Harel Insurance Investments and Financial Services Ltd

HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD.

Interim Statement As at march 31, 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 March 31, 2012

Board of Directors' Report on the state of the Company at March 31, 2012: 1-1

Auditors' Review 2-2

Condensed Interim Consolidated Financial Statements March 31, 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 2-11

Notes to the Condensed interim consolidated Financial Statements 2-15

Annex to the Condensed Consolidated Financial Statements: 2-73

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

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

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

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

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

Reports concerning Embedded Value in long-term policies

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c

Board of Directors' Report

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments & Financial Board of Directors'' Report Services Ltd Three-months period ended March 31, 2112

Harel Insurance Investments & Financial Services Ltd.

Board of Directors' Report For the three months ended March 31, 2012

The Board of Directors' Report for the three months ended March 31, 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 2111 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 9665% 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"). Pension funds management companies: Harel Pension Funds Management Ltd. (wholly controlled) ("Harel Pension"); Manof Pension Funds Management Ltd. (wholly controlled) ("Manof"); and 1 -1

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LeAtid Pension Funds Management Company Ltd. (in which the Company has a 79% stake), which manages an old pension fund ("LeAtid"). b) In the financial services and capital market sector, the Company operates through Harel Finance Ltd. ("Harel Finance") (wholly controlled by the Company) and its subsidiaries: Harel Pia Mutual Funds Ltd. ("Harel-Pia"), Harel Finance Securities and Trade Ltd. (which is a stock exchange member), Harel Finance Investments Management Ltd. (has a licensed investment advisor), Harel Financial Products Ltd. ("Harel Products") (which engages in financial products such as: ETFs, covered warrants and more). The products are offered to the public through the subsidiary Harel Sal Ltd. ("Harel Sal") which is a reporting corporation under the Securities Law and issues index products (covered warrants and ETFs) ) and through the subsidiary, Harel Sal Currencies 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, through a holding company) holds 49.61% of the Company's shares. 2. Financial situation and results of operations, shareholders' equity and cash flow 2.1. Material changes in the Company's business during the Reporting Period 2.1.1. 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.

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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. 2.1.2. 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 is due to begin in the near future and it 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. 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. 2.1.3. Reform of management fees on long-term savings products Pursuant to the Commissioner's plan to increase the competition for pension savings products, in February 2012, the Commissioner published draft 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. After discussions between the Commissioner and the Knesset Finance Committee, on February 27, 2012, the following key provisions were prescribed: (a) the maximum management fees on provident funds will not exceed 1.1% of the 1 -3

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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 a higher rate if the member is found. 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. As far as the Company is aware, 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. During the discussions of the Knesset committee, it was agreed that legislation would be introduced to determine a fixed amount for the minimum management fees. This action depends upon the completion of various legislative proceedings. The regulations also regulate the rate of management fees in the accounts of members with whom contact has been severed, and as long as such contact is not renewed, and the accounts of deceased members, and this based on the definitions prescribed in the Control of Financial Services (Provident Funds) (Locating Members and Beneficiaries) Regulations, 5772-2012. The rate of management fees for these members will be up to 0.3% a year from the accrual, as long as contact has not been renewed with the member, or with respect to deceased members, up to the date on which the financial institution terminates the relevant searching activity in connection with the heirs of deceased members. Concerning a member who is found, the financial institution may collect management fees retrospectively in respect of the period in which reduced management fees were collected, at a rate of 0.5% (instead of 0.3%). 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 Up to 2% of the 0.5% of the accrual and Current situation accrual and a rate of accrual up to 6% of the deposits 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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At the date of closing this report, it is impossible to gauge the result of the discussions about the possibility of performing changes in legislation, to the effect that in addition to the setting of maximum management fees, as detailed above, minimum amounts will also be determined and provisions will be prescribed regarding limiting the difference between the minimum and maximum fees collected by management companies. At this stage, it is therefore impossible to estimate what the final provisions to become applicable will be. Harel Insurance is reviewing the possible impact of the implementation of the regulations and is also examining measures it may take so as to moderate the effect of the regulations. Implementation of this 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. 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 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 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. 2.1.4. MF Global On November 1, 2011, bankruptcy proceedings were initiated against MF Global, a company that engages, through a subsidiary, in brokerage in securities overseas. Harel Finance Securities & Trade Ltd. ("Harel Trade & Securities"), a second-tier subsidiary of the Company, acted for its customers vis-à-vis MF Global in future contracts overseas and traded in European shares.

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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 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 Trade & Securities and its customers to MF Global is NIS 11 million in cash and NIS 1.7 million in shares (including amounts that Harel Trade & Securities asked to withdraw before the bankruptcy proceedings began and which it has not yet received). 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 Trade and Securities decided to indemnify its customers in respect of their losses. In view of this decision, Harel Trade and Securities 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 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 Trade and Securities supplemented this shortfall by injecting surpluses into the trust accounts and receiving tier-2 capital from Harel Finance. At March 31, 2012, Harel Trade is in compliance with the TASE's capital requirements. In light of the decision that Harel Trade will indemnify its customers' exposure, Harel Trade and Securities made adequate provision in its financial statements based on these estimates. 2.1.5. 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. 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.

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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 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. 2.1.6. 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. 2.1.7. 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, 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. 1 -7

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2.1.8. 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. 2.1.9. 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 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.

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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 March 31, 2012, this capital requirement was not included in the calculation of the capital required of the Company's subsidiaries, due to the fact that implementation of the pension arrangement had not yet begun. The transaction is expected to entail a one-time movement of hundreds of millions of shekels as well as on-going deposits of additional hundreds of millions of shekels each year. As this is a unique pension arrangement, despite the scope of the transaction it is not expected to have a significant impact on the Company's financial results in coming years. 2.2. Material changes in the Company's business after the Reporting 2.2.1. 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. 2.2.2. 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%. 2.2.3. 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

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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 the lower of: USD 500,000 or supplementing half the management fees and the success in respect of the balance of the as yet unraised amount, based on the fund's performance, for the period up to the date scheduled for completion of the raising of US 20 million. 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. This amount accounts for part of Harel Products' commitment in the amount of USD 20 million, so that the outstanding amount required is USD 17 million. So far, Harel Financial Products has not raised the outstanding amount required, in part as the process of opening the fund took longer than planned. 2.2.4. 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 woud stepping down from his position, effective July 1, 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 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: 14,140 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

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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, in return for a monthly payment of NIS 15,000, against an invoice. 2.2.5. 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. 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 will 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. 2.2.6. 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").

