HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD.
Interim Statement As at June 30, 2012
The original language of these Interim Consolidated Statements is Hebrew. The Hebrew version shall prevail over any translation thereof.
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Contents Page
Condensed Interim Financial Statements at June 30, 2012
Board of Directors' Report on the state of the Company at June 30, 2012: 1-1
Auditors' Review 2-2
Condensed Interim Consolidated Financial Statements June 30, 2012 (Unaudited):
Condensed interim consolidated statements on the financial position 2-4
Condensed interim consolidated statement of income and loss 2-6
Condensed interim consolidated Statements of comprehensive income 2-7
Condensed interim consolidated statements of changes in capital 2-8
Condensed interim consolidated statements of cash flows 2-31
Notes to the Condensed interim consolidated Financial Statements 2-17
Annex to the Condensed Consolidated Financial Statements: 2-90
Annex A - Details of Assets in respect to yield dependent contracts and other financial investments in the Group's insurance companies
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
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Board of Directors' Report
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Board of Directors' Report Services Ltd Six-months period ended June 30, 2132
Harel Insurance Investments & Financial Services Ltd.
Board of Directors' Report For the six months ended June 30, 2012
The Board of Directors' Report for the six months ended June 30, 2012 ("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 2133 which was published on March 29, 2012 ("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. (wholly controlled) ("Dikla"); Interasco Societe Anonyme General Insurance Company S.A.G.I. (in which the Company owns 9669% stake ("Interasco"), which operates in Greece in non-life insurance; Turk Nippon (in which the Company owns a 99698% 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").
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Pension funds management companies: Harel Pension Funds Management Ltd. (wholly controlled) ("Harel Pension"); Manof Pension Funds Management Ltd. (wholly controlled) ("Manof"); and 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 Trade), 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 Ltd. ("Harel Currencies"), which is a reporting corporation that issues deposit certificates on different currencies. The Group has been active in the insurance industry for approx. 75 years. According to the financial statements for 2011, the Group is Israel's third-largest Insurance Group, with a market share of approx. 20%. 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 fourth place regarding the volume of life-assurance premiums. In the new pension fund management sector, the Group has a market segment of about 13%. In the provident fund management sector, the Group has a market segment of about 7.6%. In the mutual fund management sector, the Group has a market segment of about 12%. 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) holds (mainly through a holding company) 50.03% 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. Announcement by the Commissioner of Insurance concerning guaranteed annuity coefficients in life assurance policies On July 11, 2012, the Commissioner published a draft position paper concerning "Update of the set of demographic assumptions for pension funds and life assurance" and Draft Insurance Circular 2012-46 concerning "Annuity conversion factors which incorporate a longevity guarantee". The draft relates, inter alia, to the improvement in longevity, including future longevity improvements, the rate at which policyholders exercise the annuity and the resulting
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repercussions on the volume of the reserves and method of calculating them. According to the draft position paper, the Ministry of Finance intends to revise the mortality tables due to the increase in life expectancy, based on studies it has conducted. The findings in the draft study on the increase in longevity, with respect to the mortality tables that are currently in use, affect, inter alia, an increase in the liabilities for annuity in life assurance policies which incorporate a longevity guarantee. On July 31, 2012, the Commissioner published a letter concerning the effect of the draft position paper on the financial statements at June 30, 2012. According to the Commissioner's letter, at this stage it is still uncertain whether the estimates included in the draft should be viewed as best estimates for the purpose of calculating the insurance or pension liabilities in the financial statements at June 30, 2012 . The Company is preparing estimates of liabilities for annuity based on the data published by the Treasury's actuary, and based on additional actuarial data which are being reviewed vis-a-vis the Group's actual experience. Harel Insurance reviewed the data about longevity published by the Commissioner on July 11, 2012 and in light of the new information available to Harel with respect to longevity, they were taken into account in calculating the insurance liabilities, where the principle impact is on life assurance policies which incorporate a guaranteed annuity coefficient . Given that the Commissioner's publication from July 11, 2012 is still only a draft, and its method of implementation has not yet been discussed, it is possible that in future further changes will be made regarding calculation of the insurance liabilities . As mentioned in Note 3 of the periodic report for 2011, the Company schedules supplements required in the reserve for annuity as per the Commissioner's instructions, taking into account the profits anticipated from the policies until the policyholders reach retirement age. This gradual allocation is made by using a capitalization rate (k) up to the amount of the management fee rate or financial margin which is sufficient to cover all the foreseeable expenses up to the age of retirement of the policyholders. In view of the increase in the amount of the liability for annuity, the Company revised the annual capitalization rate of the reserves for annuity, K, according to which the Company spreads the required reserve supplement (K) from 0.62% to 0.7%. This rate is the maximum rate determined by the Company, based on the risk-free interest rate and mix of liabilities. The said factor K is determined so as to bring about a gradual, reasonable accrual of the reserve up to the anticipated date of retirement. As a result of the assumptions relating to the revised mortality tables used to calculate the future liabilities for annuity, based on the new data published by the Ministry of Finance and the revised K rate, an additional balance of NIS 79 million before tax and a balance of NIS 51 million after tax will be recognized gradually in future to profit and loss, by using the aforementioned capitalization factor K, until the policyholders reach retirement age . Whereas, as noted above, the scheduling of the cost of the annuity was restricted by using the maximum factor K of 0.7%, an additional amount of NIS 24 million before tax and NIS 36 after
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tax, was recorded as an expense in the financial statement as at June 30, 2012, reducing profit and comprehensive profit by the said amount. The data detailed above in connection with the supplementary reserve for annuity and the outstanding provisions which will be recognized in future refer to money that was accrued in policies up to June 30, 2012 and they do not include liabilities for additional future accrual. Against the backdrop of the findings, the Commissioner published a draft position paper concerning annuity coefficients which incorporate a longevity guarantee. The draft circular proposes that from January 1, 2013, the insurance companies will not market combined life insurance and savings plans which include annuity coefficients incorporating a longevity guarantee. Nevertheless, insurance companies will be able to market insurance plans with annuity coefficients which incorporate a longevity guarantee for people who are at least 55 years old at the time of the sale, subject to several conditions detailed in the draft circular . In addition to this draft circular, on August 1, 2012, the Commissioner published an instruction whereby a limit will be placed on the total volume of life assurance contracts which incorporate guaranteed coefficients and are approved as an insurance fund to be sold by insurance companies during the period between January 1, 2012 and December 31, 2012, so that the volume of such contracts will not exceed 150% of the volume of life assurance contracts approved as an insurance fund sold by the company in 2011 and 150% of the number of life assurance contracts approved as an insurance fund that were sold by the company in 2011. In addition, a limit will be placed on the total volume of life assurance contracts which incorporate guaranteed coefficients and are not approved as an insurance fund to be sold by insurance companies during the period between January 1, 2012 and December 31, 2012, so that the volume of such contracts will not exceed 150% of the volume of life assurance contracts which are not approved as an insurance fund that was sold by the company in 2011 and 150% of the number of life assurance contracts that were not approved as an insurance fund that were sold by the company in 2011. Life assurance contracts which incorporate guaranteed coefficients which are sold during the aforesaid period will not allow deposits to be increased due to a change in the amount of the deposit, the rate of the deposit or the addition of a deposit component, except in case of an increase in the deposits for an insurance contract of a salaried policyholder due to a wage increase or an increase in the rate of the deposit from the insurable wage, based on the provisions of an extension order. These publications may affect the volume of sales of life assurance policies by Harel Insurance, and the mix of the sale of long-term savings products by the Company. At this stage it is impossible to estimate the overall impact of these changes on the Company's financial results, on its activity in the various pension savings products, on retention of the Harel Insurance policies portfolio and their embedded profit. 2.1.2. Harel Insurance Company Ltd. - obtaining a license to engage in insurance for the investments of purchasers of apartments In June 2012 Harel Insurance's insurer's license was extended to include insurance for the investments of purchasers of apartments. The application to extend the license was submitted in light of the decision of the relevant organs of Harel Insurance to examine the possible entry into
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investment activity associated with construction projects and to be able to provide house buyers with insurance policies as required under the Sale (Apartments) (Assurance of the Investments of Purchasers of Apartments) Law, 5735-1974. Harel Insurance has not yet begun to operate in this sector, and it expects to commence low-level operations in the third and fourth quarters of 2012. 2.1.3. Negotiations which ended without any results for the acquisition of rights in Netanya's Ir Yamim mall On June 11, 2012, subsidiaries of the Company which are financial institutions (hereinafter together: "the Subsidiaries"), entered into agreement with a second-tier subsidiary of Azorim Investment Development & Construction Ltd. ("Azorim") in a document of principles to acquire Azorim's rights (50%) in land and a shopping mall in Netanya's Ir Yamim neighborhood ("the Property"), which the second-tier subsidiary holds in equal parts with Shikun & Binui Real Estate (Investments) Ltd. ("Shikun & Binui"), including additional rights to land which will be allocated subject to publication of a validation of the Urban Plan which is currently in the approval process ("the Additional Rights"), and excluding Azorim's share of the rights to build an assisted living facility, from the Additional Rights6 According to the document of principles, subject to the signing of a binding agreement between the Subsidiaries and Azorim, and to meeting the conditions precedent stipulated in the agreement, the most important of which are a decision by Shikin & Binui not exercise the right of first refusal granted to it to acquire Azorim's share of the aforementioned rights and obtaining the approval of the Antitrust Commissioner (if required), Azorim will receive consideration in the total amount of NIS 410 million plus VAT, linked to the CPI of March 2012, to be paid in the manner and on the dates specified in the binding agreement, and which will be subject to various adjustments 6 As part of the document of principles, Azorim undertook towards the Subsidiaries that it will not negotiate with any third party before June 30, 2012 in connection with the sale of its aforementioned rights, and during this period the Subsidiaries will conduct a due diligence, and concurrently the parties will negotiate for the purpose of entering into a binding agreement 6 Azorim did not make any further extension of the commitment period not to conduct negotiations with a third party beyond July 29, 2012. At this stage it is impossible to estimate whether the negotiations that took place during the non-shop period will in the future mature into an agreement between the parties. 2.1.4. Reform of management fees on long-term savings products Pursuant to the Commissioner's plan to increase the competition for pension savings products, in June 21 2012, were published the Control of Financial Services (Provident Funds) (Management Fees) Regulations, 5772-2012, the purpose of which is to apply a standard model for maximum management fees on pension savings products by collecting management fees from on-going deposits and from the accrual. The following provisions were prescribed: (a) the maximum management fees on provident funds will not exceed 1.1% of the accrual and 4% of the deposits
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in 2013, and in 2014 and thereafter they will not be more than 1.05% of the accrual and 4% of the on-going deposits, where recipients of old-age pension and survivors' allowance will pay up to 0.6% of the fund's outstanding obligation towards them; (b) management fees on the accounts of members with whom contact has been severed will not be more than 0.3% a year of the balance accrued in the member's provident fund account or on the monthly rate collected by the institution on the date on which the contact was severed or the date on which the financial institution was informed of the member's death, the lower of the two. These rates will also apply to new life assurance policies, in contrast with the provident funds where the provision applies to old and new money alike. The change of management fees will not apply to insurance policies that were issued before the onset of the regulations, to guaranteed-yield insurance funds, guaranteed-yield provident funds, an old fund, new comprehensive pension fund, personally managed education fund and provident fund, central provident fund, sector provident fund, provident fund for sick pay, and provident fund for vacation. Following the discussions of the Knesset committee members of the Knesset Finance Committee published a bill to amend the Control of Financial Services (Provident Funds) Law (Amendment no. 8) (Minimum Rate of Management Fees), 5772-2012. The amendment proposes empowering the Minister of Finance to determine a minimum rate of management fees. In July the Knesset Finance Committee approved submittal of the bill for a second and third reading. At this stage, it is impossible to estimate whether the Minister of Finance will make use of the power, if it becomes law after the various stages of legislation and a minimum rate of management fees is set, and if it is set what the minimum rate of management fees will be. The following table details the rate of management fees according to the reform:
Maximum rate of Managers' insurance Provident fund General pension fund management fees (new) Up to 2% of the accrual or a lower rate of the Current situation Up to 2% of the accrual Up to 2% of the accrual accrual and a rate of the deposits (0%-13% of the deposits) For the period between up to 1.1% of the accrual + up to 4% of the on-going deposits 1.1.2013 and 31.12.2013 Commencing 1.1.2014 up to 1.05% of the accrual + up to 4% of the on-going deposits
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The reform may significantly affect the revenues from management fees earned by the provident fund management companies and it may impact the profitability of these companies and of Harel Insurance. Likewise, implementation of the reform will affect the value of provident fund activity recorded in the books of Harel Insurance, as detailed below. Following publication of the regulations, the value of the provident fund activity recorded in Harel Insurance's books was reduced in the financial statements for 2011. Based on a valuation of the provident fund activity that was prepared by an external appraiser, the balance of the value of the goodwill included under the carrying value of Harel Insurance's provident fund activity was reduced in the Financial statements for 2011 by NIS 25 million, before tax. Based on an impairment review carried out by the Company at December 31, 2011, and which formed the basis for this reduction, the Company reviewed the recoverability amount of the provident activity at June 30, 2012. Accordingly, it was found that the recoverable amount is higher than the carrying amount in Harel Insurance's books. Implementation of the reform is likely to affect on-going profits and the embedded value (EV) in respect of new life insurance policies that Harel Insurance sells in the future. The entering into force of these regulations may increase the rate of policy cancellations for policies with high management fees that were sold in the past, and the purchase of new policies with lower management fees. As a result of the foregoing, the reform of management fees may affect the embedded value (EV) in respect of life assurance and pension fund activity. The proposal to amend the Control of Financial Services (Provident Funds) (Distribution Fees) Regulations, 5771-2011, which propose reducing the distribution fees, is also expected to moderate the impact of the aforementioned reform. In addition to publication of the regulations, a circular was published concerning management fees on pension saving instruments, see Section 2.3.2.4.9 below. 2.1.5. Update of management and operating agreements - Harel Pension Pursuant to the aforementioned on Section 2.1.20 below, On May 23, 2012, the Board of Directors of Harel Pension approved an amendment to the management agreement which was signed on May 17, 2009. According to the amendment, Harel Investments' entitlement to management fees from Harel Pension at an annual rate of 0.5% of the annual contribution payments received by the pension funds managed by Harel Pension will not apply to contribution payments to be received from the IDF, excluding one-time deposits which were received close to commencement of the implementation of the IDF pension arrangement. Furthermore, the Board of Directors of Harel Pension approved an amendment to the operating agreement with Harel Insurance, whereby Harel Insurance's entitlement to operating fees at an annual rate of 0.1% of the assets of members covered by the IDF pension arrangement will not apply as long as they are active members through this arrangement and are entitled to the fixed management fees prescribed in the aforesaid arrangement.
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2.1.6. Reinsurance agreement with Interasco On May 23, 2012, the Board of Directors of Harel Insurance approved an extension of the reinsurance agreement for Interasco, an insurance company which operates in Greece and in which the Company holds a 96.5% stake. The reinsurance agreement relates to Interasco's health insurance activity only. The reinsurance agreement commenced in 2009. Pursuant to the agreement approved for 2012, Harel Insurance will provide reinsurance for Interasco at a rate of 50% and Harel Insurance and Harel Insurance will also benefit from the protections acquired by Interasco as part of the Excess of Loss contracts with reinsurers. 2.1.7. Investment in the Blau Fund In April 2011, a hedge fund, Blau Capital Absolute Return Fund ("the Hedge Fund") was established in which the general partner is Blau Capital Management & Investments Ltd., in which the owners are Harel Products (a wholly owned subsidiary of Harel Finance) - 40%, Blau Capital (whose principal shareholders are: Ishai Blau and Mark Tannenbaum) - 50%, and Mssrs. Alexandrovitz and Shweiger - 10%. Under the partnership agreement, Harel Products undertook to raise USD 20 million for the hedge fund during the period up to and no later than April 30, 2012, and it also committed to invest this amount over a period of at least two years. According to the founders agreement, a failure to comply with its commitment to raise the said funds, will incur payment of fine in respect of loss of management fees, for the period up to the date scheduled for completion of the raising of US 20 million. Subsequently, Harel Finance and Blau Capital agreed to reduce the amount of the commitment to USD 18 million and to extend the date for raising this amount until July 15, 2012. During the course of 2011, Harel Products provided an aggregate amount of USD 3 million in a designated account in Interactive Broker to be managed by Blau Capital. The investment was made from money in a loan that the Company provided to Harel Products. On July 22, 2012, the Audit Committee and Board of Directors of Harel Insurance approved the opening of a designated account in JP Morgan for managing Blau Capital. Accordingly, Harel Insurance will invest an amount of USD 5 million through Blau Capital. These amounts account for part of Harel Products' commitment in the amount of USD 18 million, so that the outstanding amount required is USD 10 million. 2.1.8. Termination of the service of a senior officer On May 1, 2012, Mr. Dan Barron, who serves as Executive Vice President, Chief Actuary and Chief Risk Officer announced that he would stepping down from his position, effective July 1, 2012. Subsequently, it was agreed with Mr. Barron that he would continue to serve until his replacement as chief actuary takes office. Mr. Arie Wurtzburger is expected to replace Mr. Dan Barron and he is due to start training with Mr. Barron during the fourth quarter of 2012.
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Mr. Dan Barron is expected to continue to serve as a director of Dikla and of Manof Pension. According to Mr. Dan Barron's employment agreement, the Company settled loans provided to Mr. Barron in recent years in the amount of NIS 1.6 million. According to the aforementioned agreement, Dan Barron is committed to a non-competition period of one year. On May 23, 2012, the Company's Board of Directors approved an agreement to extend and expand the non-competition clause with Mr. Dan Barron, after receiving the approval of the Compensation Committee and Audit Committee of Harel Insurance and the Company, at meetings which were held on May 14, 2012. Accordingly, against a commitment by Mr. Dan Barron not to compete with the Company for a period of four years, Mr. Barron will receive the total amount of NIS 2.8 million to be paid over the period in three installments. Mr. Dan Barron holds stock options that were allotted to him as part of the Company's stock options plan as follows: 14,102 options that were allotted on November 30, 2009; 30,048 options that were allotted on May 26, 2011. Regarding 9,401 options from the 2009 allotment, Mr. Barron will be entitled to exercise them in accordance with the conditions of the original plan, as if he continued to serve the Company, i.e. within 36 months of the vesting date of each tranche of options. The balance of the options issued to Mr. Dan Brown will expire at the time of termination of employer - employee relations. Additionally, a consulting agreement with Dan Barron for product development was approved for a period of 24 months (from the date of his retirement), in return for a monthly payment of NIS 15,000, against an invoice. 2.1.9. EMG Following a report by EMG dated April 22, 2012 concerning notification received of the cancellation of the agreement for the supply of natural gas from Egypt, on April 23, 2012 the Company's subsidiaries that are financial institutions (hereinafter: "the Company's subsidiaries"), resolved to write off the balance of the investment in EMG. The Company's subsidiaries invested (indirectly) in EMG's share capital in 2007 and hold 1.2% of its share capital. Since the events in Egypt began and against the backdrop of the erratic supply of gas, from time to time the subsidiaries review the value of the investment, and accordingly the value of this investment was reduced. At March 31, 2012, the value of the investment recorded in the books of the subsidiaries is NIS 28 million, NIS 20 million is held as a part of the yield dependent liabilities and NIS 8 million is held as a part of the liabilities that are not yield dependent (Nostro money). In addition, at March 31, 2012, the value of the provident and pension funds in EMG was NIS 29 million. Following the report published by EMG concerning the notice received of the cancellation of the agreement for the supply of natural gas, and after receiving permission from the investment
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committees of the financial institutions, the subsidiaries resolved to reduce the entire amount of the outstanding investment recorded in the books of the subsidiaries. Given that most of the investment is against yield dependent liabilities and the money of pension and provident funds, this reduction not significantly affected the financial performance of the Company or the subsidiaries. In addition, the Israel Infrastructure Fund also invested in EMG's share capital, and it holds 0.7% of EMG's share capital. The Company's subsidiaries that are financial institutions, invested 28% of the limited partner in the Israel Infrastructure Fund, for yield dependent liabilities and for the assets of the provident and the pension funds. 2.1.10. Harel Finance, Trade & Securities Ltd. On April 22, 2012, Harel Finance entered into an agreement, which is subject to suspensive conditions, with E-Online Capital (E.O.C.) Ltd., a public company whose shares are traded on the TASE ("the Acquirer"), for the sale of all the holdings of Harel Finance in Harel Finance Trade ("the TASE Member"), which is wholly owned by Harel Finance and is a TASE member (hereinafter - "the Sale"). The Sale will not include the employment of the employees engaged in institutional brokerage activity, and they will be employed by Harel Finance. The consideration for purchase of the Sale is an amount equal to the TASE Member's equity, subject to several adjustments which will be made on the date of completion, based on the audited reports of the TASE Member at the end of the calendar quarter immediately before the completion date, and to adjustments to be made about a month after the completion date according to a financial report to be prepared at the completion date. Furthermore, all the balances in respect of MF Global which are included in the assets of the TASE Member, will be transferred to the Vendor. For additional information, see Note 9 to the Financial Statements. Harel Finance believes that the consideration will amount to NIS 84 million. Harel Finance is not expected to record any significant capital gain or capital loss in respect of the transaction. The Acquirer announced that it intends to finance part of the consideration, i.e. an amount equal to the difference between the total consideration and NIS 25 million which the Acquirer deposited with a trustee on the date of signing the agreement ("the balance of the consideration"), by means of a bank loan. The agreement includes a mechanism whereby the Vendor will provide the financing bank with a guarantee which is limited to 20% of the balance of the consideration. This guarantee will expire no later than March 31, 2013 and it will be reduced gradually over the period from the date on which it is provided until the expiry date. Harel Finance will receive collateral and pledges from the Acquirer in respect of providing the said guarantee. The agreement includes an indemnity mechanism given to the Acquirer by the Vendor in connection with claims the cause of which precedes the completion date, in a total amount which shall not exceed, in aggregate, NIS 0.5 million for most of the claims, and no more than
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NIS 5 million in aggregate for liabilities that are undertaken, if they are undertaken, by regulatory and/or other governmental entities. The agreement includes an undertaking by the Vendor to pay a bonus to employees who are employed by the TASE Member on the completion date and who continue to work in practice for the TASE Member on the later of the following dates: (a) December 31, 2012, or (b) 4 months from the completion date. The bonus is an amount equal to one salary. The agreement is subject to suspensive conditions, the most important of which are: (a) obtaining the approval of the boards of directors of the parties. These approvals had been received at the date of closing this report; (b) agreement from the bank financing the Acquirer to provide the loan; (c) obtaining the approval of the Tel Aviv Stock Exchange Ltd.; (d) obtaining the approval of the Antitrust Commissioner. At the date of the report the Antitrust Commissioner's approval was received. Insofar as the suspensive conditions are not met within 5 months of the date of signing the agreement, each party will have the right to cancel the agreement. 2.1.11. Issuance of hybrid tier-3 capital through Harel Finance & Issues On February 28, 2012, Harel Insurance Finance & Share Issues Ltd. ("Harel Issues"), a special purpose company (SPC) of Harel Insurance, published a shelf prospectus. By virtue of the shelf prospectus, on April 4, 2012, Harel Issues published a shelf offering, in which context two series of Debentures (Series F & G) were offered to the public, which were recognized by the Commissioner as hybrid tier-3 capital held by Harel Insurance. Prior to the publication of the shelf offering, on March 26, 2012 Harel Issues received an ilAA rating from S&P Maalot for the said liability notes in the amount of NIS 250 million. On April 3, 2012, prior to publication of the shelf offering, a preliminary tender was held for classified investors. As part of the preliminary tender, offers were submitted for 616,157 units F-G (with a total value of NIS 616,157,000), of which Harel Issues received a preliminary commitment from classified investors to purchase 205,000 F-G units. Pursuant to the results of the issuance, the Debentures (Series F-G) will bear fixed annual interest of 3.85%, and will be linked (principal and interest) to the CPI. In all, according to the results of the tender for Series F-G, the Company allocated 228,065 units, for the total consideration of NIS 228 million (NIS 114 million for Series F and NIS 114 million for Series G). The interest will be paid in semi-annual installments. The Debentures Series F will be settled on May 31, 2025 and the Debentures Series G will be settled on May 31, 2026. Since the debentures are recognized as hybrid tier-3 capital held by Harel Insurance they include a condition whereby when certain delaying circumstances are present, as detailed below, the principal will not be paid. The delaying circumstances are one or more of the following: (a) according to the last financial statement of Harel Insurance published before the relevant principal repayment date, Harel Insurance holds less recognized equity than the minimum equity it is required to hold (under the capital regulations), and it has not supplemented its equity at the publication date of the financial statements; (b) the Commissioner of Insurance has ordered a
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deferral of the principal payment if he considers that there is a real, immediate concern as to Harel Insurance's ability to meet the minimum equity it is required to hold under the capital regulations. Given that this is hybrid tier-3 capital, even when the delaying circumstances are present, the interest payment will be made as normal up to the original settlement date of the principal . A principal payment that is deferred will be postponed until the delaying circumstances are no longer present, and at most for a period ending three years from the original settlement date of the debentures principal. Additionally, since according to the provisions of the law regarding the composition of an insurer's equity, two years before the final settlement date of the debentures the recognition of the debentures as hybrid tier-3 capital held by Harel Insurance is amortized at a fixed declining rate (50% each year), the debentures include a condition whereby Harel Issues may make early repayment of the debentures or part thereof, and this two years before the original settlement date. Application of this right is subject to meeting one of the following conditions: (a) obtaining the Commissioner's approval; or (b) Harel Insurance must have surplus capital so that the recognized capital after the repayment is 120% of the required capital; or (c) concurrent with the early repayment, Harel Issues will issue a capital instrument of the same or superior quality. If Harel Issues does not exercise its right to early repayment, additional interest will be paid to the debenture holders at a rate of 30% of the original risk margin, as defined in the issue. 2.1.12. Private placement - extension of the Debentures Series F On May 8, 2012, Harel Issues entered into agreement for the private placement of Debentures Series F in the amount of NIS 22 million. The private placement was performed by way of an expansion of Series F, which was issued by virtue of a shelf offering dated April 4, 2012 (see Section 263611 above). As at 30 June 2012 the balance of the liability from Series B-E will be added to the proceeds of the issue of Debentures Series F and Debentures Series G, from April 4, 2012, and will serve as hybrid tier-3 capital held by Harel Insurance. The conditions of the Debentures Series F are as specified in the shelf offering report dated April 4, 2012. 2.1.13. Yahalom parking garage On April 4, 2012, Harel Insurance entered into an agreement to acquire the rights of K.A.M. Mekarke'ey Yahalom Ltd., in land which is located next to the Yahalom Tower in Ramat Gan's Diamond Exchange compound, and serves as a parking garage. The parking garage has 140 parking spaces. The cost of the acquisition is NIS 19 million plus VAT. Harel Insurance is financing the acquisition from its own sources, as part of its Nostro portfolio. The transaction was completed on May 1, 2012. 2.1.14. Add 16 floors to the Crystal House On February 29, 2012, Harel Insurance entered into agreement with El-Har Engineering & Construction Ltd. ("the Contractor") to add 16 floors of office space to the Crystal House, including related works required for the construction of these 16 floors ("the Project"). The
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Crystal House is an office block located at 12 Hachilazon St., Ramat Gan (Parcel 365, Block 6109, and part of Parcel 366 in Block 6109), consisting of 9 floors of offices above a gallery and lobby as well as a 5-story underground parking lot. The Crystal House was acquired by Harel Insurance on December 31, 2007 in consideration of NIS 200 million. The Project is being undertaken to upgrade the Crystal House, which is mostly used by the Company for its own purposes, and so far no decision has been made regarding use of the areas to be added. The total cost of the Project, most of which is in respect of the direct construction costs to be paid to the Contractor, is expected to reach NIS 140 million. The Project is due to begin in the near future and will take about three years to complete. Implementation of the Project is subject to obtaining the relevant approvals required by law, including that of the local municipality. Harel Insurance will finance the Project from its own sources (Nostro money). At this stage, Harel Insurance has not determined the final designation of the additional floors to be constructed. Nevertheless, Harel Insurance designates three of the additional floors (about 18.75% of the additional construction) itself. Regarding the remaining the areas, no final decision has yet been made as to their designation. As a result of the permit for additional building rights, the value of Crystal House was improved based on an appraiser's estimate. This incremental value includes a rezoning of a proportionate share of the land from owner occupied use to investment property in amount of NIS 41 million, before tax, which was attributed, when the construction began, to other comprehensive income. 2.1.15. 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 Trade, a second-tier subsidiary of the Company, acted for its customers vis-à-vis MF Global in future 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 Finance Trade closed its positions on future 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 Finance Trade and its customers to MF Global is NIS 11 million in cash and NIS 1.7 million in shares (including amounts that Harel Finance Trade asked to withdraw before the bankruptcy proceedings began and which it has not yet received). Pursuant to reports published by the liquidator of MF Global, most of the money belonging to MF Global's customers has been located. Nevertheless, due to the fact that considerable time will clearly pass before the liquidator hears the debt claims that have been filed and he allocates the money, Harel Finance Trade decided to indemnify its customers in respect of their losses. In view of this decision, Harel Finance Trade attributed in its financial statements the balances in the MF accounts as the company's money and not as the balances of customers held on their
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behalf in trust. Consequently, a technical violation of the TASE regulations was created retrospectively with regard to a shortfall in customers' balances that are held for them in trust and regarding compliance with the equity requirements (as the money in these accounts is not liquid) at December 31, 2011. As a result, in February 2012, Harel Finance Trade supplemented this shortfall by injecting surpluses into the trust accounts and receiving tier-2 capital from Harel Finance. On June 30, 2012, Harel Finance Trade is in compliance with the TASE's capital requirements. In light of the decision that Harel Finance Trade will indemnify its customers' exposure, Harel Finance Trade made adequate provision in its financial statements based on these estimates. According to the agreement for the sale of Harel Finance Trade (see Section 2.1.10), Harel Finance undertook to acquire from Harel Finance Trade the balance of the assets deposited with MF Global (cash and securities) in consideration of their amortized carrying amount. On August 14, 2012, the Board of Directors of Harel Finance approved the acquisition of the debt, effective from July 1, 2012. 2.1.16. Atidit Pension Following discussions with the Commissioner concerning the method of calculating the actuarial report of the old pension fund - Atidit Pension Fund ("the Pension Fund"), the Pension Fund conducted a second review of the results of the actuarial calculations with the help of actuary David Engelmayer who was appointed for this purpose in conjunction with the Commissioner's office. Based on this review, substantial differences were found in the actuarial surplus/deficit clause, with respect to the Pension Fund's actuarial report as previously published by LeAtid. This discrepancy gives the Fund an actuarial deficit rather than a surplus, and as a result, members' rights may be affected. LeAtid is still reviewing the reasons for these discrepancies between the reports. At meetings held on February 16, 2012 and February 21, 2012, the Audit Committee and the Board of Directors (respectively) of LeAtid approved the termination of the term of office of the appointed actuary Mr. Yaakov Antler, who had served LeAtid, due to the need felt by LeAtid to make changes and bring in new blood to the position of the appointed actuary after many years in which Mr. Antler had filled this position. Mr. David Engelmayer was appointed as the appointed actuary of the Pension Fund. Pursuant to the approval of the financial statements of Atidit Pension Fund for 2011, which included an actuarial deficit, based on the actuarial report prepared by actuary David Engelmayer, a meeting was held with the Commissioner to analyze the reasons for the discrepancies and concerning the action that the company must take in connection with these discrepancies. In this context, the Commissioner appointed actuary Alan Dubin to prepare an audit of the pension fund. The audit's process is not yet concluded. The possible changes in members' rights, as mentioned, do not affect the financial results of LeAtid and the Company, due to the fact that the correction is for the pension fund which is not included in the financial results of the management company or the Company.
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2.1.17. Allotment of share options On March 26, 2012, the Remunerations Committee recommended the granting of 44,150 stock options to Mr. Shimon Alkabetz, the company's joint CEO. On March 26, 2012, the Audit Committee approved the granting of the options. On March 29, 2012, the Board of Directors approved the granting of these options. These options are granted in addition to the 44,150 stock options that were allotted to Mr. Alkabetz in July 2009. In addition to the aforementioned allotment, on the dates listed above an allotment of 38,170 stock options was approved to a senior officeholder of Harel Insurance. The exercise price of the options is NIS 129.70, based on the closing price of the Company's shares on the TASE immediately prior to the Board of Directors decision. The overall value of the share options allotted as aforementioned, based on the Black-Scholes model, is NIS 3.84 million. This expense will be amortized from the second quarter of 2012 over the vesting period of the entitlement in accordance with the outline plan. 2.1.18. Investment in the share capital of Harel Gemel and Harel Pension On February 16, 2012, Control of Financial Services (Provident Funds) (Minimum Equity Required from a Provident Fund or Pension Fund Management Company) Regulations, 5772- 2012, were published. The 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 not fall below the higher of the following amounts: (i) the initial equity required as aforementioned - NIS 10 million; (ii) the aggregate amount of 0.1% of the assets under management up to a maximum limit of assets under management of NIS 15 billion, 0.05% of the assets under management above the aforesaid limit, and 25% of the annual managed expenses. To ensure that the subsidiaries of Harel Insurance which are pension fund management companies comply with the aforementioned regulations, capital notes that had been issued in the past by Harel Pension and Manof Pension, in the total amount of NIS 47 million, were converted to share capital, against an allocation of shares. In addition, On May 23, 2012, the Board of Directors of Harel Insurance authorized the provision of a loan in the amount of NIS 15 million to Harel Pension. The loan bears interest of Prime + 1%. The loan was given for the period of a year, is renewed automatically, and Harel Insurance has the right to recall the loan at any time by giving 7 days advance notice. In addition, Harel Insurance invested the total amount of NIS 6.5 million in the share capital of provident fund management companies (directly in Tzva Hakeva Savings Fund, and in Atidit Gemel through an investment in Yedidim Holdings), against an allocation of shares. 2.1.19. Collective Long-Term Care Insurance for Clalit Health Services' members by Dikla 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
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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. Pursuant to the foregoing, Clalit and Dikla signed 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 due 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. On March 20, 2012, approval was received from the Commissioner extending the approval to operate the plan until December 31, 2012. Pursuant to the foregoing, Clalit and Dikla signed an agreement concerning an extension of the agreement until December 31, 2012, in which Clalit has the right to curtail the commitment period by giving 60 days advance notice. 2.1.20. IDF's pension arrangement On June 22, 2011, the relevant IDF entities informed the Company that subsidiaries of the Company had been selected as companies recommended by the IDF in a procedure (through entities acting on its behalf) for choosing the entity which will manage the default pension- insurance plan for IDF career soldiers. Pursuant to the provisions of the law, the entity which approves the agreement is the Minister of Defense, with the consent of the Minister of Finance. On March 26, 2012, the default plan for pension insurance for career soldiers was approved by the Minister of Defense, after receiving the consent of the Minister of Finance. This approval included several changes in relation to the plan which is the subject of the procedure. The approved pension arrangement consists of a combination of pension and insurance products and these products will include the Harel-Gilad Pension Fund and Harel General Pension fund, both of which are managed by a second-tier subsidiary of Harel Pension. Furthermore, on April 22, 2012, the Commissioner approved the setting up of a provident fund for the IDF pension arrangement. The fund is a fund that does not pay an annuity, will be managed by Harel Pension, and forms part of the pension arrangement for IDF career soldiers. The plan, as has been approved, also includes group insurance policies which have not yet entered into force. The entering into force of the policies is contingent on the Commissioner approving the policies and on legislative changes which are required for this purpose. The plan will be implemented from May 2012 in respect of new career soldiers who joined the ranks of those serving in the permanent forces as of April 2012 and from July 2012 for soldiers currently
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serving. In July, there was a one-time movement in respect of currently serving career soldiers in the amount of NIS 970 million. As part of the approval process for the arrangement vis-a-vis the Commissioner, on January 3, 2012, the Commissioner announced that under the arrangement, the management company that will manage the pension monies will be required to hold equity of NIS 16 million, in addition to the minimum equity it is required to hold by law. On March 29, 2012, an updated letter was received according to which the capital requirement will be reduced over the first five years of operation of the plan, based on the outline defined by the Commissioner and subject to the specific approval of the Commissioner every year. The transaction is expected to entail a one-time movement of hundreds of millions of shekels, which as noted took place in July, 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. 2.1.21. 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. The Law also stipulates that the aforesaid provision does not apply to central severance pay provident funds. On January 1, 2012, Harel Gemel performed a merger of the provident funds that it manages: 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") were merged into Harel Otzma such that the ownership structure of the merging funds' tracks is to be preserved. The merged fund will be called Harel Otzma-Taoz. Similarly, as part of the merger, the shekel investment track that had been part of Harel-Otzma was changed and became a short shekel track. The merger took place in accordance with the Commissioner's approval from October 5, 2011 and the approval of Income Tax from December 29, 2011.
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2.2. Material changes in the Company's business after the Reporting 2.2.1. Agreement to purchase the IKEA store in Netanya On August 19, 2012, subsidiaries of the Company which are financial institutions ("the Subsidiaries"), entered into a transaction to acquire the rights of Isralom Properties Ltd. ("Isralom") in land in the Netanya's Kiryat Nordau industrial zone on which the IKEA store operates ("the Property"). Isralom's rights in the Property comprise 50% of the Property as well as a right to acquire the share held by Israel-British Investments Group Ltd. ("Israel British"), which holds the remaining 50% of the Property. According to the outline of the transaction, concurrent with the purchase of Isralom's rights to the Property, the Subsidiaries will exercise the option to acquire Israel British's share, so that the Subsidiaries will acquire 100% of the rights in the Property. The total consideration to be paid by the Subsidiaries for the rights in the Property is NIS 289 million. The transaction will take place parallel to the signing of a new rental agreement with Northern Birch Ltd. ("Northern Birch"), which holds the exclusive franchise to operate the IKEA stores in Israel and operates the IKEA store on the Property. The lease agreement is as follows: The lease period is 24 years and 11 months, with no exit right. The rent is NIS 21.2 million a year, CPI linked. The rent will be updated every five years by 2%, in real terms. The lessee is responsible for all on-going maintenance expenses, on-going management, and insurance of the asset ("triple net lease"). Northern Birch has an option to build additional areas on the Property, in accordance with the building rights which are present in the Property. In this case, Northern Birch is entitled to finance of up to NIS 12 million from the Subsidiaries for the additional construction. If such additional areas are built, the rent will be revised, so that in respect of any additional investment by the Subsidiaries in this construction, the additional rent will reflect an annual yield of 7.6% on the outstanding lease period. The total maximum investment (assuming that Northern Birch exercises the option to build additional areas, financed by the Subsidiaries) including taxes and related costs, is expected to amount to about NIS 316 million. The Subsidiaries entered into the transaction mainly for yield-dependent policies, provident funds and pension funds managed by the Subsidiaries, and the transaction is therefore not expected to affect the financial results of the Subsidiaries or the Company . Completion of the transaction is subject to meeting suspensive conditions, including approval from the bank in whose favor liens are recorded on the rights of Isralom and Israel British in the Property, completion of the exercising of the option to acquire the rights of Israel-British, and the approval of the Israel Lands Administration to transfer the rights in the Property to the Subsidiaries.
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2.2.2. Purchase of real estate from Karnit On August 16, 2012, notice was received from Karnit to the effect that Harel Insurance had won a tender published by Karnit (Fund for the Compensation of Road Accident Victims - "Karnit") for the sale of its rights in two buildings known as Block 7454, parcels 2 and 3, which are situated in the Rothschild Boulevard area of Tel Aviv. According to the applicable Urban Plan, the buildings are slated for demolition and it is expected that office blocks will be built on the site. Harel Insurance offered consideration of NIS 50 million plus VAT . The asset will be purchased from the nostro funds of Harel Insurance. Harel Insurance will finance the acquisition from its own sources. 2.2.3. Maalot Rating On July 18, 2012, Maalot announced that in the wake of the Commissioner's publications about guaranteed annuity coefficients in life assurance policies (see Section 2.3.1), the ratings of the insurance companies which engage in long-term savings, including Harel Insurance and EMI, which was included as a subsidiary of Harel Insurance and benefits from a notch in its rating due to the support of Harel Insurance, were placed on a Credit Watch Negative watch list, with negative implications for the purpose of reviewing the exposure to the risk of extended life expectancy and the impact of the regulatory changes on the business and financial profile of the companies. 2.2.4. A.D.O. Group Ltd. On July 10, 2012, subsidiaries of the Company, which are financial institutions ("the Subsidiaries"), entered into an agreement to invest EUR 9 million in A.D.O. Group Ltd. ("ADO"), a public company whose shares are traded on the Tel Aviv Stock Exchange, against an allocation of ordinary shares of ADO and stock options that may be exercised for ordinary shares of ADO, as well as an agreement to provide a loan of EUR 6 million to ADO against an allocation of non-marketable bonds which may be converted to ordinary shares of ADO at a price of between NIS 0.263 - NIS 0.35 per share, depending on the date of the conversion. The loan bears interest of 8% for the first three years, and 6% for the following two years. The agreements determine, inter alia, provisions relating to protection against dilution, the composition of the board of directors and provisions concerning tag along rights in the event that the holdings of Shikun & Binui, the largest shareholder in ADO, fall below 25% as a result of a sale. Likewise, provisions were determined whereby the Subsidiaries may transfer their holdings without restrictions, unless they seek to transfer a package of shares of the minimum scope determined, together with the rights set forth in the agreement, in which case Shikun & Binui has right of first refusal. After the transaction which is the subject of the aforesaid agreements, and due to the conversion of the loan which Shikun & Binui provided to ADO into shares, the holding of the Subsidiaries
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will be 12.8% of the issued share capital of ADO (and 22.4% of the issued share capital of ADO, subject to adjustments defined in the agreement assuming full dilution and subject to the provisions of any law. It should be noted that according to the provisions of law applicable to the Subsidiaries, the actual holding of ADO's share capital must not be more than 20%). The transaction was signed mainly for yield-dependent policies, provident funds and pension funds managed by the Subsidiaries, and it is therefore not expected to affect the financial results of the Subsidiaries or the Company. The transaction is subject to compliance with several conditions precedent, including obtaining the approval of the shareholders of ADO for the share allocation and obtaining the TASE's approval for allocation of the securities. 2.2.5. Negotiations to acquire the life assurance portfolio of Eliahu Insurance Company Ltd. On July 10, 2012, the Company announced that further to the request received by Harel Insurance to review the possible acquisition of the life assurance portfolio of Eliahu Insurance Company Ltd. ("Eliahu Insurance"), as part of the requirements for Eliahu Insurance to complete a transaction to acquire control of the Migdal Group, and the initial contact that had been made on this subject, an outline of principles for the transaction had been formulated. According to this outline, the transaction will take place as part of the acquisition of the operations (rights and obligations) of Eliahu Insurance in its life assurance segment, based on consideration of NIS 250 million. Implementation of the transaction is subject, inter alia, to the drawing up and signing of a detailed binding agreement by the parties, obtaining the approval of the competent organs of Harel Insurance and Eliahu Insurance, and on compliance with various suspensive conditions, including obtaining all the relevant statutory approvals and execution the transaction to acquire control of the Migdal Group by Mr. Shlomo Eliahu. At this stage, it is impossible to estimate whether the agreement will be signed and if will be signed, whether the suspensive conditions and the transaction will be completed. 2.2.6. Commutation transaction in professional liability insurance On July 5, 2012, Harel Insurance entered into a commutation agreement with a reinsurer which had served as one of its reinsurers for professional liability insurance during the period 2008- 2010. In this transaction, Harel Insurance resumed responsibility for the insurance risk which had been transferred to the reinsurer as part of facultative reinsurance agreements. The reinsurer paid USD 38.5 million in consideration of Harel Insurance taking responsibility for the insurance risk. Harel Insurance is not expected to show any significant profit or loss in respect of the transaction. This transaction increases the self-retention of Harel Insurance in this operating segment for the years 2008-2010.
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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 2.3.1.1. Provisions of Law
2.3.1.1.1. On August 5, 2012, the Law to Fight Iran's Nuclear Program, 5772-2012 was published. The purpose of the law is to impose sanctions on entities who assist Iran in advancing its nuclear program, and to establish restrictions on corporations who maintain business ties with Iran, all as part of the international fight against Iran's nuclear program, to which Israel is party. The various points of the proposed legislation supplement and expand Israel's existing legislative arrangements on this subject, forming comprehensive regulations with the intention of making sanctions against Iran part of a designated, coherent and uniform law. Among other things, the law sets forth the following provisions: (a) a prohibition on economic activity and suspension of existing activity with entities who have been declared an assisting foreign entity (pursuant to the provisions specified in the law with respect to an announcement that a foreign entity which is a corporation maintains a business relationship with Iran) or entities associated with an assisting entity, limiting the possibility of financial institutions investing in corporations that have been declared as maintaining business ties with Iran; (b) an obligation to report to the Israel Police the presence of economic activity with an alien entity, or with an entity suspected of being alien; (c) sanctions (imprisonment or a penalty) will be imposed on corporations which break the law and on the senior officeholders of those corporations, unless they can prove that they took all necessary measures to uphold the obligations applicable to the corporation. Under the law, the Law for the Prohibition on Investing in Corporations which maintain a Business Relationship with Iran, 5768-2008, was abolished, and amendments were made in the Prohibition on Money Laundering Law, 5760-2000; Trading with the Enemy Ordinance, 1939, and the Court for Administrative Matters Law, 5760-2000.
2.3.1.1.2. On July 24, 2012, the Control of Financial Services (Advice, Marketing and Pension Settlement Systems) Bill (Amendment no. 5), 5772-2012, was published. Among others, the bill sets forth the following provisions: (a) an employee who wishes to perform a transaction in a pension product may do so through the services of any licensee he chooses, and an employer may not condition this transaction on a specific licensee and may not condition a benefit given to the employee on performing a pension transaction by a particular licensee. Activity in contravention of these provisions will be a criminal offense punishable by two years imprisonment; (b) the Commissioner will be authorized to obligate the entities he supervises, including licensees, to submit various reports; (c) a licensee may not condition purchase of one pension product on the purchase of another pension product from him or from
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another person; (d) the prohibition on the transfer of information through a central pension settlement system, unless it is for the purpose of carrying out the relevant provisions of law, will be extended to cover the transfer of money and information about money through the clearing system.
2.3.1.1.3. On July 9, 2012, the Promotion of Competition and Reduction of Concentration Bill, 5772-2012, was published. The bill was published further to the recommendations of the Concentration Committee from March 2012 and to a government resolution concerning the adoption of the Committee's recommendations from April 2012, which determined that the concentrated structure of the economy raises concerns of harm to the robustness of the financial system, an infringement of business competition, and loss caused to savers, minority shareholders of public corporations and the holders of bonds in bond-issuing companies. The proposed bill includes indirect legislative amendments.
The bill is based on the Committee's recommendations and consists of three main chapters: (1) Chapter 2 deals with the allocation of public assets and proposes establishing that the regulators who allocate rights in public assets to private entities will consider competitiveness when allocating these rights, after consulting with the Antitrust Commissioner. The bill also proposes that as part of the allocation of essential infrastructures, the possibility of allocating these infrastructures to applicants with concentrated assets will be limited, and a standing committee will be established for consulting on economy-wide economic concentration issues; (2) Chapter 3 discusses restrictions on the control of companies with a pyramid structure, limiting them to two "layers" of companies. Existing pyramid structures will be limited to three levels of companies. The restriction will enter into force within 6 years of publication of the bill. Additionally, provisions were prescribed for increased corporate governance in a pyramidal holding structure and enforcement measures regarding control of companies which contravenes the proposed provisions; (3) Chapter 4 discusses segregation between significant real corporations and significant financial institutions so that a significant real corporation and its controlling entity will not control a significant financial institution and will not hold more than the percentage stipulated by the Supervisor of Banks, the Superintendent of the Capital Market and Chairman of the Israel Securities Authority. Furthermore, directors of a significant real corporation will not be able to serve concurrently as directors of a significant financial institution and those who control a significant bank corporation will be prohibited from controlling a significant non-bank financial institution.
2.3.1.1.4. On July 4, 2012, the Control of Financial Services Bill (Legislative Amendments), 5772-2012, was published. As part of the bill, the Commissioner is empowered to disqualify policies retroactively, and to intervene retroactively in an entire branch of insurance and order the discontinuation or change of a large number of plans, without issuing an individual instruction for each plan, and this with respect to all the plans on the
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market, including those which have already been approved by the Commissioner. Additionally, the financial institutions will have to develop insurance plans and change provident fund articles or transfer management of provident funds, in line with the principles, guidelines, instructions and conditions dictated by the Commissioner. The bill sets forth, inter alia, the following provisions: (a) the Commissioner may instruct certain conditions, which when they are met will dispense with the obligation to obtain a permit from the Commissioner to hold the means of control in an insurer; (b) an insurer who wishes to introduce an insurance plan (including to extend or limit cover, and collective insurance) or to make a change therein (on a matter on which the Commissioner has issued an instruction) will submit notice to the Commissioner at least thirty days in advance, and in the absence of any notice of objection from the Commissioner, the plan will enter into force. Nevertheless, the Commissioner is entitled to instruct, regarding all the insurance branches or regarding certain branches of insurance or specific insurance plans, that such notice must be submitted within a shorter period; (c) the Commissioner may instruct the insurer to make changes in the insurance plan and to discontinue an insurance plan; (d) a management company that wishes to make changes in a provident fund's articles, to merge provident funds, or transfer management of a provident fund to another management company - shall submit appropriate notice to the Commissioner in advance, and in the absence of any objection by the Commissioner - it may take the said action; (e) powers are given to the Commissioner to impose financial sanctions on one who acts not in accordance with the aforementioned provisions.
2.3.1.1.5. On June 21, 2012, the Securities Authority published a draft of the disclosure required in a projected cash flow statement and an amendment concerning disclosure of working capital as part of the description of company operations. The draft proposes amending the Securities (Periodic and Immediate Reports) Regulations, 5772-2012. The amendment is designed to write into law the disclosure directive published by the ISA concerning the disclosure which a corporation must make in a projected cash flow statement regarding warning signs that apply to it. The amendment proposes several amendments to the directive regarding a projected cash flow report, including: (a) determining that the obligation to examine warning signs and include a projected cash flow report also apply to a reporting corporation; (b) abolition of the existing exemption from including a projected cash flow statement for corporations who have published a "going-concern warning" and for corporations whose boards of directors have determined that there is no concern that the corporation will not meet its obligations over the next two years. Additionally, an amendment is proposed to the Securities (Details of a Prospectus and Draft Prospectus) Regulations, 5772-2012. The amendment addresses the disclosure given about a corporation's working capital in the chapter - Description of Company Operations in the periodic report and in a prospectus, so that if there is a difference between the working capital as calculated on the basis of the figures in the accounting reports and the working capital calculated on the basis of all the liabilities due for payment during the operating turnover period
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independent of the accounting classification, disclosure will also be provided about the economic working capital.
2.3.1.1.6. On March 4, 2012, the Securities Authority published a draft disclosure directive - corporate governance questionnaire. The draft directive is further to the draft legislation outline concerning corporate governance which the ISA published in February 2011. According to the legislation outline, a corporate governance report should consist of six parts, one of which is a corporate governance questionnaire. According to the directive, the relevant provisions from the Companies Law and the recommended provisions will be implemented by way of a structured questionnaire to be attached to the chapter on additional information in every periodic report and it must be signed by the chairman of the board of directors, chairman of the audit committee, and chairman of the balance sheet committee.
The draft directive states that in the first year of implementation, a corporation will be required to implement the disclosure directive up to and no later than August 31, 2012, or up to the date on which it publishes the quarterly reports at June 30, 2012, whichever is earlier.
On July 3, 2012, the Securities Authority published an announcement whereby implementation of the directive will be postponed to the publication date of the periodic report for 2012.
2.3.1.1.7. On May 21 2012, a Law Memorandum for the Increase of Competition and Reduction of Concentration and Conflicts of Interests in Israel's Capital Market (Legislative Amendments) (Amendment no. ___) (The Promotion of Financial Education), 5772-2012, was published. The purpose of the law is to amend Chapter 7 of the Law to Encourage Competition and Reduce Concentration and Conflicts of Interests in Israel's Capital Market (Legislative Amendments), 5765-2005, which determined that a government fund would be established to promote financial education in Israel, but the law did not address an operative entity which would manage the fund's activity. A government resolution from December 2011 determined, inter alia, that the Commissioner would be instructed to prepare a comprehensive national policy program for the promotion of financial education, to promote awareness and serve as an effective factor in formulating partnerships between the government, the business sector, and the third sector to promote financial education and create a financial education plan and monitor implementation of the policy, and in this context to distribute a law memorandum which will also write into law the Commissioner's responsibility for coordinating and formulating a policy to promote financial education for the Israeli government, for outlining the national policy to promote financial education, coordinate implementation of the policy and monitor its implementation. Furthermore, it was decided that the amendment will include regulation of an advisory committee for the Commissioner on the subject of financial education. The memorandum also determined the composition of the advisory committee and the objectives to be
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advanced by the Commissioner as part of his duties.
