exposure in all regulatory changes and instructions issued by the Commissioner, in circulars that are in force and in draft circulars that are still under discussion, some of which have far-reaching legal and operational ramifications. This exposure is particularly great in pension savings and long-term insurance, including health insurance. In these sectors, the rights of the policyholders, members and customers are over a period of many years during which policies, regulations and legal trends may be changed, including through court rulings. These rights are managed through complex automated systems, and in view of these changes they must be constantly adjusted. All these create considerable operational and mechanization exposure in these areas of activity In addition, there is a general exposure due to complaints issued from time to time to the Director of Capital Markets, Insurance and Savings in the Ministry of Finance against institutional bodies in the Group, regarding the rights of insured relating to the insurance policies and/or the law. These complaints are handled on a current basis by the public complaints division in the Institutional bodies. The decisions of the Supervision on these complaints, if and to the extent that any decision is made, are liable to be given across the board and apply to large groups of insured. Sometimes, the complaining factors are even threatening to take steps regarding their complaints in the framework of a class action. At this time, it is not possible to evaluate if there is an exposure for such complaints and it is not possible to evaluate if a wide-ranging decision will be given by the Director regarding these complaints and/or if class actions will be filed as a result of such processes, and it is not possible to evaluate the potential exposure to such complaints; therefore, no provision for this exposure has been included. The following are details of the exposure for class actions and applications to recognize them as class actions filed against the Company and/or companies in the Group. Applications to approve legal actions as class actions as detailed below, which are, in management’s opinion based inter alia on legal opinions that it received, more likely than not that the defense contentions of the Company or the appeal contentions that the Company or a subsidiary filed or a compromise arrangement proposed will be accepted and the application for approving the legal action as a class action will be rejected, so no provisions have not been included in the financial statements. Applications to approve a legal action as class action regarding a claim, fully or partly, it is more reasonable that the defense contentions on the Company are likely to be rejected, the financial statements have a provision to cover the exposure estimated by the Company's management and/or the managements of subsidiaries. In the opinion of the Company's management, inter alia, based on legal opinions it received, the financial statements have suitable provisions, where provisions are required, to cover the estimated exposure by the Company and/or subsidiaries. The total provisions included in the financial statements to cover the exposure are not an immaterial amount. With regards to applications to approve actions as class actions filed as specified in sections 15-20 and 21 below, it is not possible at this early stage to estimate the chances of the applications to be approved as a class action, and therefore no provisions have been included in the financial statements for these claims. 1. In April 2003 a statement of claim was filed in the Tel Aviv District Court against a subsidiary of Harel Insurance and against three additional insurance companies, to which an application to approve it as a class action was attached. The subject of the claim and the application to approve it as a class action is the allegation that over the year Harel Insurance illegally collected from its insured stamp tax paid on insurance agreements by virtue of the Stamp Tax Law on Documents – 1961. The plaintiff alleges, inter alia, that the collection of stamp tax from which Harel Insurance illegally profited at his expense, and therefore it is liable to reimburse the amounts collected. The amount of the total claim that the plaintiff stated in the letter of claim is NIS 166 million. 2-18 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments a. Class actions and applications to approve class actions

The hearings on the application to approve the claim as a class action was joined to the hearings of other applications which are pending against the other defendants to approve class actions on subjects identical to the application against Harel Insurance, which was submitted against other defendants in other civil files. On June 7, 2009, a decision was issued in the framework of which the class action was approved and relief being the reimbursement of half of the amount of the stamp tax paid to the insured was approved. Harel Insurance and the three other defendant companies filed an application for approval to appeal to the Supreme Court on this decision. The response to the applications for approval to appeal was filed in December 2009. In May 2010 the District Court approved the application of the defendants to delay the hearings on the action until the decision of the Supreme Court on the application to appeal which was filed on behalf of the defendants. 2. In April 2006, a claim was filed with the Tel Aviv District Court against the subsidiary Harel Insurance together with an application to approve it as a class action. The claim was filed against five insurance companies, including Harel insurance, and this by five plaintiffs who were insured with the various companies in loss of work ability insurance. The plaintiffs allege that they paid insurance premiums for loss of work ability insurance policy until the end of the insurance period, and this included the last three months of the insurance period according to the policy. The plaintiffs allege in their claim that during the last three months of the insurance period, the defendants collected premiums despite the fact that for that period the plaintiffs were not entitled to receive insurance compensation, even if they suffered work disability (due to the waiting period set in the policy). The plaintiffs allege that the defendants did not give them information on this and they intend to collect the insurance premiums for the last three months of the insurance period, in accordance with the policy. The relief claimed in the legal action is the issue of a binding order to all the plaintiffs to discontinue collecting insurance premiums for the said period, and to instruct all the defendants to reimburse all the insurance premiums that the defendants collected from members of the Group, who the plaintiffs request to present in the framework of the class action, for the last three months of the insurance period, plus linkage differences and interest as mentioned in Section 28 c of the Insurance Contract Law as from the date of collecting the said payments until the date of actual reimbursement. The plaintiffs allege that the damage to all the plaintiffs caused by all the defendants and estimated by them, according to an expert opinion, in an amount of NIS 47.61 million. The damage alleged by the plaintiffs against Harel insurance aggregates, in their opinion, NIS 1.54 million. On February 3, 2009, the court approved the class action. Harel insurance filed an application for approval to appeal the decision to approve the class action.

3. In April 2007 a legal action was filed with the Tel Aviv District Court and an application to approve it as a class action against the subsidiary Harel Investment House. The class action was submitted against Bank Hapoalim B.M., Bank Leumi Le'Israel B.M., Israel Discount Bank Ltd., First International Bank of Israel Ltd. (hereinafter: "the Banks"), Clal Finance Betucha Investments Management Ltd., the Central Company for Stock Exchange Services (N.E) Ltd., and Harel Insurance House (the three last ones will hereinafter be called: "the Funds Managers").

The grounds of the claim is the reimbursement of brokerage commissions which were allegedly paid by the plaintiff from the beginning of 2004, in connection with their holdings of units of various mutual funds, as detailed in the statement of claim, and this for debits of brokerage commissions and commissions connected with the trading of foreign currency at a higher rate than allegedly the defendants should have collected. The plaintiff alleges that from 2004 the defendants collected from a number of private bodies commissions at rates less than those collected regarding mutual funds which were controlled by the banks. According to the statement of claim, the relevant period for Harel Insurance House is November 15, 2006 until March 2007. In addition, it is alleged that in the framework of the sale of control by the banks of the mutual funds to the managers of the mutual funds, it was determined that the banks will continue, allegedly, to provide the managers of the funds trading services on the Tel Aviv Stock Exchange and/or banking services (buying/selling of foreign currency) and collect the same high commission that they collected until the sale, where this is expressed, allegedly, in a reduced price paid in consideration for purchasing control of the mutual funds on account of preventing profits of mutual funds managers from collecting brokerage commissions. 2-19 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments a. Class actions and applications to approve class actions

The legal action was filed according to the Class Actions Law – 2006. The legal action alleges, inter alia, an apparent violation of the Provisions of Section 69 of the Joint Trust Investment Law, an apparent violation of the obligation of trust which the fund managers of the mutual funds owe to the holders of participating units, an apparent violation of the Banking Law (Service to Customer) – 1981, and an apparent violation of the Directives of the Supervisor of Banks, the Directives of Standard Bank Procedures No. 7 (1.01) " Banking Activities System in the Capital Market), an apparent misrepresentation of the holders of the mutual funds units, apparent illegal enrichment. The amount of the total claim of all the plaintiffs, including those that the plaintiffs requested to represent in the class action against all the defendants, is estimate by the plaintiffs initially at an amount of NIS 386 million. The group that all the plaintiffs wish to represent is anyone who purchased and/or holds and/or held during the relevant periods to this claim, participating units in mutual funds managed by the mutual fund managers, which were and/or controlled by the defendants or any of them. The amount of the legal action of all the plaintiffs, including the plaintiffs that they requested to represent, in the framework of the class action, against Harel Insurance House, is estimated by the plaintiffs at NIS 5,676 thousand. The relief requested in the claim is to order the defendants to reimburse the commissions which they allegedly collected in excess from members of the group from the beginning of 2004. In addition, the plaintiffs a mandatory injunction which instructs the defendants to change the way in which they behave in everything connected with collecting commissions.

In January 2010, Harel Insurance Investments House response was submitted regarding the application to approve the class action, and on January 1, 2011 the plaintiff submitted its response to the defendant's response.

In July 2011, Harel Investment House filed an application for a partial decision to strike out the application insofar as it was directed towards it. In October 2011 the Court ruled that the application will be decided during the discussion in the application to approve the class action.

4. During January 2008, a claim was submitted to District Court of Tel Aviv against Harel Insurance (consolidated company) and four other insurance companies, together with a request to approve the claim as a class action. The premise for the claim is a demand to return payments referred to as "payment of sub-annual factor" (payments that insurance companies are entitled to collect when the insurance tariff is determined in an annual amount, but the actual payment is done in a number of payments) as well as a mandatory injunction instructing the respondents to amend their manner of conduct. According to the claimants, the respondents collected "payment of sub-annual factor" unjustly as follows: (a) collection of payment in proportion to the component of the policy, collected and calculated on a monthly basis, which according to the claimants forms "management fees"; (b) collection of a rate exceeding the maximum rates permitted according to provisions of the Commissioner of Insurance ; (c) collection in reference to the savings component, allegedly done contrary to the provisions of the Commissioner in this matter; (d) collection for a policy which is not a life assurance policy, although according to that claimed, insurance companies are only entitled to charge such a payment for life assurance. The claimants asked to represent anyone who was part of an insurance policy with the respondents and paid "payment of sub- annual factor" under circumstances or amounts exceeding permitted amounts. According to the claimants, the damage caused (to seven claimants) amounts to NIS 1,683.54 for every year of insurance. The claimants estimate that the amount of claim for all members of the group that they wish to represent against all respondents (5 insurance companies) is NIS 2.3 billion, of which NIS 307 million is against Harel Insurance.

On February 1, 2010 the Court approved the application for a legal arrangement between the parties, according to which the plaintiff will remove its application for a class action and the claim that Harel Insurance collected a rate of sub-annual payment that exceeded the rate that was permitted in respect of a policy that was issued before 1992 as well. In accordance with the court decision, the plaintiff filed an amended claim and application for recognition as a class action. In June 2011 Harel Insurance submitted its answer to the plaintiff's claim. The plaintiffs have submitted their response to Harel Insurance's answer.

2-41 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)

5. In January 2008 a legal action was filed in the Tel Aviv District Court against the subsidiary Harel Insurance and against four additional insurance companies and an application to approve it as a class action.

The subject of the action is a claim that the respondents allegedly collected management fees from their policyholders on profit-sharing life insurance policies, contrary to the Control of Insurance Business (Conditions of Insurance Contracts) Regulations, 5742-1981, and contrary to the circulars of the Commissioner of Insurance, Supervisor of Insurance Business (Terms of Insurance Contracts) – 1981, and contrary to the Circulars of the Supervisor of Insurance. According to the plaintiffs, the defendants must reimburse the amounts collected, allegedly in excess, and to issue a mandatory instruction instructing the defendants to amend their actions regarding the matters the subject of the legal action. In the framework of the legal action, the plaintiffs request to represent anyone who was or is an insured with one or more of the defendants in a combined life assurance policy with savings of the "profit participating" type, which was produced between the years 1992 and 2002 (inclusive).

In the opinion of the plaintiffs the amount of the nominal claim against all the defendants (five insurance companies) for all the members of the group which they are requesting to represent is NIS 244 million, of which NIS 28 million against Harel Insurance. Harel Insurance filed its response to the application to approve a class action and the plaintiffs have responded to Harel Insurance's response.

6. In April 2008 a legal action and an application to recognize it as a class action was filed with the Jerusalem District Court against the subsidiary Harel Insurance and against other insurance companies. The basis of the claim is the plaintiff's allegation according to which the old managers’ insurance policies sold until 2000, the defendants customarily credited insured women reaching retirement age with a monthly pension lower than that of a man insured with identical data received, and this due to the argument that the life expectancy of women is higher. On the other hand, the plaintiff alleges that the defendants collect from their female insured a "risk" premium at a rate identical to that which it collects from the male insured, despite the fact that the rate of death of women during the "risk" cover is lower. The plaintiff alleges that in 2001 the defendants corrected the policies and this by way of reducing the discrimination that allegedly existed, and set "risk" premium rates for women at rates lower than those set for men. The plaintiff alleges that the defendants did not correct the alleged discrimination in the old polices issued before the date of the change. The grounds of the claim are: discrimination, allegedly, against the Law Prohibiting Discrimination in Products, Services, Security Areas and entry to Public Places – 2000, and contrary to the Discrimination Against Women Verdict; violation of Prohibitions of the Supervision of Financial Services Law (Insurance) – 1981; illegal enrichment and misleading, violation of the obligation of disclosure and abusing the distress and lack of experience of the plaintiffs, contrary to the Consumer Protection Law – 1981.

On September 28, 2008 the District Labor Court in Jerusalem deleted the claim due to lack of the authority of the Labor Court to discuss the legal action, it being an insurance issue and not a matter of employee-employer relations.

In November 2008, an appeal was filed on this decision and the hearings on the appeal took place in September 2009. In September 2009, a decision was issued by the National Court which accepted the appeal and determined that the District Labor Court has the authority to hear the claim relating to woman employees only. The District Labor Court ruled that the parties will amend the statements of claims according to this decision. On November 24, 2009, the plaintiff filed with the District Labor Court a legal action and an application to approve it as a class action. In December 2009, Harel Insurance filed a protest to the High Court of Justice on the decision of the National Labor Court. The High Court of Justice ruled that the hearings for the approval will be postponed until the decision of the High Court of Justice on the petition which submitted.

On October 11, 2010, the State Attorney informed the government of its intention to attend the HCJ proceeding and that it had filed its position in the case, in which context it supports the decision of the District Court. Subsequent to the HCJ hearing, Harel Insurance (together with the additional petitioners) filed an application to withdraw the petition and on March 13, 2011, the court struck out the petition. In July 2011, Harel Insurance submitted its reply to the application for approval.

2-40 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)

7. In July 2008, a legal action and an application to recognize it as a class action was filed in the Tel Aviv District Court against the subsidiary Harel Insurance.

The subject of the legal action is the allegation that Harel Insurance allegedly paying and/or indemnifying its insured for the damage caused to the means of protection installed in the vehicle in the event of a total loss or an operative total loss or a theft, and apparently has its insured signed contrary to the Directives of the Supervisor of Insurance on the letter of settlement. The allegation claims that Harel Insurance gains at the expense of the insured and violates a legislated obligation.

The group that the plaintiff wishes to represent is every insured who received from Harel Insurance, from April 1, 2004, insurance compensation due to damage to a private or commercial vehicle up to 4 tons, including due to a total loss and an apparent total loss or theft at a time that the insured was with Harel Insurance, according to Chapter A of the Supervision of Insurance Business Regulations (Contract Conditions for Insuring a Private Vehicle) – 1986, and did not receive all and/or part of the insurance compensation for the loss or damaged caused due to the protection installed in the vehicle.

The amount of the personal claim of the plaintiff is NIS 5,250. The plaintiff claims that he does not have the data in order to exactly estimate the size of the group, although it estimates the amount of the legal action for all members of the group, for a period of 4.5 years, at an amount of NIS 37 million. In February 2009, Harel Insurance filed its response to the application to approve the claim as a class action.

The hearing on the file was combined with the applications for approval of similar misrepresentation filed against additional insurance companies. At a later stage, the other files were transferred to be heard by the Hon. Judge Agmon – Gonen, and therefore were separated from the claim. As a result the handling of the claim was frozen.

8. In December 2008, a legal action and an application to recognize it as a class action was filed with the Tel Aviv District Court against the subsidiary Harel Insurance. The subject of the legal action is the allegation that Harel Insurance allegedly is avoiding paying a third party in a vehicle property claim the full compensation for the decline in value to the vehicle to which is attached the appraiser's opinion, while signing the third party on a settlement letter contrary to the law, and this without attaching the counter opinion of an appraiser on its behalf. The grounds of the claim is the violation of the legislated obligation set forth in the provisions of the Insurance Contract Law and the Supervisor's Regulation on Insurance Business (Contractual Terms for a Private Vehicle) and in the directives of the Supervisor of Insurance and illegal enrichment. The group that the plaintiff wishes to represent is every person who is apparently entitled to receive from Harel Insurance, as a third party, amounts and/or insurance compensation due to damage in the decline in value of the vehicle during the period of the seven years on the date of submitting the legal action, and Harel Insurance did not transfer the full funds that were due to it for the decline in value of the vehicle. The plaintiff states that he does not have the correct data in order to estimate the size of the group and the compensation claimed. Based on these various assumptions, the plaintiff estimates the amount of damage to all the members of the group it requests to represent at NIS 33 million. In March 2009, Harel Insurance filed a response to the application to approve the legal action as a class action.

The hearings on the file were combined with applications for similar representation filed against additional insurance companies.

9. In January 2009, a legal action and an application to recognize it as a class action was filed with the Tel Aviv District Court against the subsidiary Dikla. The subject of the legal action is the allegation that Dikla allegedly continues to collect from insured in nursing policies a premium after the occurrence of the insured event, and after the end of the insurance cover and even after the death of the insured.

The group that the plaintiff wishes to represent are all Dikla's insured in nursing insurance to whom the insured event occurred and continued to collect premiums from them after the occurrence of the insured event and the insured where the insured event did not occur and allegedly continued to collect premiums from them after their death.

2-42 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments a. Class actions and applications to approve class actions

The plaintiffs estimate the amount of the personal claim at NIS 3,600 and the amount of the claim for all members of the group at NIS 1.3 billion.

As there is an overlapping between the above permission to represent and an application described in clause C(2) below, the parties came to an agreement according to which the application for permission to represent will be "frozen" until after a decision on the application described in clause C(2) below.

10. In February 2009, a legal action and an application to recognize it as a class action was filed with the Tel Aviv District Court against the subsidiary Dikla. The subject of the legal action is the allegation that Dikla allegedly did not pay the Mushlam nursing insurance policy insurance compensation for the period of waiting set forth in the policy, while allegedly violating the provisions of the law; that Dikla did not pay interest differences on monthly insurance compensation while allegedly violating the provisions of the law; that Dikla allegedly did not correctly calculate the linkage differences to the index of the insurance compensation; that Dikla continued to collected from the insured for certain periods the insurance period for a period in which they received the nursing care; that Dikla allegedly delayed payment of nursing compensation.

The group that the plaintiff wishes to represent are Dikla's insured in Mushlam Nursing Insurance to whom the insured nursing insurance event occurred and were Dikla allegedly did not pay them the full insurance compensation due to them, as detailed above, and/or that the insurance premiums were collected from them after the occurrence of the insured event.

The plaintiffs estimate the amount of the personal claim at NIS 10,228 and the amount of the claim for all members of the group at NIS 795.9 million. In July 2009, Dikla filed its response to the application to approve a class action.

11. In November 2009, a claim was filed against the subsidiary EMI at the Jerusalem District Court together with an application to recognize it as a class action. The action alleges that EMI calculates premium refunds in cases of early full repayment of the loan based on the date on which EMI received the lending bank's notice of repayment of the loan, and not on the basis of the actual date of the loan repayment, that EMI only adds linkage differentials to the amount of the premium refunds without interest differentials at the lawful rate, and that EMI refunds surplus premium payments that were collected without adding linkage and interest differentials by law.

The applicant's personal claim is estimated at NIS 739, while the loss claimed to have been caused to the group as a whole is estimated at NIS 4,300,000.

On April 18, 2010, EMI submitted its response to the application for approval and in May 2010 the plaintiff submitted a response to EMI's response.

12. In April 2010 a legal action and an application to recognize it as a class action was filed with the Central Regional Court in Petah Tikva against the subsidiary Harel Insurance and against four additional insurance companies. The subject of the legal action is the allegation that in the event of a discontinuation of insurance during any months, after the insurance premium for that month was collected by the defendants in advance, the defendants allegedly did not reimburse the insured the proportional share, the surplus, of insurance premiums for that months, or alternatively they allegedly repaid the insurance premium for a nominal value only.

The group that the plaintiff requests to represent is anyone who is and/or was insured with one or more of the defendants in any insurance policy, excluding property insurance policy or the heirs of such an insured, and the insurance policy was for any reason discontinued, whether due to its cancellation by the insured or whether due to the occurrence of the insured event.

