Harel Insurance Investments and Financial Services Ltd

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Harel Insurance Investments and Financial Services Ltd 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. WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 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 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 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"). 1 -3 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Board of Directors' Report Services Ltd Six-months period ended June 30, 2132 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 1 -2 WorldReginfo - 7ac9f040-a6b9-4ba5-8406-b66c421f8aa3 Harel Insurance Investments & Financial Board of Directors' Report Services Ltd Six-months period ended June 30, 2132 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
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