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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 10 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 will deposit 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. 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. 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. 2.2.7. 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 1 -12

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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 the Company 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 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. 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.

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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. 2.2.8. 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. 2.2.9. 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. 2.3. Legislation and regulation regarding the Company's areas of activity The following is a description of material changes in legislation and regulation regarding the Company's areas of activity since the Periodical Report: 2.3.1. General Provisions of Law

2.3.1.1. On 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). Circulars

2.3.1.2. 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 1 -14

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gives the employer a single value identification (it should be clarified that identifying the employer by user name and password with be considered a 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.

2.3.1.3. 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. Draft circulars

2.3.1.4. 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 1 -15

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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 comply with the new policy requirements after an adjustment period.

2.3.1.5. 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.

2.3.1.6. 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 1 -16

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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- 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 1 -17

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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.

2.3.1.7. On January 31, 2012, the Commissioner published a draft circular concerning the management of compliance risks by financial institutions. The draft circular stipulates that a financial institution will appoint an official who is responsible for compliance and internal enforcement (compliance and internal enforcement officer). The draft circular also prescribes provisions concerning the qualifications and status of the compliance and internal enforcement officer, his duties, the obligations that are imposed on him to report to the board of directors, the audit committee, the CEO and the risk manager, the obligations for immediate reporting that apply to the compliance and internal enforcement officer, etc. The draft circular also stipulates that the compliance and internal enforcement officer will conduct a study of compliance risks and that a financial institution shall adopt a compliance and internal enforcement plan. The circular prescribes the board of directors' obligation to establish a compliance policy for the financial institution and ways of supervising the institution's compliance with the compliance and internal enforcement obligations. The Commissioner and the financial institutions are discussing the draft circular. Regulations

2.3.1.8. On March 14, 2012, Control of Financial Services (Provident Funds) (Investment Rules that apply to institutional bodies) Regulations, 5772-2012 ("New Investment Regulations") were approved by the Knesset's Finance Committee. 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 1 -18

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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 (Amendment), 5771-2011, 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 revision was passed as a temporary provision for a two-year period commencing July 1, 2012.

In addition, Control of Financial Services (Provident Funds) (Purchase and Sale of Securities) Regulations (Amendment), 5772-2012 were published, in which context amendments were made to adapt the definitions in the regulations to the New Investment Regulations. In addition, Control of Financial Services (Provident Funds) (Participation by a management fund in a general meeting) Regulations (Amendment), 5772-2012 were published, in which context technical amendments were made to adapt the definitions in the regulations to the New Investment Regulations. Additionally, Control of Financial Services (Provident Funds) (Calculation of the Value of Assets) Regulations (Amendment), 5772-2012 were published, in which context technical amendments were made to adapt the definitions in the regulations to the New Investment Regulations. Furthermore, Control of Financial Services (Provident Funds) (Individually managed provident fund) Regulations (Amendment), 5772-2012 were published, in which context technical amendments were made to adapt the definitions in the regulations to the New Investment Regulations. Alongside the regulations, on March 19, 2012, the Commissioner published a third draft circular concerning the investment rules that apply to financial institutions. The draft circular prescribes, inter alia, the following provisions: (a) provisions concerning a deviation from the investment rates – correction of the

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deviation by an institutional investor in accordance with a procedure to be determined, defining the dates for amending the investment deviation, 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; (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) an institutional investor or group of investors may invest in a partnership subject to the conditions prescribed in the draft circular; (f) investing in a right to land through a corporation that is not a partnership – at a rate of more than 20% of a particular category of the means of control in the corporation if the corporation's principal business is the holding or management of land, and there is no mortgages or pledge on its assets; (g) loans may be given under the conditions specified in the draft circular (e.g. – a loan rated BBB- or A-3,the loan is for housing, the amount of the loan does not exceed 10% of the estimated value of the financial institution's assets, the amount of the loan against liquid assets shall not be more than 50% of the amount that the insured has in the provident fund, and against non-liquid assets shall not be more than 30% of the redemption value at the time of giving the loan, and the amount of the loan against money that is not part of an insurance fund shall not be more than 80% of the redemption value when the loan is given). An institutional investor shall submit a report to the audit committee once every quarter regarding the list of the senior officeholder's loans; (h) transactions with 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; (i) investment in an affiliate - subject to the conditions defined in this matter in the draft 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; (j) control and holding of the means of control by an insurer - subject to the conditions prescribed in the draft circular. The Commissioner and the financial institutions are discussing the draft circular. 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.

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Draft regulations

2.3.1.9. 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. Instructions and clarifications

2.3.1.10. 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 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 1 -21

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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, in February 2012, the Commissioner published draft 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. After discussions between the Commissioner and the Knesset Finance Committee, on February 27, 2012, the following key 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 a higher rate if the member is found6 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. As far as the Company is aware, 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 During the discussions of the Knesset committee, it was agreed that legislation would be introduced to determine a fixed amount for the minimum management fees. This action depends upon the completion of various legislative proceedings. The regulations also regulate the rate of management fees in the accounts of members with whom contact has been severed, and as long as such contact is not renewed, and the accounts of deceased members, and this based on the definitions prescribed in the Control of Financial Services (Provident Funds) (Locating Members and Beneficiaries) Regulations, 5772-2012. The rate of management fees for these members will be up to 0.3% a year from the accrual, as long as contact has not been renewed with the member, or with respect to deceased members, up to the date on which the financial institution terminates the relevant searching activity in connection with the heirs of deceased members. Concerning a member who is found, the financial institution may

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collect management fees retrospectively in respect of the period in which reduced management fees were collected, at a rate of 0.5% (instead of 0.3%).