The total damage to all members of the group, the accumulated defendant of all defendants, aggregates, in the opinion of the applicants, an amount of NIS 225 million for a ten year period (the plaintiffs did not relate to any specific amount to each of the defendants separately).

2-41 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)

The amount of the personal claim of the plaintiffs from Harel Insurance is an amount of NIS 80. Harel Insurance has submitted its response to the application to approve as legal action.

13. In July 2010, a claim was filed at the Tel Aviv-Jaffa District Court with an application to approve it as a class action, against the subsidiary Harel Insurance.

The claim alleges that in a group long-term care insurance policy for members of the Kagam Pensioners Association, the insurance benefits paid to the insured under the policy when an insured event occurs are not linked to the CPI and are not updated, whereas in the policy conditions the premiums do change.

The group which the claimant wishes to represent is any person insured through the aforesaid group policy, who has suffered the event insured according to the policy .

According to the claimant, the overall loss claimed for all members of the group amounts to NIS 18 million. Harel Insurance has filed its response to the legal action. And the claimant has filed his response to Harel's response.

In February 2011 the Court ordered the plaintiff to attach the organization Akgi"m further proceedings as a respondent, and submit a claim application for approval of revised class action.

14. In August 2010, a claim was filed at the Jerusalem District Court against the subsidiary Harel Insurance, with an application to recognize it as a class action. The subject of the class action is the allegation that Harel Insurance should have prevented a situation in which its policyholders allegedly have several health insurance policies with the company.

The Group that the claimant seeks to represent is all holders of more than one health policy issued by Harel Insurance, who were not expressly informed before being charged for the additional insurance, that they already have more than one policy and who did not give their express consent to be included in the additional health insurance policy .

According to the claimant, the overall loss claimed for all members of the group amounts to NIS 161 million. Harel Insurance has filed its response to the legal action. And the claimant has filed his response to Harel's response.

15. In February 2011, a claim was filed at the Tel Aviv District Court against the subsidiary Harel Insurance and five other insurance companies, with an application to recognize it as a class action.

The subject of the action concerns allegations that when an insured event occurs, the respondents apparently do not compensate their policyholders and pay comprehensive motor insurance in respect of an impairment of value that reflects the damage caused to the vehicle in market terms, but compensate them in respect of a technical impairment of value that, allegedly, is not based on market conditions and is less than the real impairment. The claimants allege that the respondents do not clarify this to the policyholder before the insurance is purchased, and they therefore, inter alia, mislead the policyholder, allegedly violate the duty of disclosure, allegedly violate a statutory obligation, and allegedly practice unjust enrichment .

In estimating the amount of the claim against Harel Insurance, the claimants included 3 methods of calculating the amount of the claim, in which the claim against Harel Insurance ranges from NIS 2,530,987,200 and NIS 189,824,250. Harel Insurance has not yet submitted its response to the application for recognition.

16. In May 2011, a claim was filed at the Central Region District Court against the subsidiary Harel Insurance and three other insurance companies, with an application for recognition as a class action.

2-44 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)

The subject of the claim is an allegation that the respondents allegedly unlawfully collect a payment called a "policy factor" and/or "other management fees" at a considerable rate of the premium paid without their consent or knowledge and without compliance with a condition that enables such collection in the policy instructions.

The claimants allege that according to instructions issued by the Commissioner of Insurance in the Capital Market, Insurance and Savings Division ("the Commissioner"), companies may charge a policy factor under certain conditions; however they also claim that in addition to the Commissioner's authorization, the respondents must stipulate collection of the policy factor in a contractual agreement with the policyholder.

The group that the claimants wish to represent is any person is and/or was insured by the respondents or any of them, and who collected any amount as "other management fees" and/or as a "policy factor".

According to the claimants, the total loss claimed for all members of the group against all the respondents amounts to NIS 2,325 million, and against Harel Insurance, consistent with its share of the market, to NIS 386 million. The Company has yet to submit its response to the application for approval.

17. In May 2011, a claim was filed at the Tel Aviv District Court against the subsidiary Harel Insurance and Meuhedet Health Services, with an application for recognition as a class action.

The subject of the action is an allegation that Meuhedet Health Services allegedly brokers, unlawfully, between its members and Harel Insurance with respect to the sale of overseas travel insurance, and allegedly, unlawfully receives a commission in respect of such activity. The Claimant further argues that the Respondents have created a misrepresentation as if the insurance policies are part of the Supplementary Health Services that Meuhedet renders. The group that the Claimant seeks to represent is any person who, over the last seven years, purchased a Harel Insurance policy through the services of Meuhedet Health Services.

According to the Claimant, the overall loss claimed for all members of the group amounts to NIS 64 million. Harel Insurance submitted its response to the application for recognition.

18. In June 2011, a claim was filed at the Central Region District Court against the subsidiary Harel Insurance and nine other insurance companies, with an application for recognition as a class action.

The subject of the action is the allegation that when, due to attachments on insurance benefits imposed at the request of a third party, payment of the insurance benefits is withheld from policyholders, the insurance companies allegedly pay the policyholders the insurance benefits in nominal values without any revaluation, or in certain instances only with linkage differences, without the profits arising from them, as a result of this delay.

The group that the plaintiffs wish to represent is any policyholder or injured person who has filed a claim against the respondents under Section 68 of the Contracts (Insurance) Law, 5741-1981, where the insurance benefits or money to which they were entitled were withheld by the respondents due to the attachments, receivership orders or any third-party rights, and who eventually received their insurance benefits or money in nominal values only or plus linkage differences only and without interest.

The plaintiffs estimate the total loss from all the respondents for all members of the group in the amount of NIS 350 million. The plaintiffs estimate the total loss against Harel Insurance in the amount of NIS 72 million. Harel Insurance has yet to submit its response to the application for recognition.

19. In June 2011, a claim was filed at the Tel Aviv District Court against the subsidiary Harel Gemel and five other provident fund management companies, with an application for recognition as a class action.

The subject of the action is the allegation that the respondents, allegedly, discriminate unlawfully between members of the provident funds that they manage by giving some of them benefits on the management fees collected from them in respect of the provident funds that they own. 2-45 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)

The group that the plaintiff wishes to represent is any members of the provident funds managed by the respondents, from whom management fees have been collected in excess of the minimum management fees applied by the fund.

According to the plaintiffs, the overall loss that all members of the group are claiming from Harel Gemel, amounts to between NIS 180 - 360 million. Harel Gemel has yet to submit its response to the application for recognition.

20. In July 2011, a claim was filed at the Central Region District Court against the subsidiary Harel Insurance, with an application for recognition as a class action.

The subject of the action is the allegation that Harel Insurance allegedly charges its non-life insurance policyholders credit fees in excess of the maximum permitted rate or that exceed the rate that it purportedly presents to the policyholder.

The group that the plaintiff wishes to represent is any policyholder and/or beneficiary and/or insured that Harel Insurance insures in the non-life insurance branches, and who overpaid the respondent credit fees and/or collection fees and/or payment arrangement fees, constituting a deviation from the provisions of the law and/or a deviation from the interest rates presented to the policyholders in the policies, as of May 1, 1984.

According to the plaintiff, the overall loss claimed for all members of the group amounts to NIS 524 million. Harel Insurance has yet to submit its response to the application for recognition.

21. In July 2011, a claim was filed at the Central Region District Court against the subsidiary Harel Insurance and nine other insurance companies, with an application for recognition as a class action.

The subject of the claim is an allegation that the respondents allegedly charge their compulsory motor policyholders, unlawfully, a "loading component" of 4.3% of the cost of the insurance, the purpose of which is purportedly to "subsidize" the insurance companies' losses for two-wheeled motor vehicles as part of the Pool.

The group that the plaintiffs wish to represent is all persons who purchased and/or hold compulsory motor insurance, who entered into agreement with the respondents from 2004 until the date of filing the claim, from whom payment was collected in the absence of clear provisions of law and without any express decision by a competent entity, and where the charge was made without their knowledge.

The plaintiff estimates the total loss claimed from all the respondents for all members of the group in the amount of NIS 901 million. The plaintiff estimates the total loss for all member of the group from Harel Insurance in the amount of NIS 157 million. Harel Insurance has yet to submit its response to the application for recognition.

2-46 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)

The following table summarizes the amounts claimed as part of the contingent applications for the approval of class actions, actions that were approved as a class action, and other significant claims against the Company and/or subsidiaries, as specified by the claimants in the suits they filed. It should be clarified that the amount claimed does not necessarily constitute the amount of exposure estimated by the Company, given that these are the claimants' estimates and they will be investigated during the litigation process.

Amount claimed NIS Type Amount of claims thousands

Class certified a class action: amount pertaining to the Company and/ or subsidiaries 1 1,166 Prosecution refers to several companies and was allocated a specific amount of the company and/ or subsidiaries 1 166,000

Claim amount is not specified 6 Pending requests for approval of class actions: amount pertaining to the Company and/ or subsidiaries 16 0,31,,,,0 Prosecution refers to several companies and was allocated a specific amount of the company and/ or subsidiaries 2 ,89,1,6 Claim amount is not specified 1 Other significant claims 1 18,38,

The total provision amount of claims filed against the Company and / or consolidated companies, as described above amounts to about NIS 11,890 thousand (31.12.2010 – NIS 10,,66 thousand). b. Other contingent liabilities

1. In June 2004, a claim was filed with the Tel Aviv District Court and an application to approve it as a derivative claim against the subsidiary Yedidim Holdings Management (1994) Ltd. (hereinafter: "Yedidim"), the former Chairman and CEO of Yedidim, and against an additional subsidiary, Harel Pension Funds Management Services (1987) Ltd., which is the controlling shareholder in Yedidim by the minority shareholders Leatid Pension Fund Management Ltd., a subsidiary of Yedidim (hereinafter: "Leatid") for an amount of NIS 15,605 thousand. The subject of the claim is compensation to Atidit Pension Fund Ltd. (hereinafter: "Atidit"), a pension fund managed by Leatid, for the use of Atidit’s various resources, such as: the use of the operating infrastructure and reputation, the use of Adidit property, for taking a continuing pension fund and the loss of profits. The hearing on the file is in the stage of summaries in the application to approve the claim as a derivative claim. In addition the plaintiffs claim commissions of NIS 3,177 thousand in the framework of their personal claim .

On July 29, 2010, after interrogations had been conducted and written summaries had been submitted as part of the application to approve the derivative claim, the Court accepted the application and granted the claimants the option of suing the defendants in Leatid's name in respect of rights which they claim Leatid is entitled to .

Mediation process did not succeed and the defendants filed an application for permission to appeal this decision to the Supreme Court. The parties are nowadays deliberating in hopes of reaching a settlement.

Yedidim's management is of the opinion, based on the opinion of its legal advisors that the chances of the application to appeal being accepted or the derivative claim being rejected outright are greater than the chances of the action being accepted (and the appeal being rejected). Regarding the alleged entitlement of the minority shareholders group to on-going commissions by virtue of agreements that Yedidim had with them, appropriate provision has been made in the financial statements.

2-47 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) b. Other contingent liabilities (cont'd)

2. On September 15, 2010, LeAtid filed an action with the court by way of an originating summons with an application to recognize LeAtid as an entity entitled to restructure Atidit Pension Fund Ltd., and to determine that the change of Atidit Pension Fund's name in the Companies Register in 2006 is invalid. The respondents to the originating summons are the minority shareholders Mr. Abraham Sachs and Mr. Israel Meiri, the Superintendent of the Capital Markets Division at the Ministry of Finance, and the Companies Regisrar. Several preliminary hearings have taken place within the context of the legal proceeding and the parties are deliberating in hopes of reaching a settlement.

The Company is of the opinion, based on the legal opinion of its legal counsels, that the originating summons is more likely to be accepted than to be rejected.

3. Claims are pending against Turk Nippon Sigorta A.S. (Turk Nippon), a company controlled by the Company in which four former employees of Turk Nippon filed in connection with terminating employee-employer relations. For the amounts of these claims a provision was made for an immaterial amount based on the opinion of the lawyers of Turk Nippon in Turkey. c. Claims which have been completed

1. In March 2010, a claim was filed at the Petach TIkva District Court against the subsidiary Harel Insurance and four other insurance companies, with an application to recognize it as a class action. The subject of the class action is the assertion that according to circulars issued by the Commissioner of Insurance, when the policyholder pays the insurance premiums in monthly installments, the policy factor is to be measured only once a quarter, and that the respondents are not entitled to link the monthly policy factor to the new index every month, thus allegedly overcharging in respect of the policy factor. The Group that the claimants wish to represent consisted of all the respondents' policyholders from 1982.

Pursuant to the action, the claimant's personal claim against Harel Insurance was in the amount of NIS 0.80 for 2009. The claimants estimated the amount of the action for all members of the group they sought to represent against all the respondents (5 insurance companies) at NIS 114 million. Harel Insurance has submitted its response to the application to approve the suit as a class action.

On March 3, 2011, the court approved an application submitted by the claimants to withdraw from the action, after the claimants confirmed that there are no grounds for the suit. The court therefore deleted the suit.

2. During May 2007, a claim was filed against Harel Insurance (consolidated company), Dikla (consolidated company) and another insurance company, which are the insurers of a complementary insurance for pensioners, together with a request to approve it as a class action, in District Court of Tel-Aviv. The claim was submitted by a policyholder covered by "Mashlim LaGimlay," which is a group long-term care policy. According to the claimant, he was charged insurance premiums even after occurrence of an insurance event, that is, after he required long-term care and began receiving insurance compensation according to the policy. The claimant claimed that charging the insurance premiums as said, was allegedly done illegally, since there is no provision in the policy, requiring continuation of charging premiums after occurrence of any insurance event and also, supposedly contradicts provisions published by the Commissioner of Insurance regarding the release from paying insurance premiums for long-term care insurance, once the policyholders is in need of long-term care. The claimant asked to represent all policyholders of "Mashlim LaGimlay" and/or other long-term care policies with similar conditions.

The personal claim amount is NIS 8,202. The claimant estimates that the claim for all claimants in the group that he wishes to represent is NIS 166 million.

On June 29, 2009, a decision to approve the claim as a class action was giving. Harel Insurance and Dikla submitted a request to appeal this decision and the plaintiff has filed his response to the application for leave to appeal. On April 21, 2011 the Supreme Court accepted the appeal and rejected the request to recognize the claim as a class action.

2-48 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) c. Claims which have been completed (contd.)

3. In February 2007, a claim against the subsidiary Dikla and against Clalit Health Services (hereinafter: "Clalit") was filed with the Tel Aviv District Court, and an application to approve the claim as a class action (hereinafter respectively: "the legal action and application for approval").

A summary of the plaintiff's allegation is that since 2001 monthly payments were collected for it, both for the complementary insurance policy (hereinafter: "Clalit Complementary"), and also for the additional health services program (hereinafter: "Clalit Mushlam). The plaintiff alleges that this relates overlapping insurance, which is double insurance, and both of them together have no advantages. On the basis of the aforesaid, the plaintiff alleges, inter alia, a breach of contract of an engagement signed between him and between Clalit, on Clalit joining the additional insurance services, a violation of the law; a misrepresentation and a breach of the obligation of disclosure according to the Consumers Protection Law, according to the Law of the Supervision for the Financial Services (Insurance) 1981 and the illegal enrichment by Dikla and Clalit.

The plaintiff wishes to represent anyone who purchased the Dikla Comprehensive Insurance Policy and who was insured by Clalit Health Fund and concurrently with the Clalit Mushlam Medical Insurance for any insurance period. In the plaintiff's opinion, the members of the Group comprise at least 50,000 insured and he estimates that the average damage caused to each of them at NIS 1,500 (the plaintiff alleges that the personal damage to him is NIS 2,714). Therefore, the plaintiff says that the value of the whole claim is NIS 75 million.

On August 7, 2008 the response of Clalit and Dikla was submitted regarding the application for approval.

In July 2008 the plaintiff filed a response to the application for approval for a class action. In the framework of the pre hearings for the application of approval, which took place in November 2008, the District Court instructed the Supervisor to issue his position regarding the legal action. This position was received in February 2009 and in response Dikla filed an affidavit supporting its position. In September 2009 a hearing took place on the application to approve the legal action and thereafter the final summaries were submitted in writing.

On January 2, 2011 the court approved the class action while significantly reduces the period to which the claim relates to the class action.

On July 18, 2011, the court approved a compromise in the class action and awarded it the status of a court ruling. Accordingly, insureds in Dikla's Clalit Mashlim plan who are also members of Clalit's Clalit Mushlam plan, and insureds in Dikla's supplementary insurance for employees ("Mushlam Le'Oved") who are also members of Clalit's Clalit Mushlam plan, who have not filed a claim by virtue of the Dikla policy and did not ask to be insured under both plans, are entitled to apply to Dikla within the period specified in the court ruling to cancel the insurance cover and receive a refund of 65% of the premium they paid during the 7 years prior to the cancellation. According to the court ruling, plaintiffs in the class action will receive NIS 70,000 and the plaintiffs' attorney will receive NIS 250,000 plus 5% of the premium refund to be reimbursed under the arrangement, although under no circumstances more than NIS 835,000.

The Company's management is of the opinion that approval of the compromise will not significantly affect the Company's financial results. d. Commitments

1. Transaction to acquire real-estate in Germany

On September 26, 2011, Harel Insurance together with Ashtrom Properties Ltd. ("Ashtrom"), entered into a transaction to acquire a rental property in Düsseldorf, Germany, with a built area of 19,194 sq.m., which is fully leased to the Ministry of the Environment of the German state of North Rhine, Westphalia for more than 10- years.

The investment was made through a foreign partnership in which Ashtrom, through a second-tier subsidiary, holds 51%, and Harel Insurance holds 49% through a subsidiary. Total consideration for the transaction is EUR 44 million. 2-49 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) d. Commitments (cont'd)

The partnership is financing the acquisition partly from shareholders equity invested in it by Harel Insurance (about EUR 6.5 million) and Ashtrom (EUR 6.8 million), and the balance through a non-recourse bank loan. Completion of the transaction is subject to meeting suspensive conditions, including registering ownership of the property and the Düsseldorf municipality waiving the right of refusal conferred upon it under German law.

2. Transaction to acquire rights in real-estate in Manhattan

On September 21, 2011, subsidiaries of the Company that are financial institutions (hereinafter together: "the Subsidiaries"), entered into agreement to invest indirectly, for their nostro portfolio, in one third of the rights in a partnership that had acquired a commercial property in Madison Avenue, Manhattan, New York in the US. The other partners in the partnership are an American REIT fund ("the REIT fund") and another American investor, each of which will indirectly hold one third of the rights in the partnership. The total cost of acquiring the property by the partnership is USD 66 million. According to the agreements with the financing bank, the REIT fund is the guarantor towards the financing bank for the amounts specified in the financing agreement, in respect of events that are defined in the agreement. If the guarantee is exercised, the financial institutions undertook to inject a further USD 4.6 million into the partnership.

3. Transaction to acquire holdings in Property & Building

On September 13, 2011, a designated partnership that was established by the Israel Infrastructures Fund ("Israel Infrastructures" ["the Partnership"] and "the Infrastructures Fund", respectively), and which, at the end of 2010, acquired 50% of the shares of Derech Eretz Highways (1997) Ltd., the concessionaire for Highway 6 ("Derech Eretz") entered into agreement with Shikun & Binui Ltd. ("Property & Building") to acquire all Property & Building's holdings and rights in Derech Eretz, including in owners loans that Property & Building had extended to Derech Eretz. The general partner in the Partnership is the Infrastructures Fund's management company, in which Harel Insurance (nostro) holds 40% of the rights. Subsidiaries of the Company that are financial institutions ("the Subsidiaries") hold 28% of the capital rights in the Infrastructures Fund. As the Limited Partner, subsidiaries of the Company that are financial institutions hold 47%, directly, of the rights in the Partnership.

In consideration of the transaction with Property & Building, Israel Infrastructures (the Partnership) will pay Property & Building NIS 773 million, and this amount will be subject to adjustment mechanisms in respect of the period until the completion date of the transaction. Consideration for the transaction with Property & Building was determined taking note of the value of Derech Eretz as reflected in the sale process (tender) in which the State offered to sell the right to receive securities in Derech Eretz, which after exercising the option conferred on the State, will confer 49% of the capital rights in Derech Eretz, rights to a mezzanine loan that was given to Derech Eretz and rights in subordinated loans that were given to Derech Eretz by its shareholders (the "tender process" and "State's rights" respectively), taking note of the amount payable by the state and the outstanding loans extended that Property & Building extended to Derech Eretz.