2.3.1.1.8. On May 14, 2012, an amendment to the Antitrust Law (Amendment no. 13), 5772-2012, was published, the main purpose of which is to define the powers given to the Antitrust Commissioner for imposing administrative penalties (financial sanctions) in the event of a breach of the provisions of the Antitrust Law. Likewise, the amendment includes an extension of the categories of violations of the law which will lead to possible enforcement and punishment by law. Within the context of the amendment, the Antitrust Authority was given an option to exercise discretion and in certain instances, to prefer administrative sanctions over the criminal sanctions prescribed by law. The amount of the financial penalty is: for a corporation with sales turnover of more than NIS 10 million - up to 8% of the turnover and no more than NIS 24 million, and for a corporation with sales turnover of less than NIS 10 million - up to NIS 1 million. Likewise, the option to indemnify or insure a senior officeholder against the financial charge was prohibited. The amendment entered into force on its date of publication.
2.3.1.1.9. On March 14, 2012, Amendment no. 5 to the Contracts (Insurance) Law was published which stipulates that when the insured gives notice of cancellation of an insurance contract in accordance with its conditions by law, the contract is annulled 3 days after the day on which notice of the cancellation is given to the insurer (and not 15 days as was the case prior to the amendment). 2.3.1.2. Circulars
2.3.1.2.1. On June 13, 2012, a circular was published concerning reports on senior officeholders of financial institutions to be submitted to the Superintendent of the Capital Market. The circular is published against the backdrop of the development of a new internet system for the input of reports about senior officeholders of financial institutions, which was set by the Capital Market Division. The financial institution must submit on-going and quarterly reports to the Superintendent using the system on the dates stipulated in the circular, commencing July 1, 2012.
2.3.1.2.2. On April 3, 2012, a circular was published concerning a "digital graphic signature", updating the agents' circular on the same subject from August 10, 2011. The revised circular contains several changes and additions with respect to the previous circular, as detailed hereunder: (1) in the definitions section, a definition for "employee" was added - customer, excluding an employee in respect of a transaction performed for his employees and any person for whom insurance brokerage was performed; (2) an instruction was added concerning the customer signature process, which stipulates, inter alia, that a licensee may sign an employer with respect to a transaction performed for his employees on a separate document from that signed by the employee, provided that the licensee gives the employer a single value identification (it should be clarified that identifying the employer by user name and password with be considered a
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single-value identification) and subject to the conditions prescribed in the circular. (3) if the licensee is required to sign the employer on the document with a digital graphic signature, he must sign the employee and lock the document as soon as it has been signed so as to prevent any change in the document, other than adding the employer's signature to the document. After the employer has signed, the document will be locked permanently.
The provisions of the circular apply to all licensees and all financial institutions.
The circular becomes applicable on April 3, 2012.
2.3.1.2.3. 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. On January 30, 2012, a new tender was published in which several changes were made vis-a-vis the previous tender. The last date for submitting bids for this tender is April 1, 2012; the date for commencing operation of the database and the completion date for connecting the customers is January 20, 2013. On March 6, 2012, the Tendering Committee of the Ministry of Finance approved a postponement of the final date for submitting tender bids to May 1, 2012. Likewise, the date for commencing the operation of the database and completing the connection with customers was postponed to February 20, 2013. On June 14, 2012, the tendering committee published an announcement that Mirvah Hogen Ltd. will continue to provide database services for individual price quotes and interest rates for the financial institutions until December 31, 2012 or until services provided by the winner of the new tender commence, whichever is earlier. On March 28, 2011, the Commissioner published a circular concerning the collection of statistical information about claims settlement (the circular
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replaces Financial Institutions Circular 2009-9-19). The purpose of the circular is to collect statistical information that will facilitate the publication of indices in relation 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 a financial institution. The principal change in the circular is that in addition to claims, it also relates to requests for withdrawing 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. Within the context 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 every year in the format stipulated in the circular and present the information pertaining to the last four years on its website. The circular's general provisions will became 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).
In March 2012, the Commissioner published a clarification to the circular whereby a financial institution is not obligated to present data for 2011 on its website. 2.3.1.3. Draft circulars
2.3.1.3.1. On July 18, 2012, a draft circular was published concerning service for customers of agents and consultants. The draft circular details provisions which are designed to ensure that a licensee provides its customers with comprehensive service from the date of the engagement. The proposed services include: (a) a licensee will determine a service level agreement that includes, at least, the customer's rights and will publish it prominently on its website, if it has one; (b) the circular defines principles for providing customer service such as treating the customer fairly and with respect, providing the customer with information about its times for customer service, ensure that it schedules meetings within seven days of the customer's request, that it answers questions within reasonable time, etc.; (c) licensees must meet a required professional standard, including the relevant qualifications for the license, knowledge of the law, employee training, etc.; (d) a corporation which employs ten or more license holders will charge an employee with responsibility for customer service and part of his duties will be to document complaints and the manner of handling them, to submit to the business manager or person responsible for pension advice within the corporation an annual report which reviews the corporation's compliance with the provisions detailed in the draft circular and to draw to the attention of the corporation's license holders to the rules and principles which apply to customer service. The Commissioner and the financial institutions are discussing the draft
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circular.
2.3.1.3.2. On July 10, 2012, the Commissioner published a second draft circular concerning the management of compliance risks in financial institutions. The draft circular proposes, among others, the following provisions: (a) management of the financial institution will appoint an officer to be responsible for the compliance and internal enforcement system (who must comply with the requirements and limitations set forth in the circular), subject to the approval of the board of directors, and it must define a compliance and internal enforcement plan, including taking reasonable measures to ensure that the provisions of law are assimilated for all the financial institution's operations; (b) the officer's duties will include advising the board of directors and senior officeholders of the financial institution of the provisions of the law and management of compliance risks, ascertaining that procedures to monitor identification of the compliance risks are in place, coordinating preparation of the compliance and enforcement plan, pinpointing deficiencies in the entity's compliance plan, as well as reporting obligations (immediate and periodic) to the board of directors, audit committee, CEO and risk manager; (d) the board of directors of the financial institution will discuss and approve the compliance and internal enforcement plan and will also oversee its implementation and take reasonable measures to ensure that the financial institution and its senior officeholders (including outsourced activities) are in compliance with the provisions of the law.
Alongside publication of the draft circular, a draft document of detailed criteria was published, which the Superintendent will use to review the effectiveness of the financial institution's internal enforcement plan, including: (a) whether the enforcement plan corresponds with the financial institution's operations; (b) the extent to which the institution's compliance risk profile is up to date, and monitoring of the changes in the compliance environment; (c) documentation of the enforcement plan, including its preparation and implementation; (d) assimilation of the internal enforcement plan by the financial institution; (e) the presence of internal reporting mechanisms; (f) the extent to which the board of directors, audit committee and management are involved in the preparation and implementation of the enforcement plan.
The Commissioner and the financial institutions are discussing the draft circular and the document of principles.
2.3.1.3.3. 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 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
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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. On June 11, 2012, the Commissioner published a draft version of the future regulatory codex - "Chapter 6 - Instructions for Products", which lists a proposed table of contents for a standard circular for financial institutions and a pilot program for integrating the provisions applicable in existing circulars that address investments and general insurance.
2.3.1.3.4. On April 22, 2012, the Commissioner published a draft document on policy for the granting of permits for the control or holding of a financial institution. The purpose of the document is to prescribe guidelines for the granting of permits for control or holding the means of control of financial institutions and to define the conditions for such permits. Among other things, the draft document includes the following provisions: (a) limitations concerning the minimum rate of holding required for control of the financial institution, dependent on the size of the institution; (b) limitation on the difference between the capital interest of the controlling shareholder in the financial institution and the rate of control therein; (c) rules and limitations concerning the structure of the control, way of holding the means of control in a financial institution and corporations through which a controlling shareholder may hold the financial institution; (d) restrictions on the method of financing the acquisition of the control in a financial institution and the rate of financing; (e) limitations concerning the pledging of means of control in a financial institution and the corporations through which the controlling shareholder holds the financial institution; (f) requirement for equity to be held by the applicant for the control permit as a direct outcome of the scope of its investment in the financial institution; (g) a requirement that the applicant for control must undertake to supplement the minimum required equity of the financial institution which it controls. In granting the permits, the Commissioner has the power to exercise discretion in deviating from the conditions specified in the draft. The Commissioner announced that in addition to the application of the new instructions to future controlling shareholders of financial institutions, he intends to demand that existing controlling shareholders who have already received a permit will
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comply with the new policy requirements after an adjustment period.
2.3.1.3.5. On April 30, 2012, the Commissioner published a draft letter concerning Israel's solvency regime. The draft letter was published in the wake of an announcement by the European parliament that it would be postponing the vote on the amendments to the Solvency II Directive, giving cause for concern that implementation of the Directive in Europe will be substantially delayed. The Commissioner therefore saw fit to revise continuation of the process in Israel and the plan to develop a risk-based solvency regime in the spirit of Solvency II, and advance a business culture which takes into account risk management considerations and the allocation of capital during the decision- making process. Among other things, the draft details the measures planned by the Commissioner for implementation of the solvency regime in Israel: (a) adapting the existing regulatory framework in Israel to the principles of the Directive; (b) an additional QIS submittal- estimated date - November 2012; (c) a report on solvency according to IQIS - estimated date - June 2013; (d) an "Own Risk and Solvency Assessment" (ORSA) process will be conducted; (e) graded intervention by the Commissioner based on existing regulations;
Based on the draft letter, the publication date for IQIS-based capital regulations and application of the capital requirements will be determined in the future, after gaining experience with reporting the results of IQIS. 2.3.1.4. Regulations
2.3.1.4.1. On June 7, 2012, Control of Financial Services (Provident Funds) (Investment Rules that apply to institutional bodies) Regulations, 5772-2012 ("New Investment Regulations") were published. The 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 define provisions for 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 companies affiliated with them.
Alongside the amendment to the investment regulations, Control of Financial Services (Provident Funds) (Direct Expenses on Account of Transactions Performed) Regulations (Amendment no. 2), 5772-2012 were published, in which context technical amendments were made to adapt the definitions in the regulations to the New Investment Regulations.
As part of the amendment, the Control of Financial Services (Provident Funds) (Direct Expenses on account of Transactions Performed) Regulations
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(Amendment no. 2), 5772-2012, were revised so that subsequent to the revision, supervised entities are prohibited from paying management fees from monies retained in the fund to certain external managers, including index- linked certificate companies, but excluding for certificates to which both the following conditions apply: (a) at least 75% of the certificate's exposure obligation is for assets that were not issued in the State of Israel and are not traded or held in Israel; (b) the issuer of the certificate is not a related party. The regulations enter take effect on July 7, 2012, excluding Article 39 of the regulations ("Liquid Assets"), which will commence on December 7, 2012.
In addition, the following regulations were published:
A. Control of Financial Services (Provident Funds) (Purchase and Sale of Securities) Regulations (Amendment), 5772-2012, in which context amendments were made to adapt the definitions in the regulations to the New Investment Regulations.
B. Control of Financial Services (Provident Funds) (Participation by a management fund in a general meeting) Regulations (Amendment), 5772- 2012, in which context technical amendments were made to adapt the definitions in the regulations to the New Investment Regulations.
C. Control of Financial Services (Provident Funds) (Calculation of the Value of Assets) Regulations (Amendment), 5772-2012, in which context technical amendments were made to adapt the definitions in the regulations to the New Investment Regulations.
D. The Control of Financial Services (Insurance) (Ways of capital and funds investments by an insurer and management of its liabilities) Regulations (Amendment), 5772-2012, in which context technical amendments were made to adapt the definitions in the regulations to the New Investment Regulations.
E. Income Tax (Rules to Approve and Manage a Provident Fund) Regulations (Amendment no. 3), 5772-2012, in which context technical amendments were made to adapt the definitions in the regulations to the New Investment Regulations.
F. Control of Financial Services (Provident Funds) (Minimum Equity Required from a Provident Fund or Pension Fund Management Company) Regulations (Amendment), 5772-2012, in which context technical amendments were made to adapt the definitions in the regulations to the New Investment Regulations.
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G. Control of Financial Services (Provident Funds) (Individually managed provident fund) Regulations (Amendment), 5772-2012, in which context technical amendments were made to adapt the definitions in the regulations to the New Investment Regulations.
Alongside the regulations, on July 4, 2012, the Commissioner published a circular concerning the investment rules that apply to financial institutions. The purpose of the circular is to determine detailed instructions regarding the investment rules, inter alia, the following issues: (a) deviation from the investment rates - institutional investor will correct the deviation in accordance with a procedure to be determined by the institutional investor, the dates for amending the investment deviation were defined, provisions concerning documenting all types of deviation and the period for saving the documentation, reporting to the Commissioner, refund of management fees during the deviation period, and a refund for a loss 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 shall be approved by the financial institution's investment committee. Wages and other benefits to which the director is entitled, shall be transferred to the financial institution's assets or to an institutional investor, excluding for a director who is not an employee of the financial institution or a senior officer therein or in a corporation that is an affiliate of the financial institution; The right of a financial institution to recommend the appointment of a particular director by the controlling shareholder of a particular corporation, by virtue of a voting agreement to protect minority interests only. (c) rules for the holding of securities in specialist investment tracks were defined; (d) rules for investing the monies of insureds or members in special index-tracker investment tracks were defined; (e) investment in a partnership and in a right to land through a corporation that is not a partnership, subject to the conditions prescribed in the circular; (f) loans may be given - a financial institution may give loans, in the ordinary course of business, under the conditions specified in the circular. In addition, an institutional investor shall submit a report to the audit committee once every quarter regarding the list of the senior officeholder's loans; (g) institutional investor may perform transactions with an affiliate or through an affiliate provided that the transaction has been approved in advance and in writing by a majority of the external representatives on the institutional investor's investment committee; (h) investment in an affiliate - institutional investor may invest in an affiliate subject to the conditions defined in the circular, inter alia, provided that the total investment made by the institutional investor in all the entities affiliated with it is not more than 5% of the estimated value of its assets; (i) control and holding of the means of control by an insurer - an insurer who, on the publication date of the regulations, had made a lawful investment in a non-marketable asset after receiving the Commissioner's approval for such investment before the regulations were published, may continue to hold the said asset under the conditions stipulated in the Commissioner's approval and the conditions specified in the circular.
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The provisions of the circular will apply to all the financial institutions and their commencement date is the publication date of the regulations.
The Company's subsidiaries which are financial institutions conducted a review of the anticipated effect of the commencement of the New Investment Regulations and related instructions detailed above. This review indicated that the new provisions of law are not expected to significantly affect the manner of investment management by the financial institutions. 2.3.1.5. Draft regulations
2.3.1.5.1. On April 5, 2012, the Ministry of Justice published draft Companies (Other amounts included in equity which will be deemed surpluses) Regulations, 5772-2012. Among other things, the draft regulations propose determining that surpluses (as defined in Section 302 of the Companies Law) will also cover amounts included in a company's equity, originating in "other comprehensive income" and arising from profit or loss from an investment in a financial asset, and which according to generally accepted accounting principles can never be reclassified to the profit or loss of the company. Such amounts with a positive value will be deemed part of the profits when the financial asset is derecognized, and such amounts with a negative value will be deemed part of the surpluses when there is impairment of the financial asset. 2.3.1.6. Instructions and clarifications
2.3.1.6.1. 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.
On February 14, 2012, the Commissioner published another letter granting a
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further three month extension. Accordingly, a financial institution must convene a meeting of its investment committee to discuss these investments. The meeting will address, inter alia, the repercussions arising from the country's low rating and continuation of the holding. Based on the aforementioned provision, at a meeting of the Investment Committee on February 20, 2012 to discuss this subject, and after being given a review of the assets registered in Ireland, the committee decided that, taking note of the fact that the investment is a negligible proportion of the investment portfolio, and taking into account that most of these assets are registered in Ireland for the convenience of the issuing company and not on account of direct exposure to Ireland, it can continue to hold the assets that are registered in Ireland. In May 2012, the Commissioner approved a further extension, until the New Investment Regulations take effect at which time the definition of an approved foreign country will be changed (concerning the New Investment Regulations, see Section 2.3.1.4.1above). 2.3.2. Life assurance & long-term saving 2.3.2.1. Reform of management fees on long-term savings products Pursuant to the Commissioner's plan to increase the competition for pension savings products, on June 21, 2012, the Control of Financial Services (Provident Funds) (Management Fees) Regulations, 5772-2012 were published, the purpose of which is to apply a standard model for maximum management fees on pension savings products by collecting management fees from on-going deposits and from the accrual. Among other things, the regulations include the following provisions: (a) the maximum management fees on provident funds will not exceed 1.1% of the accrual and 4% of the deposits in 2013, and in 2014 and thereafter they will not be more than 1.05% of the accrual and 4% of the on-going deposits, where recipients of old-age pension and survivors' allowance will pay up to 0.6% of the fund's outstanding obligation towards them; (b) management fees on the accounts of members with whom contact has been severed will not be more than 0.3% a year of the balance accrued in the member's provident fund account or on the monthly rate collected by the institution on the date on which the contact was severed or the date on which the financial institution was informed of the member's death, the lower of the two.
These rates will also apply to new life assurance policies, in contrast with the provident funds where the provision applies to old and new money alike. The change of management fees will not apply to insurance policies that were issued before the onset of the regulations, to guaranteed-yield insurance funds, guaranteed-yield provident funds, an old fund, new comprehensive pension fund, personally managed education fund and provident fund, central provident fund, sector provident fund, provident fund for sick pay, and provident fund for vacation6
Following the discussions of the Knesset committee members of the Knesset Finance Committee published a bill to amend the Control of Financial Services (Provident Funds) Law (Amendment no. 8) (Minimum Rate of Management Fees), 5772-2012. The amendment proposes empowering the Minister of Finance to determine a
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minimum rate of management fees. In July the Knesset Finance Committee approved submittal of the bill for a second and third reading.
At this stage, it is impossible to estimate whether the Minister of Finance will make use of the power, if it becomes law after the various stages of legislation and a minimum rate of management fees is set, and if it is set what the minimum rate of management fees will be.
The following table details the rate of management fees according to the reform:
Maximum rate of Managers' Provident fund General pension fund management fees insurance (new) Up to 2% of the accrual or a lower rate of the Current situation accrual and a rate Up to 2% of the accrual Up to 2% of the accrual of the deposits (0%-13% of the deposits) For the period between 1.1.2013 up to 1.1% of the accrual + up to 4% of the on-going deposits and 31.12.2013 Commencing up to 1.05% of the accrual + up to 4% of the on-going deposits 1.1.2014
The reform may significantly affect the revenues from management fees earned by the provident fund management companies and it may impact the profitability of these companies and of Harel Insurance. Likewise, implementation of the reform will affect the value of provident fund activity recorded in the books of Harel Insurance, as detailed below.
Following publication of the regulations, the value of the provident fund activity recorded in Harel Insurance's books was reduced in the financial statements for 2011. Based on a valuation of the provident fund activity that was prepared by an external appraiser, the balance of the value of the good will included under the carrying value of Harel Insurance's provident fund activity was reduced in the financial statements for 2011 by NIS 25 million, before tax.
Based on an impairment review carried out by Harel Insurance at December 31, 2011, and which formed the basis for this reduction, Harel Insurance reviewed the recoverable amount of the provident activity at March 31, 2012. Accordingly, it was found that the recoverable amount is higher than the carrying amount in Harel Insurance's books.
Implementation of the reform is likely to affect on-going profits and the embedded value (EV) in respect of new life insurance policies that Harel Insurance sells in the
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future. The entering into force of these regulations may increase the rate of policy cancellations for policies with high management fees that were sold in the past, and the purchase of new policies with lower management fees. As a result of the foregoing, the reform of management fees may affect the embedded value (EV) in respect of life assurance and pension fund activity6
The proposal to amend the Control of Financial Services (Provident Funds) (Distribution Fees) Regulations, 5771-2011, which propose reducing the distribution fees, is also expected to moderate the impact of the aforementioned reform.
In addition to publication of the regulations, a draft circular was published concerning management fees on pension saving instruments, see Section 2.3.2.4.5 below. 2.3.2.2. Provisions of Law
2.3.2.2.1. On July 23, 2012, the Income Tax (Tax exemption for provident funds on income from the long-term rental of residential apartments) Law, 5772-2012, was published. The purpose of the law is to encourage provident funds to invest in long-term rental projects. The law prescribes a tax exemption on income earned by a provident fund from the rental of residential apartments in a building for rent (as these terms are defined in the law), as the fund chooses, subject to meeting a combination of the conditions stipulated on this matter. Among other things, the provident fund must own at least 100 residential apartments in the building for rent or in several buildings for rent, and if the buildings for rent are in the Negev or the Galilee - at least 50 apartments (in the first year in which the provident fund has rental income, it will also be entitled to the exemption if it owns fewer apartments). Another condition is that the provident fund does not provide services relating to the rental. Furthermore, it was determined that if the provident fund chooses the tax exemption according to this law, it will not be able to renege on its choice and the tax benefits applicable under the other tracks will not apply to it.
In addition to publication of the law, an amendment to the Law to Change the Tax Burden (Legislative Amendments), 5772-2011, was published.
2.3.2.2.2. On May 14, 2012, an amendment was published to the Income Tax (Amendment no. 190 and Temporary Provision) Ordinance, 5772-2012, and to the Control of Financial Services (Provident Funds) Law, 5765-2005 - Amendment no. 8. The purpose of the amendment is to broaden the tax benefits provided when money is withdrawn from an annuity savings channel. The amendment changes several arrangements relating to tax on pension savings, including the following: (a) the exemption from tax on withdrawing an annuity from a provident fund will be separated into two components: (i) "recognized" annuity - full exemption on withdrawing money that was deposited in an annuity provident fund which did not benefit from tax breaks when the deposit was made, for self-employed and salaried employees in respect of wages that are over and above four times the average wage in the
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economy, and for deposits on which the employee did not receive any tax benefit. (ii) "entitling" annuity - exemption from tax of a fixed amount, which will increase over 13 years; (b) the tax exemption will increase when capitalizing the annuity, based on the increase in the tax exemption relative to the money withdrawn for annuity; (c) there will be a change in the mechanism for calculating the exemption on annuity for an individual who has withdrawn bonuses (such as severance pay), so as to encourage leaving the tax-exempt bonuses for annuity ("the combined formula"); (d) members/beneficiaries who are entitled to money from the severance pay component in a provident fund that does not pay an annuity, will be allowed (through an indirect amendment to the Provident Funds Law) to transfer the money to a new account and this money may be withdrawn as a lump sum at any time. If the money is exercised as an annuity, then the entire annuity in respect of such money will be tax exempt. If the money is withdrawn as a lump sum (capital amount), real tax of 15% will apply (for severance pay money from which tax was deducted); (e) money to which the beneficiary of a deceased member is entitled, that was not withdrawn by the beneficiary or transferred to a new account, as noted above, within 3 months of the death of the member, will be treated as money that has been transferred to a new account within the 3 aforesaid months; (f) the limit was cancelled on the maximum deposit for a controlling shareholder. This amount was previously NIS 11,950 per year for all components. The amendment facilitates the deposit of an unlimited amount in respect of the contributions made by the employee and the employer, and the maximum deposit (NIS 11,950) remains in respect of the severance pay component. 2.3.2.3. Regulations
2.3.2.3.1. On February 29, 2011, an amendment was published to the Control of Financial Services (Provident Funds) (Direct Expenses on Account of Performing Transactions) Regulations (Amendment), 5772-2012, in which context the definition of an "external management fee" currently in force, as defined in Section 3 of the aforementioned regulations, was extended until December 31, 2013. An "external management fee" is therefore defined as follows: (1) an expense arising from an investment made by a provident fund in investment funds that are not a related party or in an investment fund that is a partnership where the general partner in the partnership is not a related party; (2) an expense stemming from the management of investments made by a provident fund that is payment to a foreign portfolio manager, subject to meeting the conditions listed in the regulation; (3) expenses arising from the management of investments made a provident fund that is payment to a licensed portfolio manager, subject to meeting the conditions listed in the regulation; (4) an expense arising from an investment made by a provident fund in a fund or foreign fund that is payment to the fund manager or to the fund, subject to meeting the conditions listed in the regulation. (5) an expense arising from an investment by a provident fund in index-linked certificates, instructed by the Superintendent, subject to meeting the conditions listed in the regulation; the commencement of the regulations will be March 1, 2012,
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excluding the provision stipulated in Section 5 above, which will commence on July 1, 2012. After December 31, 2013, this definition will be replaced with the definition prescribed in Section 1 of the regulations, whereby an external management fee shall only be that specified in Section 1 above.
2.3.2.3.2. On February 16, 2012, Control of Financial Services (Provident Funds) (Minimum Equity Required of a Provident Fund or Pension Fund Management Company) Regulations, 5772-2012, were published. The regulations prescribe that the initial equity required of a management company shall be NIS 10 milion and the minimum equity required of a management company at the reporting date (annual and quarterly) shall not be less than the higher of the following amounts: (i) the initial equity required as aforementioned - NIS 10 million; (ii) the accrued amount of 0.1% of the assets under management up to a maximum limit of assets under management of NIS 15 billion, 0.05% of the assets under management over the aforesaid limit, and - (iii) 25% of the annual management expenses. Likewise, it was determined that a management company whose shareholders' equity is less than the amount specified in the regulations must gradually increase its equity, as specified in the regulations, so that by the date of publication of the financial statements at December 31, 2014, the equity has been supplemented in full. Furthermore, the regulations prescribe ways of investing shareholders equity. The regulations give the Commmissioner the authority to reduce or increase the equity requirements, taking into account the risks that characterize the management company's activity. By virtue of this authority, on February 16, 2012, the Commissioner published a circular concerning capital requirements from management companies which contains provisions allowing the minimum equity to be reduced, subject to the purchase of an appropriate insurance policy. Concurrently, Income Tax (Rules for the Approval and Management of a Provident Fund) Regulations (Amendment no. 2), 5772-2012, were published, which determined: (a) the provisions in the regulations relating to the minimum equity required of a management company were cancelled; (b) 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) specific provisions were determined concerning indemnity for the senior officers of a company that only manages sectorial provident funds. 2.3.2.4. Circulars
2.3.2.4.1. On August 15, 2012, the Commissioner published a circular concerning the obligation to use a central pension clearing system. The circular prescribes, inter alia, the following provisions: (a) a financial institution and licensee must make all the necessary preparations to hook up to and use the clearing system (including, operational deployment, defining rules for assimilation of the
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software and training employees to use it); (b) a licensee and financial institution shall bear the costs of hooking up to and maintenance of the clearing system; (c) the circular details the operations that a financial institution and licensee must perform only through the pension clearing system. The provisions of the circular will apply to all financial institutions and licensee, excluding central provident fund for annuity, gradually from its date of publication until January 1, 2016. The circular cancels a circular concerning the obligation to use a central pension clearing system from March 22, 2012.
2.3.2.4.2. On August 1, 2012, the Commissioner published a circular concerning an internet interface for locating the accounts of members and of deceased members - technical requirements. The purpose of the circular is to specify the technical requirements for financial institutions for operating a central, accessible internet interface through which accounts can be easily located.
Furthermore, users of the interface will be obligated to provide identifying details so as to obtain information from the interface. The circular proposes the following provisions, among others: (a) a financial institution will give the Commissioner the information required about provident fund members and policyholders in the event of death for the purpose of operating the interface, as specified in the circular. The information will be transferred to the Superintendent as a file in accordance with the appendix to the circular, and before the financial institution submits the file, it must verify the correctness of the information; (b) if a member asks the financial institution to remove information about his accounts from the interface, the financial institution will not transfer details about the member's accounts from two weeks after receipt of the application or from the date of the transfer of information (based on the dates stipulated in the circular) - whichever is later, and the member's request shall be documented; (c) the financial institution will send the Superintendent contact details for the liaisons responsible for implementing the provisions of the circular. Additionally, provisions were prescribed concerning the deployment schedule. The provisions of the circular apply to all financial institutions from the publication date of the circular.
2.3.2.4.3. On July 30, 2012, a circular concerning a "Structure of the disclosure required in the financial statements of management companies pursuant to IFRS" was published. The purpose of the circular is to prescribe provisions concerning the format of disclosure required according to IFRS (as defined in institutional entities circular 2007-9-7 with regard to the adoption of International Financial Reporting Standards). Among other things, the circular lists the following provisions: (a) instructions concerning adoption of the reporting standards; (b) the method of calculating the amounts of investments in controlled management companies and in other investees; (c) a management company which chooses to make early application of the new IFRS, will be required to inform the Superintendent; (d) the annual
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financial statements must be signed in accordance with the provisions of the circular. The provisions of the circular will apply to all management companies from the publication date of the circular, excluding the instructions concerning adoption of the reporting standards which will apply from the financial statements for 2012.
2.3.2.4.4. On July 30, 2012, a circular was published concerning financial reporting and related reports by the management companies. The circular sets forth, inter alia, the following provisions: (a) the manner of submitting annual and quarterly financial statements; (b) the information to be reported as part of the related reports and the manner of the reporting; (c) provisions concerning the frequency and manner of the reporting. The circular will apply to all management companies and will commence with the annual reports for 2012 and thereafter, where the financial statements and related reporting for the first and second quarters of 2012 will be reported on the date of submittal of the 2012 Q3 reports.
2.3.2.4.5. On June 25, 2012, a circular was published concerning management fees on pension savings instruments. Among others, the circular sets forth the following provisions: (a) the change in management fees will be limited so that the financial institution will be entitled to offer members a lower rate of management fees than the maximum rate defined by law, provided that the rate is for a period of at least two years from the date on which management fees were first collected at the proposed rate; (b) certain situations were defined (suspension of deposits, full/partial withdrawal of the accrued balance, addition of a distribution entity who receives a commission from the financial institution) in which a financial institution may raise the management fees before the aforementioned period, provided that the member agrees to the change in advance and in writing; (c) the financial institution must send the member and the licensee who provides the member with pension advice (ongoing) notice of the increased management fees collected from the member; this increase will only apply at the end of two months from the date of sending the notice or from the date specified in the notice, whichever is later, provided that the notice is not sent earlier than four months before the anticipated increase. The circular becomes applicable on January 1, 2013.
2.3.2.4.6. On March 22, 2011, the Commissioner published a circular concerning power of attorney for a licensee. The circular prescribes a standard format for a power of attorney form that the customer will sign, granting the licensee power of attorney to obtain information or submit applications as part of one-time or on- going pension advice or pension marketing. The circular prescribes the following provisions, among others: (a) the power of attorney will only be used for providing one-time pension advice or pension marketing, first-time pension advice or marketing, and for dealing with the actual transaction as part of the pension advice or marketing; (b) a licensee shall attach a photocopy of an ID card or other identifying document with regard to the transferring of a power attorney through the central pension clearing system; (c) a request shall
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be submitted to the financial institution which includes a power of attorney in accordance with the attached appendices and as specified in the circular; (d) the validity of the power of attorney will be determined in accordance with the type of application or notice by the financial institution or licensee, and subject to the conditions specified in the circular; (e) a financial institution shall define a procedure for verifying a power of attorney, to be revised from time to time.
The circular prescribes transition provisions from the date of publication until July 1, 2017. The circular becomes applicable on January 1, 2013, excluding several provisions listed in the circular. On August 15, 2012, a draft circular concerning power of attorney for a licensee was published. Several amendments, clarifications and additions were made to the draft compared with the existing circular, including: (a) the addition of a pension product; (b) the customer's the right to inspect the power of attorney and understand its content before signing it; (c) a bank (or any other corporation specified in the draft circular) may display a power of attorney which has been signed by a customer of the corporation on its website.
2.3.2.4.7. On February 28, 2012, the Commissioner published a circular concerning direct expenses for performing transactions. The circular prescribes provisions relating to the Control of Financial Services (Provident Funds) (Direct Expenses for Performing Transactions) Regulations, 5772-2012, pertaining to an expense arising from an investment in index-linked certificates, an expense paid for conducting class actions and claims, an expense paid for the provision of mortgage and pertaining to issuing quarterly reports to an investment committee about the payment of direct expenses for performing transactions. On July 4, 2012, the Commissioner confirmed that the component for covering expenses may be deducted from provident fund assets or money that is held against yield-dependent liabilities (for transactions in index-linked certificates where this is prohibited according the above regulation for management fees), provided that the rate of the expense to be deducted is not more than 0.1% of the fair value of each certificate, based on the method of calculating the commissions specified in each certificate. This amendment is not expected have a significant effect on the Group's equity or profit.
2.3.2.4.8. On February 21, 2011, the Commissioner published a 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 circular prescribes provisions that address the following: (a) the annual financial statements of a management company - shall include a management review and include at least the information specified in the reporting format, based on
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the appendices to the 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) in an IRA provident fund and multi-track central severance pay provident fund, no management review will be attached to the annual reports. The reports will include certain details as specified in the circular and will be given at aggregate level only; (d) a management company that merges a provident fund or pension fund that it manages with another provident fund or pension fund that it manages or that is managed by another management company, will prepare the financial statements for the provident fund or pension fund for the year of the merger as detailed in the circular; (e) 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 2012, excluding several provisions specified in the circular. On May 24, 2012, a clarification to the circular was published stating that a management company may implement the basis of reporting clause (3.f) in the circular, from the financial statements for the first quarter of 2012.
2.3.2.4.9. On February 16, 2012, the Commissioner published a 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)(2) of the Capital Regulations; a provident fund management company that guarantees a yield shall reduce the minimum capital amount it must hold at the reporting date by 30% of the amount prescribed in Article 3(A)(2)(a) and (b) 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 circular. The provisions of the circular shall apply on the date on which the Capital Regulations take effect. Regarding the supplementary capital that the management companies in the Harel Group require as per the circular, see Note 7 to the Financial
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Statements.
2.3.2.4.10. On February 5, 2012, the Commissioner published a circular concerning the submittal of applications for merging provident funds and for merging investment tracks for the Commissioner's approval. The circular addresses the way in which applications for approving a merger of provident funds or investment tracks are to be submitted to the Commissioner. Among other things, the circular lays down guidelines for performing a merger of provident funds or investment tracks. Accordingly, provisions were prescribed concerning the manner of submitting the application when the requested merger is consistent with the guidelines and the manner of submitting the application when the merger does not meet the guidelines. The circular also stipulates that the merger must take place within six months of the date of submitting the application. Regarding merger plans that meet the guidelines, the provisions stipulate that the application will be deemed approved 20 business days after the submittal date, if the Commissioner gives no other instruction during the said period. Regarding merger applications that do not meet the guidelines, they shall be deemed approved if the Commissioner issues no other instruction during a period of 40 business days from their date of submittal. Where a merger plan also requires a change in the articles, the application will be deemed approved 30 business days after the submittal date, unless the Commissioner instructs otherwise during the said period.
2.3.2.4.11. On February 5, 2012, the Commissioner published a circular concerning a process for locating members and beneficiaries, which took effect when the Control of Financial Services (Provident Funds) (Location of Members and Beneficiaries) Regulations, 5772-2012, are published (hereinafter in this section: "the Regulations") were published on January 30, 2012. 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 for locating beneficiaries after the death of a member, as well as to inform members and beneficiaries that money exists to which they are entitled. The circular stipulates that a financial institution must operate as follows: (a) it must implement that mentioned in the Regulations in order to update the identifying details pertaining to policyholders; (b) regarding members in respect of whom the conditions listed in the circular have been met, the financial institution must contact the Population Registry by hooking up to the Population Registry databases so as to obtain the member's address, and it must prescribe an internal procedure for updating the identifying details in its records; (c) it must establish detailed work procedures for the action it will take to locate those members with whom contact has been severed and to locate the beneficiaries of deceased members; (d) it must save documentation from requests made to the Population Registry, of changes made in the records, of action taken to find members with whom contact has been severed and to locate beneficiaries, a copy of the procedures and of the
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reports submitted to the Administrator General. The circular specifies the obligations that apply to a licensee with respect to a member with whom contact has been severed or who has died, and the licensee must give the financial institution any details it is asked to provide and inform a member or beneficiaries of requests made by the financial institution. The circular also prescribes rules for informing the Administrator General about money belonging to members with whom contact has been severed and of members who have died, with respect to all the details that the financial institution has in its possession. A financial institution's board of directors must hold a meeting to approve the procedures within 120 days of the onset of the circular, it must obtain a report every year on the handling of the accounts of members with whom contact has been severed and the accounts of deceased members, and appoint an entity to take charge of implementing the procedure, the circular and the Regulations. 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 in the circular. On January 30, 2012, Control of Financial Services (Provident Funds) (Locating Members and Beneficiaries) Regulations, 5772-2012, were published. The Regulations prescribe that a financial institution must take action to update basic identifying details by contacting the Population Registry by the end of the quarter following the commencement date of the Regulations to verify the basic identifying details of its members with the details which appear in the Registry, and it must obtain the identifying details of new members who join the institution, when making the six-monthly application to the Population Registry after the enrollment of the new member. Six months after the commencement of the Regulations, and every six months thereafter - the financial institution must contact members to obtain the surnames and dates of death of provident fund members. Likewise, a financial institution shall apply reasonable diligence to locate members with whom contact has been severed, including to contact entities that may have information which can help locate such members, including – contacting contact people (the licensee or any person listed as having enrolled the member or who was appointed by the member as the person who handles the provident fund account for him), the employer, and in a sectoral provident fund – the entity representing the members, and applying to various databases. The financial institution must take the action to locate the member within a period of one year, and thereafter every three years, and this within a period of a year, unless the member has a dormant account (as this term is defined in the Regulations), and the balance in his account is more than NIS 5,000 - in which case the action must be taken again within a year. If the financial institution is informed that a member has died, it must contact the beneficiaries whose identities are known to it, and if it is unable to contact the beneficiaries – it must send notice to the deceased member's address within six months of the death, and contact the Population Registry, various databases, and concerning an address and telephone number for the beneficiary – it must contact the
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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. If the financial institution has no information pertaining to the deceased member's beneficiaries within 3 months, the financial institution must send notice to the deceased member's address and 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. If no address is obtained for sending notification as a result of such requests, it must contact various databases, the Population Registry and the licensee who appears in the financial institution's records as having enrolled the member or the licensee who was appointed by the member to handle the account. The financial institution must take the aforementioned action to locate the beneficiaries within one year of the date on which it is informed of the member's death, and thereafter - over a period of one year from the second year. The Regulations will take effect on January 1, 2013, excluding the instruction concerning contacting the Population Registry, which shall take effect on June 1, 2013. 2.3.2.5. Draft circulars
2.3.2.5.1. On August 12, 2012, a draft circular was published concerning life assurance policies with a guaranteed yield (backed by Hetz bonds). The purpose of the draft is to establish the manner in which an insurance company must operate after the policy period for yield-guaranteed insurance policies ends, if this date precedes the date on which the insured is expected to reach mandatory retirement age. The draft circular prescribes the following provisions: (a) for money which was deposited in an annuity insurance policy with a guaranteed yield - when an insured wishes to defer the date on which he will begin to receive the annuity after the policy period ends and he has income from work or an occupation during the deferment period (and in any event, no later than the date on which the insured reaches the age of 75), the deferral shall not infringe on the insured's right to continue the guaranteed yield; (b) for money which is deposited in a capital insurance policy with a guaranteed yield - after the end of the policy period, no further investment may be made in Hetz government bonds for these assets, given that according to the insurance plan, this money must be paid to the insured in full at the end of the policy period. If the employment relationship has not ended at the end of the policy period, the insured may continue the guaranteed yield on the balance of the severance pay component which has accrued in the policy until the employment relationship ends and no later than the date on which the insured reaches the age of 75; (c) for money which is deposited in a guaranteed-yield annuity policy which allows for a lump-sum (capital) withdrawal - the insurance company will present the insured with the option to choose between withdrawing the money as an annuity and withdrawing it as a lump sum. If the insured chooses the annuity, he may not renege on his choice; (d) guaranteed-yield policies which have been cancelled may not be renewed, even if their redemption value has not yet been paid. The Commissioner and the financial institutions are
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discussing the draft circular.
2.3.2.5.2. On August 8, 2012, a draft circular was published concerning financial reporting and related reports by provident funds and pension funds. The draft was published pursuant to a circular concerning instructions about the disclosure format required in the annual financial statements of provident funds and pension funds (see Section 2.3.2.4.8). The draft circular proposes, inter alia, the following provisions: (a) the manner of submitting annual and quarterly reports; (b) provisions concerning the frequency and manner of the reporting. The provisions of the circular will apply from the financial statements for 2012 and thereafter, where on the date of presenting the annual reports for 2012, the financial statements for all quarters of the years 2010- 2012 will be reported. The Commissioner and the financial institutions are discussing the draft circular.
2.3.2.5.3. On August 2, 2012, the Commissioner published a draft circular concerning an amendment to the circular on a standard format for the transfer of information and data in the pension savings market (circular on a standard format for the transfer of information and data in the pension savings market from February 28, 2011). As part of the amendment, the enrollment interface which constitutes part of the standard interface and the events interface were consolidated into one interface. Additionally, Appendix A to the circular was amended so that the information will be transferred from a financial institution to a licensee only through a holdings interface within three business days from submittal of the application to receive information. The information transferred will be the most up-to date information which the financial institution has and is requested. When the draft is published, financial institutions circular "Limited standard format for the transfer of information from a financial institution to a licensee" and financial institutions circular "standard format for the transfer of information and data in the pension savings market" will be eliminated. Concurrent with publication of the draft circular, the following were published: third draft of Appendix C - portability interface, which details the method of transferring the detailed information to be transferred at each stage of the portability and the data required based on the relevant stage of the portability process, and consistent with the schedule defined in the portability circular for implementing the said stage. The portability interface is expected to take effect on March 3, 2013, a second draft of Appendix D - Events interface, which details the information that a licensee must give the financial institutions to facilitate computerized acceptance and production of pension products, as well as the documents that a financial institution must receive as part of the application to perform the operation. Additionally, the interface defines the content of the feedback which a financial institution must send to the applicant. The events interface is due to enter into force on January 1, 2014;
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The Commissioner and the financial institutions are discussing the draft circular.
2.3.2.5.4. Announcement by the Commissioner of Insurance concerning guaranteed annuity coefficients in life assurance policies On July 11, 2012, the Commissioner published a draft position paper concerning "Update of the set of demographic assumptions for pension funds and life assurance" and Draft Insurance Circular 2012-46 concerning "Annuity conversion factors which incorporate a longevity guarantee". The draft relates, inter alia, to the improvement in longevity, including future longevity improvements, the rate at which policyholders exercise the annuity and the resulting repercussions on the volume of the reserves and method of calculating them. According to the draft position paper, the Ministry of Finance intends to revise the mortality tables due to the increase in life expectancy, based on studies it has conducted. The findings in the draft study on the increase in longevity, with respect to the mortality tables that are currently in use, affect, inter alia, an increase in the liabilities for annuity in life assurance policies which incorporate a longevity guarantee.
On July 31, 2012, the Commissioner published a letter concerning the effect of the draft position paper on the financial statements at June 30, 2012. According to the Commissioner's letter, at this stage it is still uncertain whether the estimates included in the draft should be viewed as best estimates for the purpose of calculating the insurance or pension liabilities in the financial statements at June 30, 2012.
The Company is preparing estimates of liabilities for annuity based on the data published by the Treasury's actuary, and based on additional actuarial data which are being reviewed vis-a-vis the Group's actual experience. Harel Insurance reviewed the data about longevity published by the Commissioner on July 11, 2012 and in light of the new information available to Harel with respect to longevity, they were taken into account in calculating the insurance liabilities, where the principle impact is on life assurance policies which incorporate a guaranteed annuity coefficient.
Given that the Commissioner's publication from July 11, 2012 is still only a draft, and its method of implementation has not yet been discussed, it is possible that in future further changes will be made regarding calculation of the insurance liabilities.
As mentioned in Note 3 of the periodic report for 2011, the Company schedules supplements required in the reserve for annuity as per the Commissioner's instructions, taking into account the profits anticipated from the policies until the policyholders reach retirement age. This gradual allocation is made by using a capitalization rate (k) up to the amount of the management fee rate or financial margin which is sufficient to cover all the
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foreseeable expenses up to the age of retirement of the policyholders. In view of the increase in the amount of the liability for annuity, the Company revised the annual capitalization rate of the reserves for annuity, K, according to which the Company spreads the required reserve supplement (K) from 0.62% to 0.7%. This rate is the maximum rate determined by the Company, based on the risk-free interest rate and mix of liabilities. The said factor K is determined so as to bring about a gradual, reasonable accrual of the reserve up to the anticipated date of retirement.
As a result of the assumptions relating to the revised mortality tables used to calculate the future liabilities for annuity, based on the new data published by the Ministry of Finance and the revised K rate, an additional balance of NIS 79 million before tax and a balance of NIS 51 million after tax will be recognized gradually in future to profit and loss, by using the aforementioned capitalization factor K, until the policyholders reach retirement age.
Whereas, as noted above, the scheduling of the cost of the annuity was restricted by using the maximum factor K of 0.7%, an additional amount of NIS 24 million before tax and NIS 16 after tax, as an expense in the financial statement as at June 30, 2012, reducing profit and comprehensive profit by the said amount.
2.3.2.5.5. On May 21, 2012, a draft circular was published concerning the transfer of information from the Population Registry to pension funds. The purpose of the draft circular is to regulate the application process by pension fund management companies to the Ministry of the Interior's Population Registry for information about members, so as to verify the data held by the management companies. Among others, the draft circular sets forth the following provisions: (a) a management company will apply to the Population Registry when an entitling event occurs, to verify the basic identifying details of the member or recipient of the payment; (b) once a month, management companies may ask the Population Registry for an indication of the death of members and the date of death, if it is registered; (c) management companies may apply to the Population Registry for an indication of recipients of payments who have left the country and remain outside Israel for more than 6 months; (d) management companies may apply to the Population Registry for information needed for performing an actuarial balance. The Commissioner and the insurance companies are discussing the draft circular.
2.3.2.5.6. On May 16, 2012, a draft circular on a ruling in principle concerning the raising of management fees without giving advance notice was published. The background to this circular is the obligation binding on management companies to inform members in advance of an increase in management fees, as prescribed in Article 53B(a) of the Income Tax Regulations. If it has not given advance notice, the management company may not raise the management fees and it must refund management fees collected unlawfully to the member, and that for a period beginning seven years before the decision.
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The draft circular proposes determining, inter alia, the following provisions: (a) provident fund management companies or pension fund management companies must refund excess management fees that were collected as specified in the draft to the members; (b) general instructions for making the refund: (i) when the draft circular is published, all management companies must formulate a detailed work plan which sets forth the method of implementing the instructions for making the refund, no later than three months from the publication date. During this period, the company will investigate and document those instances in which management fees for members were increased unlawfully. (ii) On the date of making the refund, the management company must send a letter to members who are entitled to a refund in accordance with the instructions in the draft circular. (iii) The management company must submit notification to the Superintendent no later than six months from the publication of the draft circular, as specified in Appendix A of the draft. (iv) Management companies must save information concerning the aforementioned refund, as specified in Appendix B of the draft. (v) management companies must give the Superintendent, no later than two months after implementing the refund instructions, a summary report prepared by the company's internal auditor, confirming that the company has fulfilled its obligations. In those instances where the periodic report sent to members reflects management fees after the tariff increase, the restitution period shall be calculated from the actual date of the increase and up to two months after the member receives disclosure in the periodic report. A management company that submits to the Superintendent, to his satisfaction, proof of proper conduct in informing members of an increase in management fees, will be exempt from the restitution obligation according to the draft.
The Commissioner and the management companies are expected to discuss the draft ruling and in addition there are questions of interpretation arising from the text of the draft and the text of Article 53B(a) to the Income Tax Regulations. Consequently, at this stage, it is impossible to estimate the effect of the draft ruling.
2.3.2.5.7. On February 20, 2012, the Commissioner published a second 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. A member who ceases to be an 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 that) without changing the policy conditions, including regarding the amount of the premiums, and without re-examination of the medical condition. The provisions of the circular shall apply to all financial institutions, from the commencement date of the circular, and about the
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policies that were issued before the onset of the circular, from January 1, 2014. The Commissioner and the financial institutions are discussing the draft circular. Concurrently, a second draft Control of Financial Services (Provident Funds) (Insurance Cover by Provident Funds) Regulations, 5772-2012, was published. The Commissioner and the financial institutions are discussing the draft circular.
2.3.2.5.8. On December 1, 2011, the Commissioner published a draft circular concerning customization of the savings track to the member's specifications. The circular is due to take effect when the Control of Financial Services (Provident Funds) (Setting up of Default Tracks) Regulations, 5772-2012, are published (hereinafter in this section: "the Regulations"). The circular stipulates that the default tracks and the track for annuity recipients (as defined in the Regulations) will be written into the fund's articles or the policy and they will stipulate that a member who is associated with a default track that no longer corresponds with his specifications according to the model, will be transferred to the default track suited to his specifications. The financial institution will report the model it has defined to the Commissioner. The model shall include an investment track for annuity recipients (as defined below), a track for savers who are more than 60 years old, 3 investment tracks for savers who are less than 60 years old ("Model A") or a model that includes a track for annuity recipients and investment tracks each of which specifies a group of members with a particular age range ("Model B"). Any change in the models must also be reported to the Commissioner, and the articles and/or the policy into which the default tracks and the track for annuity recipients are written must be submitted for the Commissioner's approval, within two weeks of being approved by the board of directors. Details of the model, the default tracks and tracks for annuity recipients, or any change made therein, must be published on the website within two weeks of obtaining the Commissioner's approval, they shall be included in the annual reports sent to members from the annual report for 2011, and shall be included in the enrollment forms for the fund from the commencement date of the Regulations. A financial institution must inform new members, who have enrolled in a default track that does not correspond with their specifications based on the model, within 30 days of their enrollment, that there is a default track better suited to their specifications and enable them to transfer to this track. Likewise, a financial institution must inform members on a default track that were included in this track at the time of enrollment, about the transfer of members to that track pursuant to the provisions of the Regulations, three months before the transfer date, specifying the expected mix of investments on the transfer date, and after the transfer has taken place, as well as the time period required for adjustment of the track. If a financial institution chooses Model B, it must inform the member that s/he is being transferred to another track in accordance with his age at least one month prior to the transfer.
The circular was published together with the text of the Control of Financial Services (Provident Funds) (Setting up of Default Tracks) Regulations, 5772-
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2012, as submitted for the approval of the Knesset Finance Committee. The Regulations stipulate that for each provident fund, a financial institution shall manage several investment tracks for managing the money of members who do not receive an annuity and have not chosen another track, which will constitute the "default tracks" based on Model A or Model B (see above). A financial institution shall manage a separate track for the severance pay component in the provident funds ("severance pay track"), unless according to the fund's articles or the policy conditions and according to the employment agreement, the accrued balance of the benefits component may be reduced based on changes in the accrued balance of the severance pay component. Likewise, a financial institution that manages an annuity paying provident fund or an insurance fund that includes insurance cover for a member in the event of death or work disability (P.H.I.), shall manage a separate account for managing the assets against liabilities towards the annuity recipients and shall set up an investment track for managing them ("track for annuity recipients"). The board of directors of a financial institution must define a model for categorizing members in investment tracks who are under 60 years old, and the overall investment policy on the default tracks and on tracks for annuity recipients, by July 1, 2012. Likewise, at least once every two years, the board of directors must discuss the model chosen and update it where necessary. The financial institution's investment committee shall define the investment policy for the default tracks and the tracks for annuity recipients. The default tracks will replace the provident funds' general tracks, and a new member will be enrolled in one of the default tracks or the track for annuity recipients, and regarding the severance pay component - the severance pay track or default track consistent with the member's specifications. The Regulations specify the dates on which a financial institution must transfer existing members on general tracks to the appropriate default tracks and when they must transfer members between the default tracks based on their age at the beginning of the quarter after the date on which the member reaches the relevant age. The Regulations also stipulate that the management company of a new comprehensive fund shall keep one separate account in which the assets of annuity recipients who are not currently entitled to an annuity (before January 1, 2004) will be managed, and one separate account for members who are already entitled to receive an annuity, and it shall set up one investment track for each of these accounts. The Regulations do not apply to guaranteed yield provident funds with respect to money that is managed on a guaranteed yield track. The Regulations will take effect on January 1, 2014. 2.3.2.6. Draft memorandum of law and regulations
2.3.2.6.1. On May 10, 2012, a third draft of the Control of Financial Services (Insurance) (Commissions) Regulations, 5772-2012, was published. The draft regulations propose, inter alia, the following provisions: (a) the structure of commissions paid to insurance agents will be one of the methods detailed in the draft (service fees, meeting sales targets, professional instructions, and marketing expenses); (b) provisions concerning proper disclosure to which an insurance
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agent is committed; (c) limitations concerning the ratio between different categories of commissions that are paid to insurance agents; (d) regulation of the method of paying commissions simultaneously to several licensees; (e) regulation of the payment of commissions for an insured or a member with whom contact has been severed.