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 0.5% of the accrual Up to 2% of the Current situation accrual and a rate of and up to 6% of the accrual the deposits (0%- deposits 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

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. 1 -23

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Accordingly, it was found that the recoverable amount is higher than the carrying amount in Harel Insurance's books.

Furthermore, 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 activity6 Provisions of Law

2.3.2.2. On May 14, 2012, an amendment was published to the Income Tax (Amendment no. 190 and Temporary Provision) Ordinance, 5772-2012. Among other things, the amendment prescribes the following provisions: (1) the tax benefits given when money is withdrawn in the annuity savings channel will be expanded; (2) members who are entitled to the severance pay component in the provident fund will be allowed to leave the money in the provident fund under the conditions prescribed in the law; (3) the Control of Financial Services (Provident Funds) Regulations will be amended so that when money is transferred from the severance pay component of a provident fund which does not pay an annuity or from an individually managed provident fund for severance pay, to a new non-paying provident fund account in the member's name, no additional amounts can be deposited in the new fund, after tax has been deducted from the transferred amount, will be tax exempt; (4) when money to which a beneficiary is entitled is transferred from a non-annuity paying provident fund, from a benefit provident fund, or from an individually managed severance pay provident fund, to a new account in a non-paying provident fund in the beneficiary's name, then no further amounts may be deposited in this account, will be tax exempt. Regulations

2.3.2.3. 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

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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. 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, 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.

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Circulars

2.3.2.5. On March 22, 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 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 through the clearing system. The provisions of the circular will apply gradually from its date of publication until January 1, 2016. Concurrent with the publication of the circular, a letter was sent to the managers of the financial institutions outlining the key princples according to which the financial institutions will finance operation of the clearing center.

2.3.2.6. 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 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.

2.3.2.7. 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.

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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 financial statements that include at least the information specified in the reporting format, based on 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.

2.3.2.9. 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.

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

2.3.2.10. 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.

2.3.2.11. 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 reports submitted to the Administrator General. The circular specifies the obligations that apply to a

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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 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 1 -29

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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.

Draft circulars

2.3.2.12. 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. 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) Additionally, 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

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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.

2.3.2.13. On April 5, 2012, draft circular 2012-23 was published - "Structure of the disclosure required in the financial statements of management companies pursuant to IFRS". The purpose of the draft 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) in the annual financial statements of management companies.

2.3.2.14. On March 7, 2012, the Commissioner published a draft circular concerning an internet interface for locating the accounts of members and of deceased members - technical requirements. The purpose of the draft is, inter alia, to specify the technical requirements for financial institutions for operating a central, accessible internet interface through which accounts can be easily located. The draft circular sets forth, inter alia, the following provisions: (1) technical requirements for financial institutions for operation of the interface, e.g.: the information that a financial institution must transfer, as requested by the Superintendent, pertaining to inactive members of provident funds that it manages. This information will be transferred through network services based on the format specified in the appendix to the circular. (2) deployment schedule: a financial institution will prepare for integration, will test the transfer to production against the Treasury's servers, through Tehila (governmental ISP), within three months of the commencement of the circular. The institution will transfer details of the agreement to the Superintendent, as specified in the draft circular. The Commissioner and the financial institutions are discussing the draft circular.

2.3.2.15. 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 policies that were issued before the onset of the circular, from January 1, 2014. The 1 -31

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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.

Draft memorandum of law and regulations

2.3.2.16. 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 fee, meeting sales targets, professional instruction, and marketing expenses); (b) provisions concerning proper disclosure to which an insurance 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.

2.3.2.17. 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.

2.3.2.18. On May 7, 2012, the government approved the granting of an exemption from tax for provident funds and pension funds that invest in residential property for long-term rental. The government's decision is the result of Prof. Trajtenberg's recommendations to lower housing prices by developing a long-term residential rental market, thus providing provident funds and pension funds with an incentive to invest in long-term residential investment property projects by offering a tax exemption on revenues from the rental of residential apartments. The government has authorized the Ministerial Legislative Committee to submit the final text of the draft law for the approval of the Knesset in the near future.

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2.3.2.19. 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 institutions are discussing the draft regulations. 2.3.3. Health insurance Circular

2.3.3.1. 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 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

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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. Drafts Circular

2.3.3.2. On February 8, 2012, the Commissioner published a draft circular concerning dental insurance. The purpose of the draft circular is to lay down principles for drawing up plans for dental insurance. These principles address, inter alia, the interface between the insurer as the administrator of a claim, and the dentist as the person who treats the insured, allowing the insured to choose his dentist and/or clinic, and the conditions under which the insured may cancel the policy. The draft circular proposes the following: (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 treatments will be defined according to their listing in the price list/catalog, including the name and code of the treatment). (b) it determines those situations in which an insured may cancel a policy, in general an insured may cancel the policy at any time and unconditionally, excluding the requirement for a monetary refund, subject to the conditions stipulated in the draft: 1. three years or three-quarters of the policy period has not yet elapsed, whichever is earlier. 2. The insured received insurance benefits for claims by virtue of the policy. 3. The amount of the monetary refund is less than the difference between the total insurance benefits and the total premiums 1 -34

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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 be prohibited from influencing the dentist's professional discretion and giving the dentist medical guidelines that limit his discretion. In addition, 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; (d) the insurer is obligated to act in accordance with the rules of fair disclosure, including presenting to the insured, upon his enrollment in the insurance and on the fair disclosure form, all the treatment packages offered in the plan, the difference between them, and details of the treatments covered in the package. The insurer's website must show lists of the dentists it has agreements with. The Commissioner and the Israel Insurance Association are discussing the draft circular. 2.3.4. General insurance Regulations and orders

2.3.4.1. 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.

2.3.4.2. 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.

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Provisions of law

2.3.4.3. 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 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. 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.

Circular

2.3.4.5. 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.

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Draft Circular

2.3.4.6. 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 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 Provisions of law

2.3.5.1. 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.

2.3.5.2. On January 30, 2012, the Israel Securities Authority published an instruction concerning the handling of referrals and complaints from the public.