The transaction is subject to meeting several conditions precedent, including obtaining State approval, approval from the entities financing the Highway 6 project, and other relevant regulatory approvals. As part of the transaction, Israel Infrastructures (the Partnership) undertook to ensure that Property & Building, itself or through its associate companies, will carry out the work on future sections of the Highway 6 project, subject to the work being carried out at market prices and to a mechanism prescribed in the agreement and based on the provisions of the existing agreement with the shareholders in Derech Eretz. The subsidiaries' investment in IIF and in the Partnership (Israel Infrastructures) is mostly for their yield-dependent investment portfolios, provident funds and pension funds, and therefore no material impact is expected on the financial performance of the Company or the subsidiaries.

Subsequent to the tender for the sale of the State's rights in Derech Eretz, as mentioned above, Derech Eretz announced that it would exercise the right of refusal conferred upon it to acquire the State's rights which are the subject of the tender.

2-51 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) d. Commitments (cont'd)

To exercise the right of refusal, Israel Infrastructures provided financing of the amount required to acquire the State's rights. The partners in Israel Infrastructures, including Harel Insurance and other subsidiaries that are financial institutions, transferred payment to Israel Infrastructures on account of a further investment in Israel Infrastructures' capital, to enable it to provide the financing to Derech Eretz. The subsidiaries gave Israel Infrastructures NIS 400.5 million. After the date of the report, due to the State's decision to reject the right of refusal exercised by Israel Infrastructures (see below), this amount was returned to the subsidiaries.

Following Derech Eretz's announcement that it would exercise the right of refusal, the State announced that it was rejecting the announcement of the exercising the right of refusal by Derech Eretz.

In the wake of the State's announcement, an arbitration procedure was conducted between Derech Eretz, the State of Israel, and the entity that the State had announced as the winner of the tender, in the presence of retired Judge Shalom Brenner), in which Derech Eretz filed a petition to strike out the State's announcement concerning the rejection of Derech Eretz's announcement of exercising the right of refusal.

On October 10, 2011, the arbitrator issued a ruling rejecting the claim by Derech Eretz and certifying the State's announcement of the dismissal of the right of refusal by Derech Eretz. Pursuant to the arbitrator's ruling, the State demanded compensation for its expenses and losses. The parties reached a compromise whereby the State would receive payment of NIS 3.5 million as final settlement of its claims for losses and expenses, from which the share of the subsidiaries in the Group, that are institutional companies, is NIS 1.7 million.

4. Acquisition of Prisma Currencies Ltd.

On September 11, 2011, a transaction was completed according to which Harel Financial Products Ltd. (hereinafter in this section: ("the Acquirer"), a second-tier subsidiary of the company (wholy owned, indirectly) entered into an agreement to acquire all the issued share capital of Prisma Currencies Ltd. ("Prisma Currencies"), a company wholly owned by KSM Israeli Index Certificates Ltd. ("the Seller"). In consideration of the acquisition, the Acquirer will pay the Seller NIS 360,000. As at the date of purchase, Prisma Currencies has a deficiency of approx. NIS 1 million.

The following details deposit certificates that Prisma Currencies issued to and are held by the public:

1. Deposit certificates (Series A), that track the US dollar rate (Securities no.: 1111707). 2. Deposit certificate (Series B), that track the Euro rate (Securities no.: 1111715). 3. Deposit certificate (Series D), that track the Norwegian Krone (Securities no.: 1111475). 4. Deposit certificate (Series F), that track the Australian dollar (Securities no.: 1111558).

The transaction was financed from independent sources

5. Transaction to acquire real-estate in London, UK

On August 28, 2011, subsidiaries of the Company that are financial institutions (hereinafter: "the Subsidiaries") entered into agreement to acquire, indirectly, 49% of the rights in an office block in London ("the Property"). The remaining rights in the Property were acquired by another Israeli financial institution and a company specializing in real-estate investments in the UK. The rights were acquired through a corporation in which the subsidiaries hold 49% of the rights, the additional financial institution holds 49% of the rights and the other company (specializing in real estate in the UK) holds 2%. The total consideration to be paid by the Subsidiaries for acquiring their share of the Property is GBP 34 million.

2-50 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) d. Commitments (cont'd)

The Subsidiaries entered into the above transaction principally using funds from reserves held against yield- dependent liabilities and from the provident fund and pension fund portfolios. The transactions are therefore not expected to significantly affect the performance of the Company or the Subsidiaries.

6. Acquisition of real estate in the US

On August 3, 2011, subsidiaries of the Company that are financial institutions (hereinafter together: "the Subsidiaries"), entered into an agreement to acquire a residential project in Jackson, New Jersey (" the Project"), through a Limited Liability Company (" LLC") in which the subsidiaries hold (indirectly, through a partnership corporation), 45% of the interests.

The remaining 55% of the interests in the LLC are held by an American partner (45%) and Gaia Real Estate (10%), which will manage the project..The Project is to be acquired for USD 44 million (equity and external debt (.

7. Acquisition of real estate in Netanya

On July 4, 2011, subsidiaries of the Company that are financial institutions (hereinafter together: ("the Subsidiaries"), entered into a transaction with Blue Square Real Estate Ltd. ("BSRE") in connection with the acquisition of BSRE's interests in a commercial center that is under construction, including office and commercial space, in the Kiryat Hasharon neighborhood in East Netanya ("the Commercial Center"). As part of the transaction, the parties signed a sale agreement and a cooperative agreement in which the Subsidiaries are to acquire from BSRE 50% of the rights in the land and in the commercial center, which as noted is under construction and will be jointly owned by BSRE and the Subsidiaries. The partnership agreement arranged the relationship between the parties as joint owners of the Project, including bearing the cost of the design, erection, marketing, management and operating costs of the commercial center, in equal parts. The Subsidiaries are expected to invest NIS 81.5 million in the project, where about half of the investment is for the nostro portfolio and the balance is for members' portfolios.

8. Pension arrangement for career soldiers in the IDF.

On June 22, 2011, the relevant IDF entities informed the Company that subsidiaries of the Company had been selected as recommended companies by the IDF in an IDF procedure (through entities acting on its behalf) to choose an entity to manage the default pension insurance plan for IDF career soldiers.

Pursuant to the provisions of the law, the entity who approves the agreement is the Minister of Defense, with the consent of the Minister of Finance. According to the information received by the subsidiaries, the IDF's recommendation was approved by the Minister of Defense, and implementation is now subject to the consent of the Minister of Finance.

The pension arrangement which is the subject of the procedure consists of a combination of pension and insurance products, consistent with the outline defined by the IDF.

The transaction is expected to consist of a lump sum deposit of hundreds of millions of shekels as well as on- going deposits of additional hundreds of millions of shekels each year.

As this is a unique pension arrangement, despite the scope of the transaction it is not expected to have a significant impact on the Company's financial results in coming years.

2-52 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) d. Commitments (cont'd)

9. During the second quarter of 2011, Harel Sal, a subsidiary of Harel Products (wholly owned, indirectly) entered into a deposit agreement with Mizrahi-Tefahot Ltd. (UMTB) whereby Harel Sal will deposit NIS 440 million with the bank for a 12-month period. The deposit will be used to cover Harel Sal's obligations to owners of the units of Index Linked Certificates Series B on the TA-100 index and Series G on the TA-25 index. The agreement period is for 12 months .Insofar as Harel Sal chooses to terminate the transaction before 12 months have elapsed from the commencement of the agreement, Harel Sal will be charged interest at a rate of 1.12% of the sum of the deposit.

10. Signing an Agreement and Partnership Agreement to acquire a plot of land in Tel Aviv

On January 27, 2011, subsidiaries of the Company that are financial institutions (hereinafter together: the Subsidiaries), together with companies that belong to the Migdal Group and other private investors (Private Investors), entered into an agreement to acquire the rights in respect of a plot of land with a registered area of 20,000 sq.m. located between Yigal Alon Road on the west and Hasolelim Street to the east in Tel Aviv (the Purchase Agreement and the Ha'argaz Lot), from Ha'argaz Ltd. (Ha'argaz).

At the time of signing the Purchase Agreement, Migdal Group, the Subsidiaries and all the purchasers and owners of the rights in the southern tower (the Purchase Group), signed a cooperation agreement arranging the partnership relationship between the members of the Purchase Group (the Partnership Agreement).

As part of the Partnership Agreement, the Subsidiaries together with the Migdal Group, acquired among themselves in equal parts, all the office space in the northern tower and the adjacent shops, the public car park, as well as the commercial section (excluding an area of 1,580 sq.m. on the eastern side) of the project. In the framework of the agreement, two buildings, each with 38 floors of office space and 83,000 sq.m. of floor space are planned for the Ha'argaz Lot, above a double commercial floor with 6,250 sq.m. of space, as well as 37,000 sq.m. of service areas above an underground car park with 4 or 5 levels and an area of 70,000 sq.m. for parking and other auxiliary space (the Project).

The Subsidiaries intend to invest NIS 310 million in the purchase and construction of their share of the Project. The Subsidiaries will finance their share of the purchase and construction of the Project from independent sources.

The Subsidiaries' investment is mostly for yield-dependent investment portfolios, provident funds and pension funds, and therefore the transaction is not expected to have any material impact on the financial performance of the Company or the Subsidiaries.

11. On May 14, 2007, the Company entered into agreement with Israel Credit Cards Ltd. ("CAL"), to set up a joint company that would give credit to customers ("the Joint Venture"). On August 30, 2009, the parties signed an agreement for the Company to leave the Joint Venture, due to the fact that the regulatory permission required to set up the joint company was not forthcoming. According to the aforementioned agreement, a mechanism for the final settlement of accounts regarding the results of the Joint Venture's activity was determined in respect of the period up to June 2011, so that after this date the parties will have no more accounts to be settled in connection with the activity of the Joint Venture. By virtue of this agreement, during the Reporting Period, the Company received payment of NIS 4 million from CAL.

2-51 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 7 - Management and capital requirements

1. Management’s policy is to maintain a stable capital base in order to safeguard the Group's ability to continue operations so as to be able to achieve yields to its shareholders and in order to support its future business operations. The institutional bodies, the management company of mutual funds, and the Company which is a member of the Stock Exchange, are consolidated in the financial statements subject to regulatory capital requirements.

2. The following is data regarding the required and calculated capital of the subsidiaries which are insurance companies according to Supervision Regulations of Insurance Businesses (Minimum Shareholders' Equity required from an Insurer) (Amendment) – 2004 (hereinafter: "the Capital Regulations") and the Supervisor’s directives:

at 30 September, 2011 at 31 December 2010 Harel Harel Insurance Dikla EMI Insurance Dikla EMI NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands

Amount required according to new capital regulations and the Supervisor's instructions (A) 4,065,005* 283,530 177,300 3,831,375* 246,698 176,450

Amount required according to capital regulations and the Supervisor's instructions before the new instructions 2,664,944 217,865 177,300 2,624,281 192,609 176,450 Difference 1,400,061 65,665 - 1,207,094 54,089 -

Amount required according to capital regulations and the Supervisor's instructions before the new instructions 2,664,944 217,865 177,300 2,624,281 192,609 176,450 difference required to complete on the date of report 1,050,046 49,249 - 724,256 32,453 - Amount required according to new capital regulations and the Supervisor's instructions at December 31 2009 (B) 3,714,990 267,114 177,300 3,348,537 225,062 176,450

Including: Primary capital 2,325,426 225,748 371,813 2,450,780 225,748 341,757 Secondary capital ------Subordinate d secondary capital 763,809 - - 835,512 - - Complex secondary capital 786,475* 99,770 - 700,950 - - Existing amount computed according to capital regulations 3,875,710 325,518 371,813 3,987,242 225,748 341,757 Surplus 160,720 58,404 194,513 638,705 686 165,307 Unavailable capital included in the surplus according to the Supervisor's provisions - 6,075 - - 83,608 -

2-51

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements

Note 7 - Management and capital requirements (contd.)

* Harel Insurance has secondary complex capital not included in the calculation in the sum of NIS 131 million.

* According to the regulations, there is a stipulation that the Supervisor will be entitled to permit, a reduction in capital requirements, up to 35% of the original difference resulting on the acquisition of provident fund operations or a company managing provident funds, should the shareholders' equity of the insurer on the date of the report be less than the minimum shareholders' equity required from it according to regulations (without the transitory provisions). Such reduction, should it be approved by the Supervisor, is expected to reduce the capital requirements in Harel Insurance by about NIS 238 million.

On October 24, 2011, Harel Insurance received the Commissioner's approval to reduce its minimum required equity due to the balance of the original difference attributed to the management companies and provident funds, as defined in Article 5 of the Capital Regulations, by 35% of the balance of the original difference, as of the financial report at December 31, 2011.

Notwithstanding the aforesaid, the approval received by Harel Insurance also stipulated that this reduced amount shall be added to the calculation of the required equity ("Supplement to the Required Equity") for the purpose of distributing a dividend.

The Commissioner's approval will be cancelled when the capital requirements according to the first pillar of the Solvency II directive takes effect, which will replace the Capital Regulations.

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Note 7 - Management and capital requirements (contd.) 2. (contd.) a. the total amount includes, inter alia, capital requirements for: at 30 September, 2011 at 31 December 2010 Harel Harel Insurance Dikla EMI Insurance Dikla EMI NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands

Primary capital required in general insurance 540,651 87,490 - 511,886 85,151 - Activities in nursing insurance 59,596 101,886 - 53,290 86,969 - Capital requirements for yield secured programs 70,366 - - 36,595 - - Investment assets and other assets (C) 998,743 33,440 - 880,429 27,105 - Catastrophe risks in general insurance 134,257 - - 98,528 - - Operating risks 262,938 32,225 - 256,960 26,983 - Deferred acquisition expenses in life assurance and health insurance and acquisition expenses in respect of insurance portfolio 871,460 28,455 - 832,572 20,364 - Investment in subsidiary management companies and insurers 764,309 - - 809,014 - - extraordinary life assurance risks 233,978 - - 218,988 - - Assets unrecognized as their definitions in capital regulations (D) 39,149 34 - 55,747 126 - Special share capital requirements according Commissioner's instructions 89,558 - - 77,366 - -

4,065,005 283,530 - 3,831,375 246,698 -

b. According to the amendment, the insurer will be obliged to increase its shareholders' equity at the rates detailed below, out of the difference of the shareholders' equity required from it according to regulations, prior to and after the amendment, (hereinafter: " the difference") for each of the dates stated therein at the following rates:  Up to the date of publishing the financial statements, as at December 31, 2009, at least 30% of the difference.  Up to the date of publishing the financial statements, as at June 30, 2010, at least 45% of the difference.  Up to the date of publishing the financial statements, as at December 31, 2010, at least 60% of the difference.  Up to the date of publishing the financial statements, as at June 30, 2011, at least 75% of the difference.  Up to December 31, 2011 the balance will complete the full amount of difference.

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Note 7 - Management and capital requirements (contd.) 2. (contd.) c. For capital requirements in respect of assets with a total value of NIS 508 million for Harel Insurance and NIS 32 million for Dikla, with an internal rating pursuant to the Finance Ministry's directive, the "unrated" category should be used for calculating the capital requirements. The capital requirement in respect of these assets amounted to NIS 57 million for Harel Insurance and NIS 3.2 million for Dikla. d. A capital requirement at a rate of 0.17% of the amount at risk in the self retention, but no less than the requirement on the date of the transfer. The capital requirement for Harel Insurance is for an amount of no less than NIS 190 million. e. Including an unrecognized assets in an insignificant amount, in respect of a passive exceeding, which was not approved in the investment regulations – the holding of an asset in a foreign country which was unapproved. The balance of the investment at a time close to the publication of this report shows no significant change. f. In December 2010, Ireland's credit rating was lowered, so that it is no longer considered an "approved foreign country", as this term is defined in the Investment Regulations and in the regulations that apply to provident funds. The Company's subsidiaries that are financial institutions have investments in Ireland. On February 21, 2011, the Commissioner published a letter granting a six-month extension, from the date of the letter, for disposing of the investments in Ireland. During this period, the continuing holding of these investments will not be construed as a holding that is contrary to the Income Tax Regulations and Investment Regulations. On August 14, 2011, the Commissioner published another letter granting a further six month extension during which further holding of investments in Ireland will not be construed as a holding that is contrary to the Income Tax Regulations and Investment Regulations. An extension was granted based on the Control of Financial Services (Provident Funds) (Rules of investment that apply to management companies and insurers) Regulations, 5771-2011. The draft regulations will allow financial institutions to invest in foreign countries that have a rating of BBB- or higher in countries that are members of the OECD.

In addition to the general requirements in the Companies Law, the distribution of a dividend from the capital surpluses of insurance companies is also subject to liquidity requirements and compliance with the Ways of Investment Regulations.

3. Subject to the existence of certain circumstances, as detailed below, the Company has undertaken, within the framework of the license that was granted to it by the Commissioner, for the control over subsidiary companies that are insurers, to top-up the shareholders' equity that is required of the consolidated insurance companies up to 50% of the shareholders' equity that is required in accordance with the regulations, but in no event more than NIS 537 million (linked to the index that was published in June 2006), in respect of Harel Insurance, NIS 65 million (linked to the index that was published in June 2006), in respect of Dikla and NIS 45 million (linked to the index that was published in October 2009), in respect of EMI. The commitment is in force so long as the Company is the controlling interest in the insurance companies and it will only be exercised if the shareholders' equity of the insurance companies becomes negative. Moreover, the Company has made a commitment in connection with the topping up of the required shareholders' equity of the affiliated company ICIC, up to 50% of the shareholders' equity that is required in accordance with the regulations and in an amount that will not exceed NIS 30 million (linked to the index that was published in January 2006), where this amount relates to the joint commitment together with the other two controlling interests in ICIC (Euler Hermes and Agricultural Insurance). On the subject of the extension of a credit limit to a subsidiary engaged in securities trading, for the purpose of compliance with the capital requirements that apply to it, see Section 10 below.

As of the date of these financial statements, the insurance companies in the Group are in compliance with the capital regulations.

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Note 7 - Management and capital requirements (contd.)

4. In accordance with a letter published by the Commissioner in January 2009 regarding relief in capital requirements of insurance companies, an asset held contrary to investment regulations, which the exception for said is passive and was accrued subsequent to October 1, 2008, will not be considered as an inadmissible asset, as defined by the capital regulations, subject to prior approval by the Commissioner. As at September 30, 2011, the company has a number of passive exceptions, which are not considered to be inadmissible assets in accordance with the Commissioner's approval.

5. In February 2009 a directive was published by the Capital Markets Division on the subject of registering deferred acquisition expenses in a company which manages pension funds, according to which it was determined that a deferred acquisition expense is an asset which is not recognized in order to calculate minimum shareholders' equity required from a management company. In 2009 the Company provided the management company of pension funds whose capital notes of NIS 33 million are to be repaid on April 1, 2014, or on an earlier date to be decided by the subsidiary. The capital notes are linked and do not bear interest.

6. In October 2010, Harel Insurance gave another subsidiary, which is a company that manages pension funds, a capital note of NIS 13 million to enable the subsidiary to meet the capital requirements applicable to it. The capital note is due to mature in November 2015 or at an earlier date to be decided upon by the subsidiary. The capital note is linked to the CPI and bears no interest.

7. In the framework of the Supervisor's approval for the acquisition of mutual funds operations by Harel Insurance, it was stipulated that the reduced balance of the cost of the purchase will be added to the capital requirements and presented in the statements of assets and liabilities against minimum shareholders' equity. A relief is expected due to the above, see section 2 above.

8. In November 2009 the amendment to the Supervision of Financial Services Regulations (Minimum Shareholders' Equity required from an Insurer) (Amendment) – 2009 (hereinafter: "the Amendment") was published.

In the framework of the amendment, additional capital requirements were added to the existing capital requirements for the following categories: a. Operating risks b. Market and credit risks as a percentage of the assets according to the level of the risk which characterizes the various assets. c. Catastrophe risks in general insurance. d. Expanding the capital requirements for yield assured plans in life assurance against which there are no designated bonds or against part of which there are no designated bonds.

In addition, the following exemptions were granted:  An exemption in the method of calculating the capital required due to expenses for developing information systems, subject to the approval of the Supervisor.  A deduction of a tax reserve created for non recognized assets which are held contrary to the investment regulations or contrary to the Supervisor's directives.  It was determined that the Supervisor will be entitled to permit a reduction of the capital required of up to 35% of the original difference resulting from the purchase of provident funds operations or a management company of provident funds, should the shareholders' equity of the insurer on the date of the report be at least the minimum shareholders' equity required from it in accordance with the Regulations (without the transitory provisions).

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Note 7 - Management and capital requirements (contd.)