2.3.2.6.2. On May 10 2012, a second draft of the Control of Financial Services (Provident Funds) (Distribution Fees) Regulations, 5772-2012, was published. The background to the regulations is to allow an insurer to pay to pay a distribution fee in respect of pension products that it manages for which the customer receives pension advice. This is to facilitate objective advice suited to the customer's needs. It is therefore proposed to determine a standard distribution format for the three categories of pension products: provident fund, new pension fund, and executive (managers) insurance. The second draft proposed, inter alia, the following provisions: (a) distribution fees will comprise two components: (i) an annual rate of 0.20% of the volume of assets accrued to the customer's credit in a pension product; (ii) a rate of 1.6% of the on-going deposits; (b) the regulations do not change the rate of the distribution fees for advice with respect to an education fund, the nature of which is different from other pension products; (c) a financial institution which manages more than one pension product, may enter into an agreement with a pension advisor only if the agreement includes all the pension products of the financial institution; (d) a distribution fee will not be paid for a member or insured with whom contact has been severed.
2.3.2.6.3. On February 20, 2012, the Commissioner published a second draft of the Control of Financial Services (Provident Funds) (Insurance Cover in provident funds) Regulations, 5772-2012. Among other things, the draft regulations prescribe the following: (a) a management company may purchase insurance cover for a member for longevity (for non-active members as well), for risk of death and disability only; (b) provisions concerning conditions of the insurance cover, where the maximum cost of the cover will be calculated in aggregate (will also apply to pension funds); (c) conditions concerning retaining the insurance cover once contributions are no longer paid into the provident fund, the cost of the risk in extending the cover may be charged from the accrued balance; (d) conditions for the purchase of group life insurance by the management company of a provident fund that does not pay annuity and of an education fund; (e) the insured will bear the full premium entailed in insuring him. The premium of an insurer, which is a party related party to the management company shall be equal to the premiums applied by the insurer to all insureds in a similar policy; (f) the draft regulations prescribe transition provisions which propose that the regulations will not apply to insurance policies that were issued under the provisions of Articles 31 and 45 of the Income Tax (Rules to Approve and Manage Provident Funds) Regulations, 5724-1964, until the commencement of the regulations. Concerning a draft circular on the purchase of insurance cover through a provident fund management company, see above. The Commissioner and the financial
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institutions are discussing the draft regulations. 2.3.3. Health insurance 2.3.3.1. Provisions of Law
2.3.3.1.1. On July 3, 2012, the National Health Insurance Bill (Amendment - Loss Bonus), 5772-2012, was tabled in the Knesset. The bill proposes amending the National Health Insurance Law so that a health fund has the right to restitution of its expenses from the private insurer if a health fund member exercises his right under an additional health services plan to receive a medical service which is not part of the health services package, and simultaneously is also entitled to payment for that service from the private insurer. If there are several private insurers, each one will bear a pro rata share of the sum total of the insurances and no more than the amount actually expended by the health fund.
If the bill is passed, it may lead to a sharp increase in health insurance claims and severely affect profit in the Company's health insurance segment. 2.3.3.2. Ruling
In May 2012, the Supreme Court handed down a ruling which eliminates the cause of wrongful birth which had been available to a child born with an abnormality on account of malpractice, and it determined that instead the child's parents have the right to file for malpractice as the injured parties in respect of loss caused to the parents due to the malpractice which resulted in the birth of a child with abnormalities. The loss will be for the additional expenses entailed in raising a child that is born with abnormalities. According to the ruling, the parents must prove that in view of the abnormality which should have been diagnosed, but was not, at the pre-natal stage, the abortions committee would have approved the termination at the time on which the abnormality should have been diagnosed, and that the parents would in fact have aborted the pregnancy. The ruling establishes a rebuttable presumption whereby the parents would have aborted the pregnancy, and the respondents must attempt to refute this presumption in the specific case. According to the ruling, the compensation payable to the parents must reflect the child's special needs arising from its abnormalities, based on the circumstances of each case, and for the duration of the child's life. This compensation will include any surplus expenses which are required in a specific case, including: medical expenses, third-party assistance, rehabilitation expenses, education expenses including related expenses, housing and mobility costs.
While the child is growing up and for the rest of his life, the parents will also be entitled to compensation for his ordinary living expenses insofar as he is unable to earn a living and there are no special circumstances which negate this right. Regarding non-financial loss, the ruling stipulates that in those instances where the court is persuaded that there is an infringement of the plaintiff's autonomy – relating to the heart of the right and on a material matter, the court must rule adequate compensation which reflects the full severity of the abnormality. Likewise, there is also room for compensation in respect of on-going mental damage.
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2.3.3.3. Circular
2.3.3.3.1. On June 18, 2012, the Commissioner published a circular concerning dental insurance. The purpose of the circular is to lay down principles for drawing up plans for dental insurance. The circular prescribes, inter alia, the following provisions: (a) an insurer may only cover the treatments listed in the Ministry of Health ambulatory services price list or the Ministry of Health catalog (the names of the treatments and the codes will be defined according to their listing in the price list/catalog). (b) it determines those situations in which an insured may cancel a policy, unlike in the past it was possible the insurer to deny, limit, or impose a fine in respect of the right of cancellation, now an insured may cancel the policy at any time and unconditionally. An insurer may require a monetary refund from an insured who canceled a policy, subject to the conditions stipulated in the circular: 1. Three years or three-quarters of the policy period has not yet elapsed, whichever is earlier ("The Determinant Period"). 2. The cancellation policy was explained in the insurance program, in the fair disclosure form and in the application form. 3. The amount of the monetary refund is less than the difference between the total insurance benefits and the total premiums paid for the policy or the monthly premium multiplied by the number of months remaining until the end of the effective period; (c) An insurer will cover treatment that was administered within 90 days of the end of the policy period, or on a later date, depending on the conditions of the insurance plan, provided that the treatment is part of a treatment plan which was submitted for the insurer's approval during the policy period or is treatment that commenced during the policy period. (d) an insurer will be prohibited from influencing the dentist's professional discretion and giving the dentist medical guidelines that limit his discretion. (e) if a claim is rejected on medical grounds, the insurer must inform the insured and send him an explanation of the rejection signed by the dentist; (f) the insurer will present to an insured in the fair disclosure form all the treatment packages offered in the plan and details of the treatments covered in the package. The insurer's website will show lists of the dentists it has agreements with.
The provisions of the circular will apply to dental insurance policies that are sold or renewed from October 1, 2012 onwards.
2.3.3.3.2. On March 11, 2012, the Commissioner published a circular on the subject of drawing up a long-term care insurance plan. The circular prescribes provisions that, inter alia, address the following: (a) minimum standards for the definition of an "insured event"; (b) an insured's minimum entitlement to insurance benefits when the insured event occurs; (c) it includes an instruction whereby the policy for long-term care insurance (LTC) is an all life policy; (d) an instruction as to whether the premium on the policy is fixed or enlarged that will be set at the age of 65 at the very latest; (e) the insured is entitled to receive the paid-up value or redemption value to be calculated such that the prepaid premium designed to cover any future risk will be credited to the insured if the premiums are no longer paid; (f) costing of the premium will not
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be based on a cross subsidy between different age groups and sexes, and there are no more than five years in each age group; (g) an insurer will be entitled to increase the premium table and adjust the table of paid-up values for existing policyholders based on the Commissioner's instructions, and the insurer must offer the insured an option to continue paying premiums based on the previous premium table in return for reduced insurance benefits; (h) premium payments will be waived while insurance benefits are being paid; (i) an insurer shall not condition enrollment in an LTC policy on the purchase of any other insurance cover and it shall not condition cancellation of any insurance cover on the cancellation of the LTC insurance cover; (j) Insurers will send insureds an annual report based on the Commissioner's instructions, also for paid-up long- term care policies; (k) instructions concerning fair disclosure that must be given to the insured before he enrolls in the insurance, the information to be included in the schedule and on the insurer's website, and the information and documents that must be given to the insured together with the claim form as part of the policy; (l) transitional provisions concerning the option to move over to a personal lines policy for the all-life policy period for a person who was insured in a group policy when the circular took effect. The circular stipulates that an insurer shall submit revised insurance plans to the Commissioner pursuant to the provisions of the circular by October 1, 2012, and send notice to all persons insured by a policy that does not comply with the provisions of the circular, offering them the option to purchase a policy that complies with the provisions of the circular until April 30, 2013. The provisions of the circular shall apply to long-term care insurance policies that are sold or renewed from January 1, 2013 onwards, excluding several provisions as specified in the circular. At this stage, it is impossible to estimate the behavior of the policyholders and collectives in light of the provisions of the circular, and it is therefore impossible to estimate its impact. Concurrent with the publication of the circular, a letter was sent to the insurance company managers on the subject of group long-term care insurance - outline for adult policyholders - draft for discussion. The letter proposes that insurance companies will offer all policyholders whose members have long- term care insurance through these companies (excluding health funds), an option to renew the insurance in a new group policy, which is the same for all the groups, with the same insurance company, for a limited period to be determined by the Commissioner and under the conditions specified in the proposed outline. The Commissioner and the insurance companies are discussing the outline. 2.3.3.4. Drafts Circular
2.3.3.4.1. On July 16, 2012, a draft circular was published concerning preparation of an insurance plan for critical illness. The purpose of the draft is to ensure that the definitions of the illnesses covered in the critical illness insurance correspond with current medical definitions. The draft prescribes principles for the drawing up of a critical illness policy, whereby: (a) the policy will include at least the illnesses listed in the draft circular; (b) definition of an illness will be
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based on accepted medical definitions and will cover severe and frequent cases of the illness; (c) insurers will review the definitions in their policies at least once every five years and update them, and will also take action to update the definitions if they become aware of the need to do so during the course of settling a claim. An appendix was attached to the draft presenting deficiencies in the currently applicable definitions in the policies and the relevant changes. The circular further stipulates that an insurer will present on its website, alongside each plan for critical illness, a list of the databases which it used for defining the illnesses included in the plan and the changes in the definitions as they may be from time to time. When the circular is published, the insurer must submit to the Commissioner revised critical illness policies based on the information in the circular, and also send each policyholder who purchased a critical illness policy before the commencement date of the circular written notice offering him the opportunity of moving over to a policy which corresponds with the provisions of the circular. The Commissioner and the financial institutions are discussing the draft circular. 2.3.4. General insurance 2.3.4.1. Calculation of Insurance Reserves in General Insurance
On July 2, 2012, draft Control of Financial Services (Insurance) (Calculation of Insurance Reserves in General Insurance) Regulations, 5772-2012, were published (which will abolish the Control of Insurance Business (Ways to Calculate Provisions for Future Claims in General Insurance) Regulations, 5745-1984). The regulations propose the gradual cancellation of the reserve for surplus income over expenses which are calculated in some of the general insurance branches over several years, as follows: (a) from the financial statements as at March 31, 2013, the reserve will be calculated for two years; (b) from the financial statements at March 31, 2014 - the reserve will be calculated for a year; (c) from the financial statements at March 31, 2015 - calculation of the reserve will no longer be required. In addition to the draft regulations, a draft circular was published concerning the calculation of insurance reserves for general insurance As part of the circular, provisions were prescribed concerning the method of calculating reserves in general insurance, insurance reserves for natural disasters in agriculture, and a surplus reserve. Likewise, a draft amendment to Insurance Circular 2007-1-4 "Commissioner's position concerning a best practice for the calculation of insurance reserves in general insurance for financial reporting" was published, in which context, the following are prescribed: (a) the actuary's declaration concerning an "adequate reserve for cover of the insurer's liabilities" shall be interpreted as meaning that it is fairly likely - i.e. a 75% probability at least - that the insurance obligation prescribed will be sufficient to cover the insurer's obligations; (b) insofar as there is a greater degree of certainty in adapting the assumptions and models, the actuary must choose the assumptions and models which provide the best estimate of the projected insurance obligations. Consequently, a margin for uncertainty should therefore be added, or alternatively - insofar as there is greater uncertainty in choosing assumptions and models, the actuary may determine a comprehensive framework of assumptions which takes into account a reasonable range of estimates
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and the uncertainty present in these estimates; (c) the actuary must establish the rate for capitalization of the flow of obligations (products with long-tail obligations) as part of the process of reviewing the other assumptions as described above, and when defining the capitalization rate, he must take into account past yields and their relevance, the level and date of the anticipated flow of obligations, the existing asset portfolio, anticipated investment strategy, and the yield anticipated from this strategy, the projection for risk-free yields in the market; (d) grouping - for calculating the margins for uncertainty in the statistical branches (as they are defined in the circular), each branch must be addressed separately, but the risks from all the underwriting years (or loss) in the branch may be grouped together. In non-statistical branches, they may all be addressed as a single entity; (e) determining the level of insurance liabilities for policies that were sold during periods close to the balance sheet date and for risks after the balance sheet date. 2.3.4.2. Instructions and clarifications
On June 26, 2012, the Ministry of Transportation, National Infrastructures and Road Safety published a declaration of intent concerning the recording of "significant safety damage" on a motor vehicle license. The declaration is published in view of the Ministry of Transport's decision not to renew the provisions of Procedure no. 22 from December 22, 2011, which establishes an obligation for an insurance assessor to report vehicles in a state of constructive total loss. The main purpose of the declaration is to ensure that a vehicle is in proper working order throughout its life and the safety of the vehicle. Additionally, there is great importance in providing the public with information about significant damage that has been caused to a vehicle. It is therefore proposed that an outline be established for action to record a warning of "significant insurance damage" in a vehicle license to which significant insurance loss has been caused and to define the entities who should report the loss. 2.3.4.3. Regulations and orders
2.3.4.3.1. On April 3, 2012, an amended version of the Control of Insurance Business (Conditions of a Contract to Insure a Private Vehicle) (Amendment) Regulations, 5772-2012, was published. The amended version amends and adds several regulations compared to the previous version, including the addition of a definitions clause (including definitions for a recommended price list and private vehicles), an exclusion of the component of cover in the event of death or physical injury in the "extensions" clause (excluding personal accidents), provisions in the addendum to the regulations are amended, and there are changes and additions in the various sections (including: calculation of the compensation, replacement of a vehicle, discontinuation and cancellation of the insurance), all as specified in the regulations. The regulations take effect six months from their date of publication and they will apply to insurance contracts which enter into force from that date and thereafter.
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2.3.4.3.2. On April 2, 2012, a Motor Vehicle (Extension of the validity of a deductible) Ordinance Order, 5772-2012, was published. The order amends the Motorized Vehicle Insurance Ordinance [New Version], 5730-1970, so that certain clauses in the Ordinance will now be valid for perpetuity, as follows: (a) Section 3A concerning a deductible which establishes the insurer's right to withhold a deductible and the policyholder's obligation to pay the deductible, subject to the conditions stipulated in the Ordinance. (b) Section 12, concerning a policy that is binding notwithstanding any law which determines that, notwithstanding that mentioned in any law, an entity issuing a policy under the conditions of the Ordinance will be obligated to indemnify the policyholders listed therein on account of a liability which the policy is supposed to cover, and to compensate the insured driving the vehicle or any person driving with his permission, for physical injury sustained in a road accident, as these terms imply in the law.
The order becomes applicable on April 3, 2012. 2.3.4.4. Provisions of law
2.3.4.4.1. On June 26, 2012, the Compensation for Road Accident Victims Bill (Amendment no. 24), 5772-2012, was published. The purpose of the bill is to make several changes in the key definitions of the law so as to ensure that the law serves its main purpose, fair and fast compensation, in an effective proceeding, for road accident victims. Among other things, the amendment to the law proposes: (a) to strike out the presumptions currently prescribed in the definition of "road accident" in the law (in which "road accident" includes events resulting from an explosion or conflagration of the vehicle, damage to a vehicle which is parked in a prohibited location, or an event that occurred due to misuse of the vehicle's mechanical power) and to leave in place only the first part of the definition which is called "the basic definition" whereby a road accident is "an event in which physical injury is sustained by a person due to the use of a motorized vehicle for transportation purposes"; (b) to amend the definition of "the use of a motorized vehicle" so that only servicing or repair that is required during the course of a journey to enable the vehicle to continue its immediate journey will constitute use of the vehicle for the purpose of defining a road accident; (c) the definition of the use of a vehicle by way of loading or unloading, when the vehicle is stationary, will not be construed as being in use for the purpose of defining a road accident; (d) the list of motorized vehicles to be which will be deemed a "motorized vehicle" which is liable, will be extended.
2.3.4.4.2. On December 22, 2011, the provisions of Ministry of Transport and Road Safety Procedure no. 22 were published concerning the obligation to provide details of the condition of a vehicle, whereby if a vehicle is damaged to the extent that the insurer decides that it is a constructive total loss, as this term is used in the Control of Insurance Business (Terms of a Private Motor Insurance Contract) Regulations, 5746-1986, and in those instances where the insurer
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buys the vehicle from the insured based on Section 3(A) of the Limit of Use and Record of Operations of Used Vehicle Parts (Prevention of Theft) Law, 5758-1998, the assessor must submit a computerized report that the vehicle is a constructive total loss, and this information will appear on the vehicle license. On February 22, 2012, this procedure expired, and this provision is therefore unlikely to adversely affect the costs of claims in the motor property branch.
2.3.4.4.3. In February 2012, a legislative memorandum was published to the Limit of Use and Record of Operations of Used Vehicle Parts (Amendment) Law, 5772-2012 ("the Memorandum"). This is an amendment to the Limit of Use and Record of Operations of Used Vehicle Parts (Prevention of Theft) Law, 5758-1998 ("the Law"). The purpose of the Memorandum is to simplify enforcement of the existing law and to improve the efficacy of the "Etgar" police unit which is responsible, inter alia, for enforcement of the said law. The Memorandum proposes several changes and additions to the existing law: (1) the obligation applicable to an insurer who has paid insurance benefits to a car owner, has purchased the ownership right and sent the vehicle to be dismantled, so that it only gives the vehicle to persons authorized by law and returns the vehicle license to the licensing authority, will be expanded so that it also applies to an insurer who has purchased the ownership right in a vehicle defined as a total loss. The transfer may take place only to a business owner who is authorized by law to break up vehicles; (2) the obligation applicable to an insurer who has sold a vehicle not for the purpose of dissembly (but for repair), to retain the buyer's vehicle license (unless he has produced a permit from an authorized garage concerning the vehicle repair together with an assessor's opinion) will be expanded so that the insurer must produce for the buyer a copy of the opinion prepared by the assessor who examined the vehicle after the damage occurred; (3) expansion of the sanctions in respect of breach of the law. 2.3.4.5. Circular
2.3.4.5.1. On April 2, 2012, the following draft circulars were published: (a) "Residual insurance tariffs applicable from May 1, 2012". The provisions of the circular will become applicable from May 1, 2012, excluding several provisions listed in the circular; (b) "Maximum insurance premiums in the compulsory motor sector". The circular cancels a previous circular on this subject from 2005. The provisions of the circular will become applicable from May 1, 2012. 2.3.4.6. Draft Circular
2.3.4.6.1. On April 30, 2012, the Commissioner published a draft circular concerning systemic restitution following a breach of Circular 2000/12 concerning motor (property) insurance - insurance benefits in the event of a total loss. The background to the draft circular is applications for class actions which have been filed over the last decade, and in some cases compromise settlements were proposed which the Commissioner believes are not necessarily for the
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policyholder's benefit. The Commissioner therefore instructed that systemic restitution be paid to policyholders in respect of the aforesaid breach of contract. Among other things, the draft circular details the following topics: (a) the considerations for applying the ruling to applications for class actions; (b) the restitution provisions, including general instructions for performing the restitution; (c) period of the restitution; (d) providing a report on implementation of the restitution provisions and saving the information. The draft circular stipulates that the provisions of the circular will not apply in respect of periods for which there is an absolute ruling in a class action. Given that in the past a class action was filed against Harel Insurance on the subject of the draft circular, which relates to most of the relevant period, and this ended with a conclusive verdict which approves the arrangement between the parties, and since, with respect to the period after the aforementioned verdict the Company operates in accordance with the provisions of the circular, implementation of the circular is not expected to significantly affect Harel Insurance. The Commissioner and the insurance companies are expected to discuss the draft. 2.3.5. Financial Services and the Capital Market 2.3.5.1. Provisions of law
2.3.5.1.1. On January 22, 2012, the Tel Aviv Stock Exchange published amendments to the TASE Regulations concerning information technology management by a Non-Bank TASE Member (NBM). By April 30, 2012, TASE members were required to conduct an analysis of the gaps between the new instructions and the method in which they operated and reported their operations to the TASE. By June 30, 2013, the TASE members are required to complete their preparations for implementing the new provisions, and until then, every quarter, TASE members must report their deployment on this subject to the TASE.
2.3.5.1.2. On January 30, 2012, the Israel Securities Authority published an instruction concerning the handling of referrals and complaints from the public.
2.3.5.1.3. On February 6, 2012, the Israel Securities Authority published a revised text of the document - "Principles for the operation of index-linked certificates in Swap transactions", whereby the issuers of index-linked certificates are required to report whether or not they have adopted the principles that were published.
2.3.5.1.4. The Joint Investments in Trust Law
2.3.5.1.4.1. On July 3, 2012, the proposed Joint Investments in Trust Bill (Amendment No. 21) (Exchange Traded Notes and Exchange Traded Funds), 5772- 2012, was published. In the bill, index products (principally Exchange
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Traded Notes - ETNs) will be moved from a reporting regime (rules of disclosure applicable to a reporting corporation) to a supervisory regime as currently practiced in the mutual funds sector. Additionally, the proposed amendment will facilitate the creation of a new class of mutual funds - Exchange Traded Funds: closed funds which are traded on the stock exchange the purpose of which is to achieve results as similar as possible to the rate of change in the underlying asset, and the applicable provisions will be prescribed. Furthermore, the bill defines a "joint investment manager" who is entitled to manage, simultaneously, one or more of the following series - traditional mutual funds, ETFs or ETNs.
Proposed Amendment no. 21 includes other subjects such as: the term of office of a trustee for a joint investment and the extension of the trustee's term of office for five years at a time, except for an exclusion that is defined, reporting on the reasons for not extending the trustee's term of office, the addition of a condition for obtaining a joint investment manager's license whereby he has at his disposal the necessary measures for management of the joint investment, a requirement to place money in a backing account to be used as collateral for upholding the obligations of the joint investment manager, the method of withdrawing money and of settling the backing account, elimination of the possibility that non- directors may also serve on a board of directors' committee, except on the investment committee if the committee member who is not a director is an expert, the application of restrictions on employing an employee in a position which entails making decisions on management of the risks of the joint investment, application of restrictions on one who participated in the management of nostro accounts of companies which are part of the group of companies to which the joint investment manager belongs, the joint investment manager will not make any significant change in the investment policy of the joint investment he manages, except in extraordinary cases which may be defined in the articles, the conditions will be limited in which a deviation from the provisions of the law and a deviation from the investment policy may be deemed a violation so that they apply only to passive deviations which do not depend on the joint investment manager. The possibility of merging joint investments will be limited, the possibility of splitting funds and allocating bonus units will be eliminated, it will be possible to consolidate and split units, it will be determined that an open fund which is not a tracker fund will not become a closed fund, the ISA may instruct that a joint investment be liquidated, various instructions will be added in connection with the liquidation of a joint investment, recurring violations of certain provisions of the law will also be deemed a violation in respect of which administrative enforcement measures may be imposed under certain conditions.
2.3.5.1.4.2. On May 2, 2012, a revised version of Amendment no. 16 to the Joint Investments in Trust Law, 5754-1994, was published concerning regulations that apply to fund managers, issues of index-linked certificates
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and deposit certificates as well as the regulation of ETFs.
2.3.5.1.4.3. On February 5, 2012, several amendments were published to the regulations of the Joint Investments in Trust Law:
• Joint Investments in Trust (Assets that May be Bought and Held by a Fund and their Maximum Amounts) Regulations, 5755-1994.
• Joint Investments in Trust (Particulars of Prospectus of Fund, Structure and Form) Regulations, 5770-2009.
• Joint Investments in Trust (Options, Future Contracts and Short Sales) Regulations, 5761-2001.
• Joint Investments in Trust (Financial Statements of a Fund) Regulations, 5769-2009.
• Joint Investments in Trust (Purchase and Sale Prices of a Fund's Assets and Value of a Fund's Assets) Regulation, 5755-1994.
2.3.5.1.5. On July 3, 2012, the Securities Authority published an RFP for receiving comments from the public (by August 19, 2012), which included the following:
(a) the maximum distribution fees collected from fund managers by the distributors who are not investment marketers (mainly banks) will be reduced as follows:
Stock funds (Class 2) on which distribution fees are currently paid at the maximum rate of 0.8%, will be merged for this purpose with the residual category (Class 3), on which distribution fees of 0.4% are currently paid, to form a single category, residual, on which the maximum distribution fees will be 0.35%.
The maximum distribution fee for short-term bond/low-risk funds (currently Class 1), for which the maximum distribution fee is currently 0.25%, will be reduced to a maximum rate of 0.2%.
The maximum distribution fee for money-market funds will be reduced from 0.125% to 0.1%.
(b) Concurrent with the entering into force of the aforesaid amendment concerning distribution fees, fund managers will be obligated to lower the fund manager's fee by a rate that reflects the full amount of payments that will actually be saved due to the reduction in the distribution fees which they pay to the distributors. Notwithstanding the foregoing, the fund managers will be entitled to collect management fees in a manner that does incorporate the full
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reduction in those cases where the management fees collected are not more than 10% higher than the maximum distribution fees at their new proposed rate. The aforementioned reduction will be in force for six months during which time the fund manager's fee cannot be increased. This restriction will be removed later on assuming that free competition leads to stabilization of the management fees at a level significantly lower than the present rate.
Due to the fact that the process is still at an early stage, Harel Pia is unable to estimate the impact of the above on its financial position, the results of its operations and its cash flows.
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2.4. Capital market developments A . General The global economic recovery, which was fairly weak even previously, slowed even more during the second quarter of 2012. The risks in the financial markets, and particularly in the government bond markets of the problematic eurozone countries, increased significantly in the second quarter, almost returning to the risk levels at the end of 2011. In Europe, the Purchasing Managers Indices, production indices, and continuing increase in unemployment rates to a new high of 11.2% in June 2012, indicate further sluggishness of the economy. Consequently, and in view of increased anxiety over the possible breakup of the eurozone, bond yields in Spain and Italy rose once again in the second quarter of 2012. The rising yields moderated somewhat in the wake of the summit of European leaders at the end of June. In the US, growth in the second quarter was just 1.5% annualized, with a similar rate of expansion in private-sector consumption. Indicators in the labor market were extremely weak, although in contrast, indicators in the real-estate market show a turn for the better. In the large emerging markets, figures continue to indicate a slowdown in the rate of growth in the second quarter of 2012, after stronger-than-expected growth was recorded in the first quarter. 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. Output during the second quarter of 2012 grew at an annual rate of 3.2%, after growth of 2.8% in the first quarter. Business output was up by an impressive 3.7%. The composition of the growth was mostly positive, with exports rising by 10% and private-sector consumption expanding by 5.4%. In contrast, investments in property, plant and equipment slowed, particularly in residential housing which dropped by 3%. Likewise, imports were 9% down. C. Stock markets Trade in shares in Israel and worldwide was extremely volatile in the first half of 2012. Most of the share indices in Israel fell sharply during the second quarter of 2012, particularly in May 2012, after strong increases during the first quarter.
The TA-100 share index was down 6% during the second quarter and 1% down for the first half of 2012. During the first half of 2012, the index of telecommunications companies plummeted 55%, and the insurance companies index fell by 18%. The MSCI Global Index fell 5% during the second quarter, but rose 6% overall to the end of the first half of 2012 due to an impressive increase in the first quarter of the year. The MSCI index for emerging markets fell sharply by 9% during the second quarter, but rose 4% during the first half of 2012.
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Performance of the leading indices
Change during Change during Change during Change during 4--6/2012 4-6/2011 1-6/2012 1-6/2011
General shares index )167%( )866%( )266%( )3361%( TA 100 )663%( )768%( )1699( )961%( TTA 25 )661%( )764%( )266%( )767%( h Yeter shares )6619( )3164%( )469%( )3164%( e MCSI World index )469%( 167% 661% 966% aMCSI Emerging vMarkets index )868%( )361%( 463% 361% e rage daily volume of trade in shares on the TASE was NIS 1.1 billion in Q2 2012, down of 5% compared with the first quarter, and compared with average volume of NIS 1.7 billion in 2011 (a decline of 36%), and NIS 2 billion in 2010. D. Bonds Market The general bond market rose 161% in Q2 2011 and 262% in the first six months of 2012. The government bond index rose 1.9% in Q2 2012, and 2.8% in the first half of 2012, after rose of 5% in 2011. The corporate bond index down 269% in Q2 2011, but rose 361% in the first half of 2012. Performance of leading indices Change Change Change during Change during 4- during during 4--6/2102 6/2011 1-6/2102 1-6/2011 Bonds - general index 161% 166% 262% 166% Government bonds index 369% 369% 268% 161% Corporate bonds index )269%( )168%( 361% 361% Index linked government bonds 361% 367% 266% 161% Index linked corporate bonds )3267%( )168%( 363% 363% Non-linked government bonds index 261% 364% 269% 164% F/C indexed government bonds index 261% )3629( 966% 168% During the second quarter of 2012 the business sector raised NIS 33 billion through bonds, and NIS 22.5 billion in the first six months of 2012 (of which NIS 32.7 billion was by real estate companies and banks), compared with the NIS 40 billion in 2011, and with the NIS 43 billion in 2010. The average daily turnover of trade in bonds was NIS 4 billion in the second quarter of 2012, similar to the first quarter, a 6% increase compared with the average turnover in 2011.
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E. Foreign Currency Market The shekel weakened during the second quarter by 5.6% against the US dollar (to NIS 3.923 / USD) but was 1.9% stronger at the end of the first half of 2012. The shekel strengthened 0.4% against the euro in the second quarter (to NIS 4.932 / EUR), and remained almost unchanged at the end of the first half of 2012. F. Inflation During the 12 months until June inflation amounted to 1%, in the inflation target. During the second quarter of 2012 the consumer price index rose by 0.6%6
Following are figures on changes in the CPI:
Change during Change during Change during Change during 4-6/2102 4-6/2011 1-6/2012 1-6/2011 Change in CPI increase 361% 361% 361% 262% (known index) Change in CPI increase 166% 369% 3% 262% (applicable index)
G. Bank of Israel Interest In the second quarter of 2012, the Bank of Israel left the interest rate unchanged, but in the first six months of 2012 lowered the interest by 0.25% to 2.5%, Inter alia, due to concern over a crisis in Europe and slower domestic economic growth. H. Material market events after the reporting date At the end of June 2012, the Bank of Israel lowered the interest rate for July by 0.25 percentage points to 2.25% and left the rate for August unchanged. The Consumer Price Index for July rose 0.1%. The government approved a broad package of measures for reducing the budget deficit, mostly on the revenues side. The International Monetary Fund (IMF) revised its forecast for global growth. Global output is expected to increase by 3.5% in 2012 and by 3.9% in 2013. The new forecast is slightly lower than the previous estimate which was published in April, mainly because much stronger-than-expected growth was recorded in the first quarter of the year.
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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 six months For the three months For year ended ended ended June 30 % change June 30 December 31 2012 2011 2012 2011 2011 Life assurance and long-term savings segment Gross premiums earned 1,596,050 1,523,898 5 793,285 746,710 3,184,370 Income from management fees 277,622 269,242 3 140,193 130,858 542,223 Profit (loss) from life assurance business (12,313) 86,511 - (122,794) 17,130 61,376 Profit from provident fund management 27,805 33,158 (16) 13,654 13,851 36,404 Profit from pension fund management 22,110 21,162 4 11,977 12,007 44,725 Total profit from life assurance and long-term savings 37,602 140,831 (73) (97,163) 42,988 142,505 Total comprehensive income from life assurance and long-term savings 73,131 83,772 (13) (110,563) 2,397 35,135 Non-life insurance segment Gross premiums earned 1,419,396 1,387,780 2 706,647 690,874 2,809,786 Premiums earned on retention 830,989 811,137 2 403,598 402,285 1,644,665 Total profit from non-lie insurance 112,283 77,641 45 32,713 40,257 110,478 Comprehensive income from non-life insurance 117,106 14,408 713 9,711 4,802 16,588 Health insurance segment Gross premiums earned 1,362,026 1,158,885 18 705,591 576,924 2,476,755 Premiums earned on retention 1,272,990 1,070,330 19 660,064 529,683 2,285,716 Total profit from health insurance 90,438 103,139 (12) 56,436 56,193 193,019 Comprehensive income from health insurance 95,724 84,687 13 51,081 44,376 162,168 Insurance companies overseas segment Gross premiums earned 87,854 68,600 28 43,222 38,151 154,491 Premiums earned on retention 56,615 45,261 25 26,767 25,556 102,069 Total profit (loss) from insurance companies overseas (6,735) (13,515) - (2,031) (11,954) (37,289) Total comprehensive profit (loss) from insurance companies overseas (3,790) (14,064) - (2,266) (10,347) (37,768)
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For the six months For the three months For year ended ended ended June 30 % change June 30 December 31 2012 2011 2012 2011 2011 Capital market and financial services segment Revenues from capital market and financial services 99,610 123,463 (19) 49,924 58,049 224,411 Total expenses from capital market and financial services 90,138 105,163 (14) 45,944 51,041 195,285 Total profit (loss) from capital market and financial services 9,472 18,300 (48) 3,980 7,008 29,126 Finance 9,472 18,098 (48) 3,988 7,050 29,126 Items not included in operating segments Net profit from investments and financing income 99,554 75,087 33 9,954 53,580 107,389 Income from commissions 30,600 33,557 (9) 15,324 15,903 70,299 Other income 4,415 1,717 157 1,071 870 8,375 General & administrative expenses not charged to reports for operating segments 54,627 46,705 17 24,340 18,340 103,445 Financing expenses 72,474 83,761 - 46,104 46,400 142,878 Pre-tax profit 262,292 315,884 (17) (42,176) 145,770 397,459 Net profit for the period 170,937 204,603 (16) (21,142) 94,951 218,161 Other comprehensive profit for the period 59,469 (112,516) - (36,135) (81,668) (173,366) Total comprehensive profit for the period 230,406 92,087 150 (57,277) 13,283 44,795 Net profit for the period attributed to the Company's shareholders 170,863 204,495 (16) (20,956) 94,862 217,835 Net profit attributed to non-controlling interests 74 108 (31) (186) 89 326 Return on equity in terms of annual comprehensive income in percent 12% 5% 135 (6%) 2% 2%
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Summary of data from the consolidated balance sheets of Harel Investments (in NIS millions):
For the six months ended For year ended June 30 % change December 31 2012 2011 2011 Total balance sheet 57,941 54,526 6.3 54,925 Assets for yield-dependent contracts 22,413 20,705 8.3 21,082 Other financial investments 18,301 17,271 6.0 17,375 Intangible assets 1,445 1,503 (3.8) 1,468 Reinsurance assets 5,154 5,120 0.7 5,115 Insurance liabilities (insurance reserves and outastanding claims) in life assurance for yield-dependent investment contracts and insurance contracts 20,144 18,874 6.7 18,980 for insurance contracts that are not yield dependent 9,801 9,288 5.5 9,551 In non-life insurance 9,754 9,662 1.0 9,620 In health insurance (yield dependent and non- yield dependent) 4,239 3,574 18.6 3,873 Insurance companies overseas segment (yield dependent (and non-yield dependent 217 192 12.6 198 Adjustments and Offsets (9) (7) 35.1 (9) Total insurance liabilities 44,146 41,584 6.2 42,214 Equity attributedt to holders of the Company's equity 3,762 3,570 5.4 3,525
Assets managed for the Group's members and policyholders (NIS millions): For the six months ended For year ended June 30 % change December 31 2012 2011 2011 For yield dependent investment contracts and 21,082 insurance contracts 22,413 20,705 8.3 For members of provident funds and pension funds * 38,033 35,906 5.9 35,161 For mutual fund customers * 18,731 20,104 (6.8) 20,754 For customers portfolios * 3,831 2,830 35.4 2,283 Index linked certificates (ETFs) 4,129 3,788 9.0 3,037 Total assets under management for the Group's policyholders and members 87,137 83,332 4.6 82,317
* Total assets managed by provident fund, pension funds, mutual funds and in portfolio management are not included in the Company's consolidated financial statements.
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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 4.5 billion compared with NIS 4.1 billion during the corresponding period last year, a growth of 8% compared with the corresponding period last year. The total amount of the premium earned from insurance business during the second quarter of 2012 amounted to NIS 2.2 billion compared with NIS 2.1 billion during the corresponding period last year, a growth of 10% compared with the corresponding period last year. Comprehensive profit, which consists 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, was up 150% at NIS 230 million for the Reporting Period, compared with comprehensive profit of NIS 92 million for the corresponding period last year. The increase in comprehensive profit for the Reporting Period relative to the corresponding period, is due to the effect of the capital market, where yields were higher than those in the corresponding period last year, and to a drop in the rate of inflation during the reporting period, compared with the corresponding period last year. Financial results for the Reporting Period were affected by a revision of the Company's estimates concerning obligations for annuity based on the revised longevity estimates and future improvements in longevity, as detailed in the draft position paper published by the Commissioner on July 11, 2012 (see Section 2.1.1 above). The increase in the provision for supplementary reserve for annuity reduced comprehensive profit by NIS 24 million before tax, and by NIS 16 million after the effects of tax. For additional information, see Note 9 to the Financial Statements. The comprehensive loss in the second quarter of 2012 was NIS 57 million, compared with profit of NIS 13 million for the corresponding quarter last year. The shift from profit to loss is due mainly to the effect of the capital market, where yields were lower than those in the corresponding period last year, and to the announcement by the Commissioner of Insurance on guaranteed annuity conversion factors in life assurance policies - see Section 2.1.1 above. Net profit for the Reporting Period was down 16% at NIS 171 million, compared with NIS 205 million for the corresponding period last year. The net loss in the second quarter of 2012 amounted to NIS 21 million, compared with net profit of NIS 95 million for the corresponding quarter last year. Investment profits during the Reporting Period helped cover part of the investment losses recorded in 2011 in respect of yield-dependent policies, although as specified below, until all the investment losses accumulated in 2011 have been covered, Harel Insurance will not be able to collect variable management fees on these policies. 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 by Harel Insurance in respect of yield- dependent policies at December 31, 2011 amounted to NIS 793 million. As mentioned, during the Reporting Period part of these losses were covered and at June 30, 2012, the real investment losses accumulated by Harel Insurance amounted to NIS 566 million. Accordingly, at June 30, 2012, Harel Insurance will be unable to collect variable management fees under the mechanism described above, in the amount of NIS 85 million until the outstanding investment losses have been covered. At July 31,
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2012, the variable management fees that Harel Insurance will not collect on these yield-dependent policies until the investment losses in respect of these policies are covered, amounts to NIS 40 million. Pre-tax profit during the Reporting Period amounted to NIS 262 million compared with a pre-tax profit that amounted to NIS 136 million during the corresponding period last year, a decline of 37% 6 Pre-tax loss during the second quarter of 2012 amounted to NIS 42 million, compared with a pre-tax profit that amounted to NIS 146 million during the corresponding quarter last year. During the Reporting Period profits from net investments and funding income amounted to NIS 1,299 million, compared with profit of NIS 698 million during the corresponding period last year6 The increase stems from the fact that yields on the capital market during the Reporting Period were higher than during the corresponding period. The Group's funding expenses, not attributed to the branches of activity during the Reporting Period amounted to NIS 71 million compared with NIS 76 million during the corresponding period last year. The decrease in financing expenses during the Reporting Period can be attributed to a decline in the rate of inflation, part of which was offset by the raising of liability notes which serve as hybrid tier-2 capital for Harel Insurance. The Company's equity as of June 11, 2012, relating to the Group shareholders amounts to NIS 3,762 million in compared to equity of NIS 3,525 million as of December 31, 2011. The increase in equity stems from: (a) profit attributed to the Group shareholders of NIS 230 million; and (b) 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 and from the provident fund management companies and the pension fund, based on the Commissioner's circular on the subject of capital requirements for insurance companies, including details about the effect of the commencement of Control of Financial Services (Provident Funds) (Minimum Capital Required of a Management Company) Regulations, 5769-2009, see Note 7 to the financial statements. 2.7. Life Assurance and Long Term Savings Comprehensive profit in life insurance and long-term savings during the Reporting Period amounted to NIS 73 million, compared with comprehensive profit of NIS 84 million in the corresponding period last year. The decrease is the result of an increase in future obligations for annuity in the wake of the announcement by the Commissioner of Insurance concerning guaranteed annuity coefficients in life assurance policies - see Section 2.1.1 above. In addition, underwriting performance was worse compared with the corresponding period last year.
Due to the investment profit during the Reporting Period some of the investment losses recorded in 2011 in respect of yield-dependent policies were covered, although as specified below, until all the investment losses accumulated in 2011 have been covered, Harel Insurance will not be able to collect variable management fees on these policies.
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 amount to NIS 793 million at December 31, 2011.
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As mentioned, some of these losses were covered during the Reporting Period and at June 30, 2012, the real investment losses accumulated by Harel Insurance in respect of these policies amounted to NIS 566 million.
Accordingly, at June 30, 2012, Harel Insurance will not collect variable management fees in line with the aforementioned mechanism in the amount of NIS 85 million, until the investment losses are covered. At July 31, 2012, the variable management fees that Harel Insurance will not collect on yield- dependent policies, until the investment losses in respect of these policies are covered, amounts to NIS 40 million.
The comprehensive loss in life insurance and long-term savings during the second quarter of 2012 was NIS 111 million, compared with comprehensive profit of NIS 2 million for the corresponding quarter last year. The shift from profit to loss is due mainly to the effect of the capital market, where yields were lower than those in the corresponding period last year, and to the announcement by the Commissioner of Insurance on guaranteed annuity conversion factors in life assurance policies - see Section 2.1.1 above.
Pre-tax profit in life assurance branch and long term savings during the Reporting Period amounted to NIS 18 million compared to pre-tax of NIS 343 million during the corresponding period last year, a decrease of about 71%.
Pre-tax loss in life assurance branch and long term savings during the second quarter of 2012 amounted to NIS 97 million compared with profit of NIS 43 million during the corresponding quarter last year.
Life assurance 2.7.1. Total premiums earned during the Reporting Period amounted to NIS 3,596 million, compared with NIS 3,524 million during the corresponding period last year, a 5% 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. Total premiums earned in life assurance during the second quarter of 2012 amounted to NIS 793 million, compared with NIS 747 million during the corresponding quarter last year, a 6% increase compared to the corresponding quarter last year.
Single premiums were recorded during the Reporting Period in a total amount of NIS 88 million, received from Bezeq's retirees transaction and from Discount's transaction, as opposed to single premiums at the amount of NIS 47 million, received from Bezeq's transaction during the corresponding period last year.
For more details concerning Bezeq's retirees transaction - see par. 3.1.1.5.3 in Chapter 1 of the Periodic Report - "Description of the Company's Business".
Details concerning the Discount transaction: on December 29, 2011, a transaction was completed between Harel Insurance and Israel Discount Bank Ltd. ("the Bank"), in which as
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part of the early retirement plan of the Bank's tenured employees, insurance for prolonged longevity will be provided for the retiring employees, who as part of the retirement arrangement are entitled to receive an annuity from the Bank. The insurance will be through insurance policies issued by Harel Insurance, and a lump-sum premium will be paid when the policies are issued. The policies guarantee insureds who retired from the Bank and reach the age of 85, continuing payment of an old-age pension from this date until the death of the insured. If the insured chooses this option in advance, the policy will also include an obligation to pay an old- age pension to the insured's spouse after his death, subject to the relevant conditions and dates stipulated in the policy.
Comprehensive income in life insurance during the Reporting Period amounted to NIS 24 million, compared with comprehensive profit of NIS 31 million in the corresponding period last year, a decrease of 22%. The decrease stems mainly from the revision of the Company's estimates concerning obligations for annuity based on the revised longevity estimates and future improvements in longevity, as detailed in the draft position paper published by the Commissioner on July 11, 2012 (see Section 2.1.1 above). The increase in the provision for supplementary reserve for annuity reduced comprehensive profit by NIS 24 million before tax, and by NIS 16 million after the effects of tax. In addition, underwriting performance was worse compared with the corresponding period last year.
Comprehensive loss in life insurance during the second quarter of 2012 amounted to NIS 136 million, compared with comprehensive loss of NIS 23 million in the corresponding quarter last year.
The increase in loss is due mainly to the effect of the capital market, where yields were lower than those in the corresponding period last year, and to the announcement by the Commissioner of Insurance on guaranteed annuity conversion factors in life assurance policies - see Section 2.1.1 above.
Pre-tax loss in life assurance during the Reporting Period amounted to NIS 12 million compared with pre-tax profit of NIS 87 million during the corresponding period last year.
Pre-tax loss in life assurance during the second quarter of 2012 amounted to NIS 321 million, compared with pre-tax profit of NIS 37 million during the corresponding quarter last year.
During the Reporting Period revenues amounted to NIS 182 million and constituted approximately 268% of the average reserve in life assurance, compared to revenues for the amount of approximately NIS 335 million during the corresponding period last year, that constituted 2.6% from the average reserve in 2011.
The total amount of life assurance reserves as of June 30, 2012, amounted to NIS 30 billion.
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Yield-dependent policies:
Policies issued from 1992-2003
1-6.2012 1-6.2011 4-6.2012 4-6.2011 (in percent) (in percent) (in percent) (in percent) Real yield before payment of management fees 2.11 (2.38) (2.69) (2.82) Real yield after payment of management fees 1.82 (2.65) (2.83) (2.92) Nominal yield before payment of management fees 3.39 (0.27) (1.47) (1.59) Nominal yield after payment of management fees 3.09 (0.56) (1.61) (1.68) Following are the yield rates on yield-dependent policies - General track Policies issued from 2004
1-6.2012 1-6.2011 4-6.2012 4-6.2011 (in percent) (in percent) (in percent) (in percent) Real yield before payment of management fees 2.18 (2.61) (2.86) (2.88) Real yield after payment of management fees 1.58 (3.18) (3.14) (3.17) Nominal yield before payment of management fees 3.46 (0.51) (1.64) (1.65) Nominal yield after payment of management fees 2.85 (1.09) (1.93) (1.94)
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):
1-6.2012 1-6.2011 4-6.2012 4-6.2011 Profits (losses) after management fee 555 (124) (308) (299) Total management fees 75 68 38 29
Pension funds 2.7.2. The number of members in the pension funds managed by the Group as of June 30, 2012, is 629,017 members, 355,381 of which are active members, a 1% decrease in the number of active members compared with December 31, 2011. The extent of assets managed by pension funds as of June 30, 2012, amounted to NIS 3969 billion compared with NIS 12.8 billion on June 30, 2011, a 21% increase and compared with the extent of assets of NIS 13.8 billion as of December 31, 2011, an increase of 12%. The increase stems from, inter alia, the influence of the capital market in which yields during the Reporting
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Period were higher than yields obtained during the corresponding period last year and from increase in the provision amounts of the members. Contribution fees that were collected by the Group's pension funds during the Reporting Period amounted to NIS 1,367 million compared with NIS 31336 million on the corresponding period last year, a 22% increase6 Concerning an increase in the volume of contribution payments to the pension funds after the Reporting Period, including one-time transfer of NIS 970 million, as a result of the agreement with the IDF on the pension arrangement for career soldiers - see par. 2.1.20 above. 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 6 The total amount from management fees collected from pension funds managed in the Group during the Reporting Period amounted to NIS 92 million, compared with NIS 84 million in the corresponding period last year, a 31% increase. The total amount from management fees collected from pension funds managed in the Group during the second quarter of 2012 amounted to NIS 47 million, compared with NIS 44 million in the corresponding quarter last year, a 7% increase. Expenses in connection with the pension funds amounted to NIS 71 million compared to NIS 65 million in the corresponding period last year. The total expenses in the pension activity during the second quarter of 2012 amounted to NIS 17 million compared to NIS 33 million in the corresponding quarter last year. Total pre-tax profit from management of pension funds and operating an old pension fund during the Reporting Period amounted to NIS 22 million compared with NIS 21 million during the corresponding period last year. Total pre-tax profit from management of pension funds and operating an old pension fund during the second quarter of 2012 amounted to NIS 12 million, similar to the corresponding quarter last year.During the Reporting Period positive yields were recorded in most of the investment tracks in the capital market. The rates of the nominal yields obtained by the new pension funds managed by the Group are as follows:
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For the six months ended June 30, 2012 Demographic Comprehensive Investment yield yield (in Fund name yield (in percent) (in percent) percent) Harel Gilad Pension* 4.12 3.78 0.34 Harel - Manof 4.67 3.73 0.94
For the three months ended June 30, 2012 Demographic Comprehensive Investment yield yield (in Fund name yield (in percent) (in percent) percent) Harel Gilad Pension* (0.01) (0.72) 0.71 Harel - Manof (0.40) (0.84) 0.44
Provident funds 2.7.3. As of the Reporting Date the Group manages 14 provident funds (provident funds, education funds, central and personal severance pay funds, 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. At June 30, 2012, the Group operates 33 tracks in its provident funds. The volume of assets in the provident funds managed by the Group as of June 30, 2012, amounted to NIS 22.5 billion compared with NIS 2163 billion as of June 30, 2011, and compared with NIS 22.2 billion as of December 31, 2133, a 2.4% decrease in relation to June 30, 2011, and an increase at the rate of 361% compared to 31 December 2011 6 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 110.2 million, compared with NIS 33764 million for the corresponding period last year, a 6.1% decrease that stems from decrease in the volume of assets managed during the Reporting Period in relation to the corresponding period last year and erosion of the average management fee's rate. The total income from management fees collected from the provident funds managed by the Group during the second of 2012 amounted to NIS 54 million, compared with NIS 98 million for the corresponding period last year.
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Expenses in the provident funds amounted to NIS 83 million compared to NIS 85 million in the corresponding period last year. Expenses in the provident funds during the second quarter of 2012 amounted to NIS 41 million, compared to NIS 44 million in the corresponding quarter last year. The total pre-tax profit of the provident funds activity included in the consolidated profit and loss statement in the life assurance and long term savings branch during the Reporting Period amounted to NIS 28 million compared with NIS 33 million during the corresponding period last year. The decline in profit compared with the corresponding period last year is mainly due to an increase in the amount for the amortization of excess cost attributable to the component "client's portfolio" in the value of provident activity in the company's books, during the Reporting Period, compared with the amount for the amortization in respect of the aforesaid component in the corresponding period last year, which is reduced as predicted from the cash flow of the client's portfolio, and to an erosion of the average management fee's rate. Pre-tax profit of the provident funds activity during the second quarter of 2012 amounted to NIS 14, similar to the corresponding quarter last year. The reform of management fees (see Section2.1.4 above) is expected to significantly affect revenues from management fees earned by the provident fund management companies. The provident funds' net accumulation (excluding profits from investments) during the Reporting Period was negative and amounted to NIS 307 million compared with negative accrual of NIS 185 million for the corresponding quarter last year.
2.8. Health Insurance Premiums earned in the health insurance sector totaled NIS 1,362 million for the Reporting Period, compared with NIS 31399 million for the corresponding period last year, a 18% increase. Total premiums earned in health insurance during the Reporting Period, accounted for 31% of all premiums earned by the Group. Premiums earned in the health insurance sector totaled NIS 706 million for the second quarter of 2012, compared with NIS 577 million for the corresponding period last year, a 21% increase. During the Reporting Period the health insurance sector posted comprehensive profit of NIS 96 million compared with a comprehensive profit of NIS 85 million in the corresponding period last year, a 31% increase. The increase 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 higher than yields obtained during the corresponding period last year and from the decrease in the inflation, which affects the reserves (that are index linked)6
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The comprehensive profit during the second quarter of 2012 in the health insurance sector amounted to NIS 51 million, compared with a comprehensive profit of NIS 44 million in the corresponding quarter last year, a 15% increase. The increase in profit in the second quarter can be attributed to improved underwriting performance compared with the corresponding period last year. Pre-tax profit in health insurance sector totaled NIS 90 million for the Reporting Period, compared with NIS 103 million in the corresponding period last year, a 12% decrease6 Pre-tax profit in health insurance sector during the second quarter of 2012 amounted to NIS 56 million, similar to the corresponding quarter last year6 Total payments and change in gross liabilities in respect of insurance contracts in the health insurance sector during the Reporting Period amounted to NIS 31163 million, compared with NIS 883 million in the corresponding period last year. Most of the change stems partly from an increase in claims paid in respect of a group long-term care policy in which most of the insurance risk is imposed on the plan rather than the insurer, as well as investment margins which are recognized in the said insurance plan, which were higher than the investment margins recognized during the corresponding period last year. During the Reporting Period, investment profits of NIS 51.4 million were recognized in the plan, compared with investment profits of NIS 14.6 million credited to the plan during the corresponding period last year. Given that the conditions of the plan stipulate that most of the investment profits are credited to the plan, these investment profits increase the insurance reserve in respect of this plan.