2.3.5.3. 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.

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Legislation

2.3.5.4. The Joint Investments in Trust Law

2.3.5.4.1. 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.

2.3.5.4.2. 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 and deposit certificates as well as the regulation of ETFs. 2.4. Capital market developments A . General Yields on stock markets around the world in the first quarter of 2012 were positive after fears of an immediate financial crisis in the Eurozone were allayed. Economic data in Europe remained weak although indicators from the US and other parts of the world were more positive. Most of the problematic Eurozone countries launched austerity programs and structural reforms in an effort to reduce public debt and strengthen the confidence of investors, and most of the European Union states signed a fiscal discipline treaty. The ECB's loan plan to provide unlimited credit to the European banks, which was introduced at the end of 2011 and continued through the first quarter of 2012, significantly mitigated fears of a liquidity crisis in the Eurozone and contributed to the positive sentiment in the markets, although it did not resolve the problems facing the countries (and the banks which hold bonds issued by the EU nations) in the long term. Initial estimates indicate that first-quarter growth in the US was 2.2%, in the Eurozone it was 0%, in China it was 7.4%, and in the UK it was 0.8% at annual rates.

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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. Growth continued to slow, as it had in the second half of 2011, and this process intensified during the first quarter of 2012. Output during the first quarter grew at an annual rate of 3% (according to preliminary estimates). The increase in exports was a pleasant surprise due to the weak growth in the US and Europe. Business output was up 2.8% (but excluding start-ups - was only 1.4% - extremely low).

C. Stock markets Share indices in Israel and worldwide rose sharply during the first quarter of 2012. The TA-100 index was 6% up during the first quarter, after dropping 20% during 2011. The MSCI World Index rose by an impressive 12% during the first quarter, after a decline of 5% during 2011. The MSCI emerging markets index rose sharply by 14% during the first quarter, after a decline of 18% during 2011. Performance of the leading indices

Change during Change during Change during 1-3/2012 1-3/2011 2011 General shares 468% -266% -2261% index TA 100 565% -163% -2161% TA 25 366% -164% -1862% Yeter shares 161% -364% -2367% MCSI World 1167% 469% -561% index MCSI Emerging 1461% 261% -1862% Markets index

The average daily volume of trade in shares on the TASE continued to fall and was just NIS 1.1 billion in Q1 2012, compared with NIS 1.4 billion in the previous quarter (down 19%), NIS 1.7 billion in 2011 (a decline of 34%), and NIS 2 billion in 2010.

D. Bonds Market In the first quarter of 2012, the general bond index rose 1.9%. During the quarter, the government bond index rose 1.5%, the variable interest government bond index rose 1.7%, and the corporate bond index rose sharply by 3.8%, after a decline of 1.2% in 2011. 1 -39

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Performance of leading indices

Change during Change during Change during 1-3/2012 1-3/2011 2011 Bonds - general 169% 1% 265% index Government bonds 165% -161% 561% index Corporate bonds 368% 169% -162% index Index linked 162% -163% 463% government bonds Index linked 369% 169% -168% corporate bonds Non-linked government bonds 166% -161% 562% index F/C indexed government bonds 365% 261% 862% index

During the first quarter of 2012 the business sector raised NIS 12 billion through bonds, (of which NIS 5 billion was in the banking sector), compared with the NIS 7 billion in the fourth quarter of 2011. The average daily turnover of trade in bonds was NIS 4 billion in the first quarter of 2012,compared with NIS 3.7 billion in the previous quarter (a 9% increase), and NIS 3.8 billion in 2011.

E. Foreign Currency Market During the first quarter of 2012, the shekel strengthened by 2.8% against the dollar (at NIS 3.715 / 1 USD) and was 0.3% weaker against the Euro (at NIS 4.953 / 1 EUR).

F. Inflation During the 12 months until March inflation amounted to 1.9%, in the inflation target. During the first quarter of 2012 the consumer price index rose by 0.4%6

Following are figures on changes in the CPI:

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Change during Change during Change during 1-3/2012 1-3/2011 2011 Change in CPI increase (known 1% 169% 266% index) Change in CPI increase 164% 167% 262% (applicable index)

G. Bank of Israel Interest In the first quarter of 2012, the Bank of Israel lowered the interest rate by 0.25% to 2.5%, in part due to concern over a crisis in Europe and slower domestic economic growth.

H. Material market events after the reporting date From the end of March 2012 until April 30, 2012, the shekel weakened 1% against the dollar and remained almost unchanged against the euro. During the same period, the MSCI World Index was 1% down and the TA-100 index was up 4%. The International Monetary Fund ((IMF) published revised forecasts at its semi-annual meeting, with a slight upward revision compared with the previous forecast which was published three months ago. The forecast for global growth in 2012 was increased by 0.2% to 3.5% and the forecast for 2013 was increased by 0.1% to 4.1%. This slight increase is more-or-less across the board for the different regions of the world and different categories of country (advanced/developing). The Bank of Israel left the interest rate for April and May unchanged. The CPI for April rose 0.9% and the inflation rate for the last 12 months is 2.1%. Exports of commodities (excluding diamonds, ships and aircraft, in dollar terms) were 3% down in April and 8% down for the last 12 months. The import of commodities fell 3% in April and remained unchanged for the last 12 months. Economic data indicating that the recession in the Eurozone - and particularly in the problematic Mediterranean states - is worsening, combined with the results of the elections in Greece which increased the uncertainty and instability in that country, led to renewed fears of the ability of the European governments to restore stability and growth. From the end of the first quarter until May 15, 2012, the shekel weakened 3% against the dollar and was 1% stronger against the euro. During the same period, the MSCI World Index was 7% down and the TA-100 index fell 3%.