Within the framework of the amendment, the definition of basic capital was deleted, the definitions of primary capital and of secondary capital were changed and a definition of tertiary capital was added. The definitions of secondary capital and tertiary capital have been made subject to such terms and rates as the

Commissioner instructs. In continuation of this and in accordance with the Commissioner's intention to adopt the directives of the European Union on the subject of the assurance of the ability of insurers to make payments, Solvency II, in the future, a draft circular for institutional bodies was published in August 2011 on the subject of the composition of recognized shareholders' equity for an insurer. The draft determines principles for the structure of the recognized shareholders' equity of an insurer as well as principles for the recognition of the various components of capital and their classification to the different bands of capital (see para. 9 below).

On September 20, 2010, the Commissioner published an instruction in connection with implementing the above mentioned definitions. Accordingly, the reinsurers' share of the capital requirement in respect of exposure to catastrophes shall be calculated according to a loss rate of at least 1.75%. The wording of the regulations prior to the instruction states that the reinsurers' share shall be calculated "according to the maximum loss rate defined by the insurer, provided that it is calculated for an event that takes place once every 250 years at most". This instruction led to an increase in the capital requirements for Harel Insurance. This amount will be added to the capital requirements for completion.

In this instance, the Commissioner published a temporary order whereby during the period from the commencement of the amendment to the regulations until a date to be announced by the Commissioner, the definitions, structure and calculation of the existing capital will remain unchanged.

9. On August 4, 2011, the Commissioner published a circular concerning the composition of an insurer's shareholders' equity. The circular stipulates that the recognized equity of an insurer shall be composed of the amounts of the components and instruments included at three levels: (a) tier-one capital – the insurer's principle and highest quality capital; (b) second-tier capital – the capital that includes loss- absorbing components and instruments, repayment of which is subordinate to any other debt, excluding tier-one capital; (c) third-tier capital – consisting of loss-absorbing components and instruments (with respect to principal only), repayment of which is subordinate to any other debt excluding tier one and second-tier capital.

The circular further stipulates that an insurer's equity is the sum of the components and instruments included in the different layers, under the following conditions: with regard to tier-one capital – the comprehensive rate of the capital components and capital instruments included in the primary capital shall not fall below 60% of the insurer's total equity, and the comprehensive rate of capital components and capital instruments that are included in "basic tier-one capital" shall not fall below 70% of the total tier-one capital as per the temporary order; regarding tier-three capital – the comprehensive rate of capital components and capital instruments included in tier-three capital shall be no more than 15% of the insurer's total equity. The draft circular further stipulates that approval from the Commissioner is required to include a complex primary capital instrument, a tier-two capital instrument and a tier-three capital instrument in the equity.

On May 10, 2010, Harel Insurance received the approval of the Commissioner to carry out an issue of liabilities which will be recognized for Harel Insurance as complex Secondary Capital. In this framework, the component of Harel Insurance capital was approved according to detailed clause 14 below.

On February 1, 2011 Dikla received the approval of the Commissioner to carry out an issue of liabilities which will be recognized for Dikla as complex Secondary Capital. In this framework, the component of Dikla capital was approved according to detailed clause 14 below.

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Note 7 - Management and capital requirements (contd.)

10. On August 5, 2010, the Board of Directors of the TASE approved a proposed amendment to the TASE Articles pertaining to the application of a new model for capital requirements of nonbanking TASE members (NBMs).Within the context of this model, the requirements for equity and liquidity and the rules for extending credit to customers by NBMs will be revised. According to an estimate prepared by a subsidiary, based on the data for its operations during the Reporting Period, and according to the existing

balances on September 30, 2011, the Subsidiary meets the requirements regarding the Minimum Capital Requirement (primary and secondary capital - as defined in the proposal).

The new model was approved by the Knesset Finance Committee on May 31, 2011 and has been implemented from June 30, 2011. For companies that are not in compliance with the capital requirements at June 30, 2011, the requirement to supplement the equity is determined gradually until June 30, 2012. In view of the fact that the subsidiary is in compliance with the requirements at June 30, 2011 and September 30. 2011, the schedule for supplementing the equity is irrelevant and it must comply with the requirements of the new model from June 30, 2011.

The capital requirement under the new model may change significantly and is noticeably affected by the volume of activity and seasonality, as well as by credit and the manner of the liquid asset investments at the date of the review. As a result, a line of credit was approved for the company from the company to be used where necessary.

11. In accordance with Stock Exchange regulations, trade registration of each series offered ETFs subsidiary which have been prospectuses conditional, inter alia, that the equity of the subsidiary after the trade registration of ETFs is not less than NIS 36,000 thousand. Correct as of the date of the financial statements the subsidiary meets this requirement.

12. On August 1, 2011, further Draft Control of Financial Services (Provident Fund) (Minimum Equity Required of a Provident Fund or Pension Fund Management Company) Regulations, 5771-2011 ("the Instructions") were published. The text of the draft was submitted for the approval of the Knesset Finance Committee.

Pursuant to the Instructions, the minimum equity required of a management company at the reporting date shall be no less than NIS 10 million or the higher of the following amounts:

a) A capital requirement at a rate of 0.1% of the total assets under management, but no less than NIS 10 million. b) Capital requirements at a rate of 25% of the fund's annual expenses.

The Instructions prescribe the manner of investing the required equity:

a) A management company shall hold liquid assets, as defined in the regulation, at a rate of at least 50% of the required minimum equity. b) A management company shall not invest the minimum it is required to hold under these regulations in its controlling shareholder, in a related party or in a party related to its controlling shareholder. c) A management company shall not hold intangible assets against the minimum equity it is required to hold under these regulations. d) Restrictions were prescribed on placing a lien on assets that are held against the minimum equity.

The provisions of the circular shall apply to all management companies excluding a company that only manages sectorial provident funds and an old pension fund management company to which a special administrator was appointed or that is owned by its members.

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Note 7 - Management and capital requirements (contd.)

Based on the computation of the capital requirements under the new draft regulations, the capital requirements for the provident fund management companies owned by the Group are expected to increase by approx. NIS 19.7 million.

The capital requirements for the Group's pension fund management companies are expected to be reduced by NIS 49 million, however in contrast, it will no longer be possible to hold DAC against these capital requirements.

Concurrently, draft Income Tax (Rules to Approve and Manage a Provident Fund) Regulations (Second Amendment), 5771-2011, were published which propose: (a) to abolish the provisions in the regulations relating to the minimum equity required of a management company; (b) to determine that the provision concerning a management company's obligation to operate on behalf of each of the fund's members only and not to give preference to any matter or consideration over the good of the members, will not apply to a management company that only manages sectorial provident funds; (c) to determine specific provisions concerning indemnity for the senior officers of a company that only manages sectorial provident funds.

13. The proposed Solvency II Directive ("the Directive") constitutes a fundamental, comprehensive change in the regulations pertaining to guaranteeing the adequacy of the capital of insurance companies. The purpose of the directive is to protect the money of policyholders, to enhance the integration between markets and to increase competition in this sector. The circular on the deployment for Solvency II, which was published in July 2008, is designed to ensure that the insurance companies in Israel make the necessary organizational preparations to implement the Directive, subject to a comprehensive, long-term work plan. Full implementation of the circular is forecast for 2012.

To help formulate the quantitative requirements according to the standard model in the first pillar of the instruction, quantitative impact studies (QIS) are conducted to consolidate the structure and calibration of the standard model for calculating the capital requirements and these enable the insurance companies themselves to prepare for the taking effect of the instruction from the organizational, operational and automation perspectives. On September 30, 2009, the Group's insurance companies submitted to the Commissioner of Insurance the first quantitative impact study conducted on the basis of data at December 31, 2008. The study was prepared in accordance with the instructions of the QIS4 document published in Europe and consistent with the adjustments required by the Commissioner in Israel.

In July 2010, a directive was published in Europe to conduct QIS5, based on data at December 31, 2009. The Commissioner of Insurance instructed the insurance companies in Israel to perform the study and he distributed instructions and adapted the study for Israel. The Company submitted the initial results of the quantitative study to the Commissioner on February 15, 2011, and the results of the qualitative questionnaire on March 31, 2011.

The Company submitted the initial results of the quantitative study to the Commissioner on February 15, 2011, and the results of the qualitative questionnaire on March 31, 2011. On May 31, 2011, the Company submitted to the Commissioner the results of the second QIS submittal and the relevant qualitative questionnaire.

Pursuant to the Commissioner's instructions, this report was made as part of a preliminary review of European requirements, in an effort to verify the extent to which they are consistent with Israel and were calculated based on unaudited data, in part manually, and submitted to the Commissioner only.

The Company continues to follow the Commissioner's directives in its deployment to implement the requirements included as part of the second pillar.

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Note 7 - Management and capital requirements (contd.)

14. As part of the permit received by Harel Insurance on May 10, 2010 to issue liability certificates through Harel Financing and Issues, that will be recognized as complex secondary (Tier 2) capital held by Harel Insurance, the Commissioner approved various parameters pertaining to the composition of Harel Insurance's equity, consistent with the New Capital Regulations, and pursuant to the Commissioner's draft circular concerning the composition of an insurer's equity.

The composition of Harel Insurance's equity, as approved, shall be as follows:

Definitions (in this section):

Complex secondary capital - shall meet all the following conditions, at least:

(a) It is subordinated to any obligation of the issuing insurer, excluding primary (Tier 1) capital;

(b) The first maturity date is no earlier than 8 years from its date of issue;

(d) According to its conditions, it includes loss-absorbing mechanisms, as follows:

1. Regarding the payment of interest - the insurer may defer payment of all or part of the interest, without this infringing upon its right to make other payments that have higher priority, provided that on the effective date for payment of the interest delaying circumstances are present, as defined below, and settlement of the interest payment is deferred to the date specified in the following clause; 2. Regarding payment of the principal - the insurer may defer payment of the all or part of the principal, without this infringing upon his right to make other payments that have higher priority, provided that on the effective date for payment of the principal delaying circumstances are present, as defined below, and settlement of the principal payment is deferred to the date specified below.

Delaying circumstances - regarding payment of the principal and interest are:

(a) The insurer has no profits worth distributing, as referred to in the Companies Law;

(b) If the insurer's equity, as reported in the financial statement preceding the date of payment, fell below that required of it in the minimum capital requirement pursuant to the Capital Regulations;

(c) The insurer's board of directors has instructed that payment of interest or payment of the principal be deferred, if it determined that there is real, immediate concern for the insurer's ability to comply with the minimum capital required of it, under the provisions of the law that apply to the insurer and/or in accordance with instructions issued by the Commissioner of Insurance, provided that the Commissioner has given prior approval for such;

(d) The insurer's board of directors instructed that payment of interest or the principal be deferred, if it determined that there is real, immediate concern for the insurer's ability to repay liabilities on time which take precedence over those of the bonds that serve as complex secondary capital, provided that the Commissioner has give prior approval for such;

(e) The commissioner of Insurance has instructed that payment of interest or payment of the principal be deferred, due to significant harm to the insurer's recognized equity or if it considers that there is real, immediate concern for the insurer's ability to comply with the minimum capital required of it, under the provisions of the law that apply to the insurer and/or in accordance with instructions issued by the Commissioner of Insurance.

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Note 7 - Management and capital requirements (contd.)

Composition of the equity:

Primary capital - shall be no less than 60% of the total equity required of Harel Insurance and shall consist of share capital, premium on shares, capital funds and accrued profits ("basic primary capital") and complex debt instruments ("complex primary capital").

Secondary capital, complex secondary and tertiary (Tier 3) capital – up to a maximum limit of 67% of the primary capital (or 40% of the total capital required); tertiary capital up to a maximum limit of 15% of the total equity required of the insurer.

It shall be clarified that "recognized equity" includes the changes in equity in accordance with Section 10 of the Capital Regulations. Further conditions are as follows:

1. An issue to a related party/controlling shareholder - a complex capital instrument that was issued to a related party shall bear interest that is not higher than the interest that the instrument would bear if it was issued to a non-related party. 2. Deductions for the purpose of calculating the equity

a. Complex primary capital – for calculating the recognized capital, from the fifth year before its maturity date, shall be amortized at a cumulative rate of 20% annually. b. Complex secondary capital – for calculating the recognized capital, from the third year before its maturity date, shall be amortized at a cumulative rate of 33.3% annually. c. Complex tertiary capital – for calculating the recognized capital, from the second year before its maturity date, shall be amortized at a cumulative rate of 50% annually. d. A component that is repaid in installments shall be amortized according to the payment date of each of the principal payments.

15. On December 28, 2009 the Commissioner published a draft circular, which deals with a plan of action for the management of the shareholders' equity of an insurance company. The objective of the circular is to ensure that an insurance company has an organized plan of action of the management and the monitoring of its capital position and to cope with changes therein. The draft circular determines that the board of directors of an insurance company is to approve a framework of guidelines in respect of the capital adequacy of the insurance company, the capital structure, its composition and its quality, and in respect of the routine monitoring and control processes, for ensuring capital adequacy, Moreover, the management of an insurance company is to set a detailed multi-annual plan of action, which is to be presented to the board of directors for approval, for the continuous management of the capital and to make preparation for changes in it in accordance with the guidelines that were approved by the board of directors. The plan of action is to be presented to the board of directors for the first time no later than July 1, 2010. The draft circular is the subject of discussions between the Commissioner and the insurance companies. Regarding the adoption of capital management policy approved by the Board of Directors and Board of Directors of Dikla and Harel Insurance – see par. 17-18 below.

16. On March 3, 2010, the Commissioner published criteria for approving the distribution of a dividend by insurance companies ("Criteria Document"). The criteria were published further to a letter issued by the Commissioner on March 9, 2009 in which he specified that a dividend may only be distributed after obtaining prior approval from the Commissioner.

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Note 7 - Management and capital requirements (contd.)

In addition, a different calculating matter was set for current equity regarding dividend distribution, according to secondary capital, as defined right before the regulations' amendment, will be fully recognized provided that its' rate do not exceed 40% from preliminary capital. If the secondary capital accounts for more than 40%, then half of the balance in excess of the 40% will be recognized. Complex capital instruments will be recognized in full subject to the rates permitted under the provisions of the law.

For the purpose of obtaining the approval, the insurer must submit an annual profit outlook for the years 2010 and 2011, a revised debt service plan approved by the board of directors of the insurer's holding company, and the minutes of the board of directors meeting at which distribution of the dividend was discussed, including comments on the Commissioner's draft circular concerning a plan of action for managing the insurance company's shareholders equity.

The Criteria Document further stipulates that an insurer whose total shareholders equity, after distribution of the dividend, is higher than 110% of the required capital, taking into account the Supplement Rates, may distribute a dividend without obtaining the Commissioner's prior approval provided that the insurer informed the Commissioner in advance and the documents mentioned above.

On October 24, the Commissioner published a draft letter extending the validity of the restrictions on dividend distribution, as follows: An insurer may apply to the Commissioner requesting permission to distribute a dividend provided that the ratio of the company's recognized equity to required equity is at least 105%. An insurer with a ratio of recognized equity to required equity, after distribution of the dividend, of at least 115% may distribute a dividend without first obtaining the Commissioner's approval, provided that it informs the Commissioner in advance and submits the documents specified in the letter.

In addition, the Commissioner sent a letter to managers of the insurance companies concerning the monitoring and management of equity, in an effort to ensure that a procedure is constantly in place for reviewing and monitoring the insurance companies own management, against the backdrop of fluctuations in the financial markets. Pursuant to the letter, insurance companies must report to the Commissioner on the state of their equity situation each month.

17. At meetings held on March 24, 2010 and June 15, 2010, the Board of Directors of Harel Insurance adopted a policy for management of its equity, based on the principles prescribed in the Commissioner's draft circular from December 28, 2009, concerning a plan of action for management of an insurer's equity. Accordingly, it was decided that, at all times, Harel Insurance will strive to meet the volume of equity recognized under the Capital Regulations, by an amount that exceeds NIS 150 million of the capital requirement that applies to it from time to time, pursuant to the aforesaid regulations. Furthermore, it was decided that reports would be submitted to the Board of Directors from time to time regarding compliance with the capital requirements and regarding developments that may affect Harel Insurance's compliance with the applicable capital requirements. The CFO was appointed as responsible for managing, monitoring, and reporting of capital requirements.

18. On March 23, 2010, the Board of Directors of Dikla adopted an equity management policy based on the principles prescribed in the Commissioner's draft circular from December 28, 2009, concerning a plan of action for management of an insurer's equity. Accordingly, it was decided that, at all times, Dikla will strive to meet the volume of equity recognized under the Capital Regulations, at a rate of 105% of the capital requirement that applies to it from time to time, pursuant to the aforesaid regulations.

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Note 7 - Management and capital requirements (contd.)

Furthermore, it was decided that reports would be submitted to the Board of Directors from time to time regarding compliance with the capital requirements and regarding developments that may affect Dikla's compliance with the applicable capital requirements. The CFO was appointed as responsible for managing, monitoring, and reporting of capital requirements.

19. As to the raising of secondary capital by Dikla after the reporting date see Note 8.

20. Regarding raising of secondary capital by Harel Insurance during the reporting period by expansion of series, see Note 8.

21. The capital requirements for EMI are calculated in accordance with the Control of Insurance Business (Minimum Equity Required of an Insurer) Regulations. Accordingly, EMI must hold capital as derived from the rate of cover and rate of financing of the loans that it guarantees. In addition, according to the regulations, the reserve for extraordinary risks is recognized as equity for the purpose of compliance with the capital regulations.

Pursuant to an amendment to the Capital Regulations, as specified in Section 9 below, no further requirements are expected to apply to EMI.

In accordance with the control permit that Harel Insurance received on January 7, 2010, the capital required of Harel Insurance in respect of its holdings in EMI is the amount of capital required of EMI, less EMI's reserve for extraordinary risks net of tax and minus tax assets in respect of the losses accumulated by EMI, up to the maximum limit of the reserve for deferred tax.

21. On May 10, 2010 Standards & Poors Maalot (hereinafter: "Maalot") published the rating of AAil to EMI. Regarding ratification of rating during the Reporting Period, see note 10 below.

22. Regarding ratification of Harel Insurance's rating after the Reporting Period, see Note 10 below.

23. Regarding distribution of dividend by Dikla during the Reporting Period, see Note 9 below.

24. Regarding the intention of Harel Share Issues, a subsidiary owned by Harel Insurance, to obtain a permit to publish a shelf prospectus, see Note 10 below.

Note 8 - Financial liabilities

1. Dikla complex secondary capital

Payment of the principal may be suspended for a maximum period of three years from the original repayment date.

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Note 8 - Financial liabilities (cont'd)

(2) in accordance with a decision made by Dikla's board of directors, Dikla's recognized shareholders' equity has fallen below the capital it is required to hold (pursuant to the provisions of law applicable to Dikla and as per the instructions of the Commissioner of Insurance), and this according to the last financial statements (annual or quarterly) preceding the relevant repayment date for the interest and/or principal; (3) Dikla's board of directors issues an instruction to delay payment of the interest and/or principal, should it determine that there is genuine concern over Dikla's ability to comply with capital it is required to hold (pursuant to the provisions of law applicable to Dikla and/or as per the instructions of the Commissioner of Insurance), provided that the Commissioner of Insurance approves such action in advance; (4) Dikla's board of directors issues an instruction to delay payment of the of the interest and/or principal should it determine that there is immediate genuine concern for Dikla's ability to repay on time obligations that take precedence over that of the debt that is the subject of this liability, provided that the Commissioner of Insurance has approved such action in advance; (5) the Commissioner of Insurance has issued an instruction concerning a delay in payment of the principal and/or interest due to significant impairment to Dikla's shareholders' equity or if he considers that there is genuine, immediate concern over Dikla's ability to comply with the capital it is required to hold (pursuant to the provisions of law applicable to Dikla and/or as per the instructions of the Commissioner of Insurance).

On February 1, 2011 Dikla received the approval of the Commissioner to raise capital notes that will be recognized as second-tier capital, in this framework, Dikla's capital requirement was also approved.

2. In February 2011, Harel Pia raised a loan of NIS 80 million from a bank. The loan is for a 5-year period, where the principal and interest are to be repaid in quarterly installments, as of June 2011. The loan was taken to repay a loan that Harel Pia took from the Company. To obtain the credit, Harel Pia and Harel Finance gave liens to the bank. Moreover, the loan agreement prescribes financial criteria, which if violated, entitle the bank to demand immediate repayment of the loan. These financial criteria mostly address the volume of revenues from management fees and the rate of available cash flow relative to repayment of the loan.

Due to decrease in the scope of managed assets in Harel Pia during the Reporting Period and the decrease in management fees resulting from it, Harel Pia has deviated from one of its financial terms, although as of today, the bank corporation approved this deviation.