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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 % 1-6.2012 1-6.2011 change 4-6.2012 4-6.2012 2011
Compulsory motor 310,662 327,352 (5.1) 118,846 121,587 547,672 Motor property 513,931 533,082 (3.6) 200,632 196,726 867,646 Property & other branches 446,290 394,529 13.1 236,501 206,622 708,018 Other liabilities branches 323,580 302,499 7.0 140,172 113,554 679,000 Credit & mortgage insurance 19,682 28,900 (31.9) 11,557 14,013 44,895
Total 1,614,145 1,586,362 1.8 707,708 652,502 2,847,231
Pre-tax profit % 1-6.2012 1-6.2011 change 4-6.2012 4-6.2012 2011 Compulsory motor 74,731 15,390 - 20,298 3,248 28,079 Motor property 4,431 (12,727) - 1,088 (1,810) (35,305) Property & other branches 20,497 24,636 (16.8) 7,410 12,077 40,526 Other liabilities branches 4,879 (6,679) - (13,947) (4,212) (14,818) Credit & mortgage insurance 12,568 (6,212) - (5,138) (4,501) (1,894) Total 117,106 14,408 - 9,711 4,802 16,588
Gross premiums during the Reporting Period totaled to approx. NIS 31634 million, compared with NIS 31986 million during the corresponding period last year, a 2% increase. The increase in the gross premiums during the Reporting Period is despite the decline in Harel Insurance's share of the insurance of state employees' motor vehicles (see Section 2.9.1 below)6 Premiums in retention during the Reporting Period totaled to approx. NIS 917 million, compared with NIS 944 million in the corresponding period last year, a 1% decrease. The total gross premiums during the second quarter of 2012 amounted to NIS 718 million, compared with NIS 691 million during the corresponding period last year, a 8% increase. Premiums in retention
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during the second quarter of 2012 totaled to approx. NIS 354 million, compared with NIS 361 million in the corresponding quarter last year, a 2% decrease. Harel Insurance's share of the activity of Broadgate was included for the first time during the Reporting Period. For further details, see Section 5.2 below. The activity was classified under the segment - non-life insurance in the property insurance branch. The total premium recorded during the Reporting Period was NIS 20.8 million and NIS 961 million during the second quarter of 2012. Comprehensive profit in general (non-life) insurance during the Reporting Period, amounted to NIS 117 million, compared with comprehensive profit of NIS 14 million in the corresponding period last year. The increase in comprehensive profit during the Reporting Period compared with comprehensive profit in the corresponding period last year stems mostly from the influence of the capital market in which yields were higher than yields in the corresponding period last year and from the decrease in the inflation rate during the corresponding period last year. Comprehensive profit in general (non-life) insurance during the second quarter of 2012 amounted to NIS 10 million, compared with NIS 5 million in the corresponding quarter last year, a 100% increase. This increase is due mainly to the release of excess revenues over expenses in the compulsory motor branch in the second quarter of 2012, which were higher than the amount released in the corresponding period last year, and to improved underwriting performance in the compulsory motor branch due to an improvement in the estimate for claims in previous underwriting years. Pre-tax profit in general (non-life) insurance during the Reporting Period amounted to NIS 112 million compared with NIS 78 million in the corresponding period last year, a 44% increase. Pre-tax profit in general (non-life) insurance during the second quarter of 2012 amounted to NIS 33 million, compared with NIS 40 million in the corresponding quarter last year, a 19% decrease in the Pre-tax profit. 2.9.1. Motor property In motor-vehicle property insurance gross premiums during the Reporting Period amounted to NIS 514 million, compared with gross premiums of NIS 911 million during the corresponding period last year, a 4% decrease. Decrease in premiums stems mostly from a decline in the share held by Harel Insurance of the insurance for state employees' motor vehicles. In motor-vehicle property insurance gross premiums during the second quarter of 2012 amounted to NIS 201 million, compared with gross premiums of NIS 197 million during the corresponding period last year, a 2% increase. During the Reporting Period, premiums in retention amounted to NIS 418 million compared with NIS 423 million in the corresponding period last year, a 3% decrease. The total premiums in retention in motor-vehicle property insurance during the second quarter of 2012 amounted to NIS 158 million, compared with NIS 155 million in the corresponding quarter last year, a 2% increase. Comprehensive income in motor-vehicle property insurance in the Reporting Period amounted to NIS 4 million, compared with loss of about NIS 31 million in the corresponding period last
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year. The transition from loss to profit stems mostly from improved underwriting performance and from the effect of the capital market, where yields were higher than those in the corresponding period last year. Comprehensive income in motor-vehicle property insurance during the second quarter of 2012 amounted to NIS 1 million, compared with loss of about NIS 2 million in the corresponding quarter last year. The transition from loss to profit stems mostly from improved underwriting performance. Pre-tax profit in motor-vehicle property insurance in the Reporting Period amounted to NIS 4 million compared with loss of about NIS 7 million in the corresponding period last year. Pre-tax profit in motor-vehicle property insurance during the second quarter of 2012 amounted to NIS 1 million, compared with pre-tax profit of about NIS 1 million in the corresponding quarter last year. In November 2133, 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. Harel Insurance's share of the insurance for state employees' vehicles is therefore expected to fall to 31% in 2012, compared with 33% in 2011 and compared with 85% in 2010. This decline in the number of state employees' vehicles that Harel insurance 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 311 million, compared with gross premiums of NIS 127 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. The total gross premiums in compulsory motor vehicle insurance during the second quarter of 2012 amounted to NIS 339 million, compared with NIS 322 million in the corresponding quarter last year, a 2% 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 248 million compared with NIS 261 million in the corresponding period last year. During the second quarter of 2012, premiums in retention in compulsory motor vehicle insurance amounted to NIS 95 million compared with NIS 97 million in the corresponding quarter last year, a 2% decrease. Comprehensive income in compulsory motor insurance in the Reporting Period amounted to NIS 75 million compared with NIS 15 million profit in the corresponding period last year. Increase in comprehensive profit stems mostly from the influence of the capital market in which yields were higher than yields in the corresponding period last year and from a lower inflation
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rate during the Reporting Period as against the corresponding period last year which affected the reserves that are linked to the CPI and due to the release of surplus income over expenses for previous underwriting years by an amount which was higher than that released in the corresponding period last year. Comprehensive profit for compulsory motor insurance during the second quarter of 2012 amounted to NIS 20 million, compared with NIS 1 million during the corresponding period last year. The increase in comprehensive profit can be attributed to the release of a higher amount in respect of surplus income over expenses in the second quarter of 2012 compared with the corresponding period last year, and to improved underwriting performance. Pre-tax profit for compulsory motor insurance during the Reporting Period amounted to NIS 72 million, compared with profit of NIS 47 million during the corresponding period last year. Pre-tax profit for compulsory motor insurance during the second quarter of 2012 amounted to NIS 30 million, compared with NIS 22 million during the corresponding quarter last year. 2.9.3. Liabilities branches and others During the Reporting Period gross premiums in liabilities insurance and others amounted to NIS 324 million, compared with NIS 302 million during the corresponding period last year. Gross premiums in liabilities insurance and others during the second quarter of 2012 totaled to approx. NIS 140 million, compared with NIS 114 million during the corresponding quarter last year. Premiums in retention in the Reporting Period amounted to NIS 344 million compared with NIS 342 million during the corresponding period last year, a 2% increase. The total premiums in retention in liabilities insurance and others during the second quarter of 2012 amounted to NIS 49 million, compared with NIS 52 million in the corresponding quarter last year, a 9% decrease. Comprehensive profit in liabilities insurance and others in the Reporting Period amounted to NIS 5 million compared with loss of about NIS 7 million in the corresponding period last year. The transition from loss to profit stems mostly from the influence of the capital market in which yields were higher than yields in the corresponding period last year and from a lower index during the Reporting Period as against the corresponding period last year which affected the reserves that are linked to the CPI. The comprehensive loss in liabilities insurance and others during the second quarter of 2012 amounted to NIS 14 million, compared with comprehensive loss of NIS 4 million during the corresponding quarter last year. The higher loss in the second quarter of 2012, compared with the corresponding quarter last year, is mainly due to the release of surplus income over expenses which was lower in the second quarter of 2012 than in the corresponding quarter last year, to a deterioration in underwriting performance and to an erosion of the shekel exchange rate against the dollar, 1 -82
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which required an increase in the reserves for dollar-based professional liability policies. Pre-tax profit in others liabilities insurance in the Reporting Period amounted to NIS 1 million, compared with NIS 7 million during the corresponding period last year. Pre-tax loss in others liabilities insurance during the second quarter of 2012 amounted to NIS 9 million, compared with profit of NIS 1 million during the corresponding quarter last year. 2.9.4. Property and other branches Premiums in property and other branches during the Reporting Period amounted to NIS 446 million compared with NIS 395 million during the corresponding period last year, a 13% increase. The total gross premiums in property and other branches during the second quarter of 2012 totaled to approx. NIS 237 million, compared with NIS 207 million during the corresponding quarter last year, a 14% increase. Premiums in retention during the Reporting Period amounted to NIS 98 million compared with NIS 92 million during the corresponding period last year, a 7% increase. The total premiums in retention in property and other branches during the second quarter of 2012 amounted to NIS 40 million, compared with NIS 44 million in the corresponding quarter last year, a 8% decrease. Comprehensive profit in property and other branches in the Reporting Period amounted to NIS 20 million, compared with NIS 25 million in the corresponding quarter last year. Comprehensive profit in property and other branches during the second quarter of 2012 amounted to NIS 7 million, compared with NIS 12 million in the corresponding quarter last year. Pre-tax profit in property insurance and other branches during the Reporting Period amounted to NIS 20 million, compared with NIS 26 million in the corresponding period last year. Pre-tax profit in property insurance and other branches during the second quarter of 2012 amounted to NIS 8 million, compared with NIS 13 million in the corresponding quarter last year, a 39% decrease. 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 20 million compared with NIS 29 million in the corresponding period last year, a decrease of about 32%. The total gross premiums in credit risks inherent in mortgage assets during the second quarter of 2012 totaled to NIS 32 million, compared with NIS 14 million during the corresponding quarter last year, a 38% decrease. The Company does not have reinsurance agreements in this branch. The directives of the Supervisor of Banks, aimed at lowering the demand for real estate by 1 -81
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limiting the availability of highly financed mortgages, had a negative impact on the scope of activity in the mortgage insurance branch, similar to that in 2011. For additional information on these directives and their impact - see par. 3.3.1.5.5 in Chapter A of the Periodic Report – "Description of Company Operations". Comprehensive income in credit risks inherent in mortgage assets during the Reporting Period amounted to NIS 13 million compared with NIS 6 million loss in the corresponding period last year. The transition from loss to profit stems mostly from the influence of the capital market during the Reporting Period in which yields were higher than yields in the corresponding period last year and from the low inflation rate during the Reporting Period as against the inflation rate for the corresponding period last year, in which affects the increase in the reserves that are linked to the CPI. The comprehensive loss in credit risks inherent in mortgage assets during the second quarter of 2012 amounted to NIS 5 million, similar to the corresponding quarter last year. Pre-tax profit in credit risks inherent in mortgage assets during the Reporting Period amounted to NIS 13 million compared with NIS 5 million in the corresponding period last year. Pre-tax profit in credit risks inherent in mortgage assets during the second quarter of 2012 was negligible, compared with NIS 1 million during the corresponding quarter last year.
2.10. Insurance companies overseas The Company is owns a 96.5% stake 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, and holds the controlling interest in Turk Nippon (wholly controlled) which operates in Turkey.
During the Reporting Period, the operating segment for insurance companies overseas earned premiums of NIS 88 million, compared with NIS 69 million for the corresponding period last year, an increase of 28%. Total premiums earned by the insurance companies operating overseas segment for the Reporting Period account for 2% of all premiums earned by the Group.
During the second quarter of 2012, the operating segment for insurance companies overseas earned premiums of NIS 43 million, compared with NIS 38 million for the corresponding period last year, an increase of 31%. 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 4 million for the Reporting Period, compared with a comprehensive loss of NIS 14 million for the corresponding period last year.
The insurance companies in the overseas operating segment posted a comprehensive loss of NIS 2 million for the second quarter of 2012, compared with a comprehensive loss of NIS 10 million for the corresponding quarter last year.
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During the Reporting Period, the insurance companies abroad posted a pre-tax loss of NIS 7 million, compared with a pre-tax loss of NIS 14 million for the corresponding period last year.
During the second quarter of 2012, the insurance companies abroad posted a pre-tax loss of NIS 2 million, compared with a pre-tax loss of NIS 12 million for the corresponding quarter last year.
The loss posted by the overseas insurance companies segment can be attributed to the losses from Turk Nippon in Turkey, which operates in an extremely competitive market and also records losses on account of the fact that the company's operations and growth are in a relatively early stage.
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, the company has invested in Turk Nippon's capital in the Reporting Period amount of about NIS 22 million.
2.11. Capital market and financial services During the Reporting Period, revenues in the capital market and financial services sector amounted to NIS 100 million, compared with NIS 123 million for the corresponding period last year, a 19% decrease compared with the corresponding period last year. This decrease in revenues during the Reporting Period compared with the corresponding period last year can be attributed mainly to a decrease in the average management fees in the mutual funds during the Reporting Period relative to the average management fees during the corresponding period last year.
Total management fees from the mutual funds and managed cases during the Reporting Period totaled NIS 71 million, compared with NIS 94 million for the corresponding period last year.
The volume of assets under management in the capital market and financial services segment at June 30, 2012, was NIS 2667 billion, compared with NIS 2667 billion at June 30, 2011, and compared with NIS 2661 billion at December 31, 2011.
Most of this increase in the volume of assets under management in this operating segment, relation to data as of December 31, 2011, can be attributed to the growth of assets under management in the mutual funds, as well as due to the Group expanding its ETF activity.
These amounts include mutual fund assets in the amount of NIS 3867 billion at June 30, 2012, compared with NIS 2163 billion at June 30, 2011 and NIS 2168 billion at December 31, 2011, as well as ETF assets, which at June 30, 2012 amounted to NIS 4.1 billion against to NIS 168 billion at June 30, 2011 and NIS 3 billion at December 31, 2011. 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 969 million, as against a pre-tax loss of NIS 3861 million for the corresponding period last year. The decrease in profit can be attributed to a decrease in management fees due to a decrease in the average management fees in the mutual funds6
Pre-tax profit in the capital market and financial services sector during the second quarter of 2012 amounted to NIS 4 million, compared with NIS 7 million during the corresponding quarter last year, mainly due to the erosion of the average management fee6 1 -89
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2.12. Income tax Income tax during the Reporting Period amounted to an expense of NIS 91 million, compared with revenues under the income tax item of NIS 111 million during the corresponding period last year.
Income tax during the second quarter of 2012 amounted to an income of NIS 21 million, compared with expense of NIS 51 during the corresponding quarter last year.
Regarding the agreement between Association of Life Assurance Companies and the Assessment Officer - see Note 5 to the Financial Statements.
Regarding the agreement between subsidiary, which is a pension fund management company, and the Tax Authority - see Note 5 to the financial Statements.
Regarding the tax assessments in dispute with the Tax Authority - see Note 5 to the financial Statements.
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 911 million. Net cash flows used for investment activity amounted to NIS 52 million. Net cash flows provided by activity and fluctuations in exchange rate amounted to NIS 700 million. The result of all the aforesaid activity is reflected in a decrease in cash balances in the amount of NIS 263 million. 2.13.2. Financing of operations As a rule, the Company and its subsidiaries finance their on-going operations from their own sources. In some cases, new operations are acquired partially by means of external financing. Likewise, in view of the capital requirements applicable to the Company's subsidiaries that are insurers, and pursuant to the Capital Regulations, the regulatory capital required of an insurer may comprise tier-1 capital, hybrid tier-2 capital, and hybrid tier-3 capital. Accordingly, Harel Insurance raised tier-2 capital and hybrid tier-3 capital and Dikla raised hybrid tier-2 capital, as specified below. Issue of liability notes by Harel Insurance In February 2004, Harel Insurance issued subordinated liability notes in the amount of NIS 200 million. The deferred liability notes are index linked and bear interest of 5.55%, and will be repaid in 10 equal annual installments starting in March 2010 (see Note 8 to the Financial Statements). The subordinated liability notes have an AA rating from Maalot. At June 30, 2012, the balance of these liability notes was NIS 172 million. Issue of liability notes by Harel Share Issues In November 2006, Harel Share Issues, a Special Purpose Company (SPC) wholly owned by Harel Insurance, issued subordinated liability notes in the amount of NIS 650 million. The
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deferred liability notes are linked to the CPI in respect of October 2006, bear interest of 4.65%, and will be repaid in 11 equal annual installments in each of the years 2011 to 2021. The interest on the liability notes will be paid in annual installments on December 31 of every calendar year starting in 2007 and until the liability notes have been repaid in full in 2021. The subordinated liability notes have an AA rating from Maalot. The proceeds of the issuance were used, among other things, to finance the acquisition from the Bank Leumi Group of provident fund activity by Harel Insurance. On September 2, 2009 Harel Share Issues published a draft shelf prospectus after having received, that same day, the Securities Authority's permission to publish the prospectus. To enable Harel Share Issues to raise liability notes that are recognized as hybrid secondary capital and/or hybrid tertiary capital by Harel Insurance, under the New Capital Regulations and in compliance with the Commissioner's instructions regarding the composition of an insurer's capital, on May 10, 2010, Harel Share Issues published an amendment to the shelf prospectus. The amendment was published after, on May 10, 2010, permission to this effect was received from the Commissioner of Insurance, the Securities Authority and the Tel Aviv Stock Exchange. The amendments include provisions which will allow Harel Share Issues to determine in the conditions of a bond it intends to raise, inter alia, grounds for deferring payment of the principal and/or interest, when certain circumstances arise ("delaying circumstances"), without this constituting a breach of the conditions of the bond and without establishing a right to early repayment. On May 10, 2010, Maalot published an AA- rating for up to NIS 700 million raised by Harel Share Issues, by way of the issuance of deferred liability notes, for which the consideration will be deposited with Harel Insurance, and which Harel Insurance undertook to repay to the investors. 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, whose rating remains AA. In order for the proceeds of the issuance to be recognized as hybrid tier-2 capital by Harel Insurance, pursuant to the Control of Financial Services (Insurance) (Minimum equity required of an insurer) Regulations (Amendment), 5769- 2009, and the Commissioner's instructions in the matter of the composition of the equity required of an insurer, the liability notes contain a mechanism in which, when certain circumstances defined in the Commissioner's instructions are present (mainly a failure to comply with the capital requirements applicable to an insurer), principal and/or interest payments will be suspended, and supplementary interest will be paid in respect of the the period of the delay. Likewise, the liability notes include Harel Share Issues' right to make early repayment of the liability notes, on a specific date to be defined in advance in the shelf offering. If Harel Share Issues does not repay the liability notes early, supplementary interest will be paid for the period remaining until the original repayment date. Following publication of the amendment to the shelf prospectus, on May 23, 2010, Harel Issues published, by virtue of the Shelf Prospectus, a statement of offer of liability notes that will be used as complex secondary capital in Harel insurance. On May 24, 2010, the issue was completed6
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The issue was carried out using four series of bonds as specified below: Series B: in an extent of approx. NIS 115 million bears changing interest based upon annual STB with the addition of a margin at the rate of 1.8%. Interest shall be paid on a quarterly basis. The principal shall be paid on May 31, 2021, which is the redemption date of the series. Series C: in an extent of approx. NIS 115 million bears changing interest based upon annual STB with the addition of a margin at the rate of 1.8%. Interest shall be paid on a quarterly basis. The fund shall be paid on May 31, 2022, which is the redemption date of the series . Series D: in an extent of approx. NIS 199 million linked to the consumer price index and bears fixed interest at the rate of 3.9%. Interest shall be paid every six months. Fund shall be paid on May 31, 2023 which is the redemption date of the series. Series E: in an extent of approx. NIS 199 million linked to the consumer price index and bears fixed interest at the rate of 3.9%. Interest shall be paid every six months. Fund shall be paid on May 31, 2024, which is the redemption date of the series. Since in accordance with the instructions prescribed by the Commissioner regarding the composition of an Insurer's equity, three years prior to the final due date of the bonds, their recognition as complex secondary capital by Harel Insurance decreases by a fixed rate each year (one third per year), the bonds include a term according to which three years prior to the redemption date of each series Harel Issues is entitled to redeem the series or a part thereof through prepayment. The exercises of this right is subject to the approval of the Commissioner unless Harel Insurance has capital surpluses so that the recognized capital following redemption is at least 120% from the required capital and in that event the Commissioner's approval is not required for the aforesaid early repayment. In the event that Harel Issues does not exercise its right of early repayment, the holders of the bonds will be paid additional interest at the rate of 50% from the original risk margin prescribed in the issue of each series . The bonds include a term according to in the occurrence of delaying circumstances the principal and/or the interest shall not be paid and this in accordance with the following: Delaying circumstances relate to the one or more of the following: (1) Lack of appropriate profits to be distributed by Harel Insurance as specified in the Companies Law and this in accordance with the recent Financial Statements (annual or quarterly) that preceded the relevant date of the redemption of interest and/or principal; (2) The amount of recognized equity of Harel Insurance went below the minimum equity required by it (in accordance with the instructions of the Law that apply to Harel Insurance and/or in accordance with the instructions of the Commissioner) and this in accordance with the recent Financial Statements (yearly or quarterly) that preceded the relevant time of the redemption of the interest and/or principal; (3) The board of directors of Harel Insurance instructed a deferral of interest payments or deferral of principal payments if it reached a conclusion that there was a close and actual concern concerning Harel Insurance's ability to meet its obligations regarding the minimum equity required from it (in accordance with the instructions of the law that apply to Harel Insurance and/or in accordance with the instructions of the Commissioner) and provided that the Commissioner's approval regarding this matter was received in advance; (4) Harel Insurance's board of directors 1 -88
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instructed a deferral of the payment of interest and/or deferral of the payment of the principal if it reached a conclusion that there was a close and actual concern regarding the ability of Harel Insurance to redeem notes whose degree of priority is higher than the bonds offered according to this Shelf Prospectus provided that the Commissioner's approval regarding this matter was received in advance; (5) the Commissioner instructed the deferral of payment of principal and/or interest due to substantial harm caused to Harel Insurance's equity or if he deemed that there was a close and actual concern regarding Harel Insurance's ability to meet with the minimum equity requirements (in accordance with the instructions of the law that apply to Harel Insurance and/or in accordance with the instructions of the Commissioner). A principal or interest that was deferred as said will be deferred until the cessation of the deferring circumstances and for a period that lasts no longer than three years than the original time of repayment of the bonds fund. On July 18, 2010, Harel Issues published, by virtue of the Shelf Prospectus, a statement of offer of liability notes in an extent of up to NIS 70 million that will be used as complex secondary capital in Harel insurance . On July 19, 2010, the issue was completed. The issue was carried out using expansion of two series of bonds, series B and C which was first issued on May 24, 2010. Depending on the results of the tender was held, the issue was carried out at a price of NIS 1.024 per NIS 1 par value bonds. Accordingly the total proceeds (gross) received was about 71.7 million. Terms of debentures are as specified below: Series B: in an extent of approx. NIS 35 million bears changing interest based upon annual STB with the addition of a margin at the rate of 1.8%. Interest shall be paid on a quarterly basis. The principal shall be paid on May 31, 2021, which is the redemption date of the series. Series C: in an extent of approx NIS 35 million, the series bears changing interest based upon annual STB with the addition of a margin at the rate of 1.8%. Interest shall be paid on a quarterly basis. The fund shall be paid on May 31, 2022, which is the redemption date of the series. For details about other conditions relating to these series - see details below. On August 30, 2011, Harel Share Issues published an offering report for liability notes with a value of up to NIS 200 million, to be used as hybrid tier-2 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 hybrid tier-2 capital. The offering report was published after, on August 28, 2011, Maalot published a rating of ilAA 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, that have an AA rating. 1 -89
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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 (gross) 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 hybrid tier-2 capital for Harel Insurance. At June 30, 2012, the balance of the liability notes from Series B - E was NIS 935 million. Issuance of hybrid tier-3 capital through Harel Finance & Issues On February 28, 2012, Harel Share Issues published a shelf prospectus. By virtue of the shelf prospectus, on April 4, 2012, Harel Share Issues published a shelf offering, in which context two series of Debentures (Series F & G) were offered to the public, which were recognized by the Commissioner as hybrid tier-3 capital held by Harel Insurance. Prior to the publication of the shelf offering, on March 26, 2012 Harel Issues received an ilAA rating from S&P Maalot for the said liability notes in the amount of NIS 250 million. Pursuant to the results of the issuance, the Debentures (Series F-G) will bear fixed annual interest of 3.85%, and will be linked (principal and interest) to the CPI. In all, according to the results of the tender for Series F-G, Harel Issues allocated 228,065 units, for the total consideration of NIS 228 million (NIS 114 million for Series F and NIS 114 million for Series G). The interest will be paid in semi-annual installments. The Debentures Series F will be settled on May 31, 2025 and the Debentures Series G will be settled on May 31, 2026. Since the debentures are recognized as hybrid tier-3 capital held by Harel Insurance they include a condition whereby when certain delaying circumstances are present, as detailed below, the principal will not be paid. The delaying circumstances are one or more of the following: (a) according to the last financial statement of Harel Insurance published before the relevant principal repayment date, Harel Insurance holds less recognized equity than the minimum equity it is required to hold (under the capital regulations), and it has not supplemented its equity at the publication date of the financial statements; (b) the Commissioner of Insurance has ordered a deferral of the principal payment if he considers that there is a real, immediate concern as to Harel Insurance's ability to meet the minimum equity it is required to hold under the capital regulations. Given that this is hybrid tier-3 capital, even when the delaying circumstances are present, the interest payment will be made as normal up to the original settlement date of the principal. A principal payment that is deferred will be postponed until the delaying circumstances are no longer present, and at most for a period ending three years from the original settlement date of the debentures principal.
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Additionally, since according to the provisions of the law regarding the composition of an insurer's equity, two years before the final settlement date of the debentures the recognition of the debentures as hybrid tier-3 capital held by Harel Insurance is amortized at a fixed declining rate (50% each year), the debentures include a condition whereby Harel Issues may make early repayment of the debentures or part thereof, and this two years before the original settlement date. Application of this right is subject to meeting one of the following conditions: (a) obtaining the Commissioner's approval; or (b) Harel Insurance must have surplus capital so that the recognized capital after the repayment is 120% of the required capital; or (c) concurrent with the early repayment, Harel Issues will issue a capital instrument of the same or superior quality. If Harel Share Issues does not exercise its right to early repayment, additional interest will be paid to the debenture holders at a rate of 30% of the original risk margin, as defined in the issue. On May 8, 2012, Harel Finance and Issues entered into agreement for the private placement of Debentures Series F in the amount of NIS 22 million. The private placement was performed by way of an expansion of Series F, which was issued by virtue of a shelf offering dated April 4, 2012 (see Section 263632 above). The proceeds of the placement will be added to the proceeds of the issue of Debentures Series F and Debentures Series G, from April 4, 2012, and will serve as hybrid tier-3 capital held by Harel Insurance. The conditions of the Debentures Series F are as specified in the shelf offering report dated April 4, 2012. Concerning Maalot's announcement of the inclusion of the ratings of the insurance companies engaged in life assurance, including Harel Insurance and EMI, see Section 2.2.1 above. Loans that the Company took from banks In November 2008, the Company secured two medium-term loans from banks in the total amount of NIS 400 million, as follows: (A) A bank loan in the amount of NIS 200 million for a period of eight years, where the principal and interest will be repaid after 30 months have elapsed, in twelve semi-annual payments; The financial covenants defined are: (1) no charge will be placed on material assets; (2) significant companies will not be sold or transferred; (3) the ratio of net financial debt to investment in investee companies will be no more than 0.35. At June 30, 2012, this ratio was 0.1; (4) the ratio of the net financial debt to shareholders equity will be no more than 0.5. At June 30, 2012, this ratio was 0.1. It is worth noting that the Company received the bank's consent for the purpose of transferring the full control of Dikla from the Company to Harel Insurance. At June 30, 2012, the outstanding loan was NIS 186 million. At June 30, 2012, the Company is in compliance with the aforementioned conditions. (B) A bank loan in the amount of NIS 200 million for a period of three years, to be repaid commencing after 24 months have elapsed, in three equal semi-annual installments. Interest on the loan will be repaid every six months from the date that the loan is received. On May 17, 2010, an agreement was signed with the bank for the early repayment of the aforementioned 1 -93
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loan, by means of a new loan that the bank extended for a 10-year period. The principal of this loan will be repaid in 20 semi-annual installments from six months after the date on which the loan was granted and up to the end of ten years from the date of granting the loan, where the last payment of the principal will be NIS 124 million, and the other payments of the principal (the semi-annual payments) will each be NIS 4 million. The loan bears variable shekel interest, on the basis of prime plus a margin. The Company undertook to meet certain financial covenants, including covenants relating to the Company's shareholders equity and holdings in subsidiaries, as follows: (1) an undertaking not to pledge material assets: (2) not to transfer control of significant companies; (3) it will retain full control of Harel Insurance; (4) a rating of at least BBB for bonds issued by Harel Insurance. At June 30, 2012, the outstanding loan was NIS 168 million. At June 30, 2012, the Company is in compliance with the aforementioned covenants. Hybrid tier-2 capital raised by Dikla 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") that constitute the financial covenants. Payment of the principal may be suspended for a maximum period of three years from the original repayment date. If payment of 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
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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. Regarding Dikla's capital - see Note 7 to the Financial Statements. As of the Reporting date, no delaying circumstances have occurred. As at June 30, 2012, the balance of the capital notes is NIS 31368 million.
A loan that Harel-Pia took from bank In February 2011, Harel Pia received a loan of NIS 80 million from a banking corporation. The loan is for a 5-year period, where the principal and the 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 cash flow relative to repayment of the loan and are as follows: (1) an undertaking not to take any additional loans that are not subordinated to the loan; (2) a failure to repay owners loans; (3) Harel Pia shares that are held by Harel Finance are to be placed under lien; (4) current lien; (5) Harel Pia's bank accounts through which the management fees are collected will be pledged; (6) the ratio between the EBITDA expected over the next 12 months, commencing at the end of each quarter, calculated as a product of EBITDA in the quarter ended, multiplied by 4, for principal and interest repayments for that period shall be no less than 1.2. 1 -91
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In March 2012, an amendment was signed to the agreement regarding the financial covenants in sub section (6), which the bank approved to the borrower ratio below 1.2, subject to meeting a combination of all the following conditions: (a) the ratio will not be less than 1 at any time; (b) the borrower will place money in deposit in accordance with a mechanism prescribed in the agreement, and up to an amount equal to 20% of the amount of the principal and interest over the next 12 months; (c) a fixed senior lien will be placed on the deposit in favor of the bank to guarantee the credit; (d) the deposit will be made within 20 days after the end of the calendar quarter; (e) the principal and interest payments for that quarter will not be paid from the money in the deposit; (f) no event shall take place which entitles the bank to demand immediate recall of the loan. At June 30, 2012, the EBITDA ratio was 1.05; after the balance sheet date, the Company deposited an amount of NIS 3 million with a bank. (7) the product of the volume of assets in each fund multiplied by its annual management fee rate for all the total funds managed by Harel-Pia shall not be less than the amount specified in the agreement and will decline over the period of the loan. At June 30, 2012, the amount required was NIS 134 million. In June 2012, an amendment was signed to the agreement regarding the financial covenants in this sub section, which the bank approved to the borrower, at June 30, 2012, a ratio no less than NIS 123 million. The total assets multiplied by the actual management fee, at that date, amounted to NIS 131 million; (8) the equity, including capital notes, shall not be less than an amount equal to 50% of the total balance sheet of Harel-Pia. At June 30, 2012, this ratio is 78.57%; (9) the equity, including capital notes, shall not be less than an amount equal to NIS 250 million from the total balance sheet of Harel-Pia. At June 30, 2012, the equity, including capital notes, was NIS 345 million. At June 30, 2012, the outstanding loan was NIS 58 million. Credit taken by Harel Financial Products As specified in Note 8 to the Financial Statements, Harel Financial Products has bank credit to finance the arbitrate activity that it performs as part of the index-linked assets. This activity includes the acquisition of contracts in lieu of sale of underlying assets as well as the acquisition of underlying assets and the sale of contracts on these assets. Acquisition of the underlying assets is financed with bank credit. Harel Financial Products' policy with respect to this arbitrage is to fully hedge the transactions so that the underlying assets are in no way exposed. Concerning a line of credit from a bank that was given to Harel Products - see Note 8 to the Financial Statements. In connection with a credit limit taken by Harel Financial Products for its operations, Harel Financial Products undertook to comply with the following covenants: (a) equity (as defined in the agreement with the bank) of no less than NIS 12 million. At June 30, 2012, the equity was NIS 52 million; (b) not to pledge any assets; (c) not to give loans to the company's controlling shareholders or to any other entity, other than its subsidiaries. At June 30, 2012, Harel Financial Products was in compliance with the aforementioned covenants. At June 30, 2012, the outstanding loans and credit undertaken by Harel Financial Products amounted to NIS 42 million. 1 -94
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Harel Trade & Securities - TASE member According to the Stock Exchange Articles, Harel Trade, which is a TASE member, must comply with the minimum capital requirements. At June 30, 2012, Harel Trade has equity of NIS 83 million. At the date of this report, Harel Trade is in compliance with the equity requirements according to the Stock Exchange Articles. In connection with a credit limit taken by Harel Trade & Securities for its operations, Harel Trade & Securities undertook to comply with the following covenants: (a) equity (as defined in the agreement with the bank) of no less than NIS 60 million. At June 30, 2012, the equity amounted to NIS 83 million; (b) Harel Finance will continue to hold the controlling interest in Harel Trade & Securities; (c) owners' loans that were given to Harel Trade & Securities must be subordinated to the loan received from the bank; (d) Harel Trade & Securities will not be able to repay owners' loans until the bank loan has been repaid. At June 30, 2012, Harel Trade & Securities was in compliance with the aforementioned covenants. At June 30, 2012, there is no outstanding amount in respect of these loans. In addition to the aforementioned loan, at June 30, 2012 the Company and companies in the Group have short-term loans in the amount of NIS 12 million. Capital note On July 8, 2012, the Company provided Harel Yedidim Pension Arrangements Ltd., a company wholly owned by the Company, with a capital note in the amount of NIS 8 million. The capital note is not linked and bears no interest.
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.
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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; (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". On January 19, 2012, the Board of Directors resolved that the members of the Committee for the review of the financial statements shall be: (a) David Granot, Chairman (External Director) (b) Doron Cohen (c) Prof. Israel Gilad (External Director) 1 -96
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On July 22, 2012, the Board of Directors resolved that Ms. Esther Dominissini, which appointed as External Director, will join to the Committee for the review of the financial statements. Accordingly, the members of the Committee for the review of the financial statements shall be: (a) David Granot, Chairman (External Director) (b) Prof. Israel Gilad (External Director) (c) Doron Cohen (d) Esther Dominissini (External Director) 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.
4.1.1. 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 Date of commencement of tenure 3.2.2011 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 the institutional entities in Harel Group, Chairman of the Credit committee of the institutional entities in Harel Group, External Director in Harel Insurance, External Director and Audit Committee member in Dikla, CEO of HaBank HabeinLeumi Harishon and chairman of subsidiaries of HaBank HabeinLeumi Harishon (Fibi London, Fibi Swiss, Bank Otsar Ha-Hayal Ltd.), Director in Bateman Litwin. Corporations in which he serves as director Mmember and chairman of the board of BSG, Director and Audit (excluding the Group's companies): Committee member in Elrov Israel (as of 23.1.11), Director and Audit Committee member of Hem-let (from July 2011) and Director and Audit Committee member in Tempo drinks (from January 2012) Director in Ormat Technologies and in G.D. Goren. 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, 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.
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Name : Prof. Israel Gilad I.D. no.: 050629005 External Director: Yes Independent Director As an outside director of the Company, Mr. Israel Gilad also meets the criteria for recognition as an independent director. Chairman of the committee: No Date of commencement of tenure 30.1.2012 Has accounting and financial expertise Yes
Education: LL.B (first of his class), Hebrew University1 BA (Cum Laude) in Economics, Hebrew University6 Ph.D. in Laws, Hebrew University6 Course in "Management Accounting" as part of MBA studies, the Open University.
Occupation over the last five years: External director and member of the Audit Committee in Harel Insurance Company Ltd External director, chairman of the Audit Committee, chairman of the Procedures Committee, chairman of the Committee for Transactions with Principal Shareholders, member of the Credit Committee, member of the Finance Committee, member of the Risk Committee, member of the Executive Compensation Committee, member of the Strategy Committee and of the Committee for the Review of the Financial Statements of Bank Leumi LeIsrael Ltd6 Full Professor, Faculty of Laws, and member of various committees at the Hebrew University, Jerusalem. A member of the public committee for the appointment of authorized managers for pension funds in the Capital Market Division of the Ministry of Finance. Corporations in which she serves as director Chairman of the management committee of the National Institute for (excluding the Group's companies): Testing and Evaluation. 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. Gilad as a director with accounting and financial expertise, 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. Gilad's qualifications, experience and knowledge as noted above, the Company regards Mr. Gilad as being capable of reading and understanding financial statements.
Name : Doron Cohen I.D. no.: 069418945 External Director: No Independent Director: Mr. Doron Cohen eligible to serve as an independent director. Chairman of the committee: No Date of commencement of tenure 3.2.2011 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 of Blue-Square Co-op Services Association Ltd. (in liquidation), Business and economic advice, Director of Tamy Secured Yield Israel Ltd., Chairman of the Board of Directors of H.A.L. Tshurah Ltd. and
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its subsidiaries. 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., and Gama Capital 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. Cohen as a director with accounting and financial expertise, 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. Cohen 's qualifications, experience and knowledge as noted above, the Company regards Mr. Cohen as being capable of reading and understanding financial statements.
Name : Esther Dominissini I.D. no.: 619294433 External Director: Yes Independent Director: As an outside director of the Company, Ms. Esther Dominissini also meets the criteria for recognition as an independent director. Chairman of the committee: No Date of commencement of tenure 22.7.2012 Has accounting and financial expertise: Yes Education: BA in Social Work, Cum Laude, from Tel Aviv University, majored in mental health. Studied towards MA in Criminology and Criminal Law (excluding thesis) at Tel Aviv University. BA in Sociology (including units in Psychology and Education) – Hebrew University of Jerusalem. Graduate of Civil Service course for directors general through the JDC Institute for Leadership and Governance, course for directors of government companies and advanced managers course at the College for the Advancement of Senior Executives. Occupation over the last five years: Director General of the National Insurance Institute, Director General of the Israeli Employment Service, member of the Board of Directors of the Academic College of Law, Ramat Gan. Corporations in which he serves as director Chairman of the Board of Directors of Hadassah (Hospitals). (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 Ms. Dominissini as a director with accounting and financial expertise, 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 Ms. Dominissini's qualifications, experience and knowledge as noted above, the Company regards Ms. Dominissini as being capable of reading and understanding financial statements.
4.1.2. Procedure for approval of the financial statements: To approve the financial statements at June 30, 2012, the Committee convened on August 19, 2012. In addition, the Company's CPA are invited to and attend meeting of the Committee and Board of Directors' meeting that discuss and approve the financial statements, and they present the 1 -99
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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 August 19, 2012 was attended by Avraham Fruchtman CPA together with Dvora Wiesel CPA and the internal auditor was also invited to the meeting. A detailed review of the material issues in the financial reporting is presented to the balance sheet committee, including material transactions that are not the normal course of business, if and insofar as there are any, the material assumptions and critical estimates that were applied in the financial statements (including a review prepared by the appointed actuaries of the subsidiaries that are an insurer), the reasonability of the data, the accounting policy which was applied and any changes which occurred in this policy, as well as implementation of the principle of fair disclosure in the financial statements and related information. The balance sheet committee also receives a review of issues that emerged, if they emerged, while performing the audit and risk management, the efficacy of the controls and procedures with respect to their disclosure in the Company's subsidiaries that are financial institutions. Likewise, the Committee received draft actuarial reports and the actuaries' declarations. 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 control6 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 19, 2012, 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. 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. 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.
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4.2. Appointment of an investment committee in Harel Investments On May 23, 2012, the board of directors of Harel Investments resolved to appoint an investment committee as a committee of the board of directors of Harel Investments. The decision was made in view of the critical importance of the investment activity carried out by the company's subsidiaries for its financial results and the risks to which the company is exposed. The board of directors determined that the committee will be a committee with powers of recommendation, which will review the investment activity carried out by the subsidiaries, and where necessary will submit conclusions regarding this activity to the board of directors. The following were appointed as members of the committee: David Granot, chair (External Director), Yair Hamburger, Doron Cohen. 4.3. Compensation Committee On July 22, 2012, the Board of Directors of Harel Investments resolved to appoint Prof. Yisrael Gilead as an additional member to the Compensation Committee of the Board of Directors. 4.4. Compensation plan of the subsidiaries which are financial institutions On August 21, 2012, the boards of directors of the Company and of Harel Insurance approved updates in the weight of the parameters used to calculate the compensation according to the remunerations plan, and to revise the method of calculating an additional parameter. The principles of the plan remain unchanged. Likewise, it was determined that if the comprehensive profit of Harel Investments is lower than a certain rate defined in the work plan, the Compensation Committee and Board of Directors will meet to review the possibility of setting a factor which will reduce compensation calculated according to the compensation plan across the board. Details about the compensation plan which was adopted by the Company and Harel Insurance for senior officeholders of Harel Insurance and its subsidiaries appear in Section 1.1.5.3.1. to Chapter 1 of the Periodic Report for 2010. Likewise, details are presented in Chapter 5, Article 21 (Additional Information about the Corporation) in the Company's Periodic Report for 2011. As part of the approval of the compensation plan by the Remunerations Committee and Board of Directors of the Company and Harel Insurance, it was determined that the compensation plan will be reviewed after its implementation in respect of 2011. Accordingly, following discussions held by the Compensation Committee, the Audit Committee and Board of Directors of the Company regarding implementation of the compensation plan, it was decided to revise several parameters which are used in the plan ('the Revision"). Following are the key parameters which were updated in the Revision: The score for the return on equity (RoE) will be calculated only according to the rating of the RoE achieved by the Company in relation to the yield attained by the four other largest insurance groups during the period of measurement. According to the plan prior to the Revision, measurement was made, in part, according to the rating in relation to the other companies, and in part according to the extent to which the target for RoE was met, as defined in the work plan at the beginning of the year. It was determined that for the CEO, the weight to be given to the score for the RoE will be 30% of the overall quantitative score (instead of 40%, as set forth in the plan before the Revision) to date (for details on the CEO's salary and terms of his employment, see Chapter 5, Article 21 in the Company's Periodic Report for 2011). 1 -313
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It was determined that the weight of the score for VIF (a figure which is included in the EV Report) will be 20% of the overall quantitative score (instead of 15% as set forth in the plan before the Revision). It should be noted that the VIF is measured against the four other large insurance groups. It was determined that the weight for compliance with sales targets, including the sales mix, based on the annual work plan approved by the Board of Directors will be 30% (instead of 25% as set forth in the plan before the Revision). Additionally, the Revision stipulates that if the comprehensive profit for the Company's shareholders is less than 25% of the comprehensive profit according to the work plan, the Remunerations Committee will meet to discuss recommending to the Board of Directors a cross- the-board reduction applicable to the result obtained from the calculation of the bonuses based on the compensation plan, for all senior officeholders who are included in the plan. If the Board of Directors adopts the recommendation to apply this reduction factor, the actual bonuses paid will be lower, in accordance with the factor to be defined, than the bonuses which should be payable according to the parameters defined in the compensation plan. This recommendation is designed to tighten the connection between the actual compensation paid and the Company's on-going performance. It should be noted that, as detailed in Chapter 5, Article 21(5) (Additional Information about the Corporation) in the Company's Periodic Report for 2011, at a Board of Directors meeting which took place on March 29, 2012, Mr. Michel Siboni announced that he would waive the minimum guaranteed bonus to which he is entitled under the terms of his employment, with a value of at least four monthly salaries, and this from 2012 and thereafter. The decision to revise the compensation plan was made based on a recommendation formulated at a meeting of the Compensation Committee which took place on July 10, 2012. The meeting was attended by the directors: Mr. Doron Cohen, Ms. Liora Kavoras-Hadar, and Mr. Avraham Rinot. The recommendation of the Compensation Committee was approved by the Audit Committee at a meeting held on August 19, 2012. The meeting was attended by the following directors: Prof. Israel Gilead, Mr. David Granot, Ms. Liora Kavoras-Hadar, and Ms. Esther Dominissini. The resolution was passed unanimously. The resolution was passed by the Board of Directors at a meeting on August 21, 2012. The meeting was attended by the following directors: Mr. Yair Hamburger, Mr. Gideon Hamburger, Mr. Yoav Manor, Mr. Doron Cohen, Ms. Liora Kavoras-Hadar, Prof. Israel Gilead, Mr. David Granot, and Ms. Esther Dominissini. The resolution was passed unanimously. Reasons for the decision of the Remunerations Committee, Audit Committee and Board of Directors of the Company: The purpose of the compensation plan is, inter alia, to provide an incentive for the senior officeholders of Harel Insurance and its subsidiaries to achieve the goals set by the Company, from time to time, while focusing on long-term goals, on operations based on the Company's strategy, and on prioritizing products, at the same time avoiding risks which are not part of the Company's risk management policy. To ensure that the compensation plan enables the Company to achieve its goals in the long term, and as stipulated when the compensation plan was first approved, the Compensation Committee periodically reviews implementation of the plan, and accordingly examines the need to revise the plan. The approved revisions are technical, relating to the method of applying the parameters already listed in the plan, and are designed to maximize the correlation between the Company's goals and the compensation plan. Calculation of the RoE parameter when 1 -312
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compared with the other insurance groups, is designed to make this parameter entirely objective. The update of the weightings of the parameters is designed to reflect the Company's long-term goals with respect to the mix of profitability and the importance attributed to increasing the value of the Company's present portfolio, which is also calculated objectively when compared with the performance of the other large insurance groups. The purpose of the stipulation that if the comprehensive profit for the Company's shareholders is less than 25% of the comprehensive profit according to the work plan, the Remunerations Committee will meet to discuss recommending to the Board of Directors a cross-the-board reduction of the bonuses obtained by calculating the parameters defined in the compensation plan, is to ensure that the compensation paid to the senior officeholders is closely related to the Company's on-going performance, and to prevent extreme scenarios in which bonuses are paid even though the Company has failed to meet its profit targets as defined in the work plan.
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. 5.2. First-time inclusion of the results of Broadgate's operations On November 15, 2011, the Board of Directors of Harel Insurance entered into an agreement with Lloyd's syndicate 1301 (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 earn 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 provided a bank guarantee of GBP 7 million in favor of Lloyd's. During the Reporting Period, Harel Insurance's share of the activity of Broadgate was included for the first time. The activity was classified under the segment - non-life insurance in the property insurance branch. The total premium recorded during the Reporting Period was NIS 11.5 million. 5.3. Details concerning progress in deployment for implementing Solvency II The proposed Solvency II directive ("the Directive") constitutes a fundamental, comprehensive change in the regulations pertaining to the adequacy of capital of insurance companies. The purpose of the Directive is to protect the money of policyholders, to enhance integration between markets, and to increase competition in this sector. The circular on the deployment for Solvency II, which was published by the Commissioner 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. Pursuant to the requirements of the Circular, a joint steering team was established in Harel Insurance led by the risk manager who is responsible for implementing the provisions of the Directive. In addition, the audit committee of Harel Insurance's board of director was appointed as committees to oversee the deployment for implementing Solvency II. The steering committee and the board of director follow the Harel Insurance deployment each quarter, ensuring that it
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progresses according to the detailed, long-term plan for implementing the Directive which was approved by this board of director. At the beginning of July 2012, the European parliament approved January 1, 2014 as the target date for the implementation of Solvency II. At the present date, the subject is still under discussion. To help formulate the quantitative requirements according to the standard model for calculating the equity requirements in the first pillar of the instruction, quantitative impact studies (QIS) were conducted to consolidate the structure and calibration of the standard model, 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 report was prepared according to the instructions for preparing the QIS4 document published in Europe, and according to the adjustments required by the Commissioner in Israel. On July 2010, guidance was published in Europe for implementation of an additional Quantitative Impact Study – QIS5, on the basis of data at December 31, 2009. The Commissioner of Insurance instructed the insurance companies in Israel to conduct the study and he distributed instructions and adapted the study for Israel. Harel Insurance submitted the initial results of this quantitative study to the Commissioner on February 15, 2011, and the results of the qualitative questionnaire on March 31, 2011. On May 31, 2011, Harel Insurance submitted to the Commissioner the results of the second QIS submittal and the relevant qualitative questionnaire. Pursuant to the Commissioner's instructions, this report which was made as part of a preliminary review of the European requirements, in an effort to verify the extent to which they are suitable for Israel, was calculated based on unaudited data, and submitted exclusively to the Commissioner for review. The results of the quantitative studies and quality questionnaires were presented to Harel Insurance various boards of directors prior to the submittal of report to the Commissioner. Concurrent with the submittals, Harel Insurance performed a gap analysis regarding the processes for calculating the capital requirements that includes, inter alia, automation and data optimization requirements, manpower requirements, required controls and difficulties encountered in the work processes. The results of the study were reported to Harel Insurance's board of director on June 26, 2011. Furthermore, according the Commissioner instructions, an internal audit performed regarding the calculation process of the quantitative evaluation report and relevant controls. The audit addressed the gap analysis. On April 30, 2012, the Capital Market, Insurance and Savings Division at the Ministry of Finance issued a draft letter on the subject of Israel's solvency regime, announcing that the division had decided to continue its formulation of a solvency regime for insurance companies in Israel which will not be linked to progress of this process in Europe. The draft lists the measures planned by the division, including the adapting of Israel's existing regulatory framework to the principles of the Solvency II Directive, a requirement to file an additional IQIS in November 2012, based on data for the end of 2011, and submittal of an "Own Risk and Solvency Assessment" (ORSA) during 2013. Pursuant to the draft, the insurance companies will be obligated to submit regular reports according to IQIS from the middle of 2013 based on the annual balance sheet, together with the ordinary solvency reports that are currently applicable. The date for application of the capital regulations 1 -314
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based on IQIS will be determined in the future, after experience has been gained in reporting the results of the IQIS. Calculation of the risk-based capital requirements requires a broad range of data to be collected to be used for a variety of purposes and managed in different information systems. To prepare for the efficient and controlled management of the information and to apply the calculations of the standard model on a regular basis, the process of building up the database needed for these calculations has begun. During the second half of 2011, an outside entity assists in conducting a gap analysis that addresses a particular mapping of the relevant data, their source systems, quality, their inter-relationship, and adapting them to performing the calculations performed. Furthermore, Harel Insurance entered into a lease agreement for a system that streamlines the work process for calculating the capital requirements based on QIS5 and facilitates the investigation and comparison of results. In addition to the preparedness for the first tier, Harel Insurance is working to implement the requirements included in the second tier, which focuses on aspects of the risk management system, controls and corporate governance.
The Board of Directors wishes to express its thanks to
the Group's employees and agents
Yair Hamburger Michel Siboni Shimon Alkabetz Chairman of the Board of Company's joint Company's joint Directors CEO CEO
August 21, 2012
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HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS As at June 30, 2012 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3
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 June 30, 2012 and the condensed interim consolidated statements of income, comprehensive income, changes in capital and cash flows for the three and six 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 and subject to the disclosure requirements issued by the Supervisor of Insurance according to the Law for the Supervision of Financial Services (Insurance) - 1981. Our responsibility is to express a conclusion on the financial information for the interim periods, 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 8.8% of all the consolidated assets as at June 30, 2012 and whose revenues included in the consolidation comprise 2.3% and 3% of all the consolidated revenues for the period of six and three months then ended. 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 158,454 thousand as at June30, 2012, and the Group’s shares of their profit aggregated NIS 9,630 thousand and NIS 6,227 thousand for the periods of six and three months then ended. 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, and on the review report of the other auditors, 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 and on the review reports of the other auditors, 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.
Without qualifying our above conclusions we direct attention to Note 6A to the interim condensed consolidated financial statements regarding exposure to contingent liabilities.