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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 three months ended For year ended Mars 31 % change December 31 2012 2011 2011 Life assurance and long-term savings segment Gross premiums earned 802,765 777,188 3 3,184,370 Income from management fees 137,429 138,384 (1) 542,223 Profit (loss) from life assurance business 110,483 69,381 59 61,376 Profit from provident fund management 14,152 19,307 (27) 36,404 Profit from pension fund management 10,133 9,155 11 44,725 Total profit from life assurance and long-term savings 134,768 97,843 38 142,505 Total comprehensive income from life assurance and long-term savings 183,701 81,375 126 35,135 Non-life insurance segment Gross premiums earned 712,749 696,906 2 2,809,786 Premiums earned on retention 427,391 408,852 5 1,644,662 Total profit from non-lie insurance 79,570 37,384 113 110,476 Comprehensive income from non-life insurance 107,395 9,606 1,018 16,586 Health insurance segment Gross premiums earned 656,435 581,961 13 2,476,755 Premiums earned on retention 612,926 540,647 13 2,285,716 Total profit from health insurance 34,002 46,946 (28) 193,019 Comprehensive income from health insurance 44,643 40,311 11 162,168 Insurance companies overseas segment Gross premiums earned 44,632 30,449 47 154,491 Premiums earned on retention 29,848 19,705 51 102,069 Total profit (loss) from insurance companies overseas (4,704) (1,561) - (37,289) Total comprehensive profit (loss) from insurance companies overseas (1,524) (3,717) - (37,768) Capital market and financial services segment Revenues from capital market and financial services 49,686 65,414 (24) 224,411 Total expenses from capital market and financial services 44,194 54,122 (18) 195,285 Total profit (loss) from capital market and financial services 5,492 11,292 (51) 29,126 Finance 5,484 11,048 (50) 29,126 Items not included in operating segments Net profit from investments and financing income 89,600 21,507 317 107,389 Income from commissions 15,276 17,654 (13) 70,299 Other income 3,340 847 294 8,375 General & administrative expenses not charged to reports for 30,287 28,365 7 103,445 1 -41

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For the three months ended For year ended Mars 31 % change December 31 2012 2011 2011 operating segments Financing expenses 26,370 37,361 (29) 142,878 Pre-tax profit 304,468 170,114 79 397,459 Net profit for the period 192,079 109,652 75 218,161 Other comprehensive profit for the period 95,604 (30,848) - (173,366) Total comprehensive profit for the period 287,683 78,804 265 44,795 Net profit for the period attributed to the Company's shareholders 191,819 109,633 75 217,835 Net profit attributed to non-controlling interests 260 19 1,268 326 Return on equity in terms of annual comprehensive income in percent 28% 9% - 2%

Summary of data from the consolidated balance sheets of Harel Investments (in NIS millions): For the three months For year ended ended Mars 31 % change December 31 2012 2011 2011 Total balance sheet 57,314 53,337 7.5 54,925 Assets for yield-dependent contracts 22,302 20,631 8.1 21,082 Other financial investments 17,730 17,136 3.5 17,375 Intangible assets 1,455 1,504 (3.3) 1,468 Reinsurance assets 5,134 5,196 (1.2) 5,115 Insurance liabilities (insurance reserves and outastanding claims) in life assurance for yield-dependent investment contracts and insurance contracts 20,126 18,806 7.0 18,980 for insurance contracts that are not yield dependent 9,611 9,172 4.8 9,551 In non-life insurance 9,744 9,718 0.3 9,620 In health insurance (yield dependent and non-yield dependent) 4,068 3,448 18.0 3,873 Insurance companies overseas segment( yield dependent (and non-yield dependent 219 174 25.9 198 Total insurance liabilities 43,767 41,319 5.9 42,222

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

Mars 31 % change December 31 2012 2011 2011 For yield dependent invetsment contracts and insurance contracts 22,302 20,631 8.1 21,082 For members of provident funds and pension funds * 37,997 35,898 5.8 36,026 For mutual fund customers * 18,118 20,729 (12.6) 16,985 For customers portfolios * 3,759 2,453 53.2 3,554 Index linked certificates (ETFs) 4,088 3,106 31.6 3,550 Total assets under management for the Group's policyholders and members 86,264 82,817 4.2 81,197

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

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 2.2 billion compared with NIS 2.1 billion during the corresponding period last year, a growth of 6% compared with the corresponding period last year. Neutralizing the influence of single premiums received from Bezeq's transaction during the reporting period and the corresponding period last year and neutralizing Discount's transaction (see section 2.7 below) and Broadgate, the growth rate over the corresponding period last year is about 10%. Net profit for the Reporting Period amounted to NIS 192 million compared with a profit of NIS 110 million during the corresponding period last year, a 75% increase. The increase in profit stems mainly from the fact that yields on the capital market during the Reporting Period were higher than during the corresponding period last year and that the rate of the CPI was zero during the Reporting Period, compared with a positive index of 0.87% during the corresponding period last year. Investment profits during the Reporting Period helped cover most 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 most of these losses were covered and at March 31, 2012, the real investment losses accumulated by Harel Insurance amounted to NIS 196 million. Accordingly, at March 31, 2012, Harel Insurance will be unable to collect variable management fees under the mechanism described above, in the amount of NIS 29 million until the outstanding investment losses have been covered. At April 30,

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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 18 million. Comprehensive income, consisting of profit after tax for the Reporting Period plus the net change in a capital fund in respect of available-for-sale financial assets and other changes in shareholders' equity, amounted to NIS 288 million for the Reporting Period, compared with comprehensive income of NIS 79 million for the corresponding period last year. The increase in comprehensive income for the Reporting Period in relation to the corresponding period last year profit stems from the fact that yields on the capital market during the Reporting Period were higher than during the corresponding period last year. Pre-tax profit during the Reporting Period amounted to NIS 314 million compared with a pre-tax profit that amounted to NIS 171 million during the corresponding period last year, a growth of 79% 6 During the Reporting Period profits from net investments and funding income amounted to NIS 11317 million compared with profit of NIS 569 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 last year. The Group's funding expenses, not attributed to the branches of activity during the Reporting Period amounted to NIS 26 million compared with NIS 35 million during the corresponding period last year. The decrease in financing expenses during the Reporting Period can be attributed to the impact of the CPI. The Company's equity as of March 31, 2012, relating to the Group shareholders amounts to NIS 3,816 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 287 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 184 million, compared with comprehensive profit of NIS 81 million in the corresponding period last year. The increase stems mainly from the fact that yields on the capital market during the Reporting Period were higher than during the corresponding period last year and due to zero-rate index during the Reporting Period, as against a positive index rate of 0.87% for the corresponding period last year.