3. As specified in Note 27A(4) to the Company's financial statements at December 31, 2010, Harel Financial Products has related activity that includes the lending of securities and hedging activity in contracts or shares, while taking credit for this activity. This related activity is performed to generate profit for Harel Financial Products.

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Note 8 - Financial liabilities (cont'd)

At September 30, 2011, Harel Finance has deposits of NIS 411 million in respect of this activity and financial obligations of a similar amount in respect of the sale of underlying and hedging assets through contracts.

4. The activity of the consolidated company, that operates as a TASE member in a trust account for its customers, requires the consolidated company (by a bank corporation by which it operates) to comply with a certain level of minimum equity. In addition, there are limitations relating to ownership of the consolidated company. As part of the TASE regulations to which the consolidated company is subject, the consolidated company must hold minimum equity in excess of the bank's requirement.. At September 30, 2011, the consolidated company complies with the TASE regulations, and consequently also with the bank's requirements.

5. In August 2011, a bank authorized a line of credit for a subsidiary of a variable amount which depends on the amount of the subsidiary's equity, which at September, 30 2011 was NIS 30 million (of which a used credit line of NIS 25 million). To receive the line of credit, the subsidiary undertook to comply with financial criteria set by the bank, including minimum equity and not to pledge its assets. At the date of signing the master agreement, the subsidiary is in compliance with all the financial criteria included in the master agreement.

6. Secondary complex capital – Harel Insurance

On August 30, 2011, Harel Insurance Financing and Share Issues Ltd. ("Harel Share Issues"), published a report offering liability notes with a value of NIS 200 million, to be used as complex second-tier capital by Harel Insurance. The offering report was published by virtue of a shelf prospectus published by Harel Share Issues on September 2, 2009, as amended on May 10, 2010, and by virtue of which on May 24, 2010 Series B and E were issued. The offering report was published after obtaining the Commissioner's approval to raise the liability notes as complex second-tier capital.

The offering report was published subsequent to the publication by Standard & Poors Maalot ("Maalot"), on August 28, 2011, of an ilAA- rating for the expanded Series E bonds in the amount of NIS 200 million, nominal value. Maalot's rating is for the liability notes that have a delayed payment mechanism and does not refer to the liability notes of Harel Share Issues that were issued in the past and are still in circulation, and that retain an AA rating.

On August 31, 2011, Harel Share Issues completed the raising of NIS 200 million nominal value bonds (Series E) by way of an expansion of the aforesaid Series E.

The bonds (Series E) were offered to the public in 200,000 units, where each unit consists of NIS 1,000 nominal value bonds (Series E), and all under the conditions specified in the shelf offering and the shelf prospectus.

Harel Share Issues received total consideration of NIS 207 million for the bonds (Series E).

The consideration received from the issue of the said bonds was deposited with Harel Insurance, and it constitutes complex second-tier capital for Harel Insurance.

Note 9 - Significant events during the reporting period

1. Distribution of Dividend by Dikla

On September 25, 2011, Dikla's Board of Directors decided to distribute a cash dividend of NIS 75 million. The Board of Directors' decision was made after taking into account the capital surplus and the capital requirements, in accordance with Dikla's capital management policy. 2-61

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Note 9 - Significant events during the reporting period (cont.)

2. Affirmation of EMI's rating

On August 4, 2011, Standard & Poor's Maalot announced affirmation of Financial Solidity (FSR) and rating of ilAA for EMI. The rating forecast remained negative due to the uncertainty regarding the business environment in the short term.

3. Merger of provident funds

Pursuant to the provisions of the fourth amendment to the Control of Financial Services (Provident Funds) Law, 5765-2005, and the sixth amendment to the Economic Efficiency (Legislative Amendments for implementation of the Economic Plan for 2009 and 2010) Law, as amended in the eighth amendment to the Economic Efficiency (Legislative Amendment for the implementation of the Economic Plan for 2009 and 2010) Law, 5771-2011, a provident fund management company shall not manage more than one provident fund in each of the categories listed in the law from January 1, 2012.

4. Method of enrollment of insured to group health insurance policies

On June 12, 2011, the Commissioner informed Harel Insurance of its intention to impose a civil fine, due to an alleged violation of the Commissioner's ruling in connection with the way in which insureds are enrolled in several group policies during the period 2009-2010. It should be mentioned, that this method of enrollment was practiced before the regulations concerning group health insurance took effect, regulating the way in which insureds are enrolled in group health insurance policies. At discussions held with the Commissioner, it was emphasized that this mistake was made innocently. On August 22, 2011 Harel Insurance received the Commissioner's decision, according to which the amount of the fine imposed on Harel Insurance is NIS 1.6 million.

5. Distribution of dividend

On May 26, 2011, the Company's Board of Directors decided to distribute a dividend of NIS 42.4 The decision of the board of directors was reached after the financial results of the Company for the Reporting Period and previous reporting periods was presented before it and was taken under consideration. The board of directors was presented with surpluses that were suitable for distribution by the Company as of March 31, 2011, at the sum of approx. NIS 3.2 billion. The board of directors examined the Company's net profit criteria and the solvency criteria as prescribed in Section 203 (A) to the Companies Law and following this examination it approved the compliance of the Company with the criteria for distribution.

The dividend was paid on June 22, 2011.

On March 23, 2011, the Company's Board of Directors decided to distribute a cash dividend of NIS 63.6 million. The Board of Directors' decision was made after taking into account the Company's financial results for 2010. The directors were presented with the Company's distributable surpluses at December 31, 2010, which amount to NIS 3.2 billion.

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Note 9 - Significant events during the reporting period (cont.)

The Board of Directors reviewed the Company's compliance with the profit test and the solvency tests that, in Section 203(a) of the Companies Law, and subsequently confirmed that the Company was in compliance with the distribution tests.

The dividend was paid on April 28, 2011.

6. Approval of an internal credit rating model

On May 15, 2011, the Commissioner authorized Harel Insurance's use of an internal credit rating model that was developed by Harel Insurance This model will serve Harel Insurance's and other financial institutions in group. According to the terms of the authorization, the rating under the internal model shall be construed as a rating that corresponds with a rating company's rating from the risk perspective. At this stage, the authorization is in force until December 31, 2012. The authorization is subject to meeting the following conditions: (a) The rating is valid for evaluating credit given to companies, excluding credit given to banks, insurance companies, credit backed by an underlying asset and credit for project financing; (b) the internal model will be used within the context of the structure, methodology and procedures presented by way of the model review process; (c) any significant change in the structure of the model must be approved in advance by the Commissioner; (d) rating according to model shall not be used for determining the rate of capital required on account of a credit risk. Furthermore, the authorization prescribes provisions concerning immediate and periodic reports that Harel Insurance must submit to the Commissioner in connection with the ratings.

7. Directives of the Supervisor of Banks concerning loans with variable interest

On April 27, 2011, the Supervisor of Banks published a draft instruction concerning housing loans with variable interest that will apply to loans that receive approval in principle from May 5, 2011 onwards. The instruction restricts the part of the loan (mortgage) with variable interest to one third of the total amount of the housing loan that the bank gives a borrower. The restriction applies to new mortgages (housing loans) on all variable interest tracks, where the interest rate may change during a period of less than five years. This instruction is in addition to previous instructions published by the Supervisor of Banks during 2010, as described in detail in the Report on the Corporation's Business for 2010, in an effort to depress the residential real-estate market.

These instructions led to extreme caution by the mortgage banks when issuing highly financed mortgages and to a decline in the demand for highly financed mortgages. Consequently, the demand for highly- financed mortgage insurance dropped, resulting in a decline in the Company's revenues from premiums from the second half of 2010.

8. Distribution of Dividend in Dikla

On March 22, 2011, the Board of Directors of Dikla decided to distribute a cash dividend of NIS 50 million, on the green track. The Board of Directors made its decision after taking into account the Company's financial results for 2010, which showed that Dikla had a distributable surplus of NIS 84 million at December 31, 2010. Likewise, the Company's plan to manage its shareholders' equity was presented, taking note of the new Capital Regulations and the Commissioner's draft circular on the subject of the management of an insurer's equity. The Board of Directors specified a capital target for the Company at 5% above the minimum equity required by law. Dikla will be in compliance with this target after distribution of the dividend.

9. Conditions of employment for the CEO of Harel Insurance and joint CEO of Harel Investments

Pursuant to the specified in Note 41 above, on March 23, 2011, the Company's Board of Directors approved a revision to the terms of employment of Mr. Michel Siboni.

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Note 9 - Significant events during the reporting period (contd.)

Accordingly, Mr. Siboni's current monthly salary will be NIS 170,000, linked to the CPI (instead of NIS 150,000 linked to the CPI, as approved on November 30, 2009), effective from January 1, 2011.

The Board of Directors takes a serious view of the fact that Mr. Siboni will be in possession of such information and that should he terminate his position he must refrain from competing against the Company's key businesses, particularly in the health insurance sector in which the Group is Israel's most prominent insurance company. The Board of Directors therefore approved payment of NIS 5 million, linked to the CPI, to Mr. Siboni in return for his commitment to refrain from competition should the employment relationship terminate. This non-competition clause will be in force for a period of 7 years (instead of 5 years as defined previously), during which time, he will be prohibited from serving as CEO of an insurance company in Israel or serving as a health insurance consultant.

10. Terms of employment for the joint CEO of Harel Investments

Pursuant to the specified in Note 41 above, on March 23, 2011, the Company's Board of Directors approved a revision to the terms of employment of Mr. Alkabetz. Pursuant to the revised conditions, Mr. Alkabetz' current wage, which is paid against a tax invoice and for which he is therefore not entitled to any social benefits, will be NIS 300,000 a month, linked to the CPI (instead of NIS 208,000 linked to the CPI, as approved in July 2010).

As a result of his appointment as joint CEO of the Group, Mr. Alkabetz' status and the considerable knowledge he will accumulate when serving in this position will privilege him to much information about the Company and its subsidiaries. The Board of Directors takes a serious view of the fact that Mr. Alkabetz will be in possession of such information and that should he terminate his position he must refrain from competing against the Company's key businesses. The Board of Directors therefore approved payment of NIS 2 million, linked to the CPI, to Mr. Alkabetz in return for his commitment to refrain from competition should the employment relationship terminate. This non-competition clause will be in force for a period of 6 years, during which time, he will be prohibited from serving as CEO of an insurance or finance group in Israel or serving as an insurance and finance consultant.

11. Allotment of share options to employees

On March 15, 2011, after first obtaining approval from the Company's Compensation Committee, the Company's Board of Directors approved an allotment of 47,047 stock options to 11 recipients. The exercise price of the options was determined according to the closing price of the Company's shares on the TASE, immediately prior to the Board of Directors decision, that is NIS 191.6 per share.

The fair value of the stock options allocated in the allotment is estimated at NIS 2.8 million, taking into account the possibility that some recipients may terminate their employment at an earlier date (excluding the Group's senior executives). The economic value of each option offered to the recipients, taking into account leaving rates and the probability that some options may be exercised at an earlier date, where the Board of Directors set the exercise price at NIS 191.6 per option linked to the CPI, is NIS 60 at the date of granting the stock options, March 15, 2011. The value of these options will be charged as an expense to the Company's financial statements over the anticipated vestment period of the options, beginning the year 2011.

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Note 9 - Significant events during the reporting period (contd.)

The fair value of the option warrants granted as aforementioned is estimated by applying a binomial model to the costing of the options. The following parameters are used in applying the model:

Expected fluctuations in the price of the share 77.1%

Risk-free interest rate 1.7%

The expected fluctuations are determined on the basis of the historical fluctuations in the share price.

The duration of life of the options is calculated using the binomial model, based on accepted exercise multiples and the Company's past experience regarding employees who leave the Company's employment.

The risk-free interest rate is determined based on linked shekel government bonds, where the remainder of the period equals the anticipated duration of life of the options.

On April 28, 2011, the board of directors of the Company decided to publish an outline for a securities offering to employees in accordance with the Securities Regulations (outline details of securities offering to employees) 5770 - 2000 and the Securities Regulations (private offering of securities in a registered company) 5770 - 2000. The outline plan is based on the outline plan published by the Company on June 4, 2009. The outline plan is for an allocation of up to 200,000 option notes for the exercise of up to 200,000 shares par value NIS 1 each of the Company.

Pursuant to the outline plan as detailed above, on May 26, 2011, after first obtaining approval from the Company's Compensation Committee, the Company's Board of Directors approved an allotment of 161,924 stock options to 13 recipients. The exercise price of the options was determined according to the closing price of the Company's shares on the TASE, immediately prior to the Board of Directors decision, that is NIS 172.5 per share .

Total value of the options will that will be credited as an expense to the Company's financial statements is estimated at NIS 9.6 million, taking into account the possibility that some recipients may terminate their employment at an earlier date (excluding the Group's senior executives). The economic value of each option offered to the recipients, taking into account leaving rates and the probability of exercising of the option at an earlier date, where the Board of Directors set the exercise price at NIS 172.5 per option linked to the CPI, is NIS 59 at the date of granting the stock options, March 26, 2011. The value of these options will be credited as an expense to the Company's financial statements over the anticipated vestment period of the options, from the beginning of the year 2011.

The fair value of the option warrants granted as aforementioned is estimated by applying a binomial model to the costing of the options. The following parameters are used in applying the model:

Expected fluctuations in the price of the share 77%

Risk-free interest rate 1.8%

The expected fluctuations are determined on the basis of the historical fluctuations in the share price. The duration of life of the options is calculated using the binomial model, based on accepted exercise multiples and the Company's past experience regarding employees who leave the Company's employment.

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Note 9 - Significant events during the reporting period (contd.)

The risk-free interest rate is determined based on linked shekel government bonds, where the remainder of the period equals the anticipated duration of life of the options.

12. Compensation for a delay in withdrawing money or for a delay in transferring money between provident funds or investment tracks

On March 15, 2011, the Commissioner published a circular concerning compensation for a delay in withdrawing money or for a delay in transferring money between provident funds or investment tracks. The circular prescribes the provisions for calculating the compensation.

The financial institutions must implement the provisions with respect to the rules determined in the circular. The compensation shall be paid for applications that were received between June 1, 2008 and December 31, 2008 not through an operating bank, and with respect to complaints that members filed with the management company before March 15, 2011 regarding a delay in implementing their request. The unpaid money must be refunded pursuant to the aforementioned provisions in accordance with the dates specified in the circular.

The Group's management companies are in the process of reviewing historic data and computing the financial implications of the decision in principle.

To implement the decision, the companies recruited manpower specially for carrying out the assignment and developed designated software to handle the matter. Based on project progress and carrying out of the required deployment, the Company (as owners of some of the provident funds managed by the Group) and the management companies made provision in the financial statements.

On September 22, the Commissioner published clarifications and a second update to the decision, stipulating, inter alia, the method of allocation compensation between the transferring fund and the recipient fund in the event of a delay in the transfer of money between provident funds, according to the attached examples. Furthermore, provisions were prescribed for calculating the compensation in respect of the transfer of money between tracks in the same fund, and management companies were obligated to save all the information that serves as the basis for calculating the compensation to which the member is entitled. As a result of this provision, implementation of the instruction in the decision on reporting the findings to the Commissioner (Section 8 C.4 of the ruling) was postponed until November 1, 2011, and the provisions concerning notice given by a recipient fund to a transferring fund on a member's entitlement to compensation (Section 8 D.3 of the ruling) was postponed until October 6, ,611.

13. License to engage in life assurance – Dikla Insurance Company

In March 2011 Dikla's insurer's license was extended to include life assurance – pure risk only. Likewise, Dikla received approval for two insurance plans in the life assurance (risk) branch. The activity of life assurance in Dikla is not marerial.

14. A senior officer who resigned from Harel Insurance

On February 3, 2011 the Company's board of directors confirmed the retirement conditions Mr. Emil Weinshel, who served until his resignation as Chief Deputy to CEO and head of the insurance department, including that a loan that had been given to Mr. Emil Weinshel by Harel Insurance, in the sum of NIS 2,759 thousand, would be repaid by the Company, including the grossing up. In addition, he would receive nine times his current monthly salary (without any social benefits), in return for an undertaking for confidentiality and to refrain from competition for a period of 18 months. Options granted to Mr. Weinshel expired following the end of his served. After the reporting period Mr. Weinshel informed the company that he intends to become CEO "Ayalon Insurance".

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Note 9 - Significant events during the reporting period (contd.)

Subsequent to this announcement, the Company is expected to hold a meeting with Mr. Weinshel regarding the repercussions of the aforementioned appointment on the settlement of accounts under his retirement agreement.

15. Replacement of the company that provides interest quotes

Regarding the replacement of the company that provides interest quotes and the change of the model used to determine the value of the fair value of non-marketable debt assets, see Note 2(B).

16. Debt Settlement of the Greece Government

The Company is the owner of Interasco Societe Anonyme General Insurance Company S.A.G.I (Interasco), an insurance company operating in Greece in the health and non-life insurance sectors.

The Company's management believes that since the financial exposure to the Greek capital market is insignificant, the crisis in Greece will not essential affect the Group's performance.

17. During July 2011 and from now on, the crisis in the capital markets in Israel and worldwide continued and further deteriorated. The crisis was reflected in a sharp drop in share and bond prices, on the background of the lowering of USA's credit rating and the ongoing crisis in the European Union.

As at September 30, 2011, Harel Insurance will be unable to collect variable management fees on yield- dependent policies issued between 1991-2003, until the investment losses in respect of these policies are covered, in the amount of approx. NIS 173 million. As at October 30, 2011, Harel Insurance will be unable to collect variable management fees on yield-dependent policies issued between 1991-2003, until the investment losses in respect of these policies are covered, in the amount of approx. NIS 97.6 million.

18. The effect of the crisis in the capital markets on the mutual funds assets.

Following the capital market crisis in Israel and around the world, during the Reporting Period the volume of mutual fund assets managed by Harel Pia declined. In addition, money was diverted from the traditional funds that generate management fees, to money-market funds on which during the Reporting Period, did not charge management fees. These trends affect the cash flows expected from mutual fund management activity vis-à-vis the Company's forecasts that were made when reviewing the value of reputation attributed to the mutual funds at December 31, 2010, that was made by an external appraiser. Pursuant to a review that the appraiser conducted, based on the balance of the assets managed and the management fees flow predicted at that date, these trends do not necessitate a write down of the balance of the amortized cost of the reputation attributed to mutual funds asset.

Note 10 - Events after the date of the financial statements

1. Harel Share Issues

On November 6, 2011, the Board of Directors of Harel Share Issues resolved to approve Harel Share Issues's intention of filing an application for permission to publish a shelf prospectus, based on the financial statements September 30, 201. For the purpose of submitting the mentioned shelf prospectuses draft, on November 24, 2011, the Board of Directors of Harel Insurance reapproved the financial statements of Harel Insurance for December 31, 2011 and September 30, 2011 in order for these to be enclosed to the sheld prospectus draft. Moreover, the Board of Directors of Harel Share Issues reapproved the financial statements for December 31, 2011 and September 30, 2011 in order for these to be enclosed to the shelf prospectus draft. As of the date of this report, there is no intention to raise additional sums based on the shelf prospectus.

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Note 10 - Events after the date of the financial statements (contd.)

2. Ratification of Harel Insurance's rating

On November 14, 2011, Maalot published a report affirming the rating of Harel Insurance and of subordinated liability notes issued by Harel Share Issues. Following are the ratings affirmed by Maalot:

Rating for Harel Insurance: ilAA+ (stable) Rating for subordinated liability notes issued by Harel Share Issues in November 2006 and that serve as Tier-2 capital for Harel Insurance: ilAA.

Rating of subordinated liability notes, with a mechanism for postponing interest and principal, that were first issued in May 2010, were expanded in July 2010 and expanded again in September 2011, and which serve as complex Tier 2 capital by Harel Insurance. ilAA-2.

3. Retirement agreement for a senior officer

On November 24, 2011, the Company's Board of Directors, after obtaining the approval of the Audit Committee on November 22, 2011 and the approval of the Compensation committee, approved an arrangement with Mr. Moshe (Muki) Abramowitz, a former senior officer of the Company, in connection with the terms of his retirement ("the Retirement Arrangement").

Mr. Abramowitz has held a variety of senior positions in the Group over more than the last 30 years. Mr. Abramowitz held a variety positions including: CEO of Sahar Insurance Company Ltd., joint CEO of Harel Insurance Company Ltd., Chairman of Harel Pension, Chairman of Harel Investment House, director of the Company's subsidiaries abroad that are insurers, etc. His last position was deputy CEO and head of the Group's overseas activity. Mr. Abramowitz stepped down from office for the Group close to the time of reaching the age of retirement.