Somekh Chaikin Certified Public Accountants (Isr) August 21, 2012
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
For the six months ended For the year June 30 ended December 31 2012 2011 2011 (Unaudited) (Unaudited) (Audited)
Assets NIS thousands NIS thousands NIS thousands Intangible assets 1,445,141 1,502,739 1,467,694 Deferred tax assets 17,092 18,154 14,951 Deferred acquisition costs 1,350,308 1,271,961 1,288,211 Fixed assets 642,580 626,708 640,808 Investments in investees treated using the balance sheet value method 336,900 214,527 316,875 Real estate investments - yield dependent contracts 884,734 747,120 873,554 Other real estate investments 1,334,932 1,054,869 1,231,808 Reinsurance assets 5,154,145 5,119,936 5,114,630 Current tax assets 140,790 29,647 102,278 Other receivables 351,975 316,097 318,943 Outstanding premiums 1,167,769 1,072,286 1,082,705 Financial assets – yield dependent contracts 20,056,505 18,667,151 18,618,758 Financial assets –for ETFs holders 3,921,127 3,541,078 3,414,992 Other financial investments Marketable debt assets 7,187,516 6,525,857 6,686,029 Non-marketable debt assets 9,153,347 8,519,333 8,665,087 Shares 479,384 595,667 511,594 Other investments 1,480,704 1,630,499 1,512,729 Total other financial investments 18,300,951 17,271,356 17,375,439 Cash and cash equivalents pledged for ETFs holders 301,173 867,379 265,511 Cash and cash equivalents - yield dependent contracts 1,093,434 920,264 1,247,598 Other cash and cash equivalents 1,441,190 1,284,547 1,550,330 Total assets 57,940,746 54,525,819 54,925,085 Total assets - yield dependent contracts 22,412,889 20,704,711 21,082,203
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 on the financial position
For the six months ended For the year ended June 30 December 31 2012 2011 2011 (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands
Equity and liabilities Equity
Share capital and share premium 308,273 307,649 306,895 Treasury stock (139,378) (139,446) (138,583) Capital reserves 129,618 122,589 63,925 Retained earnings 3,463,876 3,279,673 3,293,013 Total equity attributed to company shareholders 3,762,389 3,570,465 3,525,250 Minority rights 4,219 1,784 4,033 Total equity 3,766,608 3,572,249 3,529,283 Liabilities Liabilities in respect of non-yield dependent insurance and investment contracts 22,129,428 21,163,243 21,548,259 Liabilities in respect of yield dependent insurance and investment contracts 22,016,689 20,421,071 20,665,270 Deferred tax liabilities 327,627 283,013 308,497 Net liabilities for employee benefits 235,673 214,554 229,419 Current tax liabilities 16,855 13,274 7,400 Creditors and credit balances 2,344,269 2,200,783 2,366,177 ETF's liabilities 4,112,703 3,786,676 3,510,226 Financial liabilities 2,990,894 2,870,956 2,760,554 Total liabilities 54,174,138 50,953,570 51,395,802 Total equity and liabilities 57,940,746 54,525,819 54,925,085
Yair Hamburger Michel Siboni Shimon Alkabetz Ronen Agassi Chairman of the Board Company's joint CEO Company's joint CEO Deputy Chief Executive of Directors Officer and Chief Financial Officer
Date of approval of the financial statements: August 21, 2012 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 and loss For the six months ended For the three months ended For the year June 30 June 30 ended December 31 2012 2011 2012 2011 2011 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Premiums earned, gross 4,459,921 4,135,690 2,246,025 2,050,709 8,617,213 Premiums earned by reinsurers 760,071 744,594 390,754 376,831 1,516,608 Premiums earned in retention 3,699,850 3,391,096 1,855,271 1,673,878 7,100,605 Net profit (loss) from investments and financial income 1,298,691 657,831 (18,694) 88,918 562,823 Income from management fees 356,590 370,892 179,331 178,630 725,271 Income from commissions 197,996 205,676 103,750 108,441 437,099 Other income 2,887 438 386 223 5,849 Total income 5,556,014 4,625,933 2,120,044 2,050,090 8,831,647 Payments and changes in liabilities for insurance and investment contracts, gross 4,429,046 3,600,486 1,690,205 1,459,216 6,987,377 Reinsurers' share in payments and changes for insurance contracts liabilities 470,774 497,044 226,217 185,035 1,115,860 Payments and changes in liabilities for insurance and investment contracts, in retention 3,958,272 3,103,442 1,463,988 1,274,181 5,871,517 Commission, marketing and other acquisition expenses 800,579 701,788 412,334 372,685 1,493,118 General and administrative expenses 427,192 404,407 213,093 199,108 832,833 Other expenses 31,243 24,190 15,512 12,284 74,740 Financing expenses 97,086 91,570 70,911 50,840 193,348 Total expenses 5,314,372 4,325,397 2,175,838 1,909,098 8,465,556 Company’s share of loss (profit) of investee companies recorded on the equity basis 20,650 15,348 13,618 4,778 31,368 Profit (loss) before income taxes 262,292 315,884 (42,176) 145,770 397,459 Income taxes (benefits) 91,355 111,281 (21,034) 50,819 179,298 Net profit (loss) for the year 170,937 204,603 (21,142) 94,951 218,161 Attributed to: Company shareholders 170,863 204,495 (20,956) 94,862 217,835 Minority interests 74 108 (186) 89 326 Net profit (loss) for the year 170,937 204,603 (21,142) 94,951 218,161 Basic profit (loss) per share (shekel) 8.09 10.08 (0.99) 4.68 10.31
Diluted profit (loss) per share (shekel) 8.08 10.03 (1.01) 4.68 10.10 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 six months ended For the three months ended For the year June 30 June 30 ended December 31 2012 2011 2012 2011 2011 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
Profit (loss) for the year 170,937 204,603 (21,142) 94,951 218,161 Other comprehensive incomes: Revaluation of fixed assets 41,438 3,289 - 841 2,698 Net changes in fair value of financial assets available for sale 32,451 (129,099) (89,204) (105,887) (284,042) Net changes in fair value of financial assets available for sale transferred to statement of income (46,794) (72,733) (16,511) (31,771) (88,580) Loss from impairment in value of financial assets available for sale transferred to statement of income 57,881 21,079 44,069 16,902 94,406 Foreign currency transaction's difference in respect of overseas operations 3,436 1,702 5,284 (1,926) 9,406 Taxes on income for other components of comprehensive profit (loss) (28,942) 63,246 20,228 40,173 92,746 Other comprehensive incomes (loss), net of income tax 59,470 (112,516) (36,134) (81,668) (173,366) Total comprehensive profit for the year 230,407 92,087 (57,276) 13,283 44,795 Attributed to: Company shareholders 230,221 91,978 (57,076) 13,153 44,517 Minority rights 186 109 (200) 130 278 Total comprehensive profit for the year 230,407 92,087 (57,276) 13,283 44,795
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
Attributed to company shareholders
Transactions fund for Capital Capital Translation reserve for reserve with non- revaluation Share financing reserve for share capital assets from controlling of investment Retained Minority Total and available overseas based Treasury premium for sale operations payments stock interests real estate earnings Total rights equity NIS NIS NIS NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands NIS Thousands NIS Thousands Thousands Thousands Thousands Thousands For the six months ended June 30, 2012 (Unaudited)
Balance as at January 1, 2012 306,895 79,087 (4,834) 30,175 (138,583) (48,908) 8,405 3,293,013 3,525,250 4,033 3,529,283 Comprehensive income for year Profit for year ------170,863 170,863 74 170,937 Total other comprehensive income - 29,779 2,669 - - - 26,910 - 59,358 112 59,470 Total comprehensive income for year - 29,779 2,669 - - - 26,910 170,863 230,221 186 230,407
Transactions with owners credited directly to equity Share based payment - - - 6,335 - - - - 6,335 - 6,335 Purchase of treasury stock - - - - (8,001) - - - (8,001) - (8,001) Reissuing of treasury stock 1,378 - - - 7,206 - - - 8,584 - 8,584
Balance as at June 30, 2012 308,273 108,866 (2,165) 36,510 (139,378) (48,908) 35,315 3,463,876 3,762,389 4,219 3,766,608
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 - (contd.)
Attributed to company shareholders
Transactions fund for Capital Translation Capital reserve for reserve with non- revaluation financing reserve ofof Share for share capital assets from controlling investment Retained Minority Total and available overseas based Treasury premium for sale operations payments stock interests real estate earnings Total rights equity NIS NIS NIS NIS NIS NIS NIS NIS thousands thousands thousands NIS thousands thousands NIS Thousands NIS Thousands Thousands Thousands Thousands Thousands (For the three months ended June 30, 2012 (Unaudited
Balance as at April 1, 2012 306,296 148,654 (5,833) 33,188 (137,285) (48,908) 35,315 3,484,832 3,816,259 4,419 3,820,678 Comprehensive income (loss) for year Loss for year ------(20,956) (20,956) (185) (21,141) Total other comprehensive income (loss) - (39,788) 3,668 - - - - - (36,120) (15) (36,135) Total comprehensive income (loss) for year - (39,788) 3,668 - - - - (20,956) (57,076) (200) (57,276)
Transactions with owners credited directly to equity Share based payment - - - 3,322 - - - - 3,322 - 3,322 Purchase of treasury stock - - - - (6,796) - - - (6,796) - (6,796) Reissuing of treasury stock 1,977 - - - 4,703 - - - 6,680 - 6,680
Balance as at June 30, 2012 308,273 108,866 (2,165) 36,510 (139,378) (48,908) 35,315 3,463,876 3,762,389 4,219 3,766,608
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 - (contd.)
Attributed to company shareholders
Transactions fund for Capital Capital Translation reserve for reserve with non- revaluation financing of Share reserve from for share capital assets controlling investment Retained Minority Total and available for overseas based Treasury premium sale operations payments stock interests real estate earnings Total rights equity NIS NIS NIS NIS NIS NIS NIS NIS thousands NIS thousands NIS thousands thousands thousands Thousands Thousands Thousands NIS Thousands Thousands Thousands For the six months ended June 30, 2011 (Unaudited) 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 Comprehensive income for year Profit for year ------204,495 204,495 108 204,603 Total other comprehensive income (loss) - (116,873) 1,659 - - - 2,697 - (112,517) 1 (112,516) Total comprehensive income (loss) for year - (116,873) 1,659 - - - 2,697 204,495 91,978 109 92,087
Transactions with owners credited directly to equity Dividends paid ------(106,000) (106,000) - (106,000) Share based payment - - - 5,980 - - - - 5,980 - 5,980 Purchase of treasury stock - - - - (6,100) - - - (6,100) - (6,100) Reissuing of treasury stock 958 - - - 5,279 - - - 6,237 - 6,237
Balance as at June 30, 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
The notes accompanying the condensed interim consolidated financial statements are an integral part thereof. 2-01 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3
Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements of changes in capital - (contd.)
Attributed to company shareholders fund for Transactions revaluation Capital Capital Translation reserve for reserve with non- of Share financing reserve for share capital assets from controlling investment Retained Minority Total and available overseas based Treasury premium for sale operations payments stock interests real estate earnings Total rights equity NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands NIS Thousands Thousands Thousands Thousands Thousands Thousands For the three months ended June 30, 2011 (Unaudited)
Balance as at April 1, 2011 307,203 227,598 (10,818) 20,671 (137,789) (45,660) 8,388 3,227,674 3,597,267 1,654 3,598,921 Comprehensive income for year Profit for year ------94,862 94,862 89 94,951 Total other comprehensive income (loss) - (80,636) (1,763) - - - 690 - (81,709) 41 (81,668) Total comprehensive income (loss) for year - (80,636) (1,763) - - - 690 94,862 13,153 130 13,283
Transactions with owners credited directly to equity Dividends paid ------(42,863) (42,863) - (42,863) Share based payment - - - 4,119 - - - - 4,119 - 4,119 Purchase of treasury stock - - - - (2,779) - - - (2,779) - (2,779) Reissuing of treasury stock 446 - - - 1,122 - - - 1,568 - 1,568
Balance as at June 30, 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
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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements of changes in capital - (contd.)
Attributed to company shareholders Capital Capital Capital reserve in reserve in Transactions fund for Share respect of Translation respect of with revaluation capital assets of foreign share non- of 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 December 31, 2011 (Audited)
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 (loss) for year Profit for year ------217,835 217,835 326 218,161 Total other comprehensive income (loss) - (184,748) 9,406 - - - 2,024 - (173,318) (48) (173,366) Total comprehensive income (loss) for year - (184,748) 9,406 - - - 2,024 217,835 44,517 278 44,795
Transactions with owners credited directly to equity Dividends paid ------(106,000) (106,000) - (106,000) Share based payment - - - 11,365 - - - - 11,365 - 11,365 Purchase of treasury stock - - - - (8,398) - - - (8,398) - (8,398) Reissuing of treasury stock 204 - - - 8,440 - - - 8,644 - 8,644 Sale of non-controlling interests - - - - - (12) - - (12) 307 295 Acquisition of minority interests - - - - - (3,236) - - (3,236) 1,773 (1,463)
Balance as at December 31, 2011 306,895 79,087 (4,834) 30,175 (138,583) (48,908) 8,405 3,293,013 3,525,250 4,033 3,529,283
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 cash flows For the three months For the six months ended ended For the year ended June 30 June 30 December 31 2012 2011 2012 2011 2011 (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 (769,538) (486,460) (117,090) (843,469) 404,625 Income tax paid (130,516) (76,035) (50,717) (22,351) (212,775) Net cash provided by operating activities (900,054) (562,495) (167,807) (865,820) 191,850 Cash flows from investing activities Investment in investee companies 2,055 (2,482) 1,431 (2,482) (86,412) Proceeds from sale of investment in a company treated using the balance sheet value method - - - - - Cash used for the acquisition of a consolidated company, consolidated for the first time - - - - - Cash Used for the acquisition of a consolidated company, consolidated by the proportional consolidation method - - - - - Loan given to an investee company - - - - - Payment of loan given to an investee company - - - - - Investment of fixed assets (22,473) (40,962) (12,694) (21,537) (73,353) Investment in intangible assets (32,248) (32,995) (17,482) (19,762) (72,119) Dividends from investee company - 3,920 - 3,920 14,483 Proceeds from sale of fixed assets 549 1,257 221 795 2,549
Net cash used for investing activities Cash flows for financing activities Proceeds from issue of liability notes 247,294 - 247,294 - 305,583 sale of Treasury stock 583 137 (115) (1,211) 246
Proceeds from issue of ETF's 576,047 855,089 (264,963) 761,312 979,937 Short-term Loans from banks (14,326) 6,007 (21,897) 318,840 (255,492) Loans from banks and others - 180,000 - - - Repayments of loans from banks and others (133,067) (29,344) (39,802) (5,385) (64,944) Dividend paid to minority interests - (106,000) - (160,000) (106,000) Net cash provided by (used for) financing activities 676,531 905,889 (79,483) 967,556 859,330 Effect of fluctuations in currency exchange rate on balances of cash and cash equivalents 12,336 (9,504) 1,082 (8,418) 19,417
Increase in cash and cash equivalents (263,304) 262,628 (274,732) 54,252 855,745 Cash and cash equivalents, beginning of the year B 2,797,928 1,942,183 2,809,356 2,150,559 1,942,183
Cash and cash equivalents, end of the year C 2,534,624 2,204,811 2,534,624 2,204,811 2,797,928
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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements of cash flows (contd.)
Appendix A' - Cash flows from operating activities before taxes on income (1)
For the six months ended For the three months ended For the year June 30 June 30 ended December 31 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands (Appendix A - Cash flows from operating activities before taxes on income (1), (2), (3) Profit (loss) for period 170,937 204,603 (21,142) 94,951 218,161 Items not involving cash flows Company’s share of loss of investee companies recorded on the equity basis (20,650) (15,348) (13,618) (4,778) (31,368) profit net from financial investments - yield dependent insurance policies and investment contracts, net (187,801) 437,689* 576,945 485,911* 1,404,963 Net losses (profits) from other financial investments Marketable debt assets (99,371) (109,179)* (67,093) (37,067)* (152,707) Non-marketable debt assets (112,631) (138,980) (115,044) (68,680) (181,413) Shares 11,765 1,168 14,583 5,677 (14,907) Other investments 56,937 (40,934) 182,539 (51,134) 192,556 Financing expenses for financial liabilities 10,374 (325,324)* (51,635)* (212,623)* (807,438) Net losses (profits) from realizations Fixed assets 145 (29) - 1 (272) Changes in fair value of real estate for investment - for yield dependent contracts (2,157) (425) (1,963) 2,142 (27,967) Changes in fair value of other real estate investment (25,469) 3,129 (22,490) 3,189 (85,718) Depreciation and amortization - - - - - Fixed assets 20,184 24,468 7,081 11,235 40,864 Intangible assets 54,825 44,927 27,111 21,353 119,073 Change in liabilities for non yield dependent insurance and investment contracts 577,075 688,017 299,742 163,616 1,075,192 Change in liabilities for yield dependent insurance and investment contracts 1,351,419 763,365 87,010 112,517 1,007,564 Change in reinsurance assets (38,489) (14,882) (19,997) 75,190 (10,319) Change in deferred acquisition costs (61,561) (74,523) (10,244) (3,035) (90,944) Share based payment 6,335 5,980 3,322 4,119 11,365 Income (expenses) taxes 91,355 111,281 (21,034) 50,819 179,298 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 (9,957) (35,368) (4,872) (16,144) (134,260) Acquisition of real estate for investment 934 - 934 - - Acquisitions net, of financial investments (1,233,664) (954,469) (741,574) (592,381) (1,820,329) Other financial investments and real estate for investment Acquisition of real estate for investment (37,273) (107,076) (32,432) (32,013) (195,145) Proceeds from the sale of real estate for investment 1,013 22,845 1,013 22,505 22,845 Acquisitions net, of financial investments (779,055) (242,831) (612,348) (87,005) (411,451) Outstanding premiums (83,315) (153,485) (17,474) 19,283 (165,255) Other receivables (32,257) (53,893) 29,623 (32,417) (15,988) Investment for ETFs holders (506,135) (50,938) (39,926) (677,888) 75,148 Cash and cash equivalents pledged for ETFs holders (35,662) (545,464) 91,840 (234,895) 56,404 Other payables 115,673 87,189 (43,393) 137,584 147,726 Changes in other tax items - *- - *- *- Liabilities for employee benefits, net 6,208 (15,945) 3,665 (1,473) (1,054) Total adjustments required to present cash flows from operating activities (961,205) (689,035) (489,729) (936,392) 186,463 Total cash flows from operating activities, before taxes on income (790,268) (484,432) (510,871) (841,441) 404,624
2-04 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3
Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements of cash flows (contd.)
(1) Cash flows from operating activities include net purchases and sales of financial investments and real estate investment resulting from activities in insurance contracts and investment contracts. (2) In the framework of operating activities, interest received was presented of NIS 792 million (for the 6 months ended June 30, 2011 an amount of NIS 718 million and for 2011 an amount of NIS 1,341 million) and the interest paid of NIS 79 million (for the 6 months ended June 30, 2011 an amount of NIS 36 million and for 2011 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 91 million (for the period of 6 months ended June 30, 2011 of NIS 36 million and for 2011 an amount of NIS 196 million).
* Regarding reclassification, see Note 2 c.
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Harel Investments in Insurance & Financial Services Ltd. Condensed interim consolidated statements of cash flows - (contd.)
For the six months ended For the three months ended For the year June 30 June 30 ended December 31 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
Appendix B - Cash and cash equivalents, beginning of the period Cash and cash equivalents for yield dependent contracts 1,247,598 746,829 1,243,173 987,339 746,829 Other cash and cash equivalents 1,550,330 1,195,354 1,566,183 1,163,220 1,195,354 Cash and cash equivalents, beginning of period 2,797,928 1,942,183 2,809,356 2,150,559 1,942,183
Appendix C - Cash and cash equivalents, end of period Cash and cash equivalents for yield dependent contracts 1,093,434 920,264 1,093,434 920,264 1,247,598 Other cash and cash equivalents 1,441,190 1,284,547 1,441,190 1,284,547 1,550,330 Cash and cash equivalents, end of year 2,534,624 2,204,811 2,534,624 2,204,811 2,797,928
2-06 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 1 - General 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 June 30, 2012, include those of the Company, its subsidiaries, the Company's rights in entities with joint control (hereinafter: "the Group") and the Group's rights in affiliated companies. 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 (hereinafter: "The Law for the Supervision"), 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, 2011 (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 August 21, 2012. b. Use of estimates and discretion 1. In the preparation of the condensed interim consolidated 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, 2011. Regarding the revised estimate in connection with longevity estimates, see Note 9.
2. On June 14, 2012, the Ministry of Finance published an announcement concerning "Extension of the agreement with Mirvah Hogen Ltd.". The announcement states that Mirvah Hogen Ltd. will continue to supply the database services for individual price quotes and interest rates for the financial institutions until December 31, 2012 (and not until June 1, 2012 as determined in the previous announcement), or until the winner of the new tender that was published begins to provide the services, whichever is earlier.
2-07 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 2 - Basis for preparing the financial statements (contd.) c. Reclassification In these condensed interim consolidated financial statements reclassification was included in respect of the three and six months periods ended June 30 2012, and for the year ended December 31, 2011. The principal classifications refer to the classification of the impact of fluctuating exchange rates on the balance of cash and cash equivalents in the report on cash flows from the section net losses (gains) from financial investments for insurance contracts and yield- dependent investment contracts and from net losses (gains) from other financial investments, to the section impact of exchange rate fluctuations on the balances of cash and cash equivalents. Likewise, a reclassification was made in the report on cash flows from the item - change in current and deferred taxes and the item consideration from the issuance of index-linked certificates and cover options to financing expenses (income) in respect of financial obligations. This reclassification did not have any effect on the Group's cash flows.
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. a. First implementation of new standards
Deferred Taxes in respect of Investment Property
From January 1, 2012, the Group has implemented IAS 12 taxes 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 also applied 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 not expected to have a significant effect on the condensed interim consolidated financial statements. b. New standards and interpretations not yet adopted
Amendments to IFRS 10, IFRS 11, and IFRS 12 ("Suite of Amendments") - Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Instructions ("the Amendments").
The Amendments define the first-time implementation date and simplify the transition instructions for the Suite of Amendments, and also provide easements in the disclosure requirements pertaining to unconsolidated structured entities. The commencement date of the Amendments is for annual periods beginning on or after January 1, 2013, like the Suite of Amendments. Early implementation of the Amendments is required where there is early implementation of the Suite of Amendments. The Group is reviewing the repercussions of the adoption of these Amendments on the condensed financial statements and implementation of the Amendments is not expected to have any significant impact.
Improvements to IFRSs for 2009-2011 ("the Improvements Project")
As part of the Improvements Project, amendments were published to five IFRSs. The amendments will apply to annual periods beginning on or after January 1, 2013, with an option for early adoption with disclosure. Following are the principal amendments that may be relevant for the Group:
2-08 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 3 – Significant accounting principles (contd.)
A. IAS 32 (Amended) - Financial Instruments ("IAS 32 Amended")
IAS 32 (Amended) relates to the tax effects of equity distributions and the costs of a transaction connected with equity instruments. According to the provisions of IAS 32 ("IAS 32") in its present format, the tax effect on income relating to distributions to holders of equity instruments will be recognized as part of the equity. In contrast, under the provisions of IAS 12, the tax effects on income from dividends will usually be recognized in profit or loss, except when certain conditions are met. To eliminate the inconsistency between the provisions of IAS 32 and IAS 12 on this subject, IAS 32 was amended so that taxes on income relating to distributions to the holders of an equity instrument and to the costs of a transaction relating to an equity instrument will be treated according to the provisions of IAS 12.
B. IAS 34 (Amended) – Interim Financial Reporting ("the Amendment")
The Amendment states that for interim financial statements, disclosure must be made for the total assets and liabilities of the segment, only where the amounts are regularly reported to the CODM and where there is a material change from the amount reported in the last annual financial statements. c. Seasonality 1. Life and health insurance and Finance 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. The revenues from the finances segment are not characterized by seasonality
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.
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, dental 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.
2-09 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) 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. Harel Insurance's share of the activity of Broadgate was included for the first time during the Reporting Period. The activity was classified under the segment non-life insurance in the property insurance branch. For further details, see note 9 below. 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 (ETFs and deposit certificates). 6. Not allocated to operating segments Activities which were not relating to the operating segment include mainly activities of insurance agencies and of capital activities in consolidated insurance companies.
2-21 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) A. Information regarding segment reporting For the six months ended June 30 2012 (Unaudited) Not Life Insurance Insurance Allocated and Long- To Any Term Health General companies Financial Specific Adjustments Savings Insurance Insurance overseas Services Segment and Offsets Total NIS NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands Thousands NIS Thousands NIS Thousands Premiums earned, gross 1,596,050 1,362,026 1,419,396 87,854 - - (5,405) 4,459,921 Premiums earned by reinsurers 56,794 89,036 588,407 31,239 - - (5,405) 760,071 Premiums earned in retention 1,539,256 1,272,990 830,989 56,615 - - - 3,699,850 Net profit (loss) from investments and financial income 934,645 109,461 142,661 (818) 12,621 99,554 567 1,298,691 Income from management fees 277,622 5,158 - - 71,273 2,537 - 356,590 Income from commissions 8,048 38,873 111,738 9,772 15,716 30,600 (16,751) 197,996 Other income - - - - - 4,415 (1,528) 2,887 Total income 2,759,571 1,426,482 1,085,388 65,569 99,610 137,106 (17,712) 5,556,014 Payments and changes in liabilities for insurance and investment contracts, gross 2,269,310 1,060,707 1,035,613 67,196 - - (3,780) 4,429,046 Reinsurers' share in payments and changes for insurance contracts liabilities 48,051 41,882 351,325 33,296 - - (3,780) 470,774 Payments and changes in liabilities for insurance and investment contracts, in retention 2,221,259 1,018,825 684,288 33,900 - - - 3,958,272 Commission, marketing and other acquisition expenses 294,987 220,821 265,669 33,283 - 2,570 (16,751) 800,579 Management and general expenses 173,979 92,534 15,582 4,854 87,144 54,627 (1,528) 427,192 Other expenses 27,955 - 482 267 559 1,980 - 31,243 Financing (income) expenses 5,805 5,037 12,652 - 2,435 72,474 (1,317) 97,086 Total expenses 2,723,985 1,337,217 978,673 72,304 90,138 131,651 (19,596) 5,314,372 Company share of profit of investee companies recorded by the equity method 2,016 1,173 5,568 - - 11,893 - 20,650 Profit (loss) before income taxes 37,602 90,438 112,283 (6,735) 9,472 17,348 1,884 262,292 Other comprehensive incomes, before income tax 35,529 5,286 4,823 2,945 - 39,828 - 88,412 Total comprehensive profit (loss) before income tax 73,131 95,724 117,106 (3,790) 9,472 57,176 1,884 350,704 Liabilities in respect of non-yield dependent insurance and investment contracts 9,801,077 2,366,415 9,754,235 216,737 - - (9,036) 22,129,428 Liabilities in respect of yield dependent insurance and investment contracts 20,143,878 1,872,811 - - - - - 22,016,689 2-20 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) A. Information regarding segment reporting (Cont'd) For the three months ended June 30 2012 (Unaudited) Life Not Insurance Insurance Allocated and Long- 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 793,285 705,591 706,647 43,222 - - (2,720) 2,246,025 Premiums earned by reinsurers 28,443 45,527 303,049 16,455 - - (2,720) 390,754 Premiums earned in retention 764,842 660,064 403,598 26,767 - - - 1,855,271 Net profit (loss) from investments and financial income (137,307) 26,923 74,911 105 7,101 9,954 (381) (18,694) Income from management fees 140,193 2,349 - - 35,519 1,270 - 179,331 Income from commissions 5,901 20,531 58,233 4,929 7,304 15,324 (8,472) 103,750 Other income - - - - - 1,071 (685) 386 Total income 773,629 709,867 536,742 31,801 49,924 27,619 (9,538) 2,120,044 Payments and changes in liabilities for insurance and investment contracts, gross 638,251 518,677 513,454 22,254 - - (2,431) 1,690,205 Reinsurers' share in payments and changes for insurance contracts liabilities 21,929 23,884 175,386 7,449 - - (2,431) 226,217 Payments and changes in liabilities for insurance and investment contracts, in retention 616,322 494,793 338,068 14,805 - - - 1,463,988 Commission, marketing and other acquisition expenses 152,607 106,526 143,201 17,049 - 1,423 (8,472) 412,334 Management and general expenses 85,230 49,382 8,473 1,848 44,505 24,340 (685) 213,093 Other expenses 13,957 - 241 130 266 918 - 15,512 Financing expenses 4,044 3,530 17,371 - 1,173 46,104 (1,311) 70,911 Total expenses 872,160 654,231 507,354 33,832 45,944 72,785 (10,468) 2,175,838 Company share of profit of investee companies recorded by the equity method 1,368 800 3,325 - - 8,125 - 13,618 Profit (loss) before income taxes (97,163) 56,436 32,713 (2,031) 3,980 (37,041) 930 (42,176) Other comprehensive incomes, before income tax (13,400) (5,355) (23,002) (235) 8 (14,379) - (56,362) Total comprehensive profit (loss) before income tax (110,563) 51,081 9,711 (2,266) 3,988 (51,420) 930 (98,538)
Liabilities in respect of non-yield dependent insurance and investment contracts 9,801,077 2,366,415 9,754,235 216,737 - - (9,036) 22,129,428 Liabilities in respect of yield dependent insurance and investment contracts 20,143,878 1,872,811 - - - - - 22,016,689 2-22 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) A. Information regarding segment reporting (Cont'd) For the six ended June 30 2011 (Unaudited) Life Insurance Insurance Not Allocated and Long- To Any Term Health General companies Financial Specific Adjustments Savings Insurance Insurance overseas Services Segment and Offsets Total NIS NIS NIS NIS Thousands Thousands NIS Thousands NIS Thousands Thousands NIS Thousands NIS Thousands Thousands Premiums earned, gross 1,523,898 1,158,885 1,387,780 68,600 - - (3,473) 4,135,690 Premiums earned by reinsurers 59,530 88,555 576,643 23,339 - - (3,473) 744,594 Premiums earned in retention 1,464,368 1,070,330 811,137 45,261 - - - 3,391,096 Net profit (loss) from investments and financial income 326,166 80,632 167,630 2,463 10,184 75,087 (4,331) 657,831 Income from management fees 269,242 5,183 - - 94,293 2,174 - 370,892 Income from commissions 14,370 37,266 113,028 8,201 18,976 33,557 (19,722) 205,676 Other income - - - - 10 1,717 (1,289) 438 Total income 2,074,146 1,193,411 1,091,795 55,925 123,463 112,535 (25,342) 4,625,933 Payments and changes in liabilities for insurance and investment contracts, gross 1,526,113 883,154 1,149,564 44,074 - - (2,419) 3,600,486 Reinsurers' share in payments and changes for insurance contracts liabilities 41,108 53,373 395,777 9,205 - - (2,419) 497,044 Payments and changes in liabilities for insurance and investment contracts, in retention 1,485,005 829,781 753,787 34,869 - - - 3,103,442 Commission, marketing and other acquisition expenses 259,016 178,430 256,613 26,335 - 1,116 (19,722) 701,788 Management and general expenses 157,017 77,619 14,270 8,236 101,849 46,705 (1,289) 404,407 Other expenses 22,265 - 479 - - 1,446 - 24,190 Financing expenses 11,408 5,278 (4,696) - 3,314 83,761 (7,495) 91,570 Total expenses 1,934,711 1,091,108 1,020,453 69,440 105,163 133,028 (28,506) 4,325,397 Company share of profit of investee companies recorded by the equity method 1,396 836 6,299 - - 6,817 - 15,348 Profit (loss) before income taxes 140,831 103,139 77,641 (13,515) 18,300 (13,676) 3,164 315,884 Other comprehensive incomes, before income tax (57,059) (18,452) (63,233) (549) (202) (36,267) - (175,762) Total comprehensive profit (loss) before income tax 83,772 84,687 14,408 (14,064) 18,098 (49,943) 3,164 140,122
Liabilities in respect of non-yield dependent insurance and investment contracts 9,288,475 2,026,947 9,662,081 192,426 - - (6,686) 21,163,243 Liabilities in respect of yield dependent insurance and investment contracts 18,874,450 1,546,621 - - - - - 20,421,071 2-23 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) A. Information regarding segment reporting (Cont'd) For the three months ended June 30 2011 (Unaudited) Life Not Insurance Insurance Allocated and Long- 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 746,710 576,924 690,874 38,151 - - (1,950) 2,050,709 Premiums earned by reinsurers 30,356 47,241 288,589 12,595 - - (1,950) 376,831 Premiums earned in retention 716,354 529,683 402,285 25,556 - - - 1,673,878 Net profit (loss) from investments and financial income (78,867) 31,150 82,975 (3,403) 4,874 53,580 (1,391) 88,918 Income from management fees 130,858 2,252 - - 44,618 902 - 178,630 Income from commissions 6,163 18,963 63,931 4,451 8,547 15,903 (9,517) 108,441 Other income - - - - 10 870 (657) 223 Total income 774,508 582,048 549,191 26,604 58,049 71,255 (11,565) 2,050,090 Payments and changes in liabilities for insurance and investment contracts, gross 524,814 417,444 492,836 25,111 - - (989) 1,459,216 Reinsurers' share in payments and changes for insurance contracts liabilities 22,340 23,919 135,233 4,532 - - (989) 185,035 Payments and changes in liabilities for insurance and investment contracts, in retention 502,474 393,525 357,603 20,579 - - - 1,274,181 Commission, marketing and other acquisition expenses 131,385 90,093 146,287 13,927 - 510 (9,517) 372,685 Management and general expenses 80,111 40,117 7,663 4,052 49,482 18,340 (657) 199,108 Other expenses 11,196 - 241 - - 847 - 12,284 Financing expenses 7,084 2,101 (1,398) - 1,559 46,400 (4,906) 50,840 Total expenses 732,250 525,836 510,396 38,558 51,041 66,097 (15,080) 1,909,098 Company share of profit of investee companies recorded by the equity method 730 (19) 1,462 - - 2,605 - 4,778 Profit (loss) before income taxes 42,988 56,193 40,257 (11,954) 7,008 7,763 3,515 145,770 Other comprehensive incomes (loss), before income tax (40,591) (11,817) (35,455) 1,607 42 (35,627) - (121,841) Total comprehensive profit (loss) before income tax 2,397 44,376 4,802 (10,347) 7,050 (27,864) 3,515 23,929
Liabilities in respect of non-yield dependent insurance and investment contracts 9,288,475 2,026,947 9,662,081 192,426 - - (6,686) 21,163,243 Liabilities in respect of yield dependent insurance and investment contracts 18,874,450 1,546,621 - - - - - 20,421,071 2-24 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.)
A. Information regarding segment reporting (Cont'd) (Audited) For the year ended December 31 2011 Life Insurance Insurance Not Allocated and Long-Term Health General companies Financial To Any Specific Adjustments Savings Insurance Insurance overseas Services Segment and Offsets* Total NIS NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands NIS Thousands Thousands NIS Thousands Premiums earned, gross 3,184,370 2,476,755 2,809,786 154,491 - - (8,189) 8,617,213 Premiums earned by reinsurers 116,212 191,039 1,165,124 52,422 - - (8,189) 1,516,608 Premiums earned in retention 3,068,158 2,285,716 1,644,662 102,069 - - - 7,100,605 Net profit (loss) from investments and financial income 36,103 116,090 297,297 (4,632) 19,285 107,389 (8,709) 562,823 Income from management fees 542,223 9,799 - - 168,177 5,072 - 725,271 Income from commissions 35,293 78,522 237,245 17,017 36,939 70,299 (38,216) 437,099 Other income 107 - - - 10 8,375 (2,643) 5,849 Total income 3,681,884 2,490,127 2,179,204 114,454 224,411 191,135 (49,568) 8,831,647 Payments and changes in liabilities for insurance and investment contracts, gross 2,658,436 1,854,040 2,360,628 120,538 - - (6,265) 6,987,377 Reinsurers' share in payments and changes for insurance contracts liabilities 64,483 118,219 898,703 40,720 - - (6,265) 1,115,860 Payments and changes in liabilities for insurance and investment contracts, in retention 2,593,953 1,735,821 1,461,925 79,818 - - - 5,871,517 Commission, marketing and other acquisition expenses 537,921 388,421 543,992 58,902 - 2,099 (38,217) 1,493,118 Management and general expenses 330,318 166,777 34,786 12,428 187,721 103,445 (2,642) 832,833 Other expenses 69,584 - 967 595 841 2,753 - 74,740 Financing expenses 12,932 8,045 38,459 - 6,723 142,878 (15,689) 193,348 Total expenses 3,544,708 2,299,064 2,080,129 151,743 195,285 251,175 (56,548) 8,465,556 Company share of profit of investee companies recorded by the equity method 5,329 1,956 11,401 - - 12,682 - 31,368 Profit (loss) before income taxes 142,505 193,019 110,476 (37,289) 29,126 (47,358) 6,980 397,459 Other comprehensive incomes (loss), before income tax (107,370) (30,851) (93,890) (479) - (33,522) - (266,112) Total comprehensive profit (loss) before income tax 35,135 162,168 16,586 (37,768) 29,126 (80,880) 6,980 131,347 Liabilities in respect of non-yield dependent insurance and investment contracts 9,551,049 2,187,976 9,620,233 197,954 - - (8,953) 21,548,259 Liabilities in respect of yield dependent insurance and investment contracts 18,980,030 1,685,240 - - - - - 20,665,270 2-25 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment For the six months ended June 30 2012 (Unaudited) Compulsory Motor Property and Other Liability Mortgage Other Motor Property Segments* Segments** insurance Total NIS NIS NIS thousands NIS thousands NIS thousands NIS thousands Thousands Thousands Premiums earned, gross 310,662 513,931 446,290 323,580 19,682 1,614,145 Premiums earned by reinsurers 63,160 106,386 347,933 179,720 - 697,199 Retention premiums earned 247,502 407,545 98,357 143,860 19,682 916,946 Changes in premium balances that have not yet been earned, retention 33,609 74,960 13,674 (27,648) (8,638) 85,957 Retention premiums earned 213,893 332,585 84,683 171,508 28,320 830,989 Profits from investments, net, and financing income 75,029 13,737 3,185 39,055 11,655 142,661 Commission income 10,194 23,230 51,995 26,319 - 111,738 Total income 299,116 369,552 139,863 236,882 39,975 1,085,388 Payments and changes in liabilities for insurance contracts, gross 230,649 348,221 149,070 290,629 17,044 1,035,613 Reinsurer's share of payments and changes in liabilities for insurance contracts 44,775 69,160 111,961 125,429 - 351,325 Payments and changes in liabilities for insurance contracts, retention 185,874 279,061 37,109 165,200 17,044 684,288 Commission, marketing expenses and other acquisition costs 34,839 82,926 80,385 64,766 2,753 265,669 Management and general expenses 2,289 2,880 1,822 1,308 7,283 15,582 Other expenses - - - - 482 482 Financing expenses (income), Net 7,245 1,327 305 3,775 - 12,652 Total expenses 230,247 366,194 119,621 235,049 27,562 978,673 Company share of profit (loss) of investee companies recorded by the equity method 3,018 553 128 1,571 298 5,568 Profit before income taxes 71,887 3,911 20,370 3,404 12,711 112,283 Other comprehensive incomes (loss), before income tax 2,844 520 127 1,475 (143) 4,823 Total comprehensive profit before income tax 74,731 4,431 20,497 4,879 12,568 117,106
Liabilities for insurance policies, gross, as at June 30, 2012 2,798,019 690,153 641,299 4,972,758 652,006 9,754,235 * Property braches and others include mainly results from property loss insurance and comprehensive apartments insurance, whose activities comprise 83% of total premiums in these branches. ** Other liabilities branches include mainly results from third-party insurance and professional liability whose activities comprise 78% of total premiums in these branches. 2-26 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment For the three months ended June 30 2012 (Unaudited) Property Other Compulsory Motor and Liability Mortgage Other Motor Property Segments* Segments** insurance Total NIS NIS NIS thousands NIS thousands NIS thousands NIS thousands Thousands Thousands Premiums earned, gross 118,846 200,632 236,501 140,172 11,557 707,708 Premiums earned by reinsurers 24,229 42,171 196,389 91,246 - 354,035 Retention premiums earned 94,617 158,461 40,112 48,926 11,557 353,673 Changes in premium balances that have not yet been earned, retention (8,653) (8,629) 1,255 (33,246) (652) (49,925) Retention premiums earned 103,270 167,090 38,857 82,172 12,209 403,598 Profits from investments, net, and financing income 40,454 7,345 1,761 21,121 4,230 74,911 Commission income 5,855 12,605 25,449 14,324 - 58,233 Total income 149,579 187,040 66,067 117,617 16,439 536,742 Payments and changes in liabilities for insurance contracts, gross 107,536 166,029 80,509 148,195 11,185 513,454 Reinsurer's share of payments and changes in liabilities for insurance contracts 19,340 32,678 63,443 59,925 - 175,386 Payments and changes in liabilities for insurance contracts, retention 88,196 133,351 17,066 88,270 11,185 338,068 Commission, marketing expenses and other acquisition costs 21,460 47,447 39,693 33,165 1,436 143,201 Management and general expenses 1,421 1,790 1,155 677 3,430 8,473 Other expenses - - - - 241 241 Financing expenses (income), Net 9,951 1,827 416 5,177 - 17,371 Total expenses 121,028 184,415 58,330 127,289 16,292 507,354 Company share of profit (loss) of investee companies recorded by the equity method 1,733 315 75 904 298 3,325 Profit (loss) before income taxes 30,284 2,940 7,812 (8,768) 445 32,713 Other comprehensive incomes, before income tax (9,986) (1,852) (402) (5,179) (5,583) (23,002) Total comprehensive profit (loss) before income tax 20,298 1,088 7,410 (13,947) (5,138) 9,711
Liabilities for insurance policies, gross, as at June 30, 2012 2,798,019 690,153 641,299 4,972,758 652,006 9,754,235 * 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. 2-27 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment For the three six ended June 30 2011 (Unaudited) Other Compulsory Motor Property and Liability Mortgage Motor Property Other Segments* Segments** insurance Total NIS NIS NIS NIS NIS thousands thousands NIS thousands thousands Thousands Thousands Premiums earned, gross 327,352 533,082 394,529 302,499 28,900 1,586,362 Premiums earned by reinsurers 67,160 112,072 302,589 160,855 - 642,676 Retention premiums earned 260,192 421,010 91,940 141,644 28,900 943,686 Changes in premium balances that have not yet been earned, retention 39,368 83,706 8,325 2,543 (1,393) 132,549 Retention premiums earned 220,824 337,304 83,615 139,101 30,293 811,137 Profits from investments, net, and financing income 96,965 16,526 1,324 39,004 13,811 167,630 Commission income 9,871 23,773 52,217 27,167 - 113,028 Total income 327,660 377,603 137,156 205,272 44,104 1,091,795 Payments and changes in liabilities for insurance contracts, gross 309,295 370,875 139,129 302,286 27,979 1,149,564 Reinsurer's share of payments and changes in liabilities for insurance contracts 59,635 71,223 105,717 159,202 - 395,777 Payments and changes in liabilities for insurance contracts, retention 249,660 299,652 33,412 143,084 27,979 753,787 Commission, marketing expenses and other acquisition costs 32,785 84,480 78,960 57,335 3,053 256,613 Management and general expenses 1,714 1,874 1,493 1,342 7,847 14,270 Other expenses - - - - 479 479 Financing income, Net (55) (667) (2,438) (1,597) 61 (4,696) Total expenses 284,104 385,339 111,427 200,164 39,419 1,020,453 Company share of profit (loss) of investee companies recorded by the equity method 3,854 683 149 1,613 - 6,299 Profit (loss) before income taxes 47,410 (7,053) 25,878 6,721 4,685 77,641 Other comprehensive incomes, before income tax (32,020) (5,674) (1,242) (13,400) (10,897) (63,233) Total comprehensive profit (loss) before income tax 15,390 (12,727) 24,636 (6,679) (6,212) 14,408
Liabilities for insurance policies, gross, as at June 30, 2011 2,858,690 703,161 583,535 4,873,304 643,391 9,662,081 * Property braches and others include mainly results from property loss insurance and comprehensive apartments insurance, whose activities comprise 87% of total premiums in these branches. ** Other liabilities branches include mainly results from third-party insurance and professional liability whose activities comprise 78% of total premiums in these branches.
2-28 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment (For the three months ended June 30 2011 (Unaudited Property Other Compulsory Motor and Liability Mortgage Other Motor Property Segments* Segments** insurance Total NIS NIS NIS NIS NIS thousands NIS thousands thousands thousands Thousands Thousands Premiums earned, gross 121,587 196,726 206,622 113,554 14,013 652,502 Premiums earned by reinsurers 24,827 42,042 163,066 61,949 - 291,884 Retention premiums earned 96,760 154,684 43,556 51,605 14,013 360,618 Changes in premium balances that have not yet been earned, retention (13,344) (14,054) 3,704 (17,921) (52) (41,667) Retention premiums earned 110,104 168,738 39,852 69,526 14,065 402,285 Profits from investments, net, and financing income 47,361 7,973 1,018 19,738 6,885 82,975 Commission income 5,840 12,817 28,243 17,031 - 63,931 Total income 163,305 189,528 69,113 106,295 20,950 549,191 Payments and changes in liabilities for insurance contracts, gross 156,534 170,120 39,880 112,013 14,289 492,836 Reinsurer's share of payments and changes in liabilities for insurance contracts 34,647 32,402 23,611 44,573 - 135,233 Payments and changes in liabilities for insurance contracts, retention 121,887 137,718 16,269 67,440 14,289 357,603 Commission, marketing expenses and other acquisition costs 19,713 49,553 40,180 35,142 1,699 146,287 Management and general expenses 1,055 1,309 864 796 3,639 7,663 Other expenses - - - - 241 241 Financing income, Net 3 (300) (990) (172) 61 (1,398) Total expenses 142,658 188,280 56,323 103,206 19,929 510,396 Company share of profit (loss) of investee companies recorded by the equity method 889 151 44 378 - 1,462 Profit before income taxes 21,536 1,399 12,834 3,467 1,021 40,257 Other comprehensive incomes (loss), before income tax (18,288) (3,209) (757) (7,679) (5,522) (35,455) Total comprehensive profit (loss) before income tax 3,248 (1,810) 12,077 (4,212) (4,501) 4,802
Liabilities for insurance policies, gross, as atJune 30, 2011 2,858,690 703,161 583,535 4,873,304 643,391 9,662,081 * Property braches and others include mainly results from property loss insurance and comprehensive apartments insurance, whose activities comprise 90% of total premiums in these branches. ** Other liabilities branches include mainly results from third-party insurance and professional liability whose activities comprise 78% of total premiums in these branches. 2-29 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment (contd.) (Audited) For the year ended December 31 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 547,672 867,646 708,018 679,000 44,895 2,847,231 Premiums earned by reinsurers 113,474 182,165 545,738 316,562 - 1,157,939 Retention premiums earned 434,198 685,481 162,280 362,438 44,895 1,689,292 Changes in premium balances that have not yet been earned, retention (3,093) 4,438 689 60,716 (18,123) 44,627 Retention premiums earned 437,291 681,043 161,591 301,722 63,018 1,644,665 Profits from investments, net, and financing income 155,355 30,033 18,898 76,305 16,706 297,297 Commission income 21,122 51,548 110,517 54,058 - 237,245 Total income 613,768 762,624 291,006 432,085 79,724 2,179,207 Payments and changes in liabilities for insurance contracts, gross 559,085 733,305 280,206 740,505 47,527 2,360,628 Reinsurer's share of payments and changes in liabilities for insurance contracts 104,472 144,360 210,026 439,844 - 898,702 Payments and changes in liabilities for insurance contracts, retention 454,613 588,945 70,180 300,661 47,527 1,461,926 Commission, marketing expenses and other acquisition costs 73,448 189,097 161,939 113,107 6,401 543,992 Management and general expenses 4,773 6,405 3,739 3,598 16,271 34,786 Other expenses - - - - 967 967 Financing income, Net 9,443 6,473 12,813 9,730 - 38,459 Total expenses 542,277 790,920 248,671 427,096 71,166 2,080,130 Company share of profit (loss) of investee companies recorded by the equity method 6,853 1,107 286 3,128 27 11,401 Profit (loss) before income taxes 78,344 (27,189) 42,621 8,117 8,585 110,478 Other comprehensive incomes (loss), before income tax (50,265) (8,116) (2,095) (22,935) (10,479) (93,890) Total comprehensive profit (loss) before income tax 28,079 (35,305) 40,526 (14,818) (1,894) 16,588
Liabilities for insurance policies, gross, as at December 31, 2011 2,785,051 599,930 542,461 5,048,060 644,731 9,620,233 * Property braches and others include mainly results from property loss insurance and comprehensive apartments insurance, whose activities comprise 87% of total premiums in these branches. ** Other liabilities branches include mainly results from third-party insurance and professional liability whose activities comprise 82% of total premiums in these branches. 2-31 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) c. Additional information regarding life assurance and long-term savings segment
For the six months ended For the six months ended June 30 2012 (Unaudited June 31 2011 (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 - - 1,596,050 1,596,050 - - 1,523,898 1,523,898 Premiums earned by reinsures - - 56,794 56,794 - - 59,530 59,530 Retention premiums earned - - 1,539,256 1,539,256 - - 1,464,368 1,464,368 Profits from investments, net, and financing income 839 2,980 930,826 934,645 470 1,739 323,957 326,166 Management fee income 110,158 92,291 75,173 277,622 117,367 84,178 67,697 269,242 Commission income - - 8,048 8,048 - - 14,370 14,370 Total income 110,997 95,271 2,553,303 2,759,571 117,837 85,917 1,870,392 2,074,146 Payments and changes in liabilities for insurance contracts and investment contracts, gross 875 3,749 2,264,686 2,269,310 1,031 3,101 1,521,981 1,526,113 Reinsurer's share of payments and changes in liabilities for insurance contracts - - 48,051 48,051 - - 41,108 41,108 Payments and changes in liabilities for insurance contracts and investment contracts, retention 875 3,749 2,216,635 2,221,259 1,031 3,101 1,480,873 1,485,005 Commission, marketing expenses and other acquisition costs 30,932 42,402 221,653 294,987 28,721 37,596 192,699 259,016 Management and general expenses 36,213 24,456 113,310 173,979 45,549 19,852 91,616 157,017 Other expenses 15,134 2,194 10,627 27,955 9,243 2,394 10,628 22,265 Financing expenses , net 38 360 5,407 5,805 135 1,812 9,461 11,408 Total expenses 83,192 73,161 2,567,632 2,723,985 84,679 64,755 1,785,277 1,934,711 Company share of profit (loss) of investee companies recorded by the equity method - - 2,016 2,016 - - 1,396 1,396 Profit (loss) before income taxes 27,805 22,110 (12,313) 37,602 33,158 21,162 86,511 140,831 Other comprehensive incomes (loss), before income tax 154 (901) 36,276 35,529 (150) (1,000) (55,909) (57,059) Total comprehensive profit before income tax 27,959 21,209 23,963 73,131 33,008 20,162 30,602 83,772
2-30 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) C. Additional information regarding life assurance and long-term savings segment
For the Three months ended For the Three months ended June 30 2012 (Unaudited June 30 2011 (Unaudited Life- Life- Provident Pension assurance Total Provident Pension assurance Total NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Premiums earned, gross - - 793,285 793,285 - - 746,710 746,710 Premiums earned by reinsures - - 28,443 28,443 - - 30,356 30,356 Retention premiums earned - - 764,842 764,842 - - 716,354 716,354 Profits from investments, net, and financing income 594 1,505 (139,406) (137,307) 261 782 (79,910) (78,867) Management fee income 54,379 47,462 38,352 140,193 58,027 44,128 28,703 130,858 Commission income - - 5,901 5,901 - - 6,163 6,163
Total income 54,973 48,967 669,689 773,629 58,288 44,910 671,310 774,508 Payments and changes in liabilities for insurance contracts and investment contracts, gross 430 1,982 635,839 638,251 550 1,519 522,745 524,814 Reinsurer's share of payments and changes in liabilities for insurance contracts - - 21,929 21,929 - - 22,340 22,340 Payments and changes in liabilities for insurance contracts and investment contracts, retention 430 1,982 613,910 616,322 550 1,519 500,405 502,474 Commission, marketing expenses and other acquisition costs 15,475 21,845 115,287 152,607 14,820 19,102 97,463 131,385 Management and general expenses 17,846 11,902 55,482 85,230 24,351 10,073 45,687 80,111 Other expenses 7,568 1,076 5,313 13,957 4,647 1,235 5,314 11,196 Financing expenses , net - 185 3,859 4,044 69 974 6,041 7,084 Total expenses 41,319 36,990 793,851 872,160 44,437 32,903 654,910 732,250 Company share of profit (loss) of investee companies recorded by the equity method - - 1,368 1,368 - - 730 730 Profit (loss) before income taxes 13,654 11,977 (122,794) (97,163) 13,851 12,007 17,130 42,988 Other comprehensive incomes (loss), before income tax - (632) (12,768) (13,400) 16 (169) (40,438) (40,591) Total comprehensive profit (loss) before income tax 13,654 11,345 (135,562) (110,563) 13,867 11,838 (23,308) 2,397
2-32 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 4 - Operating segments (contd.) c. Additional information regarding life assurance and long-term savings segment
(Audited ) Year ended December 31 2011
Provident Pension Life-assurance Total NIS thousands NIS thousands NIS thousands NIS thousands Premiums earned, gross - - 3,184,370 3,184,370 Premiums earned by reinsures - - 116,212 116,212 Retention premiums earned - - 3,068,158 3,068,158 Profits from investments, net, and financing income 998 3,883 31,222 36,103 Management fee income 227,134 178,589 136,500 542,223 Commission income - - 35,293 35,293 Other income - 107 - 107 Total income 228,132 182,579 3,271,173 3,681,884 Payments and changes in liabilities for insurance contracts and investment contracts, gross 1,976 6,359 2,650,101 2,658,436 Reinsurer's share of payments and changes in liabilities for insurance contracts - - 64,483 64,483 Payments and changes in liabilities for insurance contracts and investment contracts, retention 1,976 6,359 2,585,618 2,593,953 Commission, marketing expenses and other acquisition costs 56,399 81,232 400,290 537,921 Management and general expenses 89,642 42,304 198,372 330,318 Other expenses 43,640 4,689 21,255 69,584 Financing expenses (income), net 71 3,270 9,591 12,932 Total expenses 191,728 137,854 3,215,126 3,544,708 Company share of profit (loss) of investee companies recorded by the equity method - - 5,329 5,329 Profit before income taxes 36,404 44,725 61,376 142,505 Other comprehensive incomes (loss), before income tax 226 (934) (106,662) (107,370) Total comprehensive profit (loss) before income tax 36,630 43,791 (45,286) 35,135
2-33 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 5 - Taxes on income 1. Non application of IFRS
Pursuant to the Ordinance Amendment (No. 174 – Temporary Order Regarding the 2007, 2008 and 2009 tax years) Law, 5770-2010, that was passed in the Knesset on January 25, 2010, and published in the Official Gazette on February 4, 2010 ("Amendment to the Ordinance"), when defining the taxable income for the 2007, 2008 and 2009 tax years, Accounting Standard 29 prescribed by the Israel Accounting Standards Board, shall not be applied even if it was applied in the financial statements for those tax years.