Due to the negative yields obtained in 2011 and real investment losses, Harel Insurance did not collect variable management during the Reporting Period in respect of yield-dependent policies that were sold between 1991 and 2003. 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

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losses in 2011. The real investment losses accumulated during 2011 in respect of yield-dependent policies, after most of them were covered during the reporting period, amount to NIS 196 million at March 31, 2012. Accordingly, at March 31, 2012, Harel Insurance will not collect variable management fees in line with the aforementioned mechanism in the amount of NIS 29 million. accordantly At April 30, 2012, the variable management fees that Harel Insurance will not collect on yield-dependent policies that were issued from 1991-2003, until the investment losses in respect of these policies are covered, amounts to NIS 18 million.

Pre-tax profit in life assurance branch and long term savings during the Reporting Period amounted to NIS 135 million compared to pre-tax of NIS 98 million during the corresponding period last year, an increase of about 38%. The increase stems mainly from the fact that yields on the capital market during the Reporting Period were higher than during the corresponding period last year and the improvement of the financial margin due to a positive yields and zero-rate index during the Reporting Period, as against a positive index rate of 0.87% for the corresponding period last year.

Life assurance Total premiums earned during the Reporting Period amounted to NIS 813 million compared with NIS 777 million during the corresponding period last year, a 3% increase compared to the corresponding period last year. Premiums earned during the Reporting Period constituted 36% from the total premiums earned in the Group during the Reporting Period.

Single premiums were recorded during the Reporting Period in a total amount of NIS 56 million, received from Bezeq's retirees transaction and from Discount's transaction, as opposed to single premiums at the amount of NIS 34 million, received from Bezeq's transaction during the corresponding period last year. Neutralizing the influence of single premiums from Bezeq and Discount there is no increase in the premiums earned in life assurance. Stability of the premiums can be attributed mainly to a decline in non-recurring deposits in Migvan insurance policies during the Reporting Period.

For more details concerning Bezeq's retirees transaction - see par. 3.1.1.5.2 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 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 161 million, compared with comprehensive profit of NIS 54 million in the corresponding period last year. a growth of 196%. The increase stems mainly from the fact that yields on the capital market during the

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Reporting Period were higher than during the corresponding period last year and the improvement of the financial margin due to a positive yields and zero-rate index during the Reporting Period, as against a positive index rate of 0.87% for the corresponding period last year.

Pre-tax profit in life assurance during the Reporting Period amounted to NIS 110 million compared with pre-tax profit of NIS 69 million during the corresponding period last year, a growth of 59%. The increase stems mainly from the fact that yields on the capital market during the Reporting Period were higher than the corresponding period last year and due to the improvement of the financial margin that was obtained, although variable management fees was not collected during the Reporting Period, as against variable management fees amounted to NIS 5 million, that was collected for the corresponding period last year. During the Reporting Period revenues amounted to NIS 196 million and constituted approximately 2.9% of the average reserve in life assurance, compared to revenues for the amount of approximately NIS 176 million during the corresponding period last year, that constituted 2.67% from the average reserve in 2011. The total amount of life assurance reserves as of March 31, 2012, amounted to NIS 2968 billion.

2.7.1. Yield-dependent policies:

Policies issued from 1992-2003

1-3.2012 1-3.2011 (in percent) (in percent) Real yield before payment of management fees 4.93 0.46 Real yield after payment of management fees 4.78 0.27 Nominal yield before payment of management fees 4.93 1.33 Nominal yield after payment of management fees 4.78 1.15 Following are the yield rates on yield-dependent policies - General track

Policies issued from 2004

1-3.2012 1-3.2011 (in percent) (in percent) Real yield before payment of management fees 5.19 0.28 Real yield after payment of management fees 4.88 (0.01) Nominal yield before payment of management fees 5.19 1.15 Nominal yield after payment of management fees 4.88 0.87

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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):

1-3.2012 1-3.2011

Profits (losses) after management fee 863 175 Total management fees 37 39

Pension funds 2.7.2. The number of members in the pension funds managed by the Group as of March 31, 2012, is 607,754 members, 339,725 of which are active members, a 3% decrease in the number of active members compared with March 31, 2011. The extent of assets managed by pension funds as of March 31, 2012, amounted to NIS 15 billion compared with NIS 1264 billion on March 31, 2011, a 21% increase and compared with the extent of assets of NIS 13.8 billion as of December 31, 2011, an increase of 9%. The increase stems from, inter alia, a positive yields during the Reporting Period and increase in members' provisions, including to their compulsory pension. Contribution fees that were collected by the Group's pension funds during the Reporting Period amounted to NIS 645 million compared with NIS 531 million on March 31 2011, a 22% increase. Concerning an expected increase in the volume of contribution payments to the pension funds as a result of the agreement with the IDF on the pension arrangement for career soldiers - see par. 1.1.5.2.19 in Chapter A of the Periodic Report – "Description of Company Operations". The total amount of the assets of the pension funds and the contribution fees deposited therein are not included in the consolidated financial statements of the Group . The total amount from management fees (with a deduction of returns and bonuses) collected from pension funds managed in the Group during the Reporting Period amounted to NIS 45 million compared with NIS 40 million in the corresponding period last year, a 12% increase. Expenses in connection with the pension funds amounted to NIS 36 million compared to NIS 32 million in the corresponding period last year. Total pre-tax profit from management of pension funds and operating an old pension fund during the Reporting Period amounted to NIS 10 million compared with NIS 9 million during the corresponding period last year.