Following are the details of the retirement arrangement:

Mr. Abramowitz is entitled to severance pay at the amount of 200% (an additional 100% compensation above the compensation stipulated by law), an additional 6 months acclimation period, normative bonus for 2011, acclimation period and pay in lieu of leave as total amount of NIS 2.6 million, and payments against options granted to him in 2009 which expired.

Mr. Abramowitz gave a non-competition and confidentiality undertaking for a period of 48 months, and in return he will be entitled to an amount of NIS 1.2 million per year for four years, without any entitlement to social or related benefits.

The cost of the retirement arrangement is paid partially by the Company and in part by Harel Insurance, based on the allocation of the cost of his employment between the companies in the past.

4. MF Global

On November 1, 2011, bankruptcy proceedings were initiated against MF Global, a company that engages, through a subsidiary, in brokerage in securities overseas. Harel Finance Securities & Trade Ltd. ("Harel Trade & Securities"), a second-tier subsidiary of the Company, acted for its customers vis-à-vis MF Global in futures contracts overseas and traded in European shares. Due to the insolvency proceedings, all of MF Global's activities have been frozen, including the withdrawing of money and securities from its accounts.

Immediately before the insolvency proceedings began, at the instruction of its customers Harel Trade & Securities closed its positions on futures contracts and managed to release the collateral in respect of the positions and to withdraw most of the money from MF Global.

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Note 10 - Events after the date of the financial statements (contd.)

The outstanding exposure of Harel Trade & Securities and its customers to MF Global is NIS 11 million in cash and NIS 1.7 million in shares (including amounts that Harel Trade & Securities asked to withdraw before the bankruptcy proceedings began and which it has not yet received). At this point in time, Harel Trade & Securities is unable to estimate whether these exposed amounts will be paid, when they will paid and at what rate.

5. Amendment of the Company's Articles and indemnify notes

According to the Board's approval from November 3, 2011 and subject to the approval of the proposed amendments to the Company's articles, a recommendation is to be presented to the general meeting on December 8, 2011 to adopt amended indemnity notes, without any change in the limit of the Company's liability, for the senior officers currently serving the Company and those who may serve the Company from time to time (including senior officers who are deemed controlling shareholders or their relatives, as well as senior officers where a controlling shareholder of the Company may be construed as having a personal interest in granting them indemnity notes), the provisions of which correspond with the subjects and matters in respect of which the Company may indemnify its senior officers in accordance with the Administrative Enforcement Law .

6. Directors and Officers [D&O] liability insurance policy

Pursuant to a resolution passed by the general meeting concerning a directors a D&O insurance policy, in view of the increase in the scope of activity by the Group's companies, as well as the taking effect of the enforcement powers law, the Company resolved, subject to obtaining the approval of the general meeting, to increase the limits of cover in the policy so that the new cover will be for USD 120 million per event and in aggregate for the policy period, provided that the annual premium is up to USD 1 million, and that the policy will include cover for risks that may be insured under the enforcement powers law.

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Note 10 - Events after the date of the financial statements (contd.)

a. The limits of liability under the policy shall be no more than USD 150 million per event and combined per policy period, the annual premium shall be no more than one million US dollars, and the Company's Board of Directors and Audit Committee must approve the policy and determine that the annual premium is at market conditions. b. This resolution shall remain in force for 4 years (from the time that the policy is first renewed according to this decision).

This decision constitutes a master resolution, as defined in the Companies (Easements in Transactions with Principal Shareholders) Regulations, 5760-2000, allowing the insurance for directors and officers who are principal shareholders in the Company to be renewed, in line with the conditions specified above.

7. Approval of compensation for Mr. David Granot

For Mr. David Granot's service as Chairman of the Nostro Investments Committee and Chairman of the Compensation Committee of the Harel Group's financial institutions, positions that demand many hours of work and the attending of frequent meetings, as prescribed in the provisions of law that apply to the financial institutions, the Audit Committee and Board of Directors, subject to the approval of the general meeting, approved on November 3, 2011 payment of monthly remuneration of NIS 30,000. This amount is linked to the increase in the Consumer Price Index.

8. Re-approval of the terms of employment of Mr. Yair Hamburger

In addition, Mr. Yair Hamburger is entitled to fringe benefits, including:

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Note 10 - Events after the date of the financial statements (contd.)

If the employment period is terminated before the five years end, but after May 1, 2014, the Audit Committee may approve payment of up to 50% of the additional severance pay for Mr. Yair Hamburger.

9. Re-approval of the terms of employment of Mr. Gideon Hamburger

Pursuant to the recommendations of the Compensation Committee and a resolution passed by the Audit Committee and the Board of Directors, and subject to the approval of the general meeting, as of December 1, 2011, Mr. Gideon Hamburger will receive a monthly salary of NIS 115,000, index linked. Mr. Gideon Hamburger committed himself to an employment period of at least 3 years. Likewise, Mr. Gideon Hamburger made a no-competition undertaking for a period of 36 months from the termination of his employment by the Company.

In addition, Mr. Gideon Hamburger is entitled to fringe benefits, including:

10. Re-approval of the terms of employment of Mr. Yoav Manor

Pursuant to the recommendations of the Compensation Committee and a resolution passed by the Audit Committee and the Board of Directors, and subject to the approval of the general meeting, as of December 1, 2011, Mr. Yoav Manor will receive a monthly salary of NIS 115,000, index linked. Mr. Yoav Manor committed himself to an employment period of at least 3 years. Likewise, Mr. Yoav Manor made a no-competition undertaking for a period of 36 months from the termination of his employment by the Company.

In addition, Mr. Yoav Manor is entitled to fringe benefits, including:

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Note 10 - Events after the date of the financial statements (contd.)

Mr. Yoav Manor will be entitled to an annual bonus for each year as of 2012 that is no more than 7.2 salaries and is calculated on the basis of Harel Hamishmar Computers L.T.D performance )36%( and the Company's (30%) performance for the last three years, with the current year given weight of 67% and the two previous years will be weighted equally (although in the first two years of applying the parameters, weight will only be given to the period commencing December 1, 2012).

11. Transaction with syndicate Broadgate of Lloyd's

On November 15, 2011, the Board of Directors of Harel Insurance approved an agreement with syndicate 1301 of Lloyd's (the Broadgate syndicate) whereby Harel Insurance will take a 10% share of Broadgate's insurance portfolio in the 2012 underwriting year. According to the business plan presented to Harel, during the 2012 underwriting year, Broadgate is expected to have premiums of NIS 600 million, and accordingly the share of Hare Insurance is expected to be NIS 60 million.

As part of the transaction, Harel Insurance will be required to provide a bank guarantee of GBP 7 million in favor of Lloyd's.

The transaction with Broadgate is not expected to significantly affect the performance of Harel Insurance or the Company.

12. Transaction to acquire real-estate in the US.

On October 2, 2011, subsidiaries of the Company that are financial institutions (hereinafter together: "the Subsidiaries"), entered into agreement together with Elco Landmark Residential ( "ELR"), a member of the Elco Holdings Group Ltd., and a foreign investor ( "the foreign investor") in a transaction to acquire real-estate assets in three stages ( "the Portfolio"). The Portfolio consists of 5,659 residential units in 18 housing clusters spread around the south-east USA .

The property is being acquired through companies in which the subsidiaries hold (indirectly, through corporations that are partnerships) 39% of the interests. The rest of the interests in these companies are held by the foreign investor (39%) and ELR (22%), which will also manage the project .

The total cost of acquiring the portfolio is USD 340 million. The Subsidiaries are expected to invest USD 45 million.

The first stage of the transaction to acquire 1,726 residential units, which include 6 of the 18 clusters, in consideration of USD 106 million, was completed on September 28, 2011. The Subsidiaries' share of the equity invested in acquiring the first stage is USD 14 million .

13. Tender for Collective Long-Term Care Insurance

On July 20, 2008, the Commissioner and Clalit Health Services ("Clalit") reached agreement on the sale of Clalit's holdings (35% indirectly) in Dikla. In addition, agreement was reached whereby by August 1, 2011, Clalit will hold a tender in respect of the group long-term care insurance of Clalit's customers who have been insured by Dikla since 1998. 2-74

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Note 10 - Events after the date of the financial statements (contd.)

Pursuant to the aforementioned agreement between the Commissioner and Clalit regarding the tender for long-term care insurance, Clalit expects to publish a tender for the group long-term care insurance policy "Siudi Mushlam" in the near future.

Due to the fact that the collective insurance agreement that was renewed in July 2010 ended on July 31, 2011, an agreement was signed between Clalit and Dikla to extend the collective insurance until January 1, 2012. Pursuant to the foregoing, Clalit and Dikla are expected to sign an agreement concerning an extension of the agreement until May 31, 2012, in which Clalit has the right to curtail the commitment period by giving 60 days advance notice. Likewise, an agreement is expected to be signed regulating the method of handling outstanding claims and the reserve assets for the benefit of the members, after the end of the policy period.

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD

APPENDIXES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements

Appendix A - Harel Insurance Company Ltd., details of assets for yield-dependent contracts and other financial investments a. Assets for yield-dependent contracts The following are details of assets held against insurance contracts and investment contracts presented at fair value through the statement of income: September 30 December 31 2011 2010 2010 (Unaudited) (Unaudited) (Audited)

NIS thousands NIS thousands NIS thousands

Real estate for investment 785,900 601,431 675,313

Financial investments Negotiable debt assets 6,938,195 6,782,770 6,719,816 Non-negotiable debt assets 3,847,755 3,326,251 3,268,908 Shares 2,937,675 3,422,177 3,731,791 Other financial assets 2,923,173 2,485,587 2,869,062

Total financial investments 16,646,798 16,016,785 16,589,577 Cash and cash equivalents 418,742 330,791 642,138 Handled as loans and receivables including bank deposits Non-negotiable debt assets* 267,577 280,719 272,439 Other financial assets 531,927 323,970 309,705

18,650,944 17,553,696 18,489,172

Payables 2,181 2,455 2,226 Financial liabilities** 191,058 63,503 39,052

Financial liabilities - yield dependent contracts 193,239 65,958 41,278

* Assets held contra to liabilities for yield dependent insurance contracts are presented pursuant to the directives of Circular 2-9-2009 at adjusted cost. The fair value of these assets as at September 30, 2011, is NIS 257,994 thousand (as at September 30, 2010 and as at December 31, 2010, NIS 289,751 thousand and NIS 289,588 thousand respectively). ** Mainly derivatives and future contracts.

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements

Appendix A - Harel Insurance Company Ltd., details of assets for yield-dependent contracts and other financial investments (contd.) b. other financial investments at September 30, 2011 (Unaudited)

Reported at fair value, through profit and Available Held to Other debt loss for sale maturity assets Total NIS NIS NIS NIS thousands thousands thousands NIS thousands thousands

Negotiable debt assets 849,642 4,250,568 97,541* - 5,197,751 Non negotiable debt assets - - - 8,614,093 8,614,093 Shares - 471,347 - - 471,347 Other 407,502 843,314 - - 1,250,816

Total 1,257,144 5,565,229 97,541 8,614,093 15,534,007

at September 30, 2010 (Unaudited)

Reported at fair value, through profit and Available Held to Other debt loss for sale maturity assets Total NIS NIS NIS NIS thousands thousands thousands NIS thousands thousands

Negotiable debt assets 797,575 4,508,180 203,029* - 5,508,784 Non negotiable debt assets - - - 7,568,710 7,568,710 Shares - 494,965 - - 494,965 Other 371,787 1,100,849 - - 1,472,636

Total 1,169,362 6,103,994 203,029 7,568,710 15,045,095

at December 31, 2010 (audited) Reported at fair value, through Other debt profit and Available for Held to assets loss sale maturity Total NIS NIS NIS NIS thousands NIS thousands thousands thousands thousands Negotiable debt assets 821,842 4,249,334 203,393* - 5,274,569 Non negotiable debt assets - - - 7,855,205 7,855,205 Shares - 548,413 - - 548,413 Other 458,899 1,157,143 - - 1,616,042

Total 1,280,741 5,954,890 203,393 7,855,205 15,294,229 2-72

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements

* Assets presented at fixed cost. The fair value of these assets as at September 30, 2011, is NIS 96,791 thousand (as at September 30, 2010 and as at December 31, 2010, NIS 203,910 thousand and NIS 204,377 thousand respectively).

Appendix A - Harel Insurance Company Ltd., details of assets for yield-dependent contracts and other financial investments (contd.) b. Details of other financial investments (contd.) 1. Negotiable debt assets

book value Amortized Cost** September 30 December 31 September 30 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands

Government bonds 1,799,812 2,549,102 2,052,897 1,786,878 2,454,911 2,003,134

Other assets Debt assets non-convertible 3,383,479 2,933,098 3,195,714 3,471,511 2,766,844 3,064,236 Debt assets convertible 14,461 26,584 25,957 18,184 25,826 24,547 Total tradable debt asset 5,197,752 5,508,784 5,274,568 5,276,573 5,247,581 5,091,917 Impairment balances credited to profit and loss 11,568 15,352 8,610 * Convertible bonds presented at cost and not at amortized cost. ** Amortized cost - cost less principal payments plus (less) accumulated amortization by the effective interest method on any difference between cost and the repayment amount less any reduction due to impairment in value recorded to the statement of income. 2. Non negotiable debt assets

Book Value Fair Value September 30 December 31 September 30 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands Government bonds Designated bonds 4,003,788 3,627,885 3,732,999 4,839,724 4,540,797 4,599,824 Other bonds 19,063 18,824 17,927 19,630 20,498 19,313

Total government bonds 4,022,851 3,646,709 3,750,926 4,859,354 4,561,295 4,619,137

other debt assets Non-convertible other debt assets 4,591,242 3,922,001 4,104,279 4,430,581 4,231,735 4,384,345 convertible other debt assets ------Total non tradable debt asset 8,614,093 7,568,710 7,855,205 9,289,935 8,793,030 9,003,482 Impairment balances credited to profit and loss 30,033 19,601 19,333

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements

Appendix A - Harel Insurance Company Ltd., details of assets for yield-dependent contracts and other financial investments (contd.) b. Details of other financial investments (contd.) 3. Shares

book value Amortized Cost September 30 December 31 September 30 December 31 2011 2010 2010 2011 2010 2010

(Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands

Marketable shares 371,411 408,414 450,929 334,214 285,218 293,474 Non Marketable shares 99,936 86,551 97,484 83,319 84,902 83,316

Total shares 471,347 494,965 548,413 417,533 370,120 376,790 Permanent impairment aggregate credited to profit and loss 109,618 104,923 105,226

4. Other financial investments

Tradable financial investments 661,511 1,087,515 1,075,693 635,948 1,031,477 1,024,738 Non Tradable financial investments 589,305 385,121 540,349 528,388 293,514 428,353 Total other financial investments 1,250,816 1,472,636 1,616,042 1,164,336 1,324,991 1,453,091 Permanent impairment aggregate credited to profit and loss 86,128 65,066 77,628 Derivatives presented in financial obligations 122,839 26,804 9,127 The other financial investments include mainly investments in exchange traded notes, notes participating in trust funds, investment funds, financial derivatives, forward contracts, options and structured products.

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements

Appendix B - Dikla Insurance Company Ltd., details of assets for yield-dependent contracts and other financial assets a. Assets for yield dependent contracts The following are details of assets held against insurance contracts and investment contracts presented at fair value through the statement of income:

September 30 December 31 2011 2010 2010 (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands

Real estate for investment 41,387 29,688 36,014

Financial investments Negotiable debt assets 762,975 649,629 690,636 Non-negotiable debt assets 279,064 234,790 231,625 Shares 149,242 168,598 184,606 Other financial assets 162,069 158,511 173,482 Total financial investments 1,353,350 1,211,528 1,280,349 Cash and cash equivalents 136,698 106,819 104,691 Other 67,111 35,252 35,970

Total assets for yield dependent contracts 1,598,546 1,383,287 1,457,024 * Designated and measured mainly as loans and receivables. The fair value of these assets as at September 30, 2011 is NIS 269,770 thousand (as at September 30, 2010 and December 31, 2010 - NIS 247,374 thousand and NIS 244,082 thousand respectively).

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements

Appendix B - Dikla Insurance Company Ltd., details of assets for yield-dependent contracts and other financial assets (contd.) b. Details of other financial investments

at September 30, 2011 (Unaudited)

Reported at fair value, Other debt assets through profit and loss Available for sale Total NIS thousands NIS thousands NIS thousands NIS thousands

Negotiable debt assets 373 296,671 - 297,044 Non negotiable debt assets - - 121,599 121,599 Shares - 27,508 - 27,508 Other 18,330 49,642 - 67,972 Total 18,703 373,821 121,599 514,123

at September 30, 2010 (Unaudited)

Reported at fair value, Other debt assets through profit and loss Available for sale Total NIS thousands NIS thousands NIS thousands NIS thousands

Negotiable debt assets 1,221 355,212 - 356,433 Non negotiable debt assets - - 82,833 82,833 Shares - 23,450 - 23,450 Other 24,775 51,036 - 75,811 Total 25,996 429,698 82,833 538,527

at December 31, 2010 (audited)

Reported at fair value, Other debt assets through profit and loss Available for sale Total NIS thousands NIS thousands NIS thousands NIS thousands

Negotiable debt assets 1,339 360,021 - 361,360 Non negotiable debt assets - - 88,995 88,995 Shares - 26,663 - 26,663 Other 27,183 55,781 - 82,964 Total 28,522 442,465 88,995 559,982

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements

Appendix B - Dikla Insurance Company Ltd., details of assets for yield-dependent contracts and other financial assets (contd.) b. Details of other financial investments (contd.) 1. Negotiable debt assets

Government bonds 99,679 211,281 168,987 99,013 204,805 164,252 Other assets Debt assets non- convertible 196,992 143,931 191,034 201,339 135,644 184,495 Debt assets convertible 373 1,221 1,339 566 1,204 1,298 Total tradable debt asset 297,044 356,433 361,360 300,918 341,653 350,045 Impairment balances credited to profit and loss 1,770 1,928 1,323

* Convertible bonds presented at cost and not at amortized cost. ** Amortized cost - cost less principal payments plus (less) accumulated amortization by the effective interest method on any difference between cost and the repayment amount less any reduction due to impairment in value recorded to the statement of income. 2. Non negotiable debt assets

book value Amortized Cost September 30 December 31 September 30 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS Thousands Thousands NIS Thousands Thousands Thousands NIS Thousands Other debt assets Debt assets non- convertible 121,599 82,833 88,995 116,609 86,454 92,031 Total non tradable debt asset 121,599 82,833 88,995 116,609 86,454 92,031 Impairment balances credited to profit and loss 1,190 353 353

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements

Appendix B - Dikla Insurance Company Ltd., details of assets for yield-dependent contracts and other financial assets (contd.) b. Details of other financial investments – contd. 3. Shares

book value Amortized Cost September 30 December 31 September 30 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS NIS Thousands Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands Marketable shares 23,257 19,975 22,600 22,313 13,960 14,907 Non Marketable shares 4,252 3,476 4,063 3,518 3,624 3,502 Total shares 27,509 23,451 26,663 25,831 17,584 18,409 Impairment balances credited to profit and loss 5,925 5,664 5,696

4. Other financial investments

Tradable financial investments 35,731 50,700 53,458 34,871 45,380 48,293 Non Tradable financial investments 32,240 25,111 29,507 29,676 20,273 25,965 Total other financial investments 67,791 75,811 82,965 64,445 64,547 74,258 Permanent impairment aggregate credited to profit and loss 4,429 3,729 4,585 Other financial investments include mainly investments in exchange traded notes, participation in mutual funds certificates, investment funds, financial derivatives, forward contracts, options and structured products.