On January 11, 2012, a bill was published amending the Income Tax Ordinance (Amendment no. 188), 5771- 2011, extending the temporary provision concerning the non-application of IFRS in determining the tax liable income of assesses also for the 2010 and 2011 tax years.
2. Income Tax (Tax Exemption for a Provident Fund on Income from Rent on account of the Long-term Leasing of Residential Apartments) Law, 5772-2012
On July 16, 2012, the Knesset Finance Committee passed a second and third reading of the Income Tax (Tax Exemption for a Provident Fund on Income from Rent on account of the Long-term Leasing of Residential Apartments) Law, 5772-2012. The law combines two government bills: one, the Income Tax (Tax Exemption for a Provident Fund on Income from Rent on account of the Long-term Leasing of Apartments) Bill, 5772- 2012; the second, a section that was taken out of the proposed Land Tax (Betterment and Purchase) Law (Amendment no. 71), 5771-2011, concerning leaving in place the exemption from betterment tax on the sale of a residential apartment once every four years.
To encourage provident funds to invest in long-term rental projects, the law sets forth a tax exemption on income earned by a provident fund from the rental of residential apartments in a building for rent (as these terms are defined in the law), as the fund chooses, subject to meeting a combination of the conditions stipulated on this matter. Among other things, the provident fund must own at least 100 residential apartments in the building for rent or in several buildings for rent, and if the buildings for rent are in the Negev or the Galilee - at least 50 apartments (in the first year in which the provident fund has rental income, it will also be entitled to the exemption if it owns fewer apartments). Another condition is that the provident fund does not provide services relating to the rental. Furthermore, it was determined that if the provident fund chooses the tax exemption according to this law, it will not be able to renege on its choice and the tax benefits applicable under the other tracks will not apply to it.
3. Agreement With Tax Authorities
The Israel Insurance Association has a sector agreement with the tax authorities regulating the treatment of subjects that are unique to the insurance industry, the most important of which are: 1. Deferred Acquisition Costs (DAC) - direct expenses of insurance companies for the acquisition of life insurance contracts will be deductible for tax purposes in equal parts spread over four years. Deferred acquisition costs in insurance against illness and hospitalization are amortized over a period of 6 years, similar to the amortization rate in the books. 2. Allocation of expenses to preferred income - expenses will be allocated to income that is liable for tax at reduced tax rates and to tax-exempt income received by the insurance companies ("preferred income"), meaning that part of the preferred income will become income liable for full tax, based on the allocation rate. The allocation rate defined in the agreement depends on the source of the money that generates the preferred income. 3. Taxation of revenues from assets held as investments that match yield-dependent liabilities - to prevent possible tax distortions, a method of treating profit from negotiable securities and profits from the revaluation and disposal of real-estate assets was agreed upon to ensure that revenues correspond with expenses.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-34 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 5 - Taxes on income (contd.) 4. The tax implication that are involved in the implementation of the recommendations of the Bachar Committee On August 2, 2009 the Tax Authority published the report of the Bar Zachai committee for the examination of the tax implications that are involved in the implementation of the recommendations of the Bachar Committee. The objective of the committee was to examine the tax implications and to make recommendations in connection with the manner of the transaction of transactions for the sale of holdings of the banking entities in provident funds, mutual funds and provident fund management companies, which were executed in the wake of the recommendations of the Bachar committee and following the legislation of the Law for the increasing of competition and reducing the level of concentration and conflicts of interest in the capital market in Israel (Amendments to legislation) -2009 and to set an outline for the uniform transaction of those and similar transaction, which are carried out in the future. Concerning injunctions that were issued against Harel Insurance in respect of the acquisition of provident fund activity, see section 6 below. Harel Insurance disputes these injunctions and has filed an appeal to the court. Concerning tax assessments that were issued for Harel Pia in respect of the acquisition of mutual fund activity, see section 6 below. Harel Pia disputes these assessments and submitted an objection to the Tax Authority. 5. Pre-ruling that has been approved
1. On January 16, 2012, the Company informed the Tax Authority of a restructuring pursuant to Section 104A of the Income Tax Ordinance. As part of this change, the full control of Dikla (indirectly, through Mor-Har Investments Ltd., which holds 100% of the issued share capital of Dikla) was transferred from Harel Investments to Harel Insurance, against an allocation of shares in Harel Insurance to Harel Investments. The restructuring took place on December 31, 2011, after being approved by the Commissioner on December 28, 2011. 2. On December 29, 2011, the Tax Authority issued advance approval of a merger of provident funds owned by Harel Insurance and Harel Gemel. The merger was approved against the backdrop of 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, which determine that 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. The approved mergers are: 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") were merged into Harel Otzma such that the ownership structure of the tracks in the merging funds' tracks will be preserved. The merged fund will be called Harel Otzma-Taoz. Pursuant to the approval of the merger, when the merged funds are sold or the management rights in the fund are changed in a manner that changes the management rights relative to the ownership of Harel Insurance and/or Harel Gemel on the tracks that they own, a tax event will occur. 6. Tax Assessments In Dispute
1. On December 22, 2011, Harel Insurance received an Income Tax assessment order under Section 152 of the Income Tax Ordinance, with respect to the 2007 tax year ("the Order"). In the Order, the Assessment Officer argued that Harel Insurance must allocate differently the purchase cost of the intangible assets it acquired during the acquisition of Bank Leumi's provident fund operations and to amortized them differently. Based on the opinion of the Assessment Officer, Harel Insurance may write down NIS 34,622,000 in the 2007 tax year, in respect of 10% of the goodwill and a further 4% of the right to management fees. Harel Insurance disputes the amounts determined, the tax liability in respect of these amounts, and the reasons given in the Order .
The position stated by Harel Insurance is that it is entitled to write down an amount of NIS 53,500,000, as it did in practice in the tax report, and this in respect of 10% for goodwill and the brand and a further 8% in respect of the right to management fees from customers. Harel Insurance appealed against the Order to the Tel Aviv District Court . WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-35 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 5 - Taxes on income (contd.) 6. Tax Assessments In Dispute (contd.) 1. (contd.) Harel Insurance received an opinion to the effect that there is a strong chance that its appeal will be accepted. Nevertheless, if the Tax Authority's position is accepted in full, Harel Insurance will not be able to recognize NIS 59,578,000 in respect of the component for the brand for tax purposes. Likewise, an amount of NIS 18,878,000 will be added to the tax-liable income of Harel Insurance for each of the years from the acquisition date to the date of the report .
Harel Insurance recognizes deferred taxes in respect of timing differences created as a result of a difference in the amortization rates for accounting purposes and those for tax purposes. Consequently, the aforementioned is unlikely to have any significant impact on the equity or profit of Harel Insurance or the Group. Backed by the opinion of its professional advisors, Harel Insurance believes that the approach applied in the tax reports it filed for the 2007 tax year and subsequent years, is firm and abiding, and is supported by the tax laws and a range of relevant, professional arguments.
2. In December 2011, the subsidiary Harel Pia Mutual Funds Ltd. ("Pia"), received tax assessments for the years 2007-2009. In the assessment, the Assessment Officer argued that Harel Insurance must make a different allocation of the cost of the intangible assets it acquired during the acquisition of the mutual funds from Leumi Pia Mutual Fund Management Company Ltd. Furthermore, the Assessment Officer alleges that the acquisition cost attributed to the brand component cannot be amortized for tax purposes. The Company attributed NIS 6 million to the cost of the brand, which it deducted for tax purposes. If the Tax Authority's position is accepted in full, the cost attributed to the brand will be NIS 98 million, and accordingly the Company will be unable to recognize this amount for tax purposes. Likewise, amounts of NIS 9.1 million, NIS 12.3 million, and NIS 9.6 million will be added to the Company's tax-liable income for the years 2007, 2008 and 2009 respectively. Pia has current losses for tax purposes, and consequently, even if Income Tax's position is accepted, it is unlikely to affect the current tax liability of Pia. The company filed an objection to the assessments, in part on the grounds that they do not reflect the essence of the transaction and the real and economic value of the object of the acquisition.
3. On January 15, 2012, Harel Insurance and Dikla received a decision made by Income Tax on the objection it had filed on the purchase tax assessment that had been issued to the aforementioned subsidiaries, in connection with the acquisition of 49% of all the rights in a commercial center known as G Mall in Kfar Saba. The argument put forward by the subsidiaries was that for the purpose of purchase tax, the value of the land acquired was lower than the overall consideration paid for the transaction, due to the fact that certain elements that are not tax liable were purchased. Based on the decision of the Tax Authority, the purchase tax charge is for the total consideration paid in connection with the transaction. The amount of tax in dispute is NIS 8 million, of which NIS 3.2 million is for the rights in a property acquired for the nostro portfolio, and the balance is for the rights in a property acquired for the members' portfolio. The subsidiaries intend to appeal the dismissal of their objection. The Company included in its financial statements a provision in accordance with the assessment of its legal advisors regarding the chances of the appeal. 4. On February 14, 2012, Bar Tavai, a wholly owned subsidiary of Harel Insurance, received the Tax Authority's decision concerning an objection it had filed to an assessment for betterment tax which had been issued in connection with the sale of a building in Tel Aviv's Allenby Road. According to the Tax Authority's decision, part of the cost components that Bar Tavai had declared will not be permitted for tax withholding. The amount of tax in dispute is NIS 1.4 million. Bar Tavai intends to appeal the dismissal of its objection in the courts. The legal advisors of Bar Tavai believe that there is a strong chance of their appeal being accepted. 5. In April 2012, Harel Insurance received the Tax Authority's decision concerning an objection it had filed to an assessment for purchase tax which had been issued in connection with the purchase of Crystal House in Ramat Gan, which was acquired in full from the nostro monies of Harel Insurance. Harel Insurance argued that for the purpose of calculating the purchase tax, the value of the acquired land was lower than the overall consideration paid for the transaction, due to the fact that certain components were purchased that are not liable for purchase tax. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-36 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 5 - Taxes on income (contd.) 6. Tax Assessments In Dispute (contd.) 5. (contd.) According to the decision of the Tax Authority, the purchase tax charge is for the entire consideration paid in connection with the transaction. The amount of tax in dispute is NIS 2.1 million. Harel Insurance intends to appeal the dismissal of its objection in the courts. Harel Insurance included appropriate provision in its financial statements, based on the estimates of its legal advisors. 6. In June 2009, Harel Insurance appealed an assessment for purchase tax to the Assessment Board. The assessment relates to the purchase of floors 11-13 of Harel House in Ramat Gan. The entire purchase was made with the nostro monies of Harel Insurance. The argument put forward by Harel Insurance was that for the purpose of purchase tax, the value of the land acquired was lower than the overall consideration paid for the transaction, due to the fact that certain components that are not liable for purchase tax were purchased. According to the decision of the Land Taxation Administration, the purchase tax charge is for the entire consideration paid in connection with the transaction. At the balance sheet date, the amount of tax in dispute is NIS 1 million. Harel Insurance included provision in its financial statements based on an estimate prepared by its legal advisors regarding the chances of the appeal. A proofs hearing before the Appeals Committee is scheduled for December 20, 2012. 7. In September 2011, subsidiaries of the Company filed an objection to an assessment for purchase tax issued in connection with the purchase of a plot of land in Tel Aviv, which was acquired in January 2011 from Ha'argaz Ltd. The argument put forward by the Group's subsidiaries was that for the purpose of purchase tax, the value of the land acquired was lower than the total consideration paid for the transaction, in that the purchase included certain components that are not liable for purchase tax. A decision on this objection had not been received at the time of publication of the report. The amount of tax in dispute is NIS 18.5 million. Most of the investment (about 73%) is for members' portfolios. The subsidiaries included provision in their financial statements based on the opinion of their legal advisors regarding the chances of the appeal.
7. Tax Rates applicable to the Group's companies income
On July 25, 2005, the Knesset passed the Amendment to the Income Tax Ordinance (No. 147) - 2005, which determined, inter alia, the gradual reduction of the tax rate for companies to a rate of 25% in the 2010 tax year and thereafter.
On July 14, 2009, the Knesset passed the Economic Efficiency Law (Amendments to legislation for the implementation of the economic program for the years 2009 and 2010) – 2009, which determined, inter alia, an additional gradual reduction of the tax rates for companies to a rate of 18% in the 2016 tax year and thereafter.
On December 5, 2011, the Knesset passed a second and third reading of the proposed Change in the Tax Burden (Legislative Amendments) Bill, 5772-2011 ("the Bill").
In accordance with the said amendments, the tax rates on companies that apply in the 2011 tax year and thereafter are as follows: Overall tax rate applicable to Year Company Profit Tax Financial Tax Rate Rate Institutions
2011 24% 6; 89.9=% 2012 25% 6; 8:.89% 2013 25% 6:.: 8:.5;% and afterwards 7569 25% 6:.: 8:.5;%
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-37 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
The current taxes and the deferred tax balances for the periods that are reported in these financial statements have been calculated in accordance with the new tax rates as determined by the law.
On August 2, the Value Added Tax Order was published, revising the rate of VAT in respect of a transaction and the import of goods, so that it will be 17% from September 1, 2012. On August 1, 2012, the Knesset Finance Committee approved an increase in wage tax and profit tax, effective from September 1, 2012 to 17%, although the subject has not yet been approved by the Knesset plenum and an order updating the rates of profit tax and wage tax, as noted, has not yet been published. In view of the fact that if the amendment is finalized, it will be finalized after the reporting period; the repercussions of the change in the tax rates, as noted, will be reflected in the financial statements in subsequent periods. If a Value Added Tax Order is published regarding the said change, the statutory tax rates which apply to financial institutions will increase in 2012 from 35.34% to 35.53%, and in 2013 onwards the rate will increase to 35.9%. Likewise, the wage tax rate which applies to financial institutions will increase to 17% for wages paid for work in September 2012 and onwards, instead of 16% in 2012 and 15.5% in 2013 onwards.
Note 6 - Contingent liabilities and commitments a. Contingent liabilities
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 customers. The complexity of these arrangements conceal, inter alia, potential of allegations, interpretations and others, due to the differences in information between the Group's companies and other parties to the insurance contacts and the rest of the Group's 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 Group's 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. Among these regulatory changes, on December 21, 2011, the Commissioner published a circular concerning data optimization of the rights of members of financial institutions. The 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 circular defines the stages of implementation of the optimization project as follows: (1) a gap study of the existing information at product, members and employers level - by December 31, 2012; (2) formulation of a mapping model and rating of the gaps found - by March 31, 2013; (3) a work plan is to be prepared to deal with any failure/s that are found - by September 30, 2013. The work plan will address the arrangement and saving of the existing information - by September 30, 2014. The optimization project is to be completed by June 30, 2016. At this stage, in view of the complexity of implementing the circular and the time period for its implementation, it is impossible to estimate its impact. 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.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-38 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.) Additionally, as part of the policy recently applied by the Ministry of Finance Capital Market, Insurance & Savings Division to enhance the controls and audits of financial institutions, from time to time the Commissioner conduct in- depth audits of a variety of activities of the Group's financial institutions. As a result of these audits, the Ministry of Finance may impose fines and/or financial penalties and it may also order that changes should be made with respect to various operations, both in the past and in the future. Regarding instructions with respect to past activity, the Commissioner may request the restitution of money or a change in conditions vis-à-vis policyholders and/or fund members which may impose financial liabilities on the Company's subsidiaries and/or increase the exposure of the subsidiaries that are insurers to a broader range of insurance events to be covered on account of these instructions, in policies that were issued. As part of the audits conducted by the Commissioner, during the reporting period in-depth audits of were conducted of the following: audit of non-negotiable credit of Harel Insurance and the subsidiaries that are financial institutions; audit of the prohibition on money laundering in Harel Insurance's life assurance division; audit of the location of beneficiaries in the life assurance division of Harel Insurance; audit of members' rights and the portability of money in Harel Insurance's life assurance division; general audit of Harel Pension, particularly concerning the portability of members' rights; general audit of Harel Gemel; audit of Dikla, particularly with respect to long-term care insurance; audit of the health insurance division of Harel Insurance, and more. 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 15,19,21,22, and 23 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 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.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-39 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.) 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. The request for appeal has not yet discussed.
2. 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. 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 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. At the preliminary hearing, the court dismissed Harel's application for a decision on the request for partial ruling and insisted that a decision on the application would be made as part of the application for certification as a class action. At the same hearing, the honorable court instructed the applicants' attorneys to ask the Attorney General's representative for instructions concerning the relevant entities who are required to express their position in the name of the state. On July 8, 2012 the ISA submitted its response. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-41 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.)
3. 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. Harel Insurance has submitted its response to the plaintiffs' response to the reply of Harel 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. Harel has not yet submitted its response to the request. 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. 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 response to the request. The plaintiffs filed their response to Harel Insurance's response.
4. 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 legal action according to which the defendants allegedly collected from their insured customers - management fees in a life assurance policy of the "profit participating" type contrary to the Regulations of the 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 responded to Harel Insurance's response. Parties should submit written summaries.
5. 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.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-40 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.) 5. (contd.)
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. On January 3, 2012, Harel Insurance filed an application to dismiss outright the application for certification, on grounds of prescription. The Labor Court has yet to deliver a ruling regarding this application. On July 10, 2012, a ruling was handed down by the Labor Court, in which context the application for abandonment was dismissed and a date was scheduled for a further hearing on the application for certification.
6. 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.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-42 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.)
7. 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. On December 8, 2011, the opinion of the Commissioner of Insurance was submitted to the court, in which the Commissioner states, inter alia, that an insurer may refuse to accept the request for payment of the full assessor's professional fee, if it is of the opinion that the professional fees are more than reasonable and more than the generally accepted rate.
Likewise, in his response, the Commissioner requests that the claim should not be certified as a class action, as it is not suitable to be heard as a class action, since the grounds for the claim is not included in the Schedule to the Class Actions Law. The plaintiff asked the court for an additional stay so that he can consider his position with respect to the claim stipulating that he intends to file an application for abandonment.
8. 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.
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 extreme overlapping between the above permission to represent and another class action in connection with the same policy which was rejected by the Supreme Court, the parties came to an agreement according to which the application for permission to represent will be "frozen" until after a decision on that application. Further to discussions between the parties, they recently submitted a statement to the court that they have reached agreement in principle to close the case out of court. The parties are due to submit their agreement to the court.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-43 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.)
9. 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. Due to the death of the plaintiffs, an application to replace the parties was submitted. On July 2, 2012, the court passed a resolution approving the application to replace the litigants.
10. 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). The amount of the personal claim of the plaintiffs from Harel Insurance is an amount of NIS 80. Harel Insurance submitted its response to the application for recognition as a class action. On December 12, 2011, the court instructed that the plaintiffs' allegations should be struck out in connection with Section 28.A of the Contracts (Insurance) Law and in connection with the policy of policyholders that has partially or temporarily expired. The plaintiffs filed an application for an injunction for summaries without investigations. Harel Insurance objected to the application and the parties are waiting for the court's decision in connection with a further hearing on the application for certification.
11. 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.
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
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-44 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.)
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. On December 6, 2011 the Company submit its response to the application for approval and on February 26, 2012, the plaintiffs filed their response to the Company's reply.
During a pre-trial hearing, the court determined that the Commissioner of Insurance must express his opinion on the possibility of his inclusion as a formal respondent to the application for certification. On March 27, 2012, a supplementary affidavit was filed for Harel to the factual claims which appeared in the claimants' response to the reply of Harel Insurance to application for certification.
Pursuant to the court's ruling, the Commissioner of Insurance is required to express his opinion in connection with his inclusion as a party to the proceeding. The parties are entitled to comment on the position of the Commissioner of Insurance.
12. 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. The court instructed the Commissioner of Insurance to express his opinion with respect to several issues which are the subject of the application for certification as a class action.
The Commissioner of Insurance submitted his position in connection with the application for certification and the Claimant filed her response to the Commissioner's position. Harel Insurance and Meuhedet Health Fund submitted a joint statement to the court, arguing that in view of the Commissioner's opinion, the application for certification has no substance and should be dismissed. As part of a hearing that took place on June 26, 2012, the court suggested that the parties consider an agreed arrangement based on the abandonment outline, in which context Harel Insurance and Meuhedet Health Fund will prepare a procedure which does not relate to brokerage with respect to the policy. The parties must give notice of their positions in connection with the abandonment arrangement.
13. 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 . WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-45 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.)
13. (contd.)
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. On 1.1.2012 Harel Insurance has submitted its response to the application for recognition. On February 8, 2012, the claimants announced that they were abandoning the allegation to the effect that the attachments were imposed unlawfully. The parties filed their main arguments and on June 12, 2012, the parties' oral summaries were heard. The court has not yet handed down its decision on the application to certify the action as a class action.
14. 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 .
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 .On December 20, 2011 Harel Gemel submitted its response to the application for recognition.
On March 20, 2012, notice was submitted to the court concerning an appeal being filed by the plaintiffs in the case in the High Court of Justice against the Superintendent of the Capital Market. At the pre-trial which took place on April 3, 2012, the court determined that it would wait for the state's response to the HCJ appeal which had been filed. The respondents stipulated that they are not bound by the results of the HCJ hearing, in part as they are not respondents in the aforesaid proceeding.
15. 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.
16. In January 2012, a claim and an application for its certification as a class action were filed in the Tel Aviv District Court against Harel Pension Fund Management Ltd. ("Harel Pension").The subject of the action is that Harel Pension ostensibly makes provision from the amounts that it collects from members who are unmarried or widowed or single parents (including divorced parents) with children over the age of 21, who are in the general track of the pension funds that it manages, of amounts in respect of insurance cover for "death and disability risks" ("survivors' insurance" or "survivors' coverage") thus infringing upon the amount that is accrued to the credit of those members in the pension savings.
The group that the plaintiff wishes to represent are planholders who have enrolled in the "Harel Gilad Pension" pension fund over the last seven years, in a track defined as "general" or in any other track in the aforementioned fund on which payments for survivors' cover are collected, where the status of those members Is unmarried and/or widowed and/or single parents (including divorced parents) with children over the age of 21.The plaintiff estimates the total loss claimed for all members of the group at NIS 89,489,400. Harel Pension has yet to submit its response to the application for certification as a class action. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-46 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.)
17. In February 2012, a claim and an application for its certification as a class action were filed against the subsidiary Harel Insurance in the Tel Aviv District Court.
The subject of the claim is that the Company issues, as a default option, "insurance policies for building structures at reinstatement value" and even collects an additional premium for this from its policyholders, while at the same time it ostensibly conceals and hides from its policyholders the fact alleged by the plaintiff that the chances of reconstructing the apartment building when extensive damage is sustained by the building (damage to several apartments) and/or the destruction of the apartment building and the like are extremely unlikely, due to the fact that the policyholder is dependent on the other apartment owners in the building (whose consent is required to reconstruct the building). According to the claim, the Company is in breach of the disclosure obligations that apply to it in failing to disclose to its policyholders that the chance of receiving "the equivalent for reinstatement of the building" in the event of an earthquake or destruction of the apartment building or extensive damage to the building is, apparently, extremely low, and that the Company has concealed from them the fact that the policy does not cover the full value of the apartment (including the value of the land) when the insured event occurs.
The group that the plaintiffs wish to represent is anyone who purchased structural insurance from the respondent, from the date of purchase of the structural insurance policy until the date of filing the claim and they have rights in an apartment building.
The amount of the claim was not specified and no calculation was submitted. The plaintiff believes that it would be reasonable to determine that the amount of the class action for all members of the group (estimate only) is NIS 20 million.
The principal remedies requested by the plaintiff are: a refund of the premiums collected from him and from the group members for structural insurance and/or for coverage "at reinstatement values" during the period from the issue of the policy and until the filing of the action, plus linkage differences and interest; payment to the plaintiff and to all members of the group of NIS 10,000 as non-monetary loss. On July 3, 2012, Harel Insurance submitted its response to the application for certification as a class action. The court determined that the Commissioner of Insurance may announce whether he wishes to be included in the application for certification as a class action as a respondent. The Commissioner of Insurance has yet to respond to this decision.
18. On March 13, 2012, a claim and an application for its certification as a class action were filed in the Tel Aviv District Court, against Harel Gemel. The subject of the action is the allegation that in 2008 Harel Gemel increased the rate of management fees paid by the plaintiff, allegedly without giving prior notice, as required by law. The group that the plaintiff seeks to represent includes all the provident fund members for whom the respondent increased the management fees unilaterally, as well as all members for whom the respondent raised the management fees without giving them two months advance notice in writing, as required by law. According to the plaintiff, the overall loss claimed for all members of the group amounts to NIS 200 million. From an initial review of the action, Harel Gemel believes that it has excellent arguments for refuting the action. Harel Gemel has yet to submit its response to the application for certification as a class action.
19. In May 2012, a claim was filed in the Jerusalem District Court together with an application for its recognition as a class action against the subsidiary Dikla and two other insurance companies and against three health funds ("the respondents").
The subject of the claim is the allegation that the respondents refused to insure, as part of the group long-term care insurance for health fund customers, customers with disabilities, and this ostensibly in contravention of the provisions of law prescribed in the Equal Rights for Persons with Disabilities Law, 5758-1998 ("the Law"), while discriminating against and infringing upon the right to dignity and equality.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-47 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.)
19. (contd.)
The group that the claimants wish to represent includes all persons with disabilities (as they are defined in the law) who were customers of the respondents, and the respondents cancelled the long-term care insurance contract with them, all persons with disabilities who applied for cover with group long-term care insurance, but the respondents refused to insure them, and all persons with disabilities who wanted to be insured with long-term care insurance but did not apply to the respondents.
According to the action, the estimated amount of the personal claim against Dikla is NIS 2,000. The claimants estimate the amount of the claim for all members of the group that they seek to represent against all the respondents to be NIS 659 million. Dikla has yet to submit its response to the application for certification.
20. On May 2012, a claim was filed in the Tel Aviv District Court against Harel Insurance and the Tax Authority. The action was presented to Harel Insurance on May 22, 2012. The claim concerns the allegation that the respondents ostensibly prevented the withdrawal of money from life assurance policies that are recognized as a provident fund, without the deduction of tax in respect of the months preceding the date of submittal of the declaration about low income levels in accordance with Article 34(B) of the Income Tax (Rules for the Approval and Management of Provident Funds) Regulations, 5724-1964 ("the Regulations").
The plaintiff contends that these Regulations should be interpreted such that tax might also not be deducted on the two months preceding the date of submittal of the declaration required according to the Regulations, notwithstanding the fact that the Regulations stipulate that this is possible for the month in which the declaration is submitted and for the two months after submittal of the declaration.
The Group which the plaintiff wishes to represent is any member (salaried and self-employed) of a pension fund which is a provident fund, who submitted and/or will submit a declaration to the Tax Authority and/or to the provident fund management company and who had a low income in the month preceding the month of submittal of the declaration and/or the month preceding it, unrelated to the months in respect of which the declaration was given and/or the approval or rejection of the declaration, for all his provident funds.
The plaintiff claims that his personal loss is NIS 7,700 for money that he was unable to withdraw in December 2010, to which management fees and other commissions were added, as well as NIS 8,211 for money that he was unable to withdraw in November 2011, plus management fees and other commissions. The plaintiff claims additional future loss in respect of money that he expects he will be unable to withdraw in July 2012. The plaintiff estimates the loss for the group to be hundreds of millions of shekels.
On May 9, 2012, the plaintiff filed an application to amend the claim. The essence of the application for amendment is to expand the group so that it will also include the group of self-employed members. Additionally, as part of the application for amendment, the plaintiff announced that he intends to add all the provident fund management companies and other class plaintiffs when this becomes possible.
On July 1, 2012, Harel Insurance submitted its response to the application to amend the claim (which is in fact a response to the application to amend the application for certification as a class action). Harel Insurance left the decision on the application for amendment to the discretion of the honorable court, mainly due to the fact that a review that it conducted found that the application to withdraw money without withholding tax due to low income in the months preceding the month of the declaration is an extraordinary application, to the extent that Harel Insurance did not find even one other case of this kind (for either the salaried or self-employed group). On July 11, 2012, the plaintiff submitted his response to Harel Insurance's response to the application to amend the class application. No ruling has yet been given on the application for amendment.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-48 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.)
21. In May 2012, a claim was filed in the Jerusalem District Court together with an application for its recognition as a class action against the subsidiary Harel Insurance, the subsidiary Dikla Insurance, and against four other insurance companies and one insurance agency (hereinafter together: "the Respondents"). The subject of the claim is the allegation that the Respondents allegedly refused to insure customers with disabilities in personal lines policies, for example - health insurance, travel insurance, pension, personal accident insurance, life assurance, long-term care and work disability insurance ("the personal lines policies"), and this ostensibly in contravention of the provisions of law prescribed in the Equal Rights for Persons with Disabilities Law, 5758- 1998 ("the Law"), while discriminating against and infringing upon the right to dignity and equality.
The group that the plaintiffs seek to represent, which the plaintiffs estimate includes 700,000 people, consists of all residents of the State of Israel who suffer from a particular disability and meet the definition of "disabled" under the Law, and as a result of this disability, the Respondents refuse to insure them in personal lines policies, irrespective of whether or not they have applied for insurance and been rejected, based on the knowledge that in any event the Respondents will not agree to include them in such policies due to their disabilities, from the date on which Section H of the Law entered into force in 2005. The claimants estimate the amount of the claim for all members of the group that they seek to represent against all the Respondents to be NIS 934 million. Harel Insurance and Dikla Insurance have yet to submit their response to the application for certification as a class action.
22. In May 2012, a claim was filed in the Haifa District Court together with an application for its recognition as a class action against the subsidiary Harel Insurance. The subject of the action is that Harel Insurance indemnifies third parties who suffered property loss in road accidents for impairment losses to the value of the vehicle, according to the date on which the claim is received and not the date of the accident. The plaintiff claims that this method of calculating impairment used by Harel Insurance is ostensibly in contravention of the provisions of the law, and also constitutes a breach of statutory duty and unjust enrichment. The action was filed despite a ruling by the Commissioner of Insurance from 2001, whereby in the event of a third party claim, the impairment loss may be calculated according to the date of filing the claim, and not the date of the accident. The group that the plaintiff wishes to represent is any person who, during the 7 years preceding the date of this claim, received insurance benefits from Harel Insurance for impairment loss to a vehicle which was calculated not according to the vehicle's value on the date of the accident, irrespective of whether the vehicle was insured for comprehensive insurance by Harel Insurance, or the insurance benefits were received as a third party ("the group members"). According to the action, the estimated amount of the personal claim against Harel Insurance is NIS 385. The plaintiff estimated the amount of the claim for all members of the group it seeks to represent at NIS 63 million. Harel Insurance has yet to submit its response to the application for certification as a class action.
23. In June 2012, a claim was filed in the Haifa District Court together with an application for its recognition as a class action against the subsidiary Harel Insurance. The subject of the claim is an allegation that in health insurance policies which determine that the premium will vary every five years, Harel Insurance raises the premiums when the policyholders have reached the age of 65, even before five years have elapsed from the date of purchasing the policy. The plaintiff claims that this ostensibly constitutes deceit and unjust enrichment.
The group which the plaintiff seeks to represent includes all policyholders who held a Harel Insurance health insurance policy which states that the premium will be revised every five years, and where the policy provisions do not stipulate an exclusion for the first revision of the premium within a period of less than five years, and despite this Harel Insurance revised the premium before five years passed. The personal loss claimed by the plaintiff amounts to NIS 380. According to the plaintiff, the overall loss claimed for all members of the group amounts to NIS 160 million. Harel Insurance has yet to submit its response to the application for certification as a class action.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-49 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.)
Claims submitted after the Reporting Period
1. In July 2012, a claim was filed in the Tel Aviv District Court together with an application for its recognition as a class action against the subsidiary Harel Insurance. The subject of the action is the allegation that a group life assurance policy for members of the Zahal Disabled Veterans Organization (ZVDO) ostensibly contains cover for an insured event that takes place during the year between when the insured reaches the age of 75 and 76, whereas Harel Insurance provides cover for insured events that occur until the insured is 75 years old only. The group that the plaintiff seeks to represent includes all persons insured by the ZVDO group policy, where the insured event (death) occurred after they reached the age of 75 but before the age of 77. The personal loss claimed by the plaintiff amounts to NIS 52,000. According to the plaintiff, the overall loss claimed for all members of the group amounts to NIS 46 million. It should be noted that the plaintiff filed a similar claim in the past which was struck out for lack of material jurisdiction. An initial examination of the claim shows that Harel Insurance has good defense arguments against the claim. It should also be noted that the amount claimed for the group is unrealistic, even if there was any substance to it. Harel Insurance has yet to submit its response to the application for certification as a class action.
2. In August 2012, a claim was filed in the Petach Tikva District Court together with an application for its certification as a class action against the subsidiary Harel Insurance and against four other insurance companies ("the Respondents"). The subject of the action is the allegation that the Respondents collect management fees from the total amount of the premium deposited by their policyholders in life assurance policies with a savings component, issued as of 2004, which are designed for self-employed and salaried employees (hereinafter respectively: "management fees" and "the policies"), and this ostensibly in contravention of the provisions of the Control of Financial Services (Insurance) (Conditions of Insurance Contracts) (Regulations, 5741-1981 ("the Regulations"), and ostensibly in contravention of the provisions of the law, including by misleading policyholders, being in breach of a statutory obligation, mala fides and unjust enrichment. Additionally, the plaintiffs claim that the Commissioner of Insurance exceeded his powers by allowing the Respondents to collect management fees in a manner that differs from that ostensibly prescribed in the Regulations and that any permission given by the Commissioner of Insurance to collect management fees in a manner which deviates from the Regulations is invalid and contrary to the provisions of the law. According to the plaintiffs, any management fees collected from the premium is invalid and must be returned to the policyholders. Alternatively, the maximum management fees which may be collected are 2% of the value of the investment portfolio ("management fees from the accrual") and any management fees in excess of this rate must be returned to the policyholders. Alternatively, the plaintiffs argue that even if it is permitted to collect management fees from the premium, the portion of the management fees from the premium which was collected in respect of the amount which is not directed to savings, must be returned to the policyholders. According to the plaintiffs, the group they wish to represent numbers more than 200,000 insureds, and includes anyone who was insured by the Respondents in a life assurance policy which combines savings and was issued from the beginning of 2004. The plaintiff is claiming personal loss of NIS 1,159.4 against Harel Insurance, and alternatively NIS 101.4 and NIS 510.60 for one insurance year. According to the plaintiffs, the total loss claimed for all members of the group is a nominal amount of NIS 569,800,000. Harel Insurance has yet to submit its response to the application for certification as a class action.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-51 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Contingent liabilities (contd.)
Table summarizes 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 6 64:95 Prosecution refers to several companies and was allocated a specific amount of the company and/ or subsidiaries 0 0
Claim amount is not specified 5 Pending requests for approval of class actions: amount pertaining to the Company and/ or subsidiaries 17 9497;4585 Prosecution refers to several companies and was allocated a specific amount of the company and/ or subsidiaries : 749:845=5 Claim amount is not specified 6 Other significant claims 6 6=4<=7
The total provision amount of claims filed against the Company and / or consolidated companies, as described above amounts to about NIS 10,773 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 .
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-50 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) b. Other contingent liabilities
1. (contd.)
Mediation process, which was in the presence of Adv. Lippa Meir after the decision, did not succeed and the defendants filed an application for permission to appeal this decision to the Supreme Court.
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. 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 ("the defendants"). Several preliminary hearings have taken place within the context of the legal proceeding and the parties are deliberating in hopes of reaching a settlement. On January 22, 2012, the respondents informed the honorable court that the parties' efforts to reach a settlement had been unsuccessful, due to the prolonged negotiations and that they wish to renew the proceeding .
On May 24, 2012, the plaintiffs filed a statement of defense (for the personal claim and the derivative claim). Together with the filing of the statement of defense, the respondents submitted a third-party notice against the plaintiffs in the derivative claim proceeding. The notice is based on the plaintiffs' argument that should court decide to accept all or part of the derivative claim in LeAtid's name, the plaintiffs are in fact the reason that the new pension fund was not established as part of LeAtid.
Based on the opinion of its legal advisors, the Company is of the opinion that the originating summons is more likely to be successful than to be rejected. c. Claims which have been completed
1. 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.
On April 15, 2012, the Tel Aviv District Court handed down a ruling approving the parties' agreed application for dismissal of the action and the application for certification as a class action, pursuant to the Sabo Ruling. As part of the arrangement, which was validated as a ruling, Harel Insurance undertook to send those insured by the policy a clarification to the effect that the insurance benefits are not CPI linked and a similar clarification was also included in the annual report to the insureds.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-52 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) c. Claims which have been completed (contd.)
2. 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 recognition as a class action and in May 2010, the applicant submitted its response to EMI's response. On February 21, 2012, the parties submitted a compromise settlement to the court terminating the dispute between them. If approved by the court, the compromise settlement is not expected to impose any significant amount of payment on EMI.
On June 28, 2012, the Jerusalem District Court granted a compromise settlement to terminate the action the validity of a court ruling. According to the compromise settlement, EMI will change its procedures in future as follows: in those cases where a premium is identified for the balance of a loan which has not yet been given and will not be given, the respondent will transfer to the insured (either directly to the borrower or as instructed by the insured) the premium together with linkage differences.
Additionally, within 45 days of receiving the insured's written notice, whereby the insurance certificate issued by the respondent has been cancelled due to full or partial early settlement of the mortgage loan, the respondent will transfer a proportionate premium refund to the relevant insured, in accordance with the provisions of the policy. If the respondent fails to meet this deadline, then in addition to the linkage differences, interest differences will be paid to be calculated from 45 days after receiving the insured's notification. Immediately after full or partial early settlement of the mortgage loan, the borrower may inform the respondent directly of the early settlement, including bank confirmation from the insured confirming the aforesaid repayment.
A person who has taken a mortgage and the premium paid was higher than the premium calculated according to the amount of the loan actually taken, will receive (directly or through the insured) 65% of the surplus premium plus linkage differences. In those cases where the balance of the premium was returned without linkage and interest differences, the respondent will pay 65% of the amount of the linkage differences. Regarding a person who has made early repayment of a mortgage loan that was insured by the respondent over the last 7 years, and the proportionate premium refund was calculated based on the date on which the respondent received the insured's notification of cancellation of the insurance certificate, or any other date which is later than the settlement date, he will not be entitled to any relief from the respondent.
3. 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. In September 2011, notice and an agreed application was submitted by the parties, instructing that at this stage the respondents are not required to respond to the application for recognition as the plaintiffs' attorney had informed the respondents' attorney that the plaintiffs are considering petitioning to amend the application. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-53 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) c. Claims which have been completed (contd.)
3. (contd.)
On January 24, 2012, an application was submitted to amend the claim and the application to approve the action as a class action and to include another defendant and file additional affidavits. On March 14, 2012 Harel Insurance filed its response to amendment the claim and on April 2, 2012 the plaintiffs responded to Harel Insurance's response. The decision not yet received.
On June 10, 2012, the court approved the plaintiffs' application to abandon the action, thus concluding the case.
Claims ended after the Reporting Period
1. On April 8, 2012, an application was filed in the Tel Aviv Magistrates Court to recognize an action, which is already pending against the subsidiary Harel Insurance as a class action.
The subject of the action is the allegation that a group life assurance policy for members of the Zahal Disabled Veterans Organization (ZVDO) ostensibly contains cover for an insured event that takes place during the year between when the insured reaches the age of 75 and 76, whereas Harel Insurance provides cover for insured events that occur until the insured is 75 years old only.
The action was filed in the past in the Magistrates Court as an ordinary personal claim, and the plaintiff now wishes to conduct it as a class action against Harel Insurance and ZVDO .
The group that the plaintiff seeks to represent includes all persons insured by the ZVDO group policy, where the insured event (death) occurred after they reached the age of 75 but before the age of 76.
The personal loss claimed by the plaintiff amounts to NIS 52,000. According to the plaintiff, the overall loss claimed for all members of the group amounts to NIS 2.3 million.
On July 5, 2012, the court handed down a decision that in view of the agreement between the parties, stemming from the material jurisdiction to hear the claim, the personal claim and the application for its certification as a class action were both struck out without awarding costs. The action was thus terminated. d. Commitments
1. Negotiation to acquire the rights in Netanya's Ir Yamim mall which ended with no results
On June 11, 2012, subsidiaries of the Company which are financial institutions (hereinafter together: "the Subsidiaries"), entered into an engagement with a second-tier subsidiary of Azorim Investment Development & Construction Ltd. ("Azorim") in a document of principles to acquire Azorim's rights (50%) in land and a shopping mall in Netanya's Ir Yamim neighborhood ("the Property"), which the second-tier subsidiary holds in equal parts with Shikun & Binui Real Estate (Investments) Ltd. ("Shikun & Binui"), including additional rights to land which will be allocated subject to publication of a validation of the Urban Plan which is currently in the approval process ("the Additional Rights"), and excluding Azorim's share of the rights to build an assisted living facility, from the Additional Rights. According to the document of principles, subject to the signing of a binding agreement between the Subsidiaries and Azorim, and to meeting the conditions precedent stipulated in the agreement, the most important of which are a failure to exercise right of first refusal given to Shikun & Binui to acquire Azorim's share of the aforementioned rights and obtaining the approval of the Antitrust Commissioner (if required), Azorim will receive consideration in the total amount of NIS 410 million plus VAT, linked to the CPI of March 2012, to be paid in the manner and on the dates specified in the binding agreement, and which will be subject to various adjustments. As part of the document of principles, Azorim undertook towards the Subsidiaries that it will not negotiate with any third party before June 30, 2012 in connection with the sale of its aforementioned rights, and during this period the Subsidiaries will conduct a due diligence, and concurrently the parties will negotiate for the purpose of entering into a binding agreement. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-54 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) d. Commitments (contd.)
1. (contd.)
Azorim did not make a further extension of the commitment period not to conduct negotiations with a third party beyond July 29, 2012. At this stage it is impossible to estimate whether the negotiations that took place during the non-shop period will in the future mature into an agreement between the parties.
2. Allotment of options to Mr. Shimon Alkabetz
On March 26, 2012, the Remunerations Committee recommended granting 44,150 stock options to Mr. Alkabetz. On March 26, 2012, the Audit Committee approved the granting of the options. On March 29, 2012, the Board of Directors approved the granting of these options. These options are granted in addition to the 44,150 stock options that were allotted to Mr. Alkabetz in July 2009.
The conditions for exercising the options are as specified in the outline plan published by the Company on May 1, 2011 (Ref.: 2011-01-132570). The exercise price for each option that was allotted is NIS 129.7 (based on the closing price of the Company's shares on the TASE on March 28, 2012 - immediately prior to the Board of Directors decision). The fair value of the share options that were allotted to the CEO in the new allotment is estimated at NIS 2,060,000. The fair value of the option warrants granted as aforementioned is estimated by applying a Black-Scholes model model to the costing of the options.
The Audit Committee and Board of Directors concluded that the granting of the additional options to Mr. Alkabetz is reasonable with respect to the rights emanating from the shares that will arise from the exercising of the options, the conditions for exercising the options and amount of the benefit, taking into account his contribution to the Group's business success and progress, and the Company's desire to offer him an incentive to continue to perform his duties in the long term. As part of the aforementioned considerations, the fact that Mr. Michel Siboni, who also serves as joint CEO of the Group, holds 88,300 options that were allotted to him in the past, was taken into account, and it is therefore proper that both joint CEOs should hold the same number of options.
The decision of the Audit Committee and the Board of Directors also determined that the conditions of the options and value of the bonus according to the binomial model, based on the Black-Scholes model, were determined in a way which reflects the scope of responsibility entailed in the positions held by Mr. Alkabetz, as well his expected contribution to the Group and to its future business development. The prescribed mechanism provides an incentive for the joint CEO in the long term, and it links the compensation to his on- going contribution to the Company over that period. Concerning the allotment of the options, various data were presented to the Audit Committee and Board of Directors, including, inter alia, the text of the plan, the estimated value of the options on the date of the Board of Directors' decision according to the binomial model, based on the Black-Scholes model, prepared by Prof. Y. Suari, and comparative data from other allotments. Subsequent to the information submitted to the members of the Audit Committee and Board of Directors, as aforementioned, as well as information about the compensation paid to Mr. Alkabetz, and specific details concerning his contribution to the Company, and taking into account the economic value of options, it was determined that the conditions of granting the options are those accepted by public companies with a similar scope of activity to that of the Company, and they are therefore reasonable and in no way irregular.
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. The Law also stipulates that the aforesaid provision does not apply to central severance pay provident funds.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-55 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) d. Commitments (contd.)
3. (contd.)
On January 1, 2012, Harel Gemel performed a merger of the provident funds that it manages: 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") were merged into Harel Otzma such that the ownership structure of the merging funds' tracks is to be preserved. The merged fund will be called Harel Otzma-Taoz. Similarly, as part of the merger, the shekel investment track that had been part of Harel-Otzma was changed and became a short shekel track. The merger took place in accordance with the Commissioner's approval from October 5, 2011 and the approval of Income Tax from December 29, 2011.
4. Atidit
Following discussions with the Commissioner concerning the method of calculating the actuarial report of the old pension fund - Atidit Pension Fund ("the Pension Fund"), the Pension Fund conducted a second review of the results of the actuarial calculations with the help of actuary David Engelmayer who was appointed for this purpose in conjunction with the Commissioner's office. Based on this review, substantial differences were found in the actuarial surplus/deficit clause, with respect to the Pension Fund's actuarial report as previously published by LeAtid. Thid discrepancy gives the Fund an actuarial deficit rather than a surplus, and as a result, members' rights may be affected. LeAtid is still reviewing the reasons for these discrepancies between the reports.
At meetings held on February 16, 2012 and February 21, 2012, the Audit Committee and Board of Directors (respectively) of LeAtid approved the termination of the term of office of the appointed actuary Mr. Yaakov Antler, who had served LeAtid, due to the need felt by LeAtid to make changes and bring in new blood to the position of the appointed actuary after many years in which Mr. Antler had filled this position. Mr. David Engelmayer was appointed as the appointed actuary of the Pension Fund.
Pursuant to the approval of the financial statements of Atidit Pension Fund for 2011, which included an actuarial deficit, based on the actuarial report prepared by actuary David Engelmayer, a meeting was held with the Commissioner to analyze the reasons for the discrepancies and concerning the action that the company must take in connection with these discrepancies. In this context, the Commissioner appointed actuary Alan Dubin to prepare an audit of the pension fund. The examination process has yet to be completed.
The possible changes in members' rights, as mentioned, do not affect the financial results of LeAtid and the Company, due to the fact that the correction is for the pension fund which is not included in the financial results of the management company or the Company.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-56 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed 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 existing capital of the subsidiaries which are insurance companies according to Supervision Regulations of Insurance Businesses (Minimum Shareholders' Equity required from an Insurer) - 1998 (hereinafter: "the Capital Regulations") and the Supervisor’s directives:
June 30 2012 December 31 2011 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) 4,055,947* 322,985 174,086 3,926,311* 294,656 174,292
Including: Primary capital 2,911,126 301,328 414,694 2,691,848 257,138 383,147 Secondary capital ------Subordinated secondary capital 679,266 - - 763,642 - - Complex secondary capital 924,797 99,780 - 916,527 99,770 - Complex thirdary capital 250,000 - - - - - Existing amount computed according to capital regulations 4,765,189 401,108 414,694 4,372,017 356,908 383,147 total events after the reporting date 709,242 78,123 240,608 445,706 62,252 208,855
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-57 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
2. (contd.) a. The amount required including, inter alia, capital requirements in respect of:
June 30 2012 December 31 2011 Harel Harel Insurance Dikla EMI Insurance Dikla EMI NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Primary capital required in general insurance 557,303 88,414 174,086 547,399 87,322 174,292 Activities in nursing insurance 65,342 119,303 - 61,948 106,588 - Capital requirements for yield secured programs 42,834 - - 40,101 - - Investment assets and other assets (b) 908,784 31,089 - 892,176 34,450 - Catastrophe risks in general insurance 151,326 - - 51,480 - - Operating risks 271,585 37,891 - 264,131 33,492 - Deferred acquisition expenses in life assurance and health insurance and acquisition expenses in respect of insurance portfolio 898,250 45,989 - 890,424 32,719 - Investments in consolidated companies and management rights of provident funds and pension funds 871,778 - - 794,836 - - ( extraordinary life assurance risks (c 249,661 236 - 239,299 38 - (Assets unrecognized as their definitions in capital regulations (d 38,253 63 - 50,049 47 - Special share capital requirements according Commissioner's instructions - - - 94,469 - - brodgate 831 - - - - - 4,055,947 322,985 174,086 3,926,311 294,656 174,292
(*) 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. This reduction, which is included in the calculation of the capital required of Harel Insurance, amounted to NIS 221 million at June 30, 2012. b. The capital requirements of assets for a total value of NIS 748 million in Harel Insurance and NIS 29 million in Dikla, which were rated in an internal rating and according to the directive of the Ministry of Finance, use must be made of the non-rated "category" in order to calculate the capital requirements. The capital requirements for these assets aggregated a total amount of NIS 84 million in Harel Insurance and an amount of NIS 3 million in Dikla.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-58 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.) 2. (contd.) c. 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. d. 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.
Apart from the general requirements that appear in the Companies Law, the distribution of a dividend out of the capital surpluses in insurance companies is also subject to liquidity requirements and compliance with the regulations in respect of the manner of the investment.
3. In July 2012, the Control of Financial Services (Provident Funds) (Investment Rules that apply to Institutional Entities) Regulations, 5772-2012, entered into force ("the Investment Regulations") and the final text of the circular - "Investment Rules that apply to Institutional Entities" ("Investment Circular") was published (henceforth the Investment Regulations and the Investment Circular will be called the "New Investment Rules"). The New Investment Rules include, inter alia, changes compared with the existing investment restrictions and with respect to these changes there are transition provisions.
Harel Insurance has investments and assets which, according to the New Investment Rules, will be governed by the transition provisions. In part, some of the investments may gradually be considered an unrecognized asset and accordingly the equity requirements may increase gradually up to January 1, 2015. The Company expects that this increase in equity requirements will not be significant.
4. 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). WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-59 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
4. (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 circular for institutional bodies was published in August 2011 on the subject of the composition of recognized shareholders' equity for an insurer. The circular 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 added to the capital requirements.
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.