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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:

Comprehensive Investment yield Demographic yield Fund name yield (in percent) (in percent) (in percent) Harel Gilad Pension* 4.69 4.53 0.16 Harel - Manof 5.10 4.61 0.49

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 March 31, 2012, the Group operates 33 tracks in its provident funds. The volume of assets in the provident funds managed by the Group as of March 31, 2012, amounted to NIS 23 billion compared with NIS 23.5 billion as of March 31, 2011, and compared with NIS 22.2 billion as of December 31, 2111, a 2% decrease in relation to March 31, 2011, and an increase at the rate of 4% 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 5568 million, compared with NIS 5963 million for the corresponding period last year, a 6% 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. Expenses in provident funds amounted to NIS 4169 million compared with NIS 40.2 million during the corresponding period 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 14 million compared with NIS 19 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

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client's portfolio, and to an erosion of the average management fee's rate. The provident funds' net accumulation (excluding profits from investments) during the Reporting Period was negative and amounted to NIS 183 million compared with negative accrual of NIS 118 million for the corresponding quarter last year. 2.8. Health Insurance Premiums earned in the health insurance sector totaled NIS 656 million for the Reporting Period, compared with NIS 582 million for the corresponding period last year, an 13% increase. Total premiums earned in health insurance during the Reporting Period, accounted for 30% of all premiums earned by the Group . During the Reporting Period the health insurance sector posted comprehensive profit of NIS 45 million compared with a comprehensive profit of NIS 40 million in the corresponding period last year, a 11% 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 zero-rate index during the Reporting Period, as against the positive index for the corresponding period last year, which affects the reserves (that are index linked) and adversely was affected by the increase in claims. Pre-tax profit in health insurance sector totaled NIS 34 million for the Reporting Period, compared with NIS 47 million in the corresponding period last year, a 28% decrease. Total payments and change in gross liabilities in respect of insurance contracts in the health insurance sector during the Reporting Period amounted to NIS 542 million, compared with NIS 466 million in the corresponding period last year. Part of the change stems from a collective supportive insurance plan in which most of the investment risks as well as investment profits are attributed to the plan and are not imposed on the insurer. Due to a raising rates made in the plan, the reserve for outstanding claims for this plan increased.

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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 1-3.2012 1-3.2011 % change 2011

Compulsory motor 191,816 205,765 (6.8) 547,672 Motor property 313,299 336,356 (6.9) 867,646

Property & other branches 209,789 187,907 11.6 708,018 Other liabilities branches 183,408 188,945 (2.9) 679,000 Credit & mortgage insurance 8,126 14,887 (45.4) 44,895 Total 906,438 933,860 (2.9) 2,847,231

Pre-tax profit 1-3.2012 1-3.2011 % change 2011 Compulsory motor 54,431 12,142 - 28,079 Motor property 3,343 (10,917) - (35,305) Property & other branches 13,087 12,559 4.2 40,526 Other liabilities branches 18,826 (2,467) - (14,818) Credit & mortgage insurance 17,710 (1,711) - (1,894) Total 107,397 9,606 - 16,588 Gross premiums during the Reporting Period totaled to approx. NIS 906 million compared with NIS 934 million during the corresponding period last year, a 3% decrease. Premiums in retention during the Reporting Period totaled to approx. NIS 563 million compared with NIS 583 million in the corresponding period last year, a 3.4% decrease. The decrease mostly stem from a decline in Harel Insurance's share of the insurance of state employees' motor vehicles (see Section 2.9.1 below). 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 11.5 million. Comprehensive profit in general (non-life) insurance during the Reporting Period, amounted to NIS 117 million compared with comprehensive profit of NIS 11 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 zero-rate index during the Reporting Period as against the positive index for the corresponding period last year. Pre-tax profit in general (non-life) insurance during the Reporting Period amounted to NIS 80 million compared with NIS 37 million in the corresponding period last year. 1 -43

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2.9.1. Motor property In motor-vehicle property insurance gross premiums during the Reporting Period amounted to NIS 313 million compared with gross premiums of NIS 336 million during the corresponding period last year, a 7% decrease. Decrease in premiums stems mostly from a decline in the share held by Harel Insurance of the insurance for state employees' motor vehicles and an erosion of the average premium due to severe competition in this sub-sector of activity. During the Reporting Period, premiums in retention amounted to NIS 249 million compared with NIS 266 million in the corresponding period last year, a 6% decrease. Comprehensive income in motor-vehicle property insurance in the Reporting Period amounted to NIS 3 million compared with loss of about NIS 11 million in the corresponding period last year. The transition from loss to profit stems, inter alia, from the influence of the capital market and from the influence of the inflation in which was zero-rate during the Reporting Period as against positive inflation for the corresponding period last year. Pre-tax profit in motor-vehicle property insurance in the Reporting Period amounted to NIS 1 million compared with loss of about NIS 8 million in the corresponding period last year. In November 2111, 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 11% 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's will insure in 2012 is not expected to significantly affect Harel Insurance's performance. 2.9.2. Compulsory motor During the Reporting Period, gross premiums in compulsory motor vehicle insurance sector amounted to NIS 192 million compared with gross premiums of NIS 206 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. 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 153 million compared with NIS 163 million in the corresponding period last year. Comprehensive income in compulsory motor insurance in the Reporting Period amounted to NIS 54 million compared with NIS 12 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 the zero-rate index during the Reporting Period as against the positive index for the corresponding period last year which affected the reserves that are linked to the CPI. Pre-tax profit for compulsory motor insurance during the Reporting Period amounted to NIS 42 million compared with NIS 26 million during the corresponding period last year, a 61% 1 -44

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increase. 2.9.3. Liabilities branches and others During the Reporting Period gross premiums in liabilities insurance and others amounted to NIS 183 million compared with NIS 189 million during the corresponding period last year. Premiums in retention in the Reporting Period amounted to NIS 95 million compared with NIS 91 million during the corresponding period last year, a 5% increase. Comprehensive profit in Liabilities insurance and others in the Reporting Period amounted to NIS 19 million compared with loss of about NIS 2 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 the zero-rate index during the Reporting Period as against the positive index for the corresponding period last year which affected the reserves that are linked to the CPI. Pre-tax profit in others liabilities insurance in the Reporting Period amounted to NIS 12 million compared with NIS 3 million during the corresponding period last year. 2.9.4. Property and other branches Premiums in property and other branches during the Reporting Period amounted to NIS 210 million compared with NIS 188 million during the corresponding period last year, an 12% increase. Premiums in retention during the Reporting Period amounted to NIS 58 million compared with NIS 48 million during the corresponding period last year, a 21% increase. Comprehensive profit in property and other branches in the Reporting Period amounted to NIS 13 million similar to the comprehensive profit in the corresponding period last year. Pre-tax profit in property insurance and other branches during the Reporting Period amounted to NIS 13 million, similar to the profit in the corresponding period last year. 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 8 million compared with NIS 15 million in the corresponding period last year, a decrease of about 45%. 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 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 18 million compared with NIS 2 million loss 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 the zero- rate index during the Reporting Period as against the positive index for the corresponding period 1 -45