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Appendix C - E.M.I Mortgage Insurance Company Ltd. - Details of other financial investments at September 30, 2011 (Unaudited)

Reported at fair value, Available for Other debt through profit and loss sale assets Total NIS thousands NIS thousands NIS thousands NIS thousands

Negotiable debt assets - 581,222 - 581,222 Non negotiable debt assets - - 96,266 96,266 Shares - 30,073 - 30,073 Other 7,061 40,102 - 47,163 Total 7,061 651,397 96,266 747,663

at September 30, 2010 (Unaudited)

Reported at fair value, Available for Other debt through profit and loss sale assets Total NIS thousands NIS thousands NIS thousands NIS thousands

Negotiable debt assets - 674,815 - 674,815 Non negotiable debt assets - - 26,731 26,731 Shares - 30,398 - 30,398 Others 666 11,017 - 11,683 Total 666 716,230 26,731 742,961

at December 31, 2010 (audited)

Reported at fair value, Available for Other debt through profit and loss sale assets Total NIS thousands NIS thousands NIS thousands NIS thousands

Negotiable debt assets - 634,100 - 634,100 Non negotiable debt assets - - 48,848 48,848 Shares - 35,202 - 35,202 Other 4,912 32,601 - 37,513 Total 4,912 701,903 48,848 750,751

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Appendix C - E.M.I Mortgage Insurance Company Ltd. - Details of other financial investments 1. Negotiable debt assets

book value Amortized Cost* September 30 December 31 September 30 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands

Government bonds 284,066 469,335 387,410 278,323 448,302 370,776

Other debt instruments other debt instruments, non convertible 297,156 205,480 246,690 302,294 195,825 238,773 Total marketable debt 581,222 674,815 634,100 580,617 644,127 609,549 Impairment balances credited to profit and loss 4,938 4,532 4,390

* Amortized cost - cost less payments of principal plus (less) accumulated amortization by the effective interest method of any difference between the cost of repayment less any amortization due to an impairment in value recorded to the statement of income.

2. Non negotiable debt assets

other debt assets Non-convertible other debt assets 96,266 26,731 48,848 91,242 28,676 50,274 Total non tradable debt asset 96,266 26,731 48,848 91,242 28,676 50,274 3. Shares

Tradable shares 30,073 30,398 34,513 31,149 30,196 31,139

Total shares 30,073 30,398 34,513 31,149 30,196 31,139 Impairment balances credited to profit and loss 6,443 2,522 2,349

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Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Appendices to the condensed interim and consolidated financial statements

Appendix C -E.M.I Mortgage Insurance Company Ltd. - Details of other financial investments (contd.)

4. Other financial investments

book value Cost September 30 December 31 September 30 September 30 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands

Tradable financial investments 34,508 11,466 29,244 35,036 10,914 29,302 Non Tradable financial investments 12,655 217 8,269 12,659 - 7,241 Total other financial investments 47,163 11,683 37,513 47,695 10,914 36,543 Derivatives presented in financial obligations 786 - - Other financial investments include mainly investments in exchange traded notes, participation in mutual funds certificates, investment funds, financial derivatives, forward contracts, options and structured products.

2-80 WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

Harel Insurance Investments and Financial Services Ltd.

Financial data from the interim consolidated statements relating to the Company itself As at September 30, 2011

3-1

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

Somekh Chaikin KPMG Millennium Tower Telephone: 03-684 8000 17 Ha'arbaa Street, P.O. Box 609 Fax: 03-684 8444 Tel-Aviv 61006 Internet: www.kpmg.co.il

To: The shareholders of Harel Insurance Investments and Financial Services Ltd. 3 Abba Hillel Street, Ramat Gan

Dear Sirs,

Re: Special Auditor's Report on Interim Separate Financial Information pursuant to Regulation 38D of the Securities Regulations (Periodic and Immediate Reports) - 1970.

Introduction We reviewed the separate interim financial information presented pursuant to Regulation 38d of the Securities Regulations - 1970 of Harel Insurance Investments and Financial Services Ltd. (hereinafter - “the Company”) as at September 30, 2011 and for nine and three months period ended on that date. The separate interim financial information is the responsibility of the Company’s Board of Directors and Management. Our responsibility is to express a conclusion on the separate interim financial information for the interim period, based on our review.

We did not reviewed the condensed financial information to the interim period of investee companies, and of consolidated companies that are consolidated by the proportional consolidation, in which the investment in them is NIS 485,848 thousand as at September 30, 2011, and the Company’s share in their profits is NIS 5,584 thousand and NIS and NIS 2,475 thousand to the nine months and three months period ended on that date. The condensed interim financial information of these companies was reviewed by other auditors, whose reviewed reports were furnished to us, and our conclusion, to the extent that it relates to the amounts included for those subsidiaries, is based on the reviewed reports of the other auditors.

Scope of the review We performed our review in accordance with Review Standard 1 of the Institute of Certified Public Accountants in Israel “Review of financial information for interim periods performed by the entity’s auditor”. The review of the separate financial information for interim periods comprises clarifications, mainly with the people responsible for financial and accounting matters, and from adopting analytical and other review procedures. A review is far more limited in scope than an audit performed in accordance with generally accepted auditing standards, and therefore does not enable us to be confident that we will know of all the significant matters which could have been identified in an audit. Consequently, we are not issuing an opinion of an audit.

Conclusion Based on our review, nothing came to our notice which would cause us to think that the separate interim financial information is not in all material aspects, in accordance with the provisions of Regulation 38d of the Securities Regulations (Periodic and Immediate Reports) - 1970.

Somekh Chaikin Certified Public Accountants November 24, 2011

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements on the financial position as at

September 30 December 31'

2011 2010 2010 (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands Assets Intangible assets 353 852 713 Fixed assets 2,000 2,571 2,286 Investments in investee companies 3,298,696 3,391,215 3,470,200 Loans to investee companies 44,997 210,508 153,625 Real estate for investment 17,421 17,369 17,370 Other receivables 105,149 18,345 14,580 Other financial investments Marketable debt assets 30,061 152,975 151,875 Non marketable debt assets 3,581 3,238 3,315 Shares - 52 61 Others 307,015 125,364 120,202 Total financial investments and others 340,657 281,629 275,453 Cash and cash equivalents 46,086 36,551 99,929 Total assets 3,837,589 3,959,040 4,034,156

Capital Share capital and premium on shares 306,830 306,224 306,691 Treasury stock (139,608) (137,753) (138,625) Capital reserves 21,865 257,480* 229,126 Retained earnings 3,218,536 3,081,196* 3,181,178 Total capital 3,407,623 3,507,147 3,578,370

Liabilities Liabilities for deferred taxes 5,588 6,351 4,995 Liabilities for benefits to employees 2,383 3,761 4,211 Other payables 23,167 37,508* 23,378* Liabilities for current taxes 5,296 4,051 10,062 Financial liabilities 393,532 400,222* 413,140* Total liabilities 429,966 451,893 455,786 Total liabilities and capital 3,837,589 3,959,040 4,034,156

Y. Hamburger M. Siboni S. Alkabetz R. Agassi Chairman of the Board of Company's joint CEO Company's joint CEO Deputy Chief Executive Directors Officer and Chief Financial Officer Date of Approval of the Financial Statements: November 24, 2011. * Regarding reclassification see Note 1(d).

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements of income

For the nine months ended for the year For the three months ended ended September 30, 2011 September December 31' 2011 2010 2011 2010 2010 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (audited) NIS NIS NIS NIS thousands thousands thousands thousands NIS thousands Profits from investments, net, and financing revenues 18,058 10,892 6,702 3,651 13,671 Revenues from management fees 51,672 46,401 17,159 15,055 63,039 Other revenues 4,966 - - - -

Total revenues 74,696 57,293 23,861 18,706 76,710 General and administrative expenses 18,810 25,974 8,337 9,737 35,925 Other expenses 5,000 111 54 111 76 Financing expenses 16,357 12,418 5,657 4,329 17,210

Total expenses 40,167 38,503 14,048 14,177 53,211

Company's shares in profits (losses) of investee companies 116,333 352,418 (69,683) 166,367 511,550 Income (loss) before taxes on income 150,862 371,208 (59,870) 170,896 535,049 Taxes on income (tax benefit) 7,504 4,964 1,267 1,028 5,224 Income (loss) for the year relating to the Company's shareholders 143,358 366,244 (61,137) 169,868 529,825

* Regarding reclassification see Note 1(d).

3-4

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated comprehensive profit

For the nine months ended for the year For the three months ended ended September 30, 2011 September 30, 2011 December 31, 2011 2010 2011 2010 2010 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (audited) NIS NIS NIS NIS thousands thousands thousands thousands NIS thousands

Income (loss) for the year 143,358 366,244 (61,137) 169,868 529,825 Other comprehensive income (loss): Net changes in fair value of financial assets classified as available for sales 7,971 2,885 3,475 (435) (970) Net changes in fair value of financial assets classified as available for sale transferred to the statement of income (11,289) 311 (3,866) 311 622 Loss from impairment in value of financial assets available for sale transferred to the statement of income - 93 - 24 - Taxes on income relating to components of other comprehensive income (loss) 956 * (593) 90 24 * 280 Foreign currency translation differences for foreign operations 8,722 (2,786) 7,063 2,160 * (3,160) The Grop share in the comprehensive income (loss) of investee companies (219,779) * 57,676 (107,664) * 50,941 * 29,052 Other comprehensive income (loss) for the year (213,419) 57,586 (100,902) 53,025 25,824 Total income (loss) for the year Attributed to the company's owners (70,061) 423,830 (162,039) 222,893 555,649

* Regarding reclassification see Note 1(d).

3-5

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Financial data from the condensed interim financial statements of changes in capital

Capital reserve for Translation Capital Capital financing reserve reserve Transaction reserve for Share assets from for share s with non- revaluation of Balance of capital and available overseas based Treasury controlling investment retained premium for sale operations payments stock interests real estate earnings Total NIS NIS NIS NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands thousands thousands thousands

For the Nine months ended September 30, 2011 (Unaudited)

Balance as at December 31, 2010 306,691 263,835 (45,660) (14,240) 18,810 (138,625) 6,381 3,181,178 3,578,370

Comprehensive income for year Profit for year ------143,358 143,358 Total other comprehensive income (loss) - (224,838) - 8,722 - - 2,697 - (213,419) Total comprehensive income for year - (224,838) - 8,722 - - 2,697 143,358 (70,061) Transactions with owners credited directly to equity Dividends paid ------(106,000) (106,000) Share based payment - - - - 9,406 - - - 9,406 Purchase of treasury stock 139 - - - - 6,189 - - 6,328 Reissuing of treasury stock - - - - - (7,172) - - (7,172) - - (12) - - - - - (12) - - (3,236) - - - - - (3,236)

Balance as at September 30, 2011 306,830 38,997 (48,908) (5,518) 28,216 (139,608) 9,078 3,218,536 3,407,623 3-6

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Financial data from the condensed interim financial statements of changes in capital (cont'd)

Capital Capital reserve for Translation reserve for financing reserve Capital Transactions revaluation Share assets from reserve for with non- of Balance of capital and available for overseas share based Treasury controlling investment retained premium sale operations payments stock interests real estate earnings Total NIS NIS NIS NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands thousands thousands thousands For the three months ended September 30, 2011 (Unaudited) Balance as at March 31, 2011 307,649 146,962 (45,660) (12,581) 24,790 (139,446) 9,078 3,279,673 3,570,465 Comprehensive income for year ------Profit for year ------(61,137) (61,137) Total other comprehensive income (loss) - (107,965) - 7,063 - - - - (100,902) Total comprehensive income for year - (107,965) - 7,063 - - - (61,137) (162,039) Transactions with owners credited directly to equity Dividends paid ------Share based payment - - - - 3,426 - - - 3,426 Purchase of treasury stock (819) - - - - 910 - - 91 Reissuing of treasury stock - - - - - (1,072) - - (1,072) - - (12) - - - - - (12) - - (3,236) - - - - - (3,236) Balance as at September 30, 2011 306,830 38,997 (48,908) (5,518) 28,216 (139,608) 9,078 3,218,536 3,407,623

3-7

Capital reserve Capital for reserve for financing Translation Capital Transactions revaluation Balance assets reserve from reserve for with non- of of Share capital available overseas share based Treasury controlling investment retained and premium for sale operations payments stock interests real estate earnings Total NIS NIS NIS NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands thousands thousands thousands

Balance as at December 31, 2009 140,196 229,645 - (3,741) 4,329 (90,231) 4,248 2,822,005 3,106,451 Comprehensive income for year Profit for year ------366,244 366,244 Total other comprehensive income (loss) - 57,949 - (2,786) - - 2,423 - 57,586 Total comprehensive income for year - 57,949 - (2,786) - - 2,423 366,244 423,830 Transactions with owners credited directly to equity

Dividends paid ------(107,053) (107,053) Acquisition of rights do not grant control 165,700 - (45,660) - - - - - 120,040 Share based payment - - - - 11,073 - - - 11,073 Purchase of treasury stock 328 - - - - 11,052 - - 11,380 Reissuing of treasury stock - - - - - (58,574) - - (58,574)

Balance as at September 30, 2010 306,224 287,594 (45,660) (6,527) 15,402 (137,753) 6,671 3,081,196 3,507,147 * Regarding reclassification see Note 1(d).

3-8

Capital Capital reserve for Translation reserve for financing reserve Capital Transactions revaluation Share assets from reserve for with non- of Balance of capital and available overseas share based Treasury controlling investment retained premium for sale operations payments stock interests real estate earnings Total NIS NIS NIS NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands thousands thousands thousands Balance as at March 31, 2010 306,236 236,729 (45,660) (8,687) 10,666 (100,375) 6,671 2,911,328 3,316,908 Comprehensive income for year Profit for year ------169,868 169,868 Total other comprehensive income (loss) - 50,865* - 2,160* - - - - - Total comprehensive income - 50,865 - 2,160 - - - 169,868 169,868 Transactions with owners credited directly to equity Share based payment - - - - 4,736 - - - 4,736 Acquisition of rights do not grant control ------Purchase of treasury stock (12) - - - - 6,505 - - 6,493 Reissuing of treasury stock - - - - - (43,883) - - (43,883) Balance as at September 30, 2010 306,224 287,594 (45,660) (6,527) 15,402 (137,753) 6,671 3,081,196 3,454,122

* Regarding reclassification see Note 1(d).

3-9

Capital Capital reserve for Translatio Capital reserve for financing n reserve reserve for Transaction revaluatio Share assets from share s with non- n of Balance of capital and available overseas based Treasury controlling investment retained premium for sale operations payments stock interests real estate earnings Total NIS NIS NIS NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands thousands thousands thousands

Balance as at December 31, 2009 140,196 229,645 - (3,741) 4,329 (90,231) 4,248 2,822,005 3,106,451

Comprehensive income for year Profit for year ------529,825 529,825 Total other comprehensive income (loss) - 34,190 - (10,499) - - 2,133 - 25,824 Total comprehensive income for year - 34,190 - (10,499) - - 2,133 529,825 555,649 Transactions with owners credited directly to equity Share based payment - - - - 14,481 - - - 14,481 Dividends paid ------(170,652) (170,652) Acquisition of minority interests 165,700 - (45,660) - - - - - 120,040 Purchase of treasury stock 795 - - - - 12,140 - - 12,935 Reissuing of treasury stock - - - - - (60,534) - - (60,534) Balance as at December 31, 2010 306,691 263,835 (45,660) (14,240) 18,810 (138,625) 6,381 3,181,178 3,578,370

3-11

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

el Insurance Investments and Financial Services Ltd. Financial data from the interim consolidated statements of cash flows

For the Nine months ended For the three months for the year ended ended

September 30, 2011 September 30, 2011 December 31' 2011 2010 2011 2010 2010 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (audited) NIS NIS NIS NIS Appendix Thousands Thousands Thousands Thousands NIS Thousands Cash flows from operating activities Before taxes on income A (78,476) 20,458 (87,128) (8,795) 44,736 Income tax (paid) refund (5,800) (4,044) (3,400) (2,550) (5,494) Net cash provided by operating activities (84,276) 16,414 (90,528) (11,345) 39,242

Cash flows from investing activities

Investment in investee companies (26,368) (34,093) 15,227 (17,650) (60,728) Investment in fixed assets (43) (1,577) (24) (1,576) (1,586) Proceeds from realizing fixed assets 100 307 - 307 600 Investment in intangible assets (23) (143) (4) - (181) Acquisition of real estate for investment - (478) - (114) (479) Dividends from investee companies 55,200 250,000 - - 350,360 Net Financial investments (2,908) (237,599) 62,981 37,845 (234,268) Loans to investee companies (47,993) (133,127) - (11,000) (171,215) Repayment of loans given to investee companies 158,466 270,897 85 10,739 339,833 Net cash provided by (used for) investing activities 136,431 114,187 78,265 18,551 222,336

Cash flows from financing activities Dividends paid (106,000) (107,053) - - (170,652) Purchase of treasury stock - (35,965) - (35,965) (35,965) Repayment of loans to banks and others - - - - (4,000) Net cash provided by (used for) financing activities (106,000) (143,018) - (35,965) (210,617) Increase (decrease) in cash and cash equivalents, net (53,844) (12,417) (12,262) (28,759) 50,961 Cash and cash equivalents at beginning of year 99,929 48,968 58,347 65,310 48,968 Cash and cash equivalents at end of year 46,085 36,551 46,085 36,551 99,929

3-11

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements of cash flows

For the Nine months ended For the three months ended for the year ended December September 30, 2011 September 30, 2011 31' 2011 2010 2011 2010 2010 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands Appendix A – Cash flows from operating activities before taxes on income Profit (loss) relating to the Company's shareholders 143,358 366,244 (61,137) 169,868 529,825

Items which are not connected with cash flows Company's shares in revenues of investee companies handled by the straight-line method (116,333) (352,418) 69,683 (166,367) (511,550) Net profits from financing activities 12,518 (6,855) 14,757 (7,880) (7,090) Financing expenses, net (23,535) 4,826 (7,148) 3,245 5,421 Taxes on income 7,504 4,964 1,267 1,028 5,224 Depreciation and amortization 592 823 141 299 1,019 Proceeds from realizing fixed assets 20 110 - 110 92 Share-based payment 1,407 1,075 409 356 1,438

Changes in other balance sheet items Other receivables (15,569) 1,990 (14,484) 2,329 11,693 Other payables 1,819 (1,837) (10,290) 185 505 Changes in items of current and deferred taxes (5,877) 461 2,056 (13,069) 6,634 Liabilities for benefits to employees, net (84,380) 1,075 (82,382) 1,101 1,525

Total adjustments required to present cash flows from operating activities (221,834) (345,786) (25,991) (178,663) (485,089)

Total cash flows from operating activities before taxes on income (78,476) 20,458 (87,128) (8,795) 44,736

3-12

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements

Note 1 - Method of preparing the financial information from the Company's consolidated financial statements relating to the Company itself a. General

The financial information from the consolidated interim statements relating to the Company itself are presented in accordance with Regulation 38D of the Securities Regulations (Periodic and Immediate Reports) - 1970, and do not include all the information required in Regulation 9C and in the details required in the Tenth Addendum of the Securities Regulations (Periodic and Immediate Reports)-1970 regarding corporate separate financial information. The financial information from the condensed consolidated interim statements relating to the Company itself must be read together with the financial information from the condensed consolidated interim statements relating to the Company itself for the day and year ended on December 31, 2010, and together with the condensed consolidated financial statements for September 30, 2011. b. Definitions The Company - Harel Insurance Investments and Financial Services Ltd. Investee companies - Subsidiaries, subsidiaries by proportional consolidation and companies in which the Company's investment in them is included, directly or indirectly, in the financial statements by the equity method. Date of report - Date of the statement of financial condition. c. Method of preparing the financial data The separate financial data was prepared in accordance with the accounting principles detailed in Note 1 to the separate yearly financial statements of the Company. d. Reclassified During the Reporting Period, the Company included a reclassification of a capital fund in respect of a revaluation of investment real estate that was moved from the surpluses to a separate fund in the report on changes in equity. In addition, the interest was reclassified for payment of financial obligations. The changes in classification had no effect on the Company's equity or profit.

Note 2 - Relation, commitments and significant transactions with investee companies

1. In February, 2011, Harel Pia raised a loan of NIS 80 million from a bank. The loan is for a 5-year period, where the principal and interest are to be repaid in quarterly installments, as of June 2011. The loan was taken to repay a loan that Harel Pia took from the Company. To obtain the credit, Harel Pia and Harel Finance gave liens to the bank. Moreover, the loan agreement prescribes financial criteria, which if violated, entitle the bank to demand immediate repayment of the loan. These financial criteria mostly address the volume of revenues from management fees and the rate of available cash flow relative to repayment of the loan.

On February 10, 2011, the Company and Harel Finance signed an agreement whereby from the balance of the loans that Harel Investments had extended to Harel Finance, which at that date were NIS 54 million, an amount of NIS 36 million will be converted to a capital note. Accordingly, Harel Finance issued a capital note to Harel Investments in the aforesaid amount, with no repayment date, no interest or linkage.

2. On January 1, 2010 Bar Tvai Ltd., a subsidiary owned of the Company, issued the Company a non- bearing interest liability note in exchange of NIS 25.3 million. On July 19, 2011 the parties have agreed upon partial repayment of the liability note and Bar Tvai payed the Company a total of NIS 16.5 million.