5. 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, or management companies of provident funds and pension funds. For the subsidiary companies which are insurers the obligation is 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). Regarding subsidiaries that are managing companies of provident funds and pension funds, their obligation is to complete the necessary equity in accordance with the equity regulations that will apply from time to time. 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 12 below. As of the date of these financial statements, the institutional bodies in the Group are in compliance with the capital regulations. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-61 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
6. 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 expenses is an asset which is not recognized in order to calculate minimum shareholders' equity required from a management company. For details regarding the change in this provisions after the reporting period - see section 8 below.
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. Following a legislative change that addresses the interest rates set in Section 3(j) of the Income Tax Ordinance, the terms of the capital note were revised so as to comply with the Income Tax provisions. Accordingly, from January 1, 2011, the capital note bears minimum annual interest based on the rate prescribed in Section 3j of the Income Tax Ordinance.
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. Following a legislative change that addresses the interest rates set in Section 3j of the Income Tax Ordinance, the terms of the capital note were revised so as to comply with the Income Tax provisions. Accordingly, from January 1, 2011, the capital note bears minimum annual interest based on the rate prescribed in Section 3j of the Income Tax Ordinance.
To ensure that the subsidiaries of Harel Insurance which are pension fund management companies comply with the new capital regulations, as mentioned in Section ; below, capital notes were converted to share capital, against an allocation of shares, and a loan was extended to Harel Pension
7. On February 16, 2012, Control of Financial Services (Provident Funds) (Minimum Equity Required of a Provident Fund or Pension Fund Management Company) Regulations, 5772-2012, were published. The 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 the higher of the following amounts ?
)a) The initial capital required is NIS 10 million@
(b) The aggregate amount of: 0.1% of the assets under management up to a maximum limit of assets under management of NIS 15 billion, 0.05% of the assets under management above the aforementioned limit, and 25% of the annual managed expenses;
Likewise, it was determined that a management company whose shareholders' equity is less than the amount specified in the regulations must gradually increase its equity, as specified in the regulations, so that by the date of publication of the financial statements at December 31, 2014, the equity has been supplemented in full. Concurrently, Income Tax (Rules for the Approval and Management of a Provident Fund) Regulations (Amendment no. 2), 5772-2012, were published, which determine: (a) the provisions in the regulations relating to the minimum equity required of a management company were cancelled; (b) 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) specific provisions were determined concerning indemnity for the senior officers of a company that only manages sectorial provident funds.
On February 16, 2012, the Commissioner published a 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)(2) of the Capital Regulations, a provident fund management company that guarantees a yield shall reduce the minimum amount of equity it must hold at the reporting date by 30% of the amount prescribed in Article 3(A)(2)(a) and (b) 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. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-60 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
7. (contd.)
Moreover, a management company that took out 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 41.E(f1) of the Income Tax (Rules for the Approval and Management of Provident Funds) Regulations, 57241964, may reduce its minimum equity by 20% of the amount of surplus insurance, subject to restrictions prescribed in the circular. The provisions of the circular will become applicable on the commencement date of the Capital Regulations.
Based on the computation of the capital requirements, the capital requirements for the provident fund management companies owned by the Group as of June 30, 2012 increased by NIS 13 million.
The capital requirements for the Group's pension fund management companies reduced by NIS 51 million.
Concerning an additional equity requirement for the pension fund management company in connection with management of the pension money for career soldiers, see Note 9.
To ensure that the subsidiaries of Harel Insurance which are pension fund management companies comply with the new capital regulations, capital notes that had been issued by Harel Pension and Manof Pension, in the total amount of NIS 47 million, were converted to share capital, against an allocation of shares.
On May 23, 2012, Harel Insurance's Board of Directors authorized the provision of a loan in the amount of NIS 15 million to Harel Pension, a wholly owned subsidiary of the Harel Insurance. The loan bears interest of Prime + 1%. The loan was given for the period of a year, is renewed automatically, and the Company has the right to recall the loan at any time by giving 7 days advance notice.
The loan is given to enable Harel Pension to comply with the liquidity requirements in accordance with the provisions of the Capital Regulations.
In addition, During March 2012, Harel Insurance invested the total amount of NIS 6.5 million in the share capital of provident fund management companies (directly in Tzva Hakeva Savings Fund, and in Atidit Gemel through an investment in Yedidim Holdings), against an allocation of shares.
8. On February 21, 2011, the Knesset Finance Committee approved the Control of Financial Services (Provident Funds) (Investment Rules that apply to management companies and insurers) Regulations, 5771-2011. Article 33 of the Investment Regulations concerning "Control and Holding the Means of Control by an Insurer", prescribe, inter alia, capital requirements with respect to an insurer's holdings in management companies. Based on the aforementioned article and the minimum capital rules that were determined for management companies, most of the reduction in the equity required from the Group's pension fund management companies will also reduce the equity required of Harel Insurance. As of the commencement date for implementation of the New Investment Regulations, half of the deferred acquisition costs of the management companies which are created from that date, will create a capital requirement for Harel Insurance, and the other half will be held against loans or capital surpluses only. In July the new regulations took effect.
9. 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. Due to the above, a relief was granted, see section 2 above.
10. In July 2012, the Commissioner of Insurance sent the insurance company managers a clarification\ regarding interpretations of issues pertaining to the calculation of the insurance companies' equity. The main points of the clarification are?
A. Equity required for assets
The Capital Regulations stipulate that the equity required for assets will be calculated based on the sum of the multiples of each asset held against an insurer's liability that are not yield dependent, excluding assets for which additional equity must be provided under the Capital Regulations and assets held against capital surpluses. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-62 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
10. (contd.)
This means that calculation of the capital requirements for assets is not circular and is to be calculated on the required equity before including the capital requirements in respect of the assets. To reflect this method of calculation, the reporting file was updated.
The capital requirements for assets at the reporting date are lower than for the report at September 30, 2011 by an amount of NIS 125 million, mainly as a result of the change in the calculation method according to this clarification.
B. Capital requirements in respect of operating risks
Capital requirements in respect of operating risks are derived, inter alia, from the amount of general and administrative expenses on account of yield-dependent life assurance. Based on the clarification, that amount of the general and administrative expenses on account of yield-dependent life assurance will include all three components of the general and administrative expenses: claims expenses, acquisitions costs, and other expenses.
C. Deficit or surplus created in profit-sharing policies
According to the Capital Regulations, there is no capital requirement for assets held against yield-dependent liabilities. Calculation of the yield is based on allocating the assets into different categories of liability, as reported in Form 106. According to the clarification, if there is a surplus of assets held against yield-dependent liabilities, a supplement (reduction) is to be calculated on the capital requirements at a rate of 0.5% of the amount of the surplus (shortfall.)
D. Classification of derivative financial instruments
According to the clarification, the capital requirements for derivative financial instruments will be calculated for sum of the derivative financial instruments with a positive fair value only, without offsetting derivative financial instruments with a negative fair value, except for those instances where offsetting is permitted according to the accounting principles.
E. Report concerning an obligation to invest in investment funds
According to the clarification, there is a requirement to invest 4% of the irrevocable liability in investment funds (calls for money) as part of the non-yield dependent liabilities.
F. External rating
Equity requirements on account of debt instruments or due to exposure to a reinsurer are calculated on the basis of an external rating prepared by a rating company that is approved by the Commissioner, or based on an internal rating model that has been approved by the Commissioner. According to the draft, commencing with the financial statement for the third quarter of 2012 and thereafter, if different external ratings have been issued by several different rating companies, the lowest rating is the one to be taken into account. It was clarified that in respect of reinsurers, the external rating to be taken into account for the equity requirement will be that of a rating agency to be specified in advance by each company, only ("the Default Agency"). If there is no Default Agency rating, the lower of the agency ratings approved by the Superintendent will be taken into account.
G. Capital surplus/deficit of an insurance company for activity between the reporting date and the date of publication
It is clarified that without derogating from the provisions of Article 10 of the Capital Regulations, the financial statements must include disclosure about active or passive capital activity that took place after the date of the report and which may affect the recognized equity, including converting tier-2 capital into unrecognized capital or distribution of a dividend. The provisions were applied in calculating the required equity of Harel Insurance and Dikla at the reporting date. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-63 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
11. On December 14, 2011, the Commissioner published a letter on the subject of making a deposit from money owed to a reinsurer. According to the letter, an insurer may not transfer cash to a reinsurer outside Israel, from its business that originates in Israel, unless the reinsurer leaves a deposit with him at the rates and in the amounts specified in the Control of Financial Services (Ways of Investing an Insurer's Capital and Reserves and Management of its Obligations) Regulations .
Notwithstanding the aforementioned, an insurer may decide not to hold the rates defined in Article 25(3) of the Investment Regulations, provided that in respect of the amounts that were not deposited as aforementioned, he holds additional equity to which the Control of Financial Services (Minimum Equity Required of an Insurer) Regulations, 5758-1998 apply as if it was equity held on account of an unrecognized asset.
At the reporting date, the Company holds reinsurance deposits based on the rates and amounts specified in the Control of Financial Services (Insurance) (Ways of Investing an Insurer's Capital and Reserves and Management of its Obligations) Regulations, and it is therefore not required to hold the additional equity.
12. 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.
13. 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 June 30, 2012 the Subsidiary meets the requirements regarding the Minimum Capital Requirement (primary and secondary capital - as defined in the Articles).
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. The subsidiary is in compliance with the requirements of the new model as at June 30, 2012.
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 to be used as secondary capital of NIS 25 million was approved for the subsidiary, a TASE member, from the company to be used where necessary. At the date of this report, a credit limit of NIS 5 million was utilized.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-64 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
14. On November 13, 2011, the ISA published a document "Principles of the model for the supervising index-linked certificates" that examines 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, investment standards will also be established (as part of the regulations to be promulgated in Amendment no. 16) 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 Amendment no. 16, 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 .
The supervisory model is expected to include the following principles?
1. A requirement to allocate equity in proportion to the actual risk level and the volume of the managed asset starting at NIS 30 million. 2. The market risks will be measured and estimated using the VaR (Value at Risk) model and extreme scenarios .
In addition to the allocation of the equity, a series of principles were determined with the purpose of encouraging the ETF managers to apply a conservative investment policy, which will be written into the legislation and directives of the ISA. Among others, these principles include regulation of the investment rules for assets used as coverage for index-linked certificates and standards for reporting to the ISA and the trustee, reinforcing the status of the safe keepers, and specifically reinforcing the status of the trustee, and imposing stronger obligations for approvals of the board of directors and investment committee, similar to the supervisory regime that applies to the mutual funds.
The subsidiary is reviewing the repercussions of the anticipated amendments. With respect to the aforementioned, and mainly to the information in Section 1 above, and taking into account the volume of assets under management in the Company's index-linked certificates and its method of operation, and based on calculations is has made, the subsidiary believes that the aforesaid amendments will increase the equity it is required to hold by up to NIS 15 million. On March 19, the Company extended credit of NIS 16 million to be used to increase the equity of Harel Sal in light of these requirements.
15. Subsidiaries which manage mutual funds and investment portfolios are obligated to hold minimum equity in accordance with the directives of the Israel Securities Authority. The companies work continuously to comply with this requirement. At June 30, 2012, the subsidiaries are in compliance with these requirements.
16. On June 22, 2011, the Company's subsidiaries were awarded the IDF pension arrangement tender. For further details about the pension arrangement for career soldiers serving in the IDF, see Note 9. On January 3, 2012, the Commissioner announced that under the arrangement, the management company that will manage the pension money will be required to hold NIS 16 million in equity, in addition to the minimum equity it is required to hold.
On March 29, 2012, an updated letter was received according to which the capital requirement will be reduced over the first five years of operation of the plan, based on the outline defined by the Commissioner and subject to the specific approval of the Commissioner every year. At March 31, 2012, this capital requirement was not included in the calculation of the capital required of the Company's subsidiaries, since implementation of the pension arrangement had not yet begun.
The plan has been implemented from May 2012 in respect of new career soldiers who joined the ranks of the permanent forces as of April 2012 and from July 2012 for soldiers who were already serving. At June 30, 2012, this capital requirement was included in the calculation of the equity required of the Company's subsidiaries.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-65 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
17. 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.
On April 30, 2012, the Commissioner published a draft letter concerning Israel's solvency regime. The draft letter was published against the backdrop of the announcement by the European parliament that it would be postponing the vote on the amendments to the Solvency II Directive, giving cause for concern that implementation of the Directive in Europe will be substantially delayed. The Commissioner therefore saw fit to revise continuation of the process in Israel and the plan to develop a risk-based solvency regime in the spirit of Solvency II, and advance a business culture which takes into account risk management considerations and the allocation of capital during the decision-making process. Among other things, the draft details the measures planned by the Commissioner for implementing the solvency regime in Israel: (a) adapting the existing regulatory framework in Israel to the principles of the Directive; (b) an additional QIS submittal- estimated date - November 2012; (c) a report on solvency according to IQIS - estimated date - June 2013; (d) an "Own Risk and Solvency Assessment" (ORSA) process will be conducted; (e) graded intervention by the Commissioner based on existing regulation.
Based on the draft letter, the publication date for IQIS-based capital regulations and application of the capital requirements will be determined in the future, after gaining experience with reporting the results of IQIS.
18. 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.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-66 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
18. (contd.)
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. 20 and 21 below.
19. On December 2011 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.
A reduction of the minimum equity required on account of the balance of the original difference attributed to management companies and provident funds will be added to the capital requirement for distribution of a dividend (hereinafter - 'supplement to the required equity) (see also Note 2 above).
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 .
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.
20. 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.
The equity policy of Harel Insurance comprises a range of provisions that define the method by which it manages its equity and capital surpluses at all times. The various pillars arise from the regulatory environment of Harel Insurance which determines that Harel Insurance will be able to distribute a dividend only after significant equity surpluses have been accumulated and from the aforementioned decisions made by Harel Insurance and Harel Investments whereby Harel Insurance will provide a regulatory equity surplus of at least NIS 150 million. Accordingly, it was decided that, at all times, Harel Insurance will strive to comply with the volume of equity recognized under the Capital Regulations, by an amount that is NIS 150 million higher than the capital requirement applicable to it from time to time, pursuant to the regulations. This means that below this level of equity surplus, Harel Insurance or the Company will take active measures to maintain the said minimum surplus. 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.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-67 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
21. 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. That is, below this rate, Harel Insurance or the Company will take action in order to maintain the minimal aforementioned capital rate. 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.
22. On December 28, 2011, the Commissioner’s approval was received for the transfer of the full control of Dikla (indirectly, through Mor-Har Investments Ltd., which holds 100% of the issued share capital of Dikla) from Harel Investments to Harel Insurance, against an allocation of Harel Insurance shares to Harel Investments. The restructuring took place on December 31, 2011.
This restructuring took place further to previous restructurings, in which the insurance and long-term savings activity was concentrated under Harel Insurance.
A a result of this restructuring, the equity of Harel Insurance increased by NIS 257 million, and Harel Insurance is required to hold additional capital of NIS 295 million.
23. 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.
24. In accordance with Turk Nippon's business plan and in an effort to meet the capital requirements applicable to Turk Nippon as an insurer operating in Turkey, in April 2012 the Company invested NIS 22 million in Turk Nippon's equity
At June 30, 2012, Turk Nippon had a shortfall of regulatory capital of TL 0.6 million (about NIS 1.4 million). The required supplement date according to the regulatory requirements is in the future and at the very latest during the first half of 2013.The required supplement date according to the regulatory requirements is in the future and at the very latest during the first half of 2013.
25. On December 25, 2011, the Company entered into a contingent agreement with Harel Insurance, whereby the Company injected NIS 100 million into Harel Insurance. Under the terms of the agreement, this injection of capital will constitute capital that the Company has invested in Harel Insurance, if by the end of February 2012 it transpires that at December 31, 2011 ("the effective date") Harel Insurance failed to meet the capital requirements based on its equity policy and based on its financial results for 2011 ("the suspensive condition"). If the suspensive condition is not met by the end of February 2012, the injection of capital will be deemed a loan given to Harel Insurance and it will bear interest of Prime + 1.5% until its settlement date. This loan must be repaid within 10 days of a request submitted by Harel Investments. On February 29, 2011, the validity of the suspensive condition was extended until March 20, 2012. On March 11, 2012, in view of the fact that Harel Insurance was in compliance with the equity requirements, the loan was repaid to the Company.
24. Concerning a raising of tier-3 capital by Harel Insurance after the reporting date, see Notes 8(:) and (6) below.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-68 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 8 - Financial liabilities
1. In February 2004, Harel Insurance issued NIS 200 million of deferred notes. These notes are CPI-linked, and bear annual interest of 5.55%. The deferred notes will be repaid in 10 equal payments, from March 2010. The deferred notes were rated AA by Maalot.
2. In November 2006, Harel Insurance, through a controlled "Special Purpose Company", Harel Insurance Finance & Issues Ltd (hereinafter: "Harel Issue") wholly owned by Harel Insurance, issued NIS 650 million of deferred notes. These notes are linked to the CPI of October 2006, bear interest of 4.65%, and are repayable in 11 annual and equal payments, from 2011 until 2021. Interest on the notes will be paid annually on December 31 of each calendar year, from 2007 and until final repayment of the deferred notes in 2021. The notes received an AA rating from Maalot. The notes are considered secondary capital for the purpose of capital regulations, subject to limitation on secondary capital of up to 50% of primary capital.
3. In May 2010, Harel Issues issued a written for approx. NIS 630 million, used as complex Secondary Capital in Harel Insurance. In July 2010, was issued 70 million by expanding the series B and C. In August 2011 was issued 200 million by extending the series E. The issue was made based on shelf prospectus which Harel Issue published on May 10, 2010.
The issue was made through four series of bonds, as detailed below?
a. Series B: for an amount of approx. NIS 150 million bearing variable interest on the basis of annual short- term loans (makam) plus a margin at a rate of 1.8%. The interest will be paid quarterly. The principal will be paid on May 31, 2021, which is the final due date of the Series.
b. Series C: for an amount of approx. NIS 150 million bearing variable interest on the basis of annual short- term loans (makam) plus a margin at a rate of 1.8%. The interest will be paid quarterly. The principal will be paid on May 31, 2022, which is the final due date of the Series.
c. Series D: for an amount of approx. NIS 199 million linked to the consumer price index bearing variable interest on the basis of annual short-term loans (makam) plus a margin at a rate of 3.9%. The interest will be paid semiannually. The principal will be paid on May 31, 2023, which is the final due date of the Series.
d. Series E: for an amount of approx. NIS 399 million linked to the consumer price index bearing variable interest on the basis of annual short-term loans (makam) plus a margin at a rate of 3.9%. The interest will be paid semiannually. The principal will be paid on May 31, 2024, which is the final due date of the Series.
Harel Issues right to repay the liabilities deeds?
As the directives of the Commissioner, regarding the composition of an insurer's capital three years prior to the final due date of the bonds, the recognition of them as complex Secondary Capital by Harel Insurance is reduced by a declining fixed rate (one third each year), and the bonds include conditions according to which Harel Issues is entitled three years prior to the final due date of every Series to repay the Series, or part thereof, earlier. Exercising this right is subject to receiving the Commissioner's approval, unless Harel Insurance will have surplus capital so that the recognized capital will meet - after repayment, at least 120% of the required capital. Harel then be entitled to repayment of earlier offerings without the approval of the Commissioner. In the event in which Harel Issues will not exercise its rights for early repayment, the bondholders will be paid additional interest at a rate of 50% of the original risk margin determined in the issue of every Series.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-69 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 8 - Financial liabilities (contd.)
4. The bonds include a condition according to which, on the existence of delaying circumstances detailed below, the interest and/or the principal will not be paid?
a. The delaying circumstances are the existence of one or more of the following circumstances: (1) the absence of suitable profits for distribution of Harel Insurance, within the meaning of the Companies Law, and this according to the last financial statements (annual or quarterly) prior to the due date of the interest and/or the relevant principal; (2) the amount of shareholders' equity recognized of Harel Insurance declines below the minimum capital required from it (according to the directives of the Law applying to Harel Insurance and/or according to the directives of the Commissioner of Insurance), and this according to the last financial statements (annual or quarterly) prior to the date of payment of interest and/or the relevant principal; (3) Harel Insurance's Board of Directors instructed to postpone payment of interest or postpone the payment of principal if it determines that there is a real fear of Harel Insurance's ability to meet the minimum capital requirements from it (according to the provisions of the Law applying to Harel Insurance and/or according to the directives of the Commissioner of Insurance), provided that it received for this the prior approval of the Commissioner of Insurance; (4) Harel Insurance's Board of Directors instructed to postpone payment of interest and/or delay in the payment of principal if it is of the opinion that there is a real fear in the short-term of the ability of Harel Insurance to repay in due time its liabilities which are rated as having a higher preference than that of these bonds, provided that it received for this the prior approval of the Commissioner of Insurance; (5) the Commissioner of Insurance instructed that postponement of the payment of principal and/or due to the significant harm to the recognized share capital of Harel Insurance or if they saw that there is a real fear of Harel Insurance’s ability to meet the minimum capital requirements from it (according to the provisions of the Law applying to Harel Insurance and/or according to the directives of the Commissioner of Insurance).
b. Principal or interest which were postponed, will be postponed until the discontinuation of the existence of the postponing circumstances and for a maximum period ending three years from the date of the original repayment of the principal of the bonds.
5. Issuance of hybrid tier-3 capital through Harel Finance & Issues
In April 2012, Harel Insurance, through Harel Finance & Share Issues Ltd. ("Harel Share Issues"), a special purpose subsidiary (SPC) of Harel Insurance, issued subordinated liability notes in the amount of NIS 228 million, which will serve as hybrid tier-3 capital of Harel Insurance. The issue was performed by virtue of a shelf prospectus published by Harel Share Issues on February 28, 2012.
The issue was performed by means of two series of bonds, as follows?
A. Series F: in the amount of NIS 114 million, linked to the CPI (principal and interest) and bearing a fixed rate of interest of 3.85%. The interest will be paid in semi-annual installments. The principal will be paid on May 31, 2025, which is the final settlement date for the series.
B. Series G: in the amount of NIS 114 million, linked to the CPI (principal and interest) and bearing a fixed rate of interest of 3.85%. The interest will be paid in semi-annual installments. The principal will be paid on May 31, 2026, which is the final settlement date for the series.
Pursuant to the provisions of law concerning the composition of an insurer's equity, equity components and capital instruments that are included as part of tier-3 capital shall not exceed 15% of the insurer's total equity. Recognition of the capital instruments as hybrid tier-3 capital held by Harel Insurance will be amortized at a fixed declining rate (50% each year), two years before the final settlement date of the bonds .
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-71 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 8 - Financial liabilities (contd.) 5. (contd.)
Harel Share Issues' right to early settlement of the liability notes?
The debentures include a condition whereby Harel Issues may make early repayment of the debentures or part thereof, and this two years before the original settlement date. Application of this right is subject to meeting one of the following conditions: (a) obtaining the Commissioner's approval; or (b) Harel Insurance must have surplus capital so that the recognized capital after the repayment is 120% of the required capital; or (c) concurrent with the early repayment, Harel Share Issues will issue a capital instrument of the same or superior quality.
If Harel Share Issues does not exercise its right to early repayment, additional interest will be paid to the debenture holders at a rate of 30% of the original risk margin, as defined in the issue.
The debentures include a condition whereby when certain delaying circumstances are present, as detailed below, the principal will not be paid?
The delaying circumstances are one or more of the following: (a) according to the last financial statement of Harel Insurance published before the relevant principal repayment date, Harel Insurance holds less recognized equity than the minimum amount it is required to hold (under the capital regulations), and it has not supplemented its equity at the publication date of the financial statements; (b) the Commissioner of Insurance has ordered a deferral of the principal payment if he considers that there is a real, immediate concern as to Harel Insurance's ability to meet the minimum equity it is required to hold under the capital regulations. It is clarified that since this is hybrid tier-3 capital, even when the delaying circumstances are present, the interest payments will be made as normal up to the original payment date of the principal .
A principal payment that is deferred will be postponed until the delaying circumstances are no longer present, and at most for a period ending three years from the original settlement date of the debentures principal.
Prior to the publication of the shelf prospectus, on March 26, 2012 Harel Issues received an ilAA rating from S&P Maalot for the said liability notes in the amount of NIS 250 million.
6. Private placement - extension of the Debentures Series F
On May 8, 2012, Harel Finance and Issues, an SPC subsidiary wholly owned by Harel Insurance, entered into agreement for the private placement of Debentures Series F in the amount of NIS 22 million. The private placement was performed by way of an expansion of Series F, which was issued by virtue of a shelf offering dated April 4, 2012 (see Section 2.2.5 above). The proceeds of the placement will be added to the proceeds of the issue of Debentures Series F and Debentures Series G, from April 4, 2012, and will serve as hybrid tier-3 capital held by Harel Insurance. The conditions of the Debentures Series F are as specified in the shelf offering report dated April 4, 2012.
The total liability notes that were raised and will be used by Harel Insurance as hybrid tier-3 capital amount to NIS 250 million.
At June 30, 2012, the balance of the liability notes (A-F) is NIS 1,886 million. At the date of the report, the delaying circumstances stipulated in the conditions of the liability notes were not present. The balance of the liabilities, net of issuance expenses of NIS 16 million is amortized according to the effective interest method.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-70 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 8 - Financial liabilities (contd.)
7. Dikla complex secondary capital
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.
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 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.
At June 30, 2012, the balance of the capital note (including interest) is in the amount of NIS 101.8 million. As at the reporting date, no delaying circumstances have occurred.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-72 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 8 - Financial liabilities (contd.)
8. In November 2008, the Company received 2 medium loans, totaling NIS 400 million, as follows:
A. a loan of NIS 200 million for a period of eight years, with principal and interest repayable after 30 months, in 12 semi-annual payments@
The financial criteria defined are: (1) material assets will not be pledged; (2) significant companies will not be sold or transferred; (3) the ratio of net financial debt to investment in investee companies will be no more than 0.35. At June 30, 2012, this ratio was 0.1; (4) the ratio of the net financial debt to shareholders equity will be no more than 0.5. At June 30, 2012, this ratio was 0.1. It is worth noting that the Company received the bank's consent for the purpose of transferring the full control of Dikla from the Company to Harel Insurance as noted in Section 9(I) above. At June 30, 2012, the Company is in compliance with the aforementioned conditions.
B. A loan of NIS 200 million for a period of three years, which will be repaid after 24 months, in three equal and semi-annual payments. Interest on the loan will be paid every six months, from receipt of the loan. The loans are at variable Shekel interest rates, at prime plus a certain margin (one of the loans has a margin update trigger, in the event of any change in Harel Insurance's credit rating.
The Company undertook to meet certain financial criteria, including criteria which relate to the Company's shareholders equity and holdings in subsidiaries, as follows: (1) an undertaking not to pledge material assets: (2) not to transfer control of significant companies; (3) it will retain full control of Harel Insurance; (4) a rating of at least BBB for bonds issued by Harel Insurance. At June 30, 2012, the Company is in compliance with the aforementioned conditions. At June 30, there are outstanding loans in the amount of NIS 168 million (at December 31, 2011 - NIS 373 million).
In December 2008, the Company gave Harel Insurance a loan of NIS 356 million out of the proceeds of the above loans. On January 2010, Harel Insurance repaid loan of about NIS 117 million of the above loan. On May 2010, Harel Insurance repaid the remaining loan .
In May 2010, the Company signed an agreement to extend the average duration of life of a loan (B above), without any significant change in the rate of interest. Under the agreement, one third of the amount of the loan will be repaid in 20, equal six-monthly installments, from the end of six months after the loan was extended and up to the end of ten years from the date of the extension of the loan, and the balance will be repaid as a lump sum 10 years after the agreement was signed. The interest on the loan will be repaid currently.
9. From the second half of 2010, Harel Sal Products embarked on arbitrage activity as part of an index-linked certificate on the TA-25 and TA-100 index. The arbitrage activity is performed through the ETF assets. This activity includes the acquisition of contracts in lieu of sale for underlying assets as well as the acquisition of underlying assets and the sale of contracts on these assets. The acquisition of the underlying assets is financed with bank credit. The credit is short-term credit, renewed from time to time in line with the activity undertaken. The average cost of the credit is a margin of 0.5%-0.8% above the Bank of Israel interest rate. In respect of the credit, the bank received a lien on the certificate's assets. Harel Sal Products policy with respect to this arbitrage is to fully hedge the transactions so that the underlying assets are in no way exposed. At the reporting date, the balance of the financial liabilities is in the amount of NIS 20 million.
10. In connection with a credit limit taken by Harel Financial Products for its operations, Harel Financial Products undertook to meet the following criteria: (a) equity (as defined in the agreement with the bank) of no less than NIS 12 million. At June 30, 2012, the equity was NIS 52 million; (b) not to pledge any assets; (c) not to give loans to the company's controlling shareholders or to any other entity, other than its subsidiaries. At the reporting date, there are outstanding loans and credit undertaken by Harel Financial Products in connection with the aforementioned undertaking in the amount of NIS 20 million.
11. A loan given by a bank to 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. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-73 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 8 - Financial liabilities (contd.) 11. (contd.)
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, as follows? (1) an undertaking not to take any additional loans that are not subordinated to the loan; (2) owners loans will not be repaid; (3) Harel Pia shares that are held by Harel Finance are to be placed under lien; (4) current lien; (5) Harel Pia's bank accounts through which the management fees are collected will be pledged; (6) the ratio between the EBITDA expected over the next 12 months, commencing at the end of the quarter, calculated as a product of EBITDA in the quarter ended, multiplied by 4, for principal and interest repayments for that period shall be no less than 1.2.
In March 2012, an amendment was signed to the agreement which changes the financial covenants in this sub section. Pursuant to the amendment, the EBITDA ratio may fall below 1.2, subject to meeting a combination of all the following conditions: (a) the ratio will not be less than 1 at any time; (b) Given that the ratio is lower than 1.2,Harel Pia will place money in deposit in accordance with a mechanism prescribed in the addendum to the agreement, and up to an amount equal to 20% of the amount of the principal and interest repayments to financial institutions over the next 12 months; (c) a fixed senior lien will be placed on the deposit in favor of the bank to guarantee the credit; (d) the deposit will be made within 20 days after the end of the calendar quarter; (e) the principal and interest payments for that quarter will not be paid from the money in the deposit; (f) no event shall take place which entitles the bank to demand immediate recall of the loan. At June 30, 2012, the EBITDA ratio was 1.05. After the balance sheet date, the Company deposited an amount of NIS 3 million with a bank. (7) the product of the volume of assets in each fund multiplied by its annual management fee rate for all the total funds managed by Harel Pia shall not be less than the amount specified in the loan agreement and will decline over the period of the loan. At March 31, 2012, the amount required was NIS 134 million. In June 2012, an amendment to this financial covenant agreement was signed whereby the bank confirms for the borrower that the ratio at June 30, 2012 will not fall below an amount of NIS 123 million. The amount of the volume of assets multiplied by its management fee rate amounted to NIS 131 million.(8) the equity, including capital notes, shall not be less than an amount equal to 50% of the total balance sheet of Harel Pia. At June 30, 2012, this ratio is 78.57%; (9) the equity, including capital notes, shall not be less than an amount equal to NIS 250 million. At June 30, 2012, the equity, including capital notes, was NIS 345 million. At June 30, 2012, the outstanding loan was NIS 58 million.
12. Harel Trade & Securities - TASE member
In connection with a credit limit taken by Harel Trade & Securities for its operations, Harel Trade & Securities undertook to meet the following criteria: (a) equity (as defined in the agreement with the bank) of no less than NIS 60 million. At June 30, 2012, the equity amounted to NIS 83 million; (b) Harel Finance will continue to hold the controlling interest in Harel Trade & Securities; (c) owners' loans that were given to Harel Trade & Securities must be subordinated to the loan received from the bank; (d) Harel Trade & Securities will not be able to repay owners' loans until the bank loan has been repaid. At March 31, 2012, there are no outstanding loans and credit undertaken by Harel Trade & Securities. At June 30, 2012, Harel Trade & Securities was in compliance with the aforementioned criteria.
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 June 302012 was NIS 52 million (of which a used credit line of NIS 10 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 June 30, 2012, the subsidiary is in compliance with all the financial criteria included in the master agreement.
13. During the second quarter of 2011, Harel Sal 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 an interest at a certain rate of the sum of the deposit . During the course of June 2012, both the deposit agreements expired. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-74 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 8 - Financial liabilities (contd.) 13. (contd.)
At the same time, in June 2012, the subsidiary deposited NIS 185 million with Mizrahi-Tefahot Bank Ltd. 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 conditions of the deposits are similar to those of the expired deposits. As at June 30, 2012, the subsidiary is in compliance with the provisions of the instruction.
Due to the fact that the TA-100 and TA-25 share indices have fallen since the commencement of the agreement, the Company has an obligation to the bank of NIS 34 million against the deposit, which is similar to the reduction in the obligation to the public for the index-linked certificates derived from the volume of these transactions.
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% of the volume of each series excluding the actual transaction. Existing agreements that as of the effective date (October 31, 2011) did not exceed the limit determined for them (30%) were not required to make adjustments. The instruction was adopted by the Company in February 2012. After the balance sheet date, the subsidiary deposited NIS 75 million in these series, under similar conditions.
Note 9 - Significant events during the reporting period
1. Announcement by the Commissioner of Insurance on guaranteed annuity coefficients in life assurance policies
On July 11, 2012, the Commissioner published a draft position paper concerning an "Update of the set of demographic assumptions for pension funds and life assurance" and Draft Insurance Circular 2012-46 concerning "Annuity conversion factors which incorporate a longevity guarantee". The draft relates, inter alia, to the improvement in longevity, including future longevity improvements, the rate at which policyholders exercise the annuity and the resulting repercussions on the volume of the reserves and method of calculating them. According to the draft position paper, the Ministry of Finance intends to revise the mortality tables due to the increase in life expectancy, based on studies conducted by the Ministry of Finance. The findings in the draft paper on the increase in longevity, with respect to the mortality tables that are currently in use, affect, inter alia, an increase in liabilities for annuity in life assurance policies which incorporate a longevity guarantee.
On July 31, 2012, the Commissioner published a letter concerning the effect of the draft position paper on the financial statements at June 30, 2012. According to the Commissioner's letter, at this stage it is still uncertain whether the estimates included in the draft should be viewed as best estimates for the purpose of calculating the insurance or pension liabilities in the financial statements at June 30, 2012.
The Company is preparing estimates of liabilities for annuity based on the data published by the Treasury's actuary, and based on additional actuarial data which were reviewed vis-a-vis the Group's actual experience. Harel Insurance reviewed the data published by the Commissioner on July 11, 2012 and in light of the information available to Harel with respect to longevity, they were taken into account in calculating the insurance liabilities, where the principle impact is for life assurance policies which incorporate a guaranteed annuity coefficient.
Given that the Commissioner's publication from July 11, 2012 regarding the life expectancy is still only a draft, and its method of implementation has not yet been discussed, it is possible that in future further changes will be made regarding calculation of the insurance liabilities.
As mentioned in Note 3 of the annual report, the Company schedules supplements required in the reserve for annuity as per the Commissioner's instructions, taking into account the profits anticipated from the policies until the policyholders reach retirement age. This gradual allocation is made by using a capitalization rate (k) up to the amount of the management fee rate or financial margin which is sufficient to cover all the foreseen expenses up to the policyholder's date of retirement. In view of the increase in the amount of the liability for annuity, the Company revised the annual capitalization rate of the reserves for annuity, K, according to which the Company spreads the required reserve supplement (K) from 0.62% to 0.7%. This rate is the maximum rate determined by the Company. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-75 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 9 - Significant events during the reporting period (contd.)
1. (contd.)
As a result of the revised assumptions used to calculate the future liabilities for annuity, based on the new data published by the Ministry of Finance and the revised K rate, an additional balance of NIS 79 million before tax and a balance of NIS 51 million after tax will be recognized gradually in future to profit and loss, by using the aforementioned capitalization factor K, until the policyholders reach retirement age whereas, as noted above, the scheduling of the cost of the annuity was restricted by using the maximum factor K at a rate of 0.7%, an additional amount of NIS 24 million before tax and NIS 16 million after tax, was included as an expense in the financial statement as at June 30, 2012, reducing profit and comprehensive profit by the said amount.
The data detailed above in connection with the supplementary reserve for annuity and the outstanding provisions which will be recognized in future refer to money that was accrued in policies up to June 30, 2012 and they do not include liabilities for additional future accrual.
Against the backdrop of the findings, the Commissioner published a draft position paper concerning annuity coefficients which incorporate a longevity guarantee. The draft circular proposes that from January 1, 2013, the insurance companies will not market combined life insurance and savings plans which include annuity coefficients incorporating a longevity guarantee. Nevertheless, insurance companies will be able to market insurance plans with annuity coefficients which incorporate a longevity guarantee for people who are at least 55 years old at the time of the sale, subject to several conditions detailed in the draft circular.
In addition to this draft circular, on August 1, 2012, the Commissioner published an instruction whereby a limit will be placed on the total volume of life assurance contracts which incorporate guaranteed coefficients and are approved as an insurance fund that insurance companies may sell during the period between January 1, 2012 and December 31, 2012, so that the volume of such contracts will not exceed 150% of the volume of life assurance contracts approved as an insurance fund sold by the company in 2011 and 150% of the number of life assurance contracts approved as an insurance fund that were sold by the company in 2011. In addition, a limit will be placed on the total volume of life assurance contracts which incorporate guaranteed coefficients and are not approved as an insurance fund to be sold by insurance companies during the period between January 1, 2012 and December 31, 2012, so that the volume of such contracts will not exceed 150% of the volume of life assurance contracts which are not approved as an insurance fund that were sold by the company in 2011 and 150% of the number of life assurance contracts that were not approved as an insurance fund that were sold by the company in 2011. Life assurance contracts which incorporate guaranteed coefficients which are sold during the aforesaid period will not allow deposits to be increased due to a change in the amount of the deposit, the rate of the deposit or the addition of a deposit component, except in case of an increase in the deposits for an insurance contract of a salaried policyholder due to a wage increase or an increase in the rate of the deposit from the insurable wage, based on the provisions of an extension order. The publications described above may affect the volume of sales of life assurance policies by Harel Insurance, and the mix of the sale of long-term savings products by the Company. At this stage it is impossible to estimate the overall impact of these changes on the Company's financial results, on its activity in the various pension savings products, on retention of the Harel Insurance policies portfolio and their embedded profit.
2. Harel Insurance Company Ltd - obtaining a license to engage in the branch for investments of apartment buyers
In June 2012 Harel Insurance's insurer's license was extended to include insurance for the investments of purchasers of apartment. The application to extend the license was submitted in view of the Harel Insurance's decision to examine the possible entry into investment activity associated with construction projects, and to this end it must also be able to provide house buyers with insurance policies as required under the Sale (Apartments) (Assurance of the Investments of Purchasers of Apartments) Law, 5735-1974. Harel Insurance has not yet started to operate in this sector, and it expects to commence low-level operations in the third and fourth quarters of 2012.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-76 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 9 - Significant events during the reporting period (contd.)
3. Reinsurance agreement with Interasco
On May 23, 2012, the Board of Directors of Harel Insurance approved an extension of the reinsurance agreement for Interasco, an insurance company which operates in Greece and in which the Company holds a 93% stake. The reinsurance agreement relates to Interasco's health insurance activity only. The reinsurance agreement commenced in 2009. Pursuant to the agreement approved for 2012, the Company will provide reinsurance for Interasco at a rate of 50%.
4. Update of management and operating agreements - Harel Pension
On May 23, 2012, the Board of Directors of Harel Pension approved an amendment to the management agreement which was signed on May 17, 2009. According to the amendment, Harel Investments' entitlement to management fees from Harel Pension at an annual rate of 0.5% of the annual contribution payments received by the pension funds managed by Harel Pension will not apply to contribution payments to be received from the IDF, excluding one-time deposits which will be received close to commencement of the implementation of the IDF pension arrangement.
Furthermore, the Board of Directors of Harel Pension approved an amendment to the operating agreement with Harel Insurance, whereby Harel Insurance's entitlement to operating fees at an annual rate of 0.1% of the assets of members covered by the IDF pension arrangement will not apply as long as they are active members through this arrangement and are entitled to the fixed management fees prescribed in the aforesaid arrangement.
5. Termination of the service of a senior officer
On May 1, 2012, Mr. Dan Barron, who serves as Executive Vice President, Chief Actuary and Chief Risk Officer announced that he would stepping down from his position, effective July 1, 2012.
Subsequently, it was agreed with Mr. Barron that he would continue to serve until his replacement as chief actuary takes up his position. Mr. Arie Wurtzburger is expected to replace Mr. Dan Barron and he is due to start working alongside Mr. Barron during the fourth quarter of 2012.
Mr. Dan Barron is expected to continue to serve as a director of Dikla and of Manof Pension. According to Mr. Dan Barron's employment agreement, upon his retirement, the Company will settle loans provided to Mr. Barron in recent years in the amount of NIS 1.6 million. According to the aforementioned agreement, Dan is committed to a non-competition period of one year .
On May 23, 2012, the Company's Board of Directors approved an agreement to extend the non-competition clause with Mr. Dan Barron, after receiving the approval of the Compensation Committee and Audit Committee of Harel Insurance and the Company, at meetings which were held on May 14, 2012. Accordingly, against a commitment by Mr. Dan Barron not to compete with the Company for a period of four years, Mr. Barron will receive the total amount of NIS 2.8 million to be paid over the period in three installments .
Mr. Dan Barron holds stock options that were allotted to him as part of the Company's stock options plan as follows: 14,140 options that were allotted on November 30, 2009; 30,048 options that were allotted on May 26, 2011. Regarding 9,401 options from the 2009 allotment, Mr. Barron will be entitled to exercise them in accordance with the conditions of the original plan, as if he continued to serve the Company, i.e. within 36 months of the vesting date of each tranche of options .
Additionally, a consulting agreement with Dan Barron for product development was approved for a period of 24 months, in return for a monthly payment of NIS 15,000, against an invoice. The agreement will take force beginning the retirement date of Dan Barron.
6. EMG
Following a report by EMG dated April 22, 2012 concerning notification received of the cancellation of the agreement for the supply of natural gas from Egypt, on April 23, 2012 the Company's subsidiaries that are financial institutions, resolved to write off the balance of the investment in EMG. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-77 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 9 - Significant events during the reporting period (contd.)
;. (contd.)
The Company's subsidiaries that are financial institutions invested (indirectly) in EMG's share capital in 2007 and hold 1.2% of its share capital .
Since the events in Egypt began and against the backdrop of the erratic supply of gas, from time to time the subsidiaries review the value of the investment, and accordingly the value of this investment was reduced.
At March 31, 2012, the value of the investment recorded in the books of the subsidiaries is NIS 28 million, NIS 20 million is held as a part of the yield dependent liabilities and NIS 8 million is held as a part of the liabilities that are not yield dependent (Nostro money).
In addition, at March 31, 2012, the value of the provident and pension funds in EMG is NIS 25 million.
Following the report published by EMG concerning the notice received of the cancellation of the agreement for the supply of natural gas, and after receiving permission from the investment committees of the financial institutions, the subsidiaries resolved to reduce the entire amount of the outstanding investment recorded in the books of the subsidiaries.
Given that most of the investment is against yield dependent liabilities and the money of pension and provident funds, this reduction did not significantly affect the financial performance of the Company or the subsidiaries.
In addition, the Israel Infrastructure Fund also invested in EMG's share capital, and it holds 0.7% of EMG's share capital. The Company's subsidiaries that are financial institutions, invested 28% of the limited partner in the Israel Infrastructure Fund, for yield dependent liabilities and for the assets of the provident and the pension funds. 7. Harel Finance, Trade & Securities Ltd.
On April 22, 2012, Harel Finance Holdings Ltd. ("Harel Finance"), a wholly owned subsidiary of the Company, entered into an agreement, which is subject to suspensive conditions, with E-Online Capital (E.O.C.) Ltd., a public company whose shares are traded on the TASE ("the Acquirer"), for the sale of all the holdings of Harel Finance in Harel Finance Trade & Securities Ltd. ("the TASE Member"), which is wholly owned by Harel Finance and is a TASE member (hereinafter - "the Sale").
The Sale will not include the employment of the employees engaged in institutional brokerage activity, who will be employed by Harel Finance.
The consideration for purchase of the Sale is an amount equal to the TASE Member's equity, subject to several adjustments which will be made on the date of completion, based on the audited reports of the TASE Member at the end of the calendar quarter immediately before the completion date, and to adjustments to be made about a month after the completion date according to a financial report to be prepared at the completion date .
Harel Finance believes that the consideration will amount to NIS 84 million. Harel Finance is not expected to record any significant capital gain or capital loss in respect of the transaction .
The Acquirer announced that it intends to finance part of the consideration, i.e. an amount equal to the difference between the total consideration and NIS 25 million which the Acquirer deposited with a trustee on the date of signing the agreement ("the balance of the consideration"), by means of a bank loan. The agreement includes a mechanism whereby the Vendor will provide the financing bank with a guarantee which is limited to 20% of the balance of the consideration. This guarantee will expire no later than March 31, 2013 and it will be reduced gradually over the period from the date on which it is provided until the expiry date. Harel Finance will receive collateral and pledges from the Acquirer in respect of providing the said guarantee.
The agreement includes an indemnity mechanism given to the Acquirer by the Vendor in connection with claims the cause of which precedes the completion date, in a total amount which shall not exceed, in aggregate, NIS 0.5 million for most of the claims, and no more than NIS 5 million in aggregate for liabilities that are undertaken, if they are undertaken, by regulatory and/or other governmental entities . WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-78 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 9 - Significant events during the reporting period (contd.)
7. (contd.)
The agreement includes an undertaking by the Vendor to pay a bonus to employees who are employed by the TASE Member on the completion date and who continue to work in practice for the TASE Member on the later of the following dates: (a) December 31, 2012, or (b) 4 months from the completion date. The bonus is an amount equal to one salary. Furthermore, as part of the sale, all the balances in respect of MF Global which are included in the assets of the TASE Member, will be transferred to the Vendor. See Note >(9) below.
The agreement is subject to suspensive conditions, the most important of which are: (a) obtaining the approval of the boards of directors of the parties. These approvals had been received at the date of closing this report; (b) agreement from the bank financing the Acquirer to provide the loan; (c) obtaining the approval of the Tel Aviv Stock Exchange Ltd.; (d) obtaining the approval of the Antitrust Commissioner . At the reporting date, the approval was provided.
Insofar as the suspensive conditions are not met within 5 months of the date of signing the agreement, each party will have the right to cancel the agreement. 8. Yahalom parking garage
On April 4, 2012, Harel Insurance entered into an agreement to acquire the rights of K.A.M. Mekarke'ey Yahalom Ltd., in land which is located next to the Yahalom Tower in Ramat Gan's Diamond Exchange compound, and serves as a parking garage. The parking garage has 140 parking spaces. The cost of the acquisition is NIS 19 million plus VAT. Harel Insurance is financing the acquisition from its own sources, as part of its Nostro portfolio. The agreement is subject to obtaining the consent of the registered owners within a period of 60 days. The transaction was completed on May 1, 2012. 9. Concerning a raising of tier-3 capital by Harel Insurance after the reporting date, see Notes 8(5) and (6) above.
10. Debt of variable management fees
At June 30, 2012, Harel Insurance will be unable to collect variable management fees for yield-dependent policies in the amount of NIS 87 million until the outstanding investment losses have been covered. At July 31, 2012, the variable management fees that were not collected on these yield-dependent policies, until the investment losses in respect of these policies are covered, amounts to NIS 40 million.
11. Allotment of share options
On March 26, 2012, the Remunerations Committee recommended granting 44,150 stock options to Mr. Alkabetz. On March 26, 2012, the Audit Committee approved the granting of the options. On March 29, 2012, the Board of Directors approved the granting of these options. These options are granted in addition to the 44,150 stock options that were allotted to Mr. Alkabetz in July 2009.
In addition to the aforementioned allotment, on the dates listed above an allotment of 38,170 stock options was approved to a senior officeholder of Harel Insurance.
The exercise price of the options is NIS 129.70, based on the closing price of the Company's shares on the TASE immediately prior to the Board of Directors decision. The overall value of the share options allotted as aforementioned, based on the Black-Scholes model, is NIS 3.84 million. This expense will be amortized from the second quarter of 2012 over the vesting period of the entitlement in accordance with the outline plan.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-79 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 9 - Significant events during the reporting period (contd.)
12. General Meeting
On March 5, 2012, an extraordinary General Meeting of the Company took place. The following subjects were listed on the agenda:(1) amendment of the Company's articles in view of Amendment 16 to the Companies Law; (2) approval of revised indemnity notes for the Company's senior officers; (3) directors and officers insurance policy (D&O); (4) approval of the terms of employment of Mr. Yair Hamburger; (5) approval of the terms of employment of Mr. Gideon Hamburger; (6) approval of the terms of employment of Mr. Yoav Manor; (7) reapproval of the terms of employment of Mr. Ben Hamburger, whose employment terminated in December 2010.
The General Meeting approved all the subjects on the agenda.
13. Add 16 floors to the Crystal House
On February 29, 2012, the subsidiary Harel Insurance Company Ltd. ("Harel Insurance") entered into agreement with El-Har Engineering & Construction Ltd. ("the Contractor") to add 16 floors of office space to the Crystal House, including related works required for the construction of these 16 floors ("the Project"). The Crystal House is an office block located at 12 Hachilazon St., Ramat Gan (Parcel 365, Block 6109, and part of Parcel 366 in Block 6109), consisting of 9 floors of offices above a gallery and lobby as well as a 5-story underground parking lot. The Crystal House was acquired by Harel Insurance on December 31, 2007 in consideration of NIS 200 million.
The Project is being undertaken to upgrade Crystal House, which is mostly used by the Company for its own purposes, and so far no decision has been made regarding use of the areas to be added. The total cost of the Project, most of which is in respect of the direct construction costs to be paid to the Contractor, is expected to reach NIS 140 million. The Project began and it will take about three years to complete.
At this stage, Harel Insurance has not determined the final designation of the additional floors to be constructed. Nevertheless, Harel Insurance designates three of the additional floors (about 18.75% of the additional construction) itself. Regarding the remaining the areas, no final decision has yet been made as to their designation.
As a result of the permit for additional building rights, the value of Crystal House was improved based on an appraiser's estimate. This incremental value includes a rezoning of a proportionate share of the land from owner occupied use to investment property in amount of NIS 41 million, before tax, which was attributed, when the construction began, to other comprehensive income.
14. Double management fees
On February 28, 2012, the Commissioner published a circular concerning direct expenses for performing transactions. The circular prescribes provisions relating to the Control of Financial Services (Provident Funds) (Direct Expenses for Performing Transactions) Regulations, 5772-2012, pertaining to an expense arising from an investment in index-linked certificates, an expense paid for conducting claims and actions, an expense paid for issuing mortgages and providing quarterly reports to an investment committee about the payment of direct expenses for performing transactions.
15. Held-to-maturity assets
On February 1, 2012, Harel Insurance classified marketable CPI-linked, debt assets that are not convertible in the amount of NIS 400 million that are held as part of non-yield dependent liabilities. These assets were classified in the "held-to-maturity" category for the following reasons: the Company intends and is able to hold these assets until their final date of maturity. In addition, these assets are held against insurance liabilities most of which are CPI linked. Classifying the assets in this category creates an accounting match that is sensitive to changes in the CPI between the assets and liabilities they are held against.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-81 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 9 - Significant events during the reporting period (contd.)
16. Thirteenth annual salary
On January 19, 2012, the Company resolved to discontinue payment of the thirteenth annual salary, and this after payment of half the thirteenth salary before the forthcoming Passover festival (which falls in April 2012). Instead it will update salaries at a rate that constitutes conversion of the value of the thirteenth salary, on which social benefits are not paid, to an on-going wage supplement on which social benefits are paid ("rate of the update.)"
The full rate of the update will be paid in the wage for April 2012 to employees who earn up to the average wage in the economy. For employees and management who earn more than the average wage in the economy, the rate of the update will be paid gradually, based on the salary level of the employees.
In the long term, this decision is not expected to significantly affect the Group's payroll expenses due to the fact that instead of the thirteenth annual salary, wage supplements will be paid gradually. However the decision is expected to result in an insignificant saving in payroll expenses over the next two years.
17. The transaction with Lloyd's syndicate - The Broadgate syndicate
On November 15, 2011, the Board of Directors of Harel Insurance entered into an agreement with Lloyd's syndicate 1301 (the Broadgate syndicate) whereby Harel Insurance, as reinsurer, 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 earn 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 provided a bank guarantee of GBP 7 million in favor of Lloyd's.
During the Reporting Period, Harel Insurance's share of the activity of Broadgate was included for the first time. The activity was classified under the segment - non-life insurance in the property insurance branch. The transaction with Broadgate is unlikely to have any significant impact on the results of operations of Harel Insurance or the Company.
18. Approval for the IDF pension arrangement
On June 22, 2011, the relevant IDF entities informed the Company that subsidiaries of the Company had been selected as companies recommended by the IDF in a procedure (through entities acting on its behalf) for choosing the entity which will manage the default pension-insurance plan for IDF career soldiers.
Pursuant to the provisions of the law, the entity which approves the agreement is the Minister of Defense, with the consent of the Minister of Finance. On March 26, 2012, the default plan for pension insurance for career soldiers was approved by the Minister of Defense, after receiving the consent of the Minister of Finance.
This approval included several changes in relation to the plan which is the subject of the procedure. The approved pension arrangement consists of a combination of pension and insurance products and these products will include the Harel-Gilad Pension Fund and Harel General Pension fund, both of which are managed by a second-tier subsidiary of Harel Pension. Furthermore, on April 22, 2012, the Commissioner approved the setting up of a provident fund for the IDF pension arrangement. The fund is a fund that does not pay an annuity, will be managed by Harel Gemel, and forms part of the pension arrangement for IDF career soldiers. The plan, as has been approved, also includes group insurance policies which have not yet entered into force. The entering into force of the policies is contingent on the Commissioner approving the policies and on legislative changes which are required for this purpose. The plan will be implemented from May 2012 in respect of new career soldiers who joined the ranks of those serving in the permanent forces as of April 2012.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-80 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 9 - Significant events during the reporting period (condt.)
18. (contd.)
As part of the approval process for the arrangement vis-a-vis the Commissioner, on January 3, 2012, the Commissioner announced that under the arrangement, the management company that will manage the pension monies will be required to hold equity of NIS 16 million, in addition to the minimum equity it is required to hold by law. On March 29, 2012, an updated letter was received according to which the capital requirement will be reduced over the first five years of operation of the plan, based on the outline defined by the Commissioner and subject to the specific approval of the Commissioner every year .
At June 30, 2012, this capital requirement was included in the calculation of the capital required of the Company's subsidiaries.
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.
19. Cooperation with Blau Capital Ltd. and Schweiger Alexandrovitz Investments Ltd. to establish a hedge fund
In April 2011, a hedge fund, Blau Capital Absolute Return Fund ("the Hedge Fund") was established in which the general partner is Blau Capital Management & Investments Ltd., in which the owners are Harel Financial Products (a wholly owned subsidiary of Harel Finance) - 40%, Blau Capital (whose principal shareholders are: Ishai Blau and Mark Tannenbaum) - 50%, and Mssrs. Alexandrovitz and Shweiger - 10%.
Under the partnership agreement, Harel Financial Products undertook to raise USD 20 million for the hedge fund during the period up to and no later than April 30, 2012, and it also committed to invest this amount over a period of at least two years.
According to the founders agreement, a failure to comply with its commitment to raise the said funds, will incur payment of a fine resulting from the loss of management fees, for the period up to the date scheduled for completion of the raising of US 20 million . Subsequently, Harel Finance and Blau Capital agreed to reduce the amount of the commitment to USD 18 million and to extend the date of raising this amount up to July 15, 2012.
During the course of 2011, Harel Products provided an aggregate amount of USD 3 million in a designated account in Interactive Broker to be managed by Blau Capital. The investment was made from money in a loan that the Company provided to Harel Financial Products.
On July 22, 2012, the Audit Committee and Board of Directors of Harel Insurance approved the opening of a designated account in JP Morgan for managing Blau Capital. Accordingly, Harel Insurance will invest an amount of USD 5 million through Blau Capital. This amount accounts for part of Harel Products' commitment in the amount of USD 18 million, so that the outstanding amount required, after the investment by Harel Products and Harel Insurance, is USD 10 million.
20. 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.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-82 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 9 - Significant events during the reporting period (contd.)
20. (contd.)
The outstanding exposure of Harel Trade & Securities and its customers to MF Global is NIS 11.4 million in cash and NIS 2.2 million in shares (including amounts that Harel Trade & Securities asked to withdraw before the bankruptcy proceedings began and which it has not yet received).
Pursuant to reports published by the liquidator of MF Global, most of the money belonging to MF Global's customers has been located. Nevertheless, due to the fact that it will clearly take some time for the liquidator to discuss the debt claims that have been submitted and to distribute the money, Harel Trade & Securities resolved to indemnify its customers for the losses .
In view of this decision, in its financial statements, Harel Trade & Securities attributed the balances in the MF accounts as money belonging to the Company and not as outstanding customer balances held for them in trust. Consequently, a retroactive technical violation of the TASE Articles was created regarding a shortfall in customer balances that are held for them in trust, and a violation of the equity requirements (due to the fact that the money in these accounts is not liquid) at December 31, 2011.
In February 2012, Harel Trade & Securities therefore supplemented the shortfall by injecting surpluses into the trust accounts and receiving Tier-2 capital from Harel Finance. As at June 30, 2012, Harel Trade and Securities is in compliance with the capital requirements of TASE.
In view of the decision that Harel Trade will indemnify its customers' exposure, Harel Trade & Securities made reasonable provision in its financial statements based on these estimates.
According to the agreement for the sale of Harel Trade & Securities, detailed in Note 9(6) to the financial statements, Harel Finance undertook to acquire from Harel Trade & Securities the balance of the assets deposited with MF Global (cash and securities) in consideration of their amortized carrying amount.
On August 14, 2012, the Board of Directors of Harel Finance approved the acquisition of the debt, effective from July 1, 2012.
21. Collective Long-Term Care Insurance for Clalit Health Services' members by Dikla
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. Pursuant to the foregoing, Clalit and Dikla signed 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.
On March 20, 2012, approval was received from the Commissioner extending the approval to operate the plan until December 31, 2012. Pursuant to the foregoing, Clalit and Dikla signed an agreement concerning an extension of the agreement until December 31, 2012, in which Clalit has the right to curtail the commitment period by giving 60 days advance notice.
22. Reform of management fees on long-term savings products
Pursuant to the Commissioner's plan to increase the competition for pension savings products, in June 21 2012, were published the Control of Financial Services (Provident Funds) (Management Fees) Regulations, 5772-2012, the purpose of which is to apply a standard model for maximum management fees on pension savings products by collecting management fees from on-going deposits and from the accrual. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-83 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 9 - Significant events during the reporting period (contd.)
22. (contd.)
The following provisions were prescribed: (a) the maximum management fees on provident funds will not exceed 1.1% of the accrual and 4% of the deposits in 2013, and in 2014 and thereafter they will not be more than 1.05% of the accrual and 4% of the on-going deposits, where recipients of old-age pension and survivors' allowance will pay up to 0.6% of the fund's outstanding obligation towards them; (b) management fees on the accounts of members with whom contact has been severed will not be more than 0.3% a year of the balance accrued in the member's provident fund account or on the monthly rate collected by the institution on the date on which contact was severed or the date on which the financial institution was informed of the member's death, the lower of the two. These rates will also apply to new life assurance policies, in contrast with the provident funds where the provision applies to old and new money alike. The change of management fees will not apply to insurance policies that were issued before the onset of the regulations, to guaranteed-yield insurance funds, guaranteed-yield provident funds, an old fund, new comprehensive pension fund, personally managed education fund and provident fund, central provident fund, sector provident fund, provident fund for sick pay, and provident fund for vacation.
The reform may significantly affect the revenues from management fees earned by the provident fund management companies and it may impact the profitability of these companies and of Harel Insurance. Likewise, implementation of the reform will affect the value of provident fund activity recorded in the books of Harel Insurance, as detailed below.
It should be emphasized that materialization of the publications with respect to setting minimum amounts for management fees may mitigate the damage expected to the revenues and profits of the subsidiaries.
In addition, On June 25, 2012, a circular was published concerning management fees on pension savings instruments. Among others, the circular sets forth the following provisions: (a) the change in management fees will be limited so that the financial institution will be entitled to offer members a lower rate of management fees than the maximum rate defined by law, provided that the rate is for a period of at least two years from the date on which management fees were first collected at the proposed rate; (b) certain situations were defined (suspension of deposits, full/partial withdrawal of the accrued balance, addition of a distribution entity who receives a commission from the financial institution) in which a financial institution may raise the management fees before the aforementioned period, provided that the member agrees to the change in advance and in writing; (c) the financial institution must send the member and the licensee who provides the member with pension advice (ongoing) notice of the increased management fees collected from the member; this increase will only apply at the end of two months from the date of sending the notice or from the date specified in the notice, whichever is later, provided that the notice is not sent earlier than four months before the anticipated increase. The circular becomes applicable on January 1, 2013.
Further to discussions in the Knesset Committee, a bill was tabled the purpose of which is to empower the Minister of Finance to determine a minimum rate of management fees. The bill passed the first reading and is now being discussed by the Knesset Finance Committee.
Following publication of the regulations, the value of the provident fund activity recorded in Harel Insurance's books was reduced in the financial statements for 2011. Based on a valuation of the provident fund activity that was prepared by an external appraiser, the balance of the value of the goodwill included under the carrying value of Harel Insurance's provident fund activity was reduced in the Financial statements for 2011 by NIS 25 million, before tax.
Based on an impairment review carried out by the Company at December 31, 2011, and which formed the basis for this reduction, the Company reviewed the recoverability agreement of the provident activity at June 30, 2012. Accordingly, it was found that the recoverable amount is higher than the carrying amount in Harel Insurance's books.
Implementation of the reform is likely to affect on-going profits and the embedded value (EV) in respect of new life insurance policies that Harel Insurance sells in the future.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-84 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 10 - Events after the date of the financial statements
1. Maalot Rating
On July 18, 2012, Maalot announced that in the wake of the Commissioner's publications about guaranteed annuity coefficients in life assurance policies (see also Note 9), the ratings of the insurance companies which engage in long-term savings, including Harel Insurance and EMI, which was included as a subsidiary of Harel Insurance and benefits from a notch in its rating due to the support of Harel Insurance, were placed on a Credit Watch Negative watchlist, with negative implications for the purpose of reviewing the exposure to the risk of extended life expectancy and the impact of the regulatory changes on the business and financial profile of the companies.
2. Inquiries into the acquisition of the life assurance portfolio of Eliahu Insurance Company Ltd.
On July 10, 2012, the Company announced that further to the request received by Harel Insurance to review the possible acquisition of the life assurance portfolio of Eliahu Insurance Company Ltd. ("Eliahu Insurance"), as part of the requirements for Eliahu Insurance to complete a transaction to acquire control of the Migdal Group, and the initial contact that had been made on this subject, an outline of principles for the transaction had been formulated. According to this outline, the transaction will take place as part of the acquisition of the operations (rights and obligations) of Eliahu Insurance in its the life assurance segment, based on consideration of NIS 250 million. Implementation of the transaction is subject, inter alia, to the drawing up and signing of a detailed binding agreement by the parties, obtaining the approval of the competent organs of Harel Insurance and Eliahu Insurance, and on compliance with various suspensive conditions, including obtaining all the relevant statutory approvals, and performance of a transaction to acquire control of the Migdal Group by Mr. Shlomo Eliahu. At this stage, it is impossible to estimate whether the agreement will be signed, and if it is signed whether the suspensive conditions will be met and the transaction completed.
3. Commutation transaction in professional liability insurance
On July 5, 2012, Harel Insurance entered into a commutation agreement with a reinsurer which had served as one of its reinsurers for professional liability insurance during the period 2008-2010. In this transaction, Harel Insurance resumed responsibility for the insurance risk which had been transferred to the reinsurer as part of facultative reinsurance agreements, in return for which the reinsurer paid USD 38.5 million. Harel Insurance is not expected to show any significant profit or loss in respect of the transaction. This transaction increases the self-retention of Harel Insurance in this operating segment for the years 2008-2010.
4. Reduction of the distribution fees collected from fund managers and a respective reduction of the management fees collected from unit owners
On July 3, 2012, the Securities Authority published an RFP for comments from the public (by August 19, 2012), which included the following: a) The maximum distribution fees collected from fund managers by the distributors who are not investment marketers (mainly banks) will be reduced as follows: Stock funds (Class 2) on which distribution fees are currently paid at the maximum rate of 0.8%, will be merged for this purpose with the residual category (Class 3), on which distribution fees of 0.4% are currently paid, to form a single category, residual, on which the maximum distribution fees will be 0.35%. The maximum distribution fee for short-term bond/low-risk funds (currently Class 1), for which the maximum distribution fee is currently 0.25%, will be reduced to a maximum rate of 0.2%. The maximum distribution fee for money-market funds will be reduced from 0.125% to 0.1%.
b) Concurrent with the entering into force of the aforesaid amendment concerning distribution fees, fund managers will be obligated to lower the fund manager's fee by a rate that reflects the full amount of payments that will actually be saved due to the reduction in the distribution fees which they pay to the distributors. Notwithstanding the foregoing, the fund managers will be entitled to collect management fees in a manner that does incorporate the full reduction in those cases where the management fees collected are not more than 10% higher than the maximum distribution fees at their new proposed rate. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-85 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 10 - Events after the date of the financial statements (contd.)
4. (contd.)
The aforementioned reduction will be in force for six months during which time the fund manager's fee cannot be increased. This restriction will be removed later on assuming that free competition leads to stabilization of the management fees at a level significantly lower than the present rate.
Due to the fact that the process is still at an early stage, the Company is unable to estimate at this stage the impact of the above on its financial position, the results of its operations and its cash flows.
5. A.D.O. Group Ltd.
On July 10, 2012, subsidiaries of the Company, which are financial institutions ("the Subsidiaries"), entered into an agreement to invest EUR 9 million in A.D.O. Group Ltd., a public company whose shares are traded on the Tel Aviv Stock Exchange ("ADO"), against an allocation of ordinary shares of ADO and stock options that may be exercised for ordinary shares of ADO, as well as an agreement to provide a loan of EUR 6 million to ADO against an allocation of non-marketable bonds which may be converted to ordinary shares of ADO at a price of between NIS 0.263 - NIS 0.35 per share, depending on the date of the conversion. The loan bears interest of 8% for the first three years, and 6% for the following two years. The agreements determine, inter alia, provisions relating to protection against dilution, the composition of the board of directors and provisions concerning tag along rights in the event that the holdings of Shikun & Binui, the largest shareholder in ADO, fall below 25% as a result of a sale. Likewise, provisions were determined whereby the Subsidiaries may transfer their holdings unrestricted, unless they seek to transfer a package of shares of the minimum scope determined, together with the rights set forth in the agreement, in which case Shikun & Binui has right of first refusal.
After the transaction which is the subject of the aforesaid agreements, and due to the conversion of the loan which Shikun & Binui provided to ADO to shares, the holding of the Subsidiaries will be 12.8% of the issued share capital of ADO (and 22.4% of the issued share capital of ADO, subject to adjustments defined in the agreement assuming full dilution and subject to the provisions of any law. It should be noted that according to the provisions of law applicable to the Subsidiaries, the actual holding of ADO's share capital must not be more than 20%). The transaction was signed mainly for yield-dependent policies, provident funds and pension funds managed by the Subsidiaries, and it is therefore not expected to affect the financial results of the Subsidiaries or the Company. The transaction is subject to meeting several conditions precedent, including obtaining the approval of the shareholders of ADO for the share allocation and obtaining the TASE's approval for allocation of the securities.
6. Proposed changes in calculating insurance reserves for general insurance
On July 2, 2012, the Commissioner published draft Control of Financial Services (Insurance) (Calculation of Reserves for General Insurance) Regulations, 5772-2012 ("the New Regulations") and a draft circular (hereinafter together - "the Proposed Amendment"), which revise the existing provisions of law concerning calculation of insurance reserves in general insurance.
Accordingly, the Control of Insurance Business (Ways to Calculate Provisions for Future Claims in General Insurance) Regulations, 5745-1984 will be abolished and they will be replaced by the New Regulations. The key change which will apply when the aforementioned drafts take effect is a gradual elimination of the reserves of excess income over expenses ("the Reserve") which is currently calculated for a period of three years, in the long-tail claims general insurance branches and for which the following actuarial estimate is calculated:
1) from the financial statements at March 31, 2013 - the reserve will be calculated for two years; 2) from the financial statements at March 31, 2014 - the reserve will be calculated for one year; 3) from the financial statements at March 31, 2015 - calculation of the excess income over expenses reserves will no longer be required.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-86 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 10 - Events after the date of the financial statements (contd.)
6. (contd.)
Additionally, as a supplementary measure, the Superintendent published a draft position paper ("the Superintendent's position") concerning a best practice for actuaries when calculating insurance reserves for general insurance for the purpose of the financial statements, which will properly reflect the insurance liabilities. The Superintendent's position includes, among other things, the following stipulations: a) "A reserve adequate to cover the insurer's obligations" meaning that it is fairly likely - i.e. a 75% probability at least - that the insurance undertaking defined will be adequate to cover the insurer's obligations. b) Insofar as there is a greater degree of certainty in adapting the assumptions and models, the actuary must choose the assumptions and models which provide the best estimate of the projected insurance obligations. Consequently, a margin for uncertainty must be added separately. c) Capitalization rate for the flow of liabilities (products with long-tail liabilities). d) Grouping - for the purpose of calculating margins for uncertainty in statistical branches (as defined in the circular), each branch must be addressed separately, but the risks from all the underwriting years (or loss) in the branch may be grouped together. In non-statistical branches, they may all be treated as a single group. e) Determining the level of insurance liabilities for policies that were sold during periods close to the balance sheet date and for risks after the balance sheet date.
Harel Insurance is reviewing the overall impact of the Proposed Amendment which is impossible to estimate at this stage, given that the subject is still being discussed and clarified by the insurance companies and the Superintendent's office.
7. Effect of the revised National Insurance payment
On August 13, 2012, the Law to Reduce the Deficit and Change the Tax Burden (Legislative Amendments), 5772-2012 ("the Law"), was published. As part of the Law, from January 2013, the rate of National Insurance payments to be collected from employers in respect of that part of a wage in excess of 60% of the average wage in the economy will increase from the current 5.9% to 6.5%. Additionally, this rate will increase in January 2014 and January 2015 to 7% and 7.5% respectively.
8. Purchase of real estate from Karnit
On August 16, 2012, notice was received from Karnit to the effect that Harel Insurance had won a tender published by Karnit (Fund for the Compensation of Road Accident Victims - "Karnit") for the sale of its rights in two buildings known as Block 7454, parcels 2 and 3, which are situated in the Rothschild Boulevard area of Tel Aviv. According to the applicable Urban Plan, the buildings are slated for demolition and it is expected that office blocks will be built on the site. Harel Insurance offered consideration of NIS 50 million plus VAT. The asset will be purchased from the nostro funds of Harel Insurance. Harel Insurance will finance the acquisition from its own sources.
9. Agreement to purchase the IKEA store in Netanya.
On August 19, 2012, subsidiaries of the Company which are financial institutions ("the Subsidiaries"), entered into a transaction to acquire the rights of Isralom Properties Ltd. ("Isralom") in land in the Netanya's Kiryat Nordau industrial zone on which the IKEA store operates ("the Property"). Isralom's rights in the Property comprise 50% of the Property as well as a right to acquire the share held by Israel-British Investments Group Ltd. ("Israel British"), which holds the remaining 50% of the Property. According to the outline of the transaction, concurrent with the purchase of Isralom's rights to the Property, the Subsidiaries will exercise the option to acquire Israel British's share, so that the Subsidiaries will acquire 100% of the rights in the Property. The total consideration to be paid by the Subsidiaries for the rights in the Property is NIS 289 million. The transaction will take place parallel to the signing of a new rental agreement with Northern Birch Ltd. ("Northern Birch"), which holds the exclusive franchise to operate the IKEA stores in Israel and operates the IKEA store on the Property. The lease agreement is as follows: WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-87 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 10 - Events after the date of the financial statements (contd.)
9. (contd.)
The lease period is 24 years and 11 months, with no exit right. The rent is NIS 21.2 million a year, CPI linked. The rent will be updated every five years by 2%, in real terms. The lessee is responsible for all on- going maintenance expenses, on-going management, and insurance of the asset ("triple net lease"). Northern Birch has an option to build additional areas on the Property, in accordance with the building rights which are present in the Property. In this case, Northern Birch is entitled to finance of up to NIS 12 million from the Subsidiaries for the additional construction. If such additional areas are built, the rent will be revised, so that in respect of any additional investment by the Subsidiaries in this construction, the additional rent will reflect an annual yield of 7.6% on the outstanding lease period. The total maximum investment (assuming that Northern Birch exercises the option to build additional areas, financed by the Subsidiaries) including taxes and related costs, is expected to amount to about NIS 316 million. The Subsidiaries entered into the transaction mainly for yield-dependent policies, provident funds and pension funds managed by the Subsidiaries, and the transaction is therefore not expected to affect the financial results of the Subsidiaries or the Company. Completion of the transaction is subject to meeting suspensive conditions, including approval from the bank in whose favor liens are recorded on the rights of Isralom and Israel British in the Property, completion of the exercising of the option to acquire the rights of Israel-British, and the approval of the Israel Lands Administration to transfer the rights in the Property to the Subsidiaries.
10. Compensation plan in the subsidiaries which are financial institutions
On August 21, 2012, the boards of directors of the Company and of Harel Insurance approved revisions in the weight of the parameters used to calculate the compensation based on the remunerations plan, and to revise the method of calculating an additional parameter. The principles of the plan remain unchanged. Likewise, it was determined that if the comprehensive profit of Harel Investments is lower than a certain rate defined in the work plan, the Compensation Committee and Board of Directors will meet to review the possibility of setting a factor which will reduce compensation calculated according to the compensation plan across the board. Details about the compensation plan which was adopted by the Company and Harel Insurance for senior officeholders of Harel Insurance and its subsidiaries appear in Section 1.1.5.3.1. to Chapter 1 of the Periodic Report for 2010. Likewise, details are presented in Chapter 5, Article 21 (Additional Information about the Corporation) in the Company's Periodic Report for 2011. As part of the approval of the compensation plan by the Remunerations Committee and Board of Directors of the Company and Harel Insurance, it was determined that the compensation plan will be reviewed after its implementation in respect of 2011. Accordingly, following discussions held by the Compensation Committee, the Audit Committee and Board of Directors of the Company regarding implementation of the compensation plan, it was decided to revise several parameters which are used in the plan ('the Revision"). Following are the key parameters which were updated in the Revision: The score for the return on equity (RoE) will be calculated only according to the rating of the RoE achieved by the Company in relation to the yield attained by the four other largest insurance groups during the period of measurement. According to the plan prior to the Revision, measurement was made, in part, according to the rating in relation to the other companies, and in part according to the extent to which the target for RoE was met, as defined in the work plan at the beginning of the year. It was determined that for the CEO, the weight to be given to the score for the RoE will be 30% of the overall quantitative score (instead of 40%, as set forth in the plan before the Revision) to date (for details on the CEO's salary and terms of his employment, see Chapter 5, Article 21 in the Company's Periodic Report for 2011). It was determined that the weight of the score for VIF (a figure which is included in the EV Report) will be 20% of the overall quantitative score (instead of 15% as set forth in the plan before the Revision). It should be noted that the VIF is measured against the four other large insurance groups. It was determined that the weight for compliance with sales targets, including the sales mix, based on the annual work plan approved by the Board of Directors will be 30% (instead of 25% as set forth in the plan before the Revision). WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-88 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 10 - Events after the date of the financial statements (contd.)
10. (contd.)
Additionally, the Revision stipulates that if the comprehensive profit for the Company's shareholders is less than 25% of the comprehensive profit according to the work plan, the Remunerations Committee will meet to discuss recommending to the Board of Directors a cross-the-board reduction applicable to the result obtained from the calculation of the bonuses based on the compensation plan, for all senior officeholders who are included in the plan. If the Board of Directors adopts the recommendation to apply this reduction factor, the actual bonuses paid will be lower, in accordance with the factor to be defined, than the bonuses which should be payable according to the parameters defined in the compensation plan. This recommendation is designed to tighten the connection between the actual compensation paid and the Company's on-going performance. It should be noted that, as detailed in Chapter 5, Article 21(5) (Additional Information about the Corporation) in the Company's Periodic Report for 2011, at a Board of Directors meeting which took place on March 29, 2012, Mr. Michel Siboni announced that he would waive the minimum guaranteed bonus to which he is entitled under the terms of his employment, with a value of at least four monthly salaries, and this from 2012 and thereafter. The decision to revise the compensation plan was made based on a recommendation formulated at a meeting of the Compensation Committee which took place on July 10, 2012. The meeting was attended by the directors: Mr. Doron Cohen, Ms. Liora Kavoras-Hadar, and Mr. Avraham Rinot. The recommendation of the Compensation Committee was approved by the Audit Committee at a meeting held on August 19, 2012. The meeting was attended by the following directors: Prof. Israel Gilead, Mr. David Granot, Ms. Liora Kavoras-Hadar, and Ms. Esther Dominissini. The resolution was passed unanimously. The resolution was passed by the Board of Directors at a meeting on August 21, 2012. The meeting was attended by the following directors: Mr. Yair Hamburger, Mr. Gideon Hamburger, Mr. Yoav Manor, Mr. Doron Cohen, Ms. Liora Kavoras-Hadar, Prof. Israel Gilead, Mr. David Granot, and Ms. Esther Dominissini. The resolution was passed unanimously. Reasons for the decision of the Remunerations Committee, Audit Committee and Board of Directors of the Company: The purpose of the compensation plan is, inter alia, to provide an incentive for the senior officeholders of Harel Insurance and its subsidiaries to achieve the goals set by the Company, from time to time, while focusing on long-term goals, on operations based on the Company's strategy, and on prioritizing products, at the same time avoiding risks which are not part of the Company's risk management policy. To ensure that the compensation plan enables the Company to achieve its goals in the long term, and as stipulated when the compensation plan was first approved, the Compensation Committee periodically reviews implementation of the plan, and accordingly examines the need to revise the plan. The approved revisions are technical, relating to the method of applying the parameters already listed in the plan, and are designed to maximize the correlation between the Company's goals and the compensation plan. Calculation of the RoE parameter when compared with the other insurance groups, is designed to make this parameter entirely objective. The update of the weightings of the parameters is designed to reflect the Company's long-term goals with respect to the mix of profitability and the importance attributed to increasing the value of the Company's present portfolio, which is also calculated objectively when compared with the performance of the other large insurance groups. The purpose of the stipulation that if the comprehensive profit for the Company's shareholders is less than 25% of the comprehensive profit according to the work plan, the Remunerations Committee will meet to discuss recommending to the Board of Directors a cross-the-board reduction of the bonuses obtained by calculating the parameters defined in the compensation plan, is to ensure that the compensation paid to the senior officeholders is closely related to the Company's on-going performance, and to prevent extreme scenarios in which bonuses are paid even though the Company has failed to meet its profit targets as defined in the work plan.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 2-89
HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD
APPENDIXES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
2-91 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix A - Details of assets for yield-dependent contracts and other financial investments in the Group's insurance companies 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: For the six months ended For the year ended December June 30 31 2012 2011 2011 (Unaudited) (Unaudited) (Audited) NIS NIS thousands thousands NIS thousands Fixed assets 884,734 747,120 873,554
financial investments - - - Marketable debt assets 9,361,289 7,679,750 7,965,536 Non marketable debt assets 3,959,212 3,738,477 3,842,768 Shares 3,186,368 3,421,996 3,279,772 Other financial investments 3,032,678 3,282,606 2,993,046
Total financial investments 19,539,547 18,122,829 18,081,122 Cash and cash equivalents 1,093,434 920,264 1,247,598 accounted for as loans and payables including bank deposits - - - Non marketable debt assets* 516,958 544,322 537,636 Other 378,216 370,176 342,293
22,412,889 20,704,711 21,082,203 Other payables 6,141 6,620 2,021 **Financial liabilities 131,189 39,294 104,688
Financial liabilities in respect of yield dependent 137,330 45,914 106,709
* 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 June 30, 2012, is NIS 502,743 thousand (as at June 30, 2012, 2011 and as at December 31, 2011, NIS 542,758 thousand and NIS 524,314 thousand respectively). ** Mainly derivatives and future contracts.
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WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix A - Details of assets for yield-dependent contracts and other financial investments in the Group's insurance companies b. other financial investments (Unaudited) June 30 2012 Reported at fair value, Available for *Held to Loans and through profit and loss sale maturity Receivables Total NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands
Marketable debt assets 1,052,536 5,546,140 466,861 - 7,065,537 Non marketable debt assets 33 - - 9,242,008 9,242,041 Shares - 459,174 - - 459,174 Others 273,864 821,231 - - 1,095,095 Total 1,326,433 6,826,545 466,861 9,242,008 17,861,847
(Unaudited) June 30 2011
Reported at fair value, Available for *Held to Loans and through profit and loss sale maturity Receivables Total NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands
Marketable debt assets 886,984 5,288,536 203,392 - 6,378,912 Non marketable debt assets - - - 8,632,840 8,632,840 Shares - 584,821 - - 584,821 Others 483,206 817,739 - - 1,300,945
Total 1,370,190 6,691,096 203,392 8,632,840 16,897,518
( Audited) December 31 2011
Reported at fair value Available for *Held to Loans and through profit and loss sale maturity Receivables Total NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands
Marketable debt assets 1,071,090 5,380,521 96,457 - 6,548,068 Non marketable debt assets - - - 8,765,802 8,765,802 Shares - 489,945 - - 489,945 Others 345,202 933,653 - - 1,278,855
Total 1,416,292 6,804,119 96,457 8,765,802 17,082,670
* The assets held for redemption are presented at adjusted cost. The fair value of these assets is NIS 459,693 thousands, as at June 30, 2012, 2012. (as at March 31, 2011 and as at December 31, 2011, NIS 203,465 thousand and NIS 96,066 thousand respectively).
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WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix A - Details of assets for yield-dependent contracts and other financial investments in the Group's insurance companies (contd.) b. Details of other financial investments (contd.) 1. Negotiable debt assets
Book Value Amortized Cost (**) ended June 30 December 31 June 30 ended December 31 2012 2011 2011 2012 2011 2011 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
Government bonds 2,719,106 2,773,022 2,539,074 2,696,915 2,769,617 2,508,373
Other debt instruments Total other debt instruments, non convertible 4,330,259 3,587,771 3,984,544 4,389,457 3,556,247 4,049,607 Other debt instruments convertible (*) 16,172 18,119 24,450 18,760 19,242 28,633
Total marketable debt 7,065,537 6,378,912 6,548,068 7,105,132 6,345,106 6,586,613 Fixed impairments recognized in aggregate in profit and loss 29,745 11,136 17,511
* 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.
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WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix A - Details of assets for yield-dependent contracts and other financial investments in the Group's insurance companies (contd.) b. Details of other financial investments (contd.) 2. Non negotiable debt assets
Book Value Fair Value ended December ended December June 30 31 June 30 31 2012 2011 2011 2012 2011 2011 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
Government bonds Designated bonds 4,119,502 3,931,751 3,989,589 4,793,141 4,543,166 4,692,777 Other bonds - 17,250 19,297 - 18,083 19,643
Total government bonds 4,119,502 3,949,001 4,008,886 4,793,141 4,561,249 4,712,420
Other debt instruments ------other debt instruments, non convertible 5,122,506 4,683,839 4,756,916 4,973,866 4,725,185 4,660,747
Total non marketable debt 9,242,041 8,632,840 8,765,802 9,767,040 9,286,434 9,373,167 Fixed impairments recognized in aggregate in profit and loss 53,849 25,722 46,587
3. Shares
Book Value Cost ended June 30 December 31 2012 2011 2011 ended December 2012 2011 2011 2012 2011 31 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands NIS thousands
Marketable Shares 362,487 482,734 383,636 341,583 372,301 355,411 Non marketable Shares 96,687 102,087 106,309 83,656 87,139 90,378
Total Shares 459,174 584,821 489,945 425,239 459,440 445,789 Impairment balances - other financial investments reported as available for sale 106,951 112,669 96,671
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WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix A - Details of assets for yield-dependent contracts and other financial investments in the Group's insurance companies (contd.) b. Details of other financial investments (contd.) 4. Other financial investments Book Value Cost ended ended June 30 December 31 June 30 December 31 2012 2011 2011 2012 2011 2011 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
Marketable Financial investments 548,513 672,469 720,029 491,409 615,893 686,217 Non marketable Financial investments 546,582 628,476 558,826 453,738 542,738 471,150
Total other Financial investments 1,095,095 1,300,945 1,278,855 945,147 1,158,631 1,157,367 Fixed impairments recognized in aggregate in profit and loss 87,948 79,156 85,939
Derivative instruments, reported as financial liabilities 176,979 18,671 118,467
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.
2-95
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3
Harel Insurance Investments and Financial Services Ltd.
Financial data from the interim consolidated statements relating to the Company itself As at June 30, 2012
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3
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 June 30, 2012 and for six and three months periods 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 periods, 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 556,366 thousand as at June 30, 2012, and the Company’s share in their profits is NIS 9,117 thousand and 6,996 NIS thousand to the six and three months periods ended on that date, respectively. 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 and on the review reports of the other auditors, 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 August 21, 2012
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WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements on the financial position as at
June 30 December 31 2012 2011 2011 (Unaudited) (Unaudited) (Audited) NIS Thousands NIS Thousands NIS Thousands Assets Intangible assets 91 464 240 Fixed assets 2,850 2,002 1,921 Investments in investee companies 3,545,101 3,542,274 3,391,389 Loans to investee companies 181,860 39,745 180,265 Real estate for investment 17,766 17,370 17,766 Other receivables 35,372 10,500 26,145 Other financial investments Marketable debt assets 30,359 30,154 29,840 Non marketable debt assets 3,624 3,501 3,634 Others 299,330 306,999 222,229 Total financial investments and others 333,313 340,654 255,703 Cash and cash equivalents 43,096 58,347 63,923 Total assets 4,159,449 4,011,356 3,937,352
Capital Share capital and premium on shares 308,273 307,649 306,895 Treasury stock (139,378) (139,446) (138,583) Capital reserves 129,618 122,589 63,925 Retained earnings 3,463,876 3,279,673 3,293,013 Total capital 3,762,389 3,570,465 3,525,250
Liabilities Liabilities for deferred taxes 3,914 5,267 5,093 Liabilities for benefits to employees, Net 11,414 2,213 8,880 Other payables 24,274 35,067 20,679 Liabilities for current taxes 5,013 4,828 2,520 Financial liabilities 352,445 393,516 374,930 Total liabilities 397,060 440,891 412,102 Total liabilities and capital 4,159,449 4,011,356 3,937,352
Yair Hamburger Michel Siboni Shimon Alkabetz Ronen Agassi Chairman of the Board Company's joint CEO Company's joint CEO Deputy Chief Executive of Directors Officer and Chief Financial Officer Date of Approval of the Financial Statements: August 21, 2012.
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WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements of income
For the six months ended For the three months ended For the year June 30 June 30 ended December 31 2012 2011 2012 2011 2011 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Profits from investments, net, and financing revenues 5,546 11,356 3,656 9,081 22,964 Revenues from management fees 36,176 34,513 17,639 16,482 69,473 Other revenues - 20 - 28 5,021
Total revenues 41,722 45,889 21,295 25,591 97,458 General and administrative expenses 15,074 10,473 6,362 1,906 45,265 Other expenses 145 - - - - Financing expenses 9,298 10,700 4,547 5,840 20,088
Total expenses 24,517 21,173 10,909 7,746 65,353
Company's shares in profits (losses) of investee companies 157,571 186,016 (28,872) 81,258 193,300 Income (loss) before taxes on income 174,776 210,732 (18,486) 99,103 225,405
Taxes on income 3,913 6,237 2,470 4,241 7,570 Income for period ended 30 June relating to the Company's shareholders 170,863 204,495 (20,956) 94,862 217,835
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WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd.
Financial data from the consolidated statements on the comprehensive profit
For the six months ended For the three months ended For the year June 30 June 30 ended December 31 2012 2011 2012 2011 2011 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
Income (loss) for the year 170,863 204,495 (20,956) 94,862 217,835
Other comprehensive income (loss):
Net changes in fair value of financial assets classified as available for sales 2,012 4,496 2,685 2,088 8,120 Net changes in fair value of financial assets available for sale transferred to statement of income (1,451) (7,423) (1,234) (7,544) (14,692) Loss from impairment in value of financial assets available for sale transferred to the statement of income 318 - 318 - 1,014 Taxes on income relating to components of other comprehensive income (loss) (220) 866 (443) 1,255 522 Foreign currency translation differences for foreign operations 3,436 1,659 5,284 59 9,406 The Group share in the comprehensive income (loss) of investee companies 55,263 (112,115) (42,731) (77,567) (177,688) Other comprehensive income (loss) for the year 59,358 (112,517) (36,120) (81,709) (173,318)
Total income (loss) for the year Attributed to the company's owners 230,221 91,978 (57,076) 13,153 44,517
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WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd. Financial data from the condensed interim financial statements of changes in capital
Capital reserve for Transactions Capital financing with non- Translation Capital reserve for assets reserve from reserve for revaluation of Balance of Share capital available for controlling overseas share based Treasury investment retained and premium sale interests operations payments stock Fixed assets earnings Total NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
For the six months ended June 30, 2012 (Unaudited) Balance as at December 31, 2011 306,895 79,087 (48,908) (4,834) 30,175 (138,583) 8,405 3,293,013 3,525,250
Comprehensive income for year Profit for year ------170,863 170,863 Total other comprehensive income - 29,779 - 2,669 - - 26,910 - 59,358 Total comprehensive income for year - 29,779 - 2,669 - - 26,910 170,863 230,221
Transactions with owners credited directly to equity Share based payment - - - - 6,335 - - - 6,335 Reissuing of treasury stock 1,378 - - - - 7,206 - - 8,584 Purchase of treasury stock - - - - - (8,001) - - (8,001) Balance as at June 30, 2012 308,273 108,866 (48,908) (2,165) 36,510 (139,378) 35,315 3,463,876 3,762,389
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WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd. Financial data from the condensed interim financial statements of changes in capital (cont'd)
Capital reserve for Capital financing Transactions Translation Capital reserve for assets with non- reserve from reserve for revaluation of Balance of Share capital available for controlling overseas share based Treasury investment retained and premium sale interests operations payments stock Fixed assets earnings Total NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
For the three months ended June 30, 2012 (Unaudited)
Balance as at april 1, 2012 306,296 148,654 (48,908) (5,833) 33,188 (137,285) 35,315 3,484,832 3,816,259
Comprehensive income (loss) for year Loss for year ------(20,956) (20,956) Total other comprehensive income (loss) - (39,788) - 3,668 - - - - (36,120) Total comprehensive income (loss) for year - (39,788) - 3,668 - - - (20,956) (57,076)
Transactions with owners credited directly to equity Share based payment - - - - 3,322 - - - 3,322 Reissuing of treasury stock 1,977 - - - - 4,704 - - 6,681 Purchase of treasury stock - - - - - (6,796) - - (6,796)
Balance as at June 30, 2012 308,273 108,866 (48,908) (2,165) 36,510 (139,378) 35,315 3,463,876 3,762,389
3-6
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd. Financial data from the condensed interim financial statements of changes in capital (cont'd)
Capital reserve for Capital financing Transactions Capital reserve for assets with non- reserve from reserve for revaluation of Balance of Share capital available for controlling overseas share based Treasury investment retained and premium sale interests operations payments stock Fixed assets earnings Total NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
For the six months ended June 30, 2011 (Unaudited) Balance as at December 31, 2011 306,691 263,835 (45,660) (14,240) 18,810 (138,625) 6,381 3,181,178 3,578,370
Comprehensive income (loss) for year Profit for year ------204,495 204,495 Total other comprehensive income (loss) - (116,873) - 1,659 - - 2,697 - (112,517) Total comprehensive income (loss) for year - (116,873) - 1,659 - - 2,697 204,495 91,978 Transactions with owners credited directly to equity Dividends paid ------(106,000) (106,000) Share based payment - - - - 5,980 - - - 5,980 Reissuing of treasury stock 958 - - - - 5,279 - - 6,237 Acquisition of treasury stock - - - - - (6,100) - - (6,100)
Balance as at June 30, 2011 307,649 146,962 (45,660) (12,581) 24,790 (139,446) 9,078 3,279,673 3,570,465
3-7
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd. Financial data from the condensed interim financial statements of changes in capital (cont'd)
Capital reserve Transactions Translation Capital reserve for Share for financing with non- reserve from Capital reserve revaluation of Balance of capital and assets available controlling overseas for share based investment Fixed retained premium for sale interests operations payments Treasury stock assets earnings Total NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
For the three months ended June 30, 2011 (Unaudited) Balance as at April 1, 2011 307,203 227,598 (45,660) (10,818) 20,671 (137,789) 8,388 3,227,674 3,597,267
Comprehensive income for year Profit for year ------94,862 94,862 Total other comprehensive income (loss) - (80,636) - (1,763) - - 690 - (81,709) Total comprehensive income (loss) for year - (80,636) - (1,763) - - 690 94,862 13,153
Transactions with owners credited directly to equity
Dividends paid ------(42,863) (42,863) Share based payment - - - - 4,119 - - - 4,119 Reissuing of treasury stock 446 - - - - 1,122 - - 1,568 Acquisition of treasury stock - - - - - (2,779) - - (2,779) Balance as at June 30, 2011 307,649 146,962 (45,660) (12,581) 24,790 (139,446) 9,078 3,279,673 3,570,465
3-8
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd. Financial data from the condensed interim financial statements of changes in capital (cont'd)
Capital reserve for Capital financing Transactions Translation Capital reserve for assets with non- reserve from reserve for revaluation of Balance of Share capital available for controlling overseas share based Treasury investment retained and premium sale interests operations payments stock Fixed assets earnings Total NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
Balance as at December 31, 2011 (Audited) 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 ------217,835 217,835 Total other comprehensive income (loss) - (184,748) - 9,406 - - 2,024 - (173,318) Total comprehensive income for year - (184,748) - 9,406 - - 2,024 217,835 44,517
Transactions with owners credited directly to equity
Share based payment - - - - 11,365 - - - 11,365 Dividends paid ------(106,000) (106,000) Acquisition of minority interests - - (3,236) - - - - - (3,236) Purchase of treasury stock 204 - - - - 8,440 - - 8,644 Sale of non-controlling interests - - (12) - - - - - (12) Acquisition of treasury stock - - - - - (8,398) - - (8,398) Balance as at December 31, 2011 306,895 79,087 (48,908) (4,834) 30,175 (138,583) 8,405 3,293,013 3,525,250
3-9
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd. Financial data from the interim consolidated statements of cash flows
For the six months ended For the three months ended For the year ended June 30 June 30 December 31 2012 2011 2012 2011 2011 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) Appendix NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Cash flows from operating activities Before taxes on income A 12,540 8,652 (17,735) 18,468 9,370 Income tax (paid) refund (2,599) (2,400) (1,119) (1,180) (8,100) Net cash provided by operating activities 9,941 6,252 (18,854) 17,288 1,270
Cash flows from investing activities Investment in investee companies (22,355) (41,595) - (5,595) (22,372) investment in fixed assets (1,454) (19) - (19) (368) Proceeds from realizing fixed assets 326 100 - - 268 Investment in intangible assets (14) (19) (14) (1) (25) Acquisition of real estate for investment - - - - (396) Dividends from investee companies - 55,200 - 200 129,808 Net Financial investments (75,142) (65,889) 26,005 37,918 26,954 Loans to investee companies (38,000) (47,993) (22,000) (23,096) (183,188) Repayment of loans given to investee companies 125,917 158,381 15,162 20,987 158,043 Net cash provided by (used for) investing activities (10,722) 58,166 19,153 30,394 108,724
Cash flows from financing activities Dividends paid - (106,000) - (106,000) (106,000) Repayment of loans to banks and others (20,045) - (20,045) - (40,000) Net cash provided by (used for) financing activities (20,045) (106,000) (20,045) (106,000) (146,000) Increase (decrease) in cash and cash equivalents (20,827) (41,582) (19,746) (58,318) (36,006) Cash and cash equivalents at beginning of year 63,923 99,929 62,843 116,665 99,929 Cash and cash equivalents at end of the period 43,096 58,347 43,096 58,347 63,923
3-11
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements of cash flows
For the six months ended For the three months ended For the year ended June 30 June 30 December 31 2012 2011 2012 2011 2011 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands
Appendix A – Cash flows from operating activities
before taxes on income 170,863 204,495 (20,956) 94,862 217,835
Items which are not connected with cash flows Company's shares in revenues of investee companies (157,571) (186,016) 28,872 (81,258) (193,300) Net loss (profits) from financing activities (1,590) (2,239) (253) (1,735) (12,762) Financing expenses (income), net (2,983) (24,320)* (6,922) (24,868)* 9,279* Taxes on income (tax benefit) 3,913 6,237 2,470 4,241 7,570 Depreciation and amortization 362 451 214 187 929 Gains from realizing fixed assets - 20 (20) 28 34 Share-based payment 744 998 398 565 2,448
Changes in other balance sheet items Other receivables (9,227) (1,085) (6,813) 11,576 (8,730) Other payables 5,494 12,109 (14,057) 16,185 (18,603) Changes n items of current taxes - -* - -* -* Liabilities for benefits to employees, net 2,534 (1,998) (668) (1,315) 4,670
Total adjustments required to present cash flows from operating activities (158,323) (195,843) 3,221 (76,394) (208,465) Total cash flows from operating activities, before taxes on income 12,540 8,652 (17,735) 18,468 9,370
* Regarding reclassification – see Note 1(d).
3-11
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 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 June 30, 2012 and together with the condensed consolidated financial statements for December 31, 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 Reclassifications were included in the condensed consolidated financial statements for the periods of six and three months ended on June 30 and for the year ended on December 31, 2011. The classification refers to the classification in the cash flow report, under the change item, current and deferred taxes were reclassified to financing expenses (income) in respect of financial liabilities. 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. On January 1, 2012, the Company gave Harel Finance capital notes in the total amount of NIS 22 million. The capital notes are not linked and bear no interest. The capital note will be no less than 5 years.
2. On February 6, 2012, the Company signed an agreement with Harel Finance for providing a loan in the total amount of USD 1 billion (NIS 3.7 million). The loan bears interest at a rate of Prime + 0.6%, based on the Prime rate as it may be from time to time. The loan is for a period of 11 months and 29 days and it will be renewed automatically for the same period. The balance of the remaining loan as at June 30, 2012 is NIS 3.8 million.
3. On February 16, 2012, the Company provided Harel Finance with a loan in the amount of NIS 8 million. The loan is for a period of one year, renewable. The interest on the loan is Prime + 0.6%. The Company may, at any time, ask Harel Finance to repay the loan, by giving 30 days advance notice. During the second quarter of the year, Harel Finance repaid NIS 3 million. The balance of the revalued loan after the repayments at June 30, 2012 is NIS 5.1 million.
3-12
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements
Note 2 - Relation, commitments and significant transactions with investee companies (cont'd)
4. On March 20, 2012 the Company provided Harel Finance with a capital note in the amount of NIS 16 million, with no repayment date, no linkage and no interest.
5. On May 3, 2011, the Company provided a loan to Harel Finance in the amount of NIS 5 million. The loan is for a period of 11 months and 29 days. The loan was renewed for another year with interest of Prime + 0.6%. The Company may, at any time, by giving 30 days advance notice, ask Harel Finance to settle the loan.
6. On July 3, 2011, the Company provided a loan of NIS 5 million to Harel Finance. The loan is for a period of 11 months and 29 days. The loan was renewed as of the beginning of July 2012 for another year with interest of Prime + 1%. The Company may, at any time, by giving 30 days advance notice, as Harel Finance to settle the loan.
7. Update of management and operating agreements - Harel Pension
On May 23, 2012, the Board of Directors of Harel Pension approved an amendment to the management agreement which was signed on May 17, 2009. According to the amendment, Harel Investments' entitlement to management fees from Harel Pension at an annual rate of 0.5% of the annual contribution payments received by the pension funds managed by Harel Pension will not apply to contribution payments to be received from the IDF, excluding one-time deposits which will be received close to commencement of the implementation of the IDF pension arrangement. Furthermore, the Board of Directors of Harel Pension approved an amendment to the operating agreement with Harel Insurance, whereby Harel Insurance's entitlement to operating fees at an annual rate of 0.1% of the assets of members covered by the IDF pension arrangement will not apply as long as they are active members through this arrangement and are entitled to the fixed management fees prescribed in the aforesaid arrangement.
Note 3- Significant events during the period of report
1. General meeting
On March 5, 2012, an extraordinary General Meeting of the Company took place. The following subjects were listed on the agenda:(1) amendment of the Company's articles in view of Amendment 16 to the Companies Law; (2) approval of revised indemnity notes for the Company's senior officers; (3) directors and officers insurance policy (D&O); (4) approval of the terms of employment of Mr. Yair Hamburger; (5) approval of the terms of employment of Mr. Gideon Hamburger; (6) approval of the terms of employment of Mr. Yoav Manor; (7) reapproval of the terms of employment of Mr. Ben Hamburger, whose employment terminated in December 2010.
2. Allotment of options
On March 26, 2012, the Remunerations Committee recommended granting 44,150 stock options to Mr. Alkabetz. On March 26, 2012, the Audit Committee approved the granting of the options. On March 29, 2012, the Board of Directors approved the granting of these options. These options are granted in addition to the 44,150 stock options that were allotted to Mr. Alkabetz in July 2009. In addition to the described above issue, at the same time allocation of 38,170 options to an officer in Harel Insurance was approved. The issue was carried out in accordance with section 102(b)(2) to the Tax Ordinance in the capital gain rout.
3-13
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements
Note 3- Significant events during the period of report (cont'd)
2. (contd.)
The exercise price for each option that was allotted is NIS 129.7 (based on the closing price of the Company's shares on the TASE on March 28, 2012. The total value of the options granted as detailed above, according to the binomial model, based on the Black-Scholes model, amounts to approx. NIS 3.84 million. The expense described above will be reduced, beginning the second quarter of 2012 throughout the vesting period in accordance with the option plan.
3. Thirteenth annual salary
On January 19, 2012, the Company resolved to discontinue payment of the thirteenth annual salary, and this after payment of half the thirteenth salary that was paid before the forthcoming Passover festival. Instead it will update salaries at a rate that constitutes conversion of the value of the thirteenth salary, on which social benefits are not paid, to an on-going wage supplement on which social benefits are paid ("rate of the update"). The full rate of the update will be paid in the wage for April 2012 to employees who earn up to the average wage in the economy. For employees and management who earn more than the average wage in the economy, the rate of the update will be paid gradually, based on the salary level of the employees. In the long term, this decision is not expected to significantly affect the Group's payroll expenses due to the fact that instead of the thirteenth annual salary, wage supplements will be paid gradually. However the decision is expected to result in an insignificant saving in payroll expenses over the next two years.
3-14
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3
Harel Insurance Investments & Financial Services Ltd.
Chapter 4
Report concerning the effectiveness of internal control over financial
reporting and disclosure
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 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 Fridman, 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 assurance 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 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
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd.
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 quarterly report for the period ended March 31, 2012 (hereinafter – the last quarterly report on internal control), the internal control was 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 found in the last quarterly report on the subject of internal control. At the reporting date, based on the quarterly report, and based on information presented to the management and the Board of Directors, as noted above, the internal control is effective.
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 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 second quarter of 2012 ("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 they are defined in the Securities (Annual Financial Statements) Regulations, 5770-2010, 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) No event or matter which took place during the period between the date of the last report (quarterly or periodic, as applicable) and the date of this report was brought to my attention, which may change the conclusion of the Board of Directors and Management in relation to the effectiveness of the corporation's internal control over financial reporting and disclosure. The aforesaid shall not derogate from my responsibility or from the responsibility of any other person, under any law.
August 21, 2012 ______
Michel Siboni Joint CEO
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 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 second quarter of 2012 ("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 they are defined in the Securities (Annual Financial Statements) Regulations, 5770-2010, 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) No event or matter which took place during the period between the date of the last report (quarterly or periodic, as applicable) and the date of this report was brought to my attention, which may change the conclusion of the Board of Directors and Management in relation to the effectiveness of the corporation's internal control over financial reporting and disclosure. The aforesaid shall not derogate from my responsibility or from the responsibility of any other person, under any law.
August 21, 2012 ______
Shimon Alkabetz Joint CEO
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Services Ltd.
Certification I, Ronen Agassi, hereby attest that: )1( I have reviewed the Quarterly Report of Harel Insurance Investments and Financial Services Ltd. ("the Corporation") for the second quarter of 2012 ("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 they are defined in the Securities (Annual Financial Statements) Regulations, 5770-2010, 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) No event or matter which took place during the period between the date of the last report (quarterly or periodic, as applicable) and the date of this report was brought to my attention, which relates to the interim financial statements and to any other financial information included in the reports for the interim period, which may change the conclusion of the Board of Directors and Management in relation to the effectiveness of the corporation's internal control over financial reporting and disclosure. The aforesaid shall not derogate from my responsibility or from the responsibility of any other person, under any law.
August 21, 2012 ______
Ronen Agassi CFO
WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3