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements

Note 3- Significant events during the period of report

1. A senior officer who resigned from Harel Insurance

On February 3, 2011 the Company's board of directors confirmed Mr. Weinshel's retirement conditions including loan that had been given to Mr. Emil Weinshel, in the sum of NIS 2,759 thousand, would be repaid by the Company, including the grossing up. In addition, he would receive nine times his current monthly salary (without any social benefits), in return for an undertaking for confidentiality and to refrain from competition for a period of 18 months. Options granted to Mr. Weinshel expired following the end of his served.

2. Conditions of employment for the CEO of Harel Insurance and joint CEO of Harel Investments

Pursuant to the specified in Note 41 to the periodic report, on March 23, 2011, the Company's Board of Directors approved a revision to the terms of employment of Mr. Michel Siboni. Accordingly, Mr. Siboni's current monthly salary will be NIS 170,000, linked to the CPI (instead of NIS 150,000 linked to the CPI, as approved on November 30, 2009), effective from January 1, 2011.

As a result of his appointment as joint CEO of the Group, Mr. Siboni's status and the considerable knowledge he will accumulate when serving in this position will privilege him to much information about the Company and its subsidiaries. The Board of Directors takes a serious view of the fact that Mr. Siboni will be in possession of such information and that should he terminate his position he must refrain from competing against the Company's key businesses, particularly in the health insurance sector in which the Group is Israel's most prominent insurance company. The Board of Directors therefore approved payment of NIS 5 million, linked to the CPI, to Mr. Siboni in return for his commitment to refrain from competition should the employment relationship terminate. This non-competition clause will be in force for a period of 7 years (instead of 5 years as defined previously), during which time, he will be prohibited from serving as CEO of an insurance company in Israel or serving as a health insurance consultant.

3. Terms of employment for the joint CEO of Harel Investments

Pursuant to the specified in Note 41 to the periodic report, on March 23, 2011, the Company's Board of Directors approved a revision to the terms of employment of Mr. Alkabetz. Pursuant to the revised conditions, Mr. Alkabetz' current wage, which is paid against a tax invoice and for which he is therefore not entitled to any social benefits, will be NIS 300,000 a month, linked to the CPI (instead of NIS 208,000 linked to the CPI, as approved in July 2010).

As a result of his appointment as joint CEO of the Group, Mr. Alkabetz' status and the considerable knowledge he will accumulate when serving in this position will privilege him to much information about the Company and its subsidiaries. The Board of Directors takes a serious view of the fact that Mr. Alkabetz will be in possession of such information and that should he terminate his position he must refrain from competing against the Company's key businesses. The Board of Directors therefore approved payment of NIS 2 million, linked to the CPI, to Mr. Alkabetz in return for his commitment to refrain from competition should the employment relationship terminate.This non-competition clause will be in force for a period of 6 years, during which time, he will be prohibited from serving as CEO of an insurance or finance group in Israel or serving as an insurance and finance consultant.

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements

Note 3- Significant events during the period of report (cont'd)

4. Distribution of Dividend

On March 23, 2011, the Company's Board of Directors decided to distribute a cash dividend of NIS 64 million. The Board of Directors' decision was made after taking into account the Company's financial results for the Reporting Period. The directors were presented with the Company's distributable surpluses at December 31, 2010, which amount to NIS 3.5 billion. The Board of Directors reviewed the Company's compliance with the profit test and the solvency tests that, in Section 203(a) of the Companies Law, and subsequently confirmed that the Company was in compliance with the distribution tests.

The dividend was paid on April 28, 2011.

On May 26, 2011, the Company's Board of Directors decided to distribute a dividend of NIS 42.4 The decision of the board of directors was reached after the financial results of the Company for the Reporting Period was presented before it and was taken under consideration. The board of directors was presented with surpluses that were suitable for distribution by the Company as of March 31, 2011, at the sum of approx. NIS 3.2 billion. The board of directors examined the Company's net profit criteria and the solvency criteria as prescribed in Section 203 (A) to the Companies Law and following this examination it approved the compliance of the Company with the criteria for distribution.

The dividend was paid on June 22, 2011

5. On May 14, 2007, the Company entered into agreement with Israel Credit Cards Ltd. ("CAL"), to set up a joint company that would give credit to customers ("the Joint Venture"). On August 30, 2009, the parties signed an agreement for the Company to leave the Joint Venture, due to the fact that the regulatory permission required to set up the joint company was not forthcoming. According to the aforementioned agreement, a mechanism for the final settlement of accounts regarding the results of the Joint Venture's activity was determined in respect of the period up to June 2011, so that after this date the parties will have no more accounts to be settled in connection with the activity of the Joint Venture. By virtue of this agreement, during the Reporting Period, the Company received payment of NIS 4 million from CAL.

6. Distribution of Dividend in Dikla

On September 25, 2011, the Board of Directors of Dikla decided to distribute a cash dividend of NIS 75 million. The decision was made after the Board examined Dikla's surpluses and capital requirements, in accordance with Dikla's capital management policy.

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements

Note 3- Significant events during the period of report (cont'd)

7. Allotment of share options to employees

On March 15, 2011, after first obtaining approval from the Company's Compensation Committee, the Company's Board of Directors approved an allotment of 47,047 stock options to 11 recipients. The

exercise price of the options was determined according to the closing price of the Company's shares on the TASE, immediately prior to the Board of Directors decision, that is NIS 191.6 per share.

The fair value of the option warrants granted as aforementioned is estimated by applying a binomial model to the costing of the options. The following parameters are used in applying the model:

Expected fluctuations in the price of the share ..34% Risk-free interest rate 53.%

The risk-free interest rate is determined based on linked shekel government bonds, where the remainder of the period equals the anticipated duration of life of the options.

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements

Note 3- Significant events during the period of report (cont'd)

option offered to the recipients, taking into account leaving rates and the probability of exercising of the option at an earlier date, where the Board of Directors set the exercise

price at NIS 172.5 per option linked to the CPI, is NIS 59 at the date of granting the stock options, March 26, 2011. The value of these options will be credited as an expense to the Company's financial statements over the anticipated vestment period of the options, from the beginning of the year 2011.

The fair value of the option warrants granted as aforementioned is estimated by applying a binomial model to the costing of the options. The following parameters are used in applying the model:

Expected fluctuations in the price of the share ..% Risk-free interest rate 538%

Note 10- Significant events after the period of report

Retirement agreement for a senior officer

Following are the details of the retirement arrangement:

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements

Note 10- Significant events after the period of report (cont'd)

The cost of the retirement arrangement is paid partially by the Company and in part by Harel Insurance, based on the allocation of the cost of his employment between the companies in the past.

Investment House, director of the Company's subsidiaries abroad that are insurers, etc.), the retirement arrangement is reasonable and fitting and does not contravene the Company's interests.

2. Amendment of the Company's Articles and indemnify notes

therein, and subject to conditions stipulated therein, where the amount of the indemnity is limited to 20% of the Company's equity according to the last financial statement published prior to the actual date of payment of the indemnity, and this to the senior officers severally and together, for an individual case and in aggregate ("the Existing Indemnity Notes")3

3. Directors and Officers [D&O] liability insurance policy

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements

Note 10- Significant events after the period of report (cont'd)

This decision constitutes a master resolution, as defined in the Companies (Easements in Transactions with Principal Shareholders) Regulations, 5760-2000, allowing the insurance for directors and officers who are principal shareholders in the Company to be renewed, in line with the conditions specified above3

4. Approval of compensation for Mr. David Granot

5. Re-approval of the terms of employment of Mr. Yair Hamburger

In addition, Mr. Yair Hamburger is entitled to fringe benefits, including:

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements

Note 10- Significant events after the period of report (cont'd)

current year given weight of 67% and the two previous years will be weighted equally (although in the first two years of applying the parameters, weight will only be given to the period commencing December 1, 2012). The parameters for calculating the bonus are based on the parameters prescribed for the CEO of Harel Insurance.

Subject to completing the 5-year employment period at least, upon terminating his employment for the Company, Mr. Yair Hamburger will be entitled to double severance pay, i.e. an additional 100%

compensation (over and above the compensation stipulated by law). If the employment period is terminated before the five years end, but after May 1, 2014, the Audit Committee may approve payment of up to 50% of the additional severance pay for Mr. Yair Hamburger.

6. Re-approval of the terms of employment of Mr. Gideon Hamburger

Pursuant to the recommendations of the Compensation Committee and a resolution passed by the Audit Committee and the Board of Directors, and subject to the approval of the general meeting, as of December 1, 2011, Mr. Gideon Hamburger will receive a monthly salary of NIS 115,000, index linked. Mr. Gideon Hamburger committed himself to an employment period of at least 3 years. Likewise, Mr. Gideon Hamburger made a no-competition undertaking for a period of 36 months from the termination of his employment by the Company.

In addition, Mr. Gideon Hamburger is entitled to fringe benefits, including:

7. Re-approval of the terms of employment of Mr. Yoav Manor

Pursuant to the recommendations of the Compensation Committee and a resolution passed by the Audit Committee and the Board of Directors, and subject to the approval of the general meeting, as of December 1, 2011, Mr. Yoav Manor will receive a monthly salary of NIS 115,000, index linked. Mr. Yoav Manor committed himself to an employment period of at least 3 years. Likewise, Mr. Yoav Manor made a no- competition undertaking for a period of 36 months from the termination of his employment by the Company.

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements

Note 10- Significant events after the period of report (cont'd)

In addition, Mr. Yoav Manor is entitled to fringe benefits, including:

Mr. Yoav Manor will be entitled to an annual bonus for each year as of 2012 that is no more than 7.2 salaries and is calculated on the basis of Harel Hamishmar Computers L.T.D performance )07%( and the Company's (30%) performance for the last three years, with the current year given weight of 67% and the two previous years will be weighted equally (although in the first two years of applying the parameters, weight will only be given to the period commencing December 1, 2012).

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9

Harel Insurance Investments & Financial Services Ltd.

Chapter 4

Report concerning the effectiveness of internal control over financial reporting and disclosure

WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd.

Quarterly report concerning the effectiveness of the internal control over financial reporting and disclosure as per Article 38c (a) Under the oversight of the Board of Directors of Harel Insurance Investments and Financial Services Ltd. ("the Corporation"), management is responsible for defining and maintaining due internal control over the Corporation's financial reporting and disclosure. In this instance, management consists of: (a) Joint CEOs: Mr. Michel Siboni, who also serves as CEO of Harel Insurance Ltd. and chairs the boards of directors of the Group's subsidiaries that are financial institutions. Mr. Shimon Alkabetz, who also chairs the board of directors of Harel Finance Holdings Ltd., chairs the board of directors of Pia Mutual Funds Ltd. and holds other positions in the Group's companies. (b) Mr. Ronen Agassi – the Company's CFO, deputy CEO and head of the finance and resources division of Harel Insurance Company Ltd. (c) Mr. Sami Babkov – CEO of Harel Finance Holdings and CEO of Harel Pia Mutual Funds Ltd. (d) Mr. Avi Keller, CEO of Dikla Insurance Company Ltd. (e) Mr. Dan Bar-On, deputy CEO of Harel Insurance Company Ltd., Chief Actuary and risk manager for Harel Insurance Company Ltd. (f) Mr. Hanan Friedman, legal advisor to the Corporation and the Group's companies, deputy CEO of Harel Insurance Company Ltd. (g) Mr. Amir Hessel, VP of the Corporation and manager of the Group's investments, deputy CEO and manager of the investment division of Harel Insurance Company Ltd. Internal control over financial reporting and disclosure includes the Corporation's existing controls and procedures that were planned by the general manager and the most senior financial officer or are monitored by them or by the person who actually performs these duties, under the oversight of the Corporation's board of directors. The purpose of the controls and procedures is to provide a reasonable measure of assurance certainty regarding the reliability of financial reporting and the preparation of the financial statements pursuant to the provisions of the law, and to ensure that the information that the Corporation is required to disclose in its published reports in accordance with the provisions of the law, is collected, processed, summarized and reported on the dates and in the format prescribed by law. Among other things, the internal control consists of controls and procedures designed to ensure that the information that the corporation is required to disclose, as noted, is accumulated and transferred to the Corporation's management, including to the CEO and most senior financial officer, or to the person who actually performs these duties, in an effort to ensure that decisions aremade at the appropriate time, with respect to the disclosure requirement. Due to its inherent limitations, internal control over financial reporting and disclosure may not provide absolute assurance regarding the prevention or detection of misstatements. Harel Insurance Company Ltd. and Dikla Insurance Company Ltd., subsidiaries of the

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd.

Corporation, are financial institutions governed by the instructions of the Superintendent of the Capital Market, Insurance and Savings Division at the Ministry of Finance, regarding the assessment of the effectiveness of the internal control over financial reporting. With respect to internal control in the aforementioned subsidiaries, the corporation implements the following instructions:  Financial institutions Circular 2010-9-7 from November 2010 – "Internal control over financial reporting – attestations, statements, and disclosures";  Financial institutions Circular 2010-9-6 from November 2010 – "Management's responsibility for the internal control over financial reporting – Amendment" (amendment to Financial institutions Circular 2009-9-10);  Financial institutions Circular 2009-9-10, from June 2009 – "Management's responsibility for the internal control over financial reporting"; In the Quarterly report concerning the effectiveness of the internal control over financial reporting and disclosure that is included in the Quarterly Report for the period ended June 30, 2011 (hereinafter – the last Quarterly report on internal control), the Corporation's internal control was found effective. Up to the date of the report, the Board of Directors and management received no information regarding any event or matter that is likely to change the assessment of the effectiveness of the internal control, as described in the latest Quarterly report regarding internal control. At the reporting date, based on the last Quarterly report, and based on information presented to the management and the Board of Directors, as noted above, the internal control is effective.

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd.

Certification I, Michel Siboni, hereby attest that: )1( I have reviewed the quarterly Report of Harel Insurance Investments and Financial Services Ltd. ("the Corporation") for the third quarter of 2011 ("the Reports"). )2( Based on my knowledge, the Reports contain no misstatement of a material fact nor do they omit any statement of a material fact necessary to ensure that the statements that they contain, in light of the circumstances under which such statements were included, shall not be misleading with respect to the period covered in the Reports; )3( Based on my knowledge, the financial statements and other financial information contained in the Reports reasonably reflect, in all material respects, the financial situation, results of operations, and cash flows of the Corporation at the dates and periods covered in the Report. )4( I disclosed to the Corporation's external auditor, the board of directors and the audit committee of the Corporation's board of directors, based on my most recent evaluations of the internal control over financial reporting: (a) Any significant deficiencies and material weakenesses in the determination or application of the internal control over financial reporting and disclosure that may reasonably have an adverse effect on the Corporation's ability to collect, process, summarise or report financial information in a manner that may cast doubt on the credibility of the financial reporting and preparation of the financial reports pursuant to the provisions of the law; and - (b) any fraud, whether material or immaterial, that involves the general manager (CEO) or any person directly accountable to him or other employees who have a significant role in the Company's internal control over financial reporting and disclosure; )5( I, myself or together with others in the Corporation: (a) Defined controls and procedures, or ensured that controls and procedures are in place under my supervision, to ensure that material information pertaining to the Corporation, including its subsidiaries as defined in the Securities (Preparation of Annual Financial Reports) Regulations, 5753-1993, has been brought to my attention is brought to my attention by others in the Corporation, specifically during the period in which the Reports are prepared; and - (b) I defined controls and procedures, or ensured that controls and procedures under my supervision are in place, to ensure with reasonable certainty that the financial reports are credible and that the financial reports are prepared in accordance with the provisions of the law, including in accordance with generally accepted accounting standards; (c) I evaluated the effectiveness of the internal control over financial reporting and disclosure, and in this report I have presented the conclusions of the board of directors and management regarding the effectiveness of the internal control at the reporting date. The aforesaid shall not derogate from my responsibility or from the responsibility of any other person, under any law.

November 24, 2011 Michel Siboni Joint CEO

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd.

Certification I, Shimon Alkabetz, hereby attest that: )1( I have reviewed the quarterly Report of Harel Insurance Investments and Financial Services Ltd. ("the Corporation") for the for third quarter of 2011 ("the Reports"). )2( Based on my knowledge, the Reports contain no misstatement of a material fact nor do they omit any statement of a material fact necessary to ensure that the statements that they contain, in light of the circumstances under which such statements were included, shall not be misleading with respect to the period covered in the Reports; )3( Based on my knowledge, the financial statements and other financial information contained in the Reports reasonably reflect, in all material respects, the financial situation, results of operations, and cash flows of the Corporation at the dates and periods covered in the Report. )4( I disclosed to the Corporation's external auditor, the board of directors and the audit committee of the Corporation's board of directors, based on my most recent evaluations of the internal control over financial reporting: (a) Any significant deficiencies and material weakenesses in the determination or application of the internal control over financial reporting and disclosure that may reasonably have an adverse effect on the Corporation's ability to collect, process, summarise or report financial information in a manner that may cast doubt on the credibility of the financial reporting and preparation of the financial reports pursuant to the provisions of the law; and - (b) any fraud, whether material or immaterial, that involves the general manager (CEO) or any person directly accountable to him or other employees who have a significant role in the Company's internal control over financial reporting and disclosure; )5( I, myself or together with others in the Corporation: (a) Defined controls and procedures, or ensured that controls and procedures are in place under my supervision, to ensure that material information pertaining to the Corporation, including its subsidiaries as defined in the Securities (Preparation of Annual Financial Reports) Regulations, 5753-1993, has been brought to my attention is brought to my attention by others in the Corporation, specifically during the period in which the Reports are prepared; and - (b) I defined controls and procedures, or ensured that controls and procedures under my supervision are in place, to ensure with reasonable certainty that the financial reports are credible and that the financial reports are prepared in accordance with the provisions of the law, including in accordance with generally accepted accounting standards; (c) I assessed the effectiveness of the internal control over financial reporting and disclosure, and in this report I have presented the conclusions of the board of directors and management regarding the effectiveness of the internal control at the reporting date.

The aforesaid shall not derogate from my responsibility or from the responsibility of any other person, under any law.

November 24, 2011 Shimon Alkabetz Joint CEO

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9 Harel Insurance Investments & Financial Services Ltd.

Certification I, Ronen Agassi, hereby attest that: )1( I have reviewed the interim financial report and the other financial information included in the quarterly report of Harel Insurance Investments and Financial Services Ltd.("the Corporation") for the third quarter of 2011 ("the Reports"). )2( Based on my knowledge, the Reports contain no misstatement of a material fact nor do they omit any statement of a material fact necessary to ensure that the statements that they contain, in light of the circumstances under which such statements were included, shall not be misleading with respect to the period covered in the Reports; )3( Based on my knowledge, the financial statements and other financial information contained in the Reports reasonably reflect, in all material respects, the financial situation, results of operations, and cash flows of the Corporation at the dates and periods covered in the Report. )4( I disclosed to the Corporation's external auditor, the board of directors and the audit committee of the Corporation's board of directors, based on my most recent evaluation of the internal control over financial reporting: (a) Any significant deficiencies and material weakenesses in the determination or application of the internal control over financial reporting and disclosure that may reasonably have an adverse effect on the Corporation's ability to collect, process, summarise or report financial information in a manner that may cast doubt on the credibility of the financial reporting and preparation of the financial reports pursuant to the provisions of the law; and - (b) any fraud, whether material or immaterial, that involves the general manager (CEO) or any person directly accountable to him or other employees who have a significant role in the Company's internal control over financial reporting and disclosure; )5( I, myself or together with others in the Corporation: (a) Defined controls and procedures, or ensured that controls and procedures are in place under my supervision, to ensure that material information pertaining to the Corporation, including its subsidiaries as defined in the Securities (Preparation of Annual Financial Reports) Regulations, 5753-1993, has been brought to my attention, is brought to my attention by others in the Corporation, specifically during the period in which the Reports are prepared; and - (b) I defined controls and procedures, or ensured that controls and procedures under my supervision are in place, to ensure with reasonable certainty that the financial reports are credible and that the financial reports are prepared in accordance with the provisions of the law, including in accordance with generally accepted accounting standards; (c) I evaluated the effectiveness of the internal control over financial reporting and disclosure, and in this report I have presented the conclusions of the board of directors and management regarding the effectiveness of the internal control at the reporting date. The aforesaid shall not derogate from my responsibility or from the responsibility of any other person, under any law.

November 24, 2011

Ronen Agassi CFO

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WorldReginfo - 7beacb5b-659e-438d-b970-6799b4de0dd9