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last year. Positive index affects the increase in the reserves that are linked to the CPI. Pre-tax profit in credit risks inherent in mortgage assets during the Reporting Period amounted to NIS 12 million compared with NIS 4 million in the corresponding period 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 45 million, compared with NIS 30 million for the corresponding period last year, an increase of 47%. 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 2 million for the Reporting Period, compared with a comprehensive loss of NIS 4 million for the corresponding period last year.

During the Reporting Period, the insurance companies abroad posted a pre-tax loss of NIS 5 million, compared with a pre-tax loss of NIS 2 million for the corresponding period 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 April 2012 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 50 million, compared with NIS 65 million for the corresponding period last year, a 24% 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 volume of assets under management in the mutual funds during the Reporting Period relative to the average volume of assets under management during the corresponding period last year.

Total Management fees from the mutual funds and Managed Cases during the Reporting Period totaled NIS 36 million, compared with NIS 50 million for the corresponding period last year.

The volume of assets under management in the capital market and financial services segment at March 31, 2012, was NIS 26 billion, compared with NIS 26.3 billion at March 31, 2011, and compared with NIS 24.1 billion at December 31, 2011. This is a 1% decrease against the corresponding period last year and a 8% increase against December 31, 2011.

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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 18.1 billion at March 31, 2012, compared with NIS 20.7 billion at March 31, 2011 and NIS 17 billion at December 31, 2011, as well as ETF assets, which at March 31, 2012 amounted to NIS 4.1 billion against to NIS 3.1 billion at March 31, 2011 and NIS 3.6 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 5.5 million, as against a pre-tax loss of NIS 11.3 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 volume of assets under management in the mutual funds6 2.12. Income tax Income tax During the Reporting Period amounted to an expense of NIS 112 million, compared with revenues under the income tax item of NIS 60 million compared with the corresponding period 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 732 million. Net cash flows used for investment activity amounted to NIS 24 million. Net cash flows resulting from activity and fluctuations in exchange rate amounted to NIS 767 million. The result of all the aforesaid activity is reflected in an increase in cash balances in the amount of NIS 11 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.

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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 March 31, 2012, the balance of these liability notes was NIS 194 million. Issue of liability notes by Harel Financing &Share Issues Ltd. ("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 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 and of mutual funds by Harel- Pia. 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, Standard & Poor's Maalot ("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 1 -48

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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 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 1 -49

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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 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), had 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 1 -51

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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. 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 March 31, 2012, the balance of the liability notes from Series B - E was NIS 962 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 1 -51

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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 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 2.2.7 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. 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 December 31, 2011, this ratio was 0.1; (4) the ratio of the net financial debt to shareholders equity will be no more than 0.5. At December 31, 2011, 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.

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At March 31, 2012, the outstanding loan was NIS 192 million. At March 31, 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 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 March 31, 2012, the outstanding loan was NIS 187 million. At March 31, 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 1 -53

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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. Regarding Dikla's capital - see Note 7 to the Financial Statements. As of the Reporting date, no delaying circumstances have occurred. As at March 31, 2012, the balance of the capital notes is NIS 100.4 million.

A loan that Harel-Pia took from bank In February 2011, Harel Pia took a loan of NIS 80 million from a bank. The loan is for a 5-year period, where the principal and interest are to be repaid in quarterly installments, as of June 2011. The loan was taken to repay a loan that Harel Pia took from the Company. To obtain the credit, Harel Pia and Harel Finance gave liens to the bank. Moreover, the loan agreement prescribes financial criteria, which if violated, entitle the bank to demand immediate repayment of the loan. These financial criteria mostly address the volume of revenues from management fees and the rate of 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, for example a loan from Harel Insurance; (3) Harel Pia shares that are held 1 -54

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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) 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 March 31, 2012, the EBITDA ratio was 1.2; (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 March 31, 2012, the amount required was NIS 134 million. The total assets multiplied by the actual management fee, at that date, amounted to NIS 136 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 March 31, 2012, this ratio is 77.9%; (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 March 31, 2012, the equity, including capital notes, was NIS 343 million. At March 31, 2012, the outstanding loan was NIS 62.6 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 March 31, 2012, the equity was NIS 51.2 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 March 31, 2012, Harel Financial Products was in compliance with the aforementioned covenants. 1 -55

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At March 31, 2012, the outstanding loans and credit undertaken by Harel Financial Products amounted to NIS 72 million. 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 March 31, 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 March 31, 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, Harel Trade & Securities was in compliance with the aforementioned covenants. At March 31, 2012, there is no outstanding amount in respect of these loans. In addition to the aforementioned loan, at March 31, 2012 the Company and companies in the Group have short-term loans in the amount of NIS 48 million.

3. Market Risk Exposure and Management There were no material changes during the Reporting Period in the exposure to the Company's market risks and their management compared with the periodical report.

4. Corporate governance 4.1. Details concerning the process for approving the Company's financial statements The Companies (Provisions and conditions concerning the procedure for approval of the financial statements) Regulations, 5770-2010, include mandatory rules that public companies must apply in the process of approving financial statements. The provisions of the regulations apply from the financial statements at December 31, 2010. The regulations stipulate that before the annual financial statements are presented for the approval of the company's board of directors, the reports are to be discussed and approved by a special committee known as "the Committee for the Review of the Financial Statements" ("the Committee"). The Committee is responsible for discussing the financial statements and formulating a recommendation to the board of directors regarding those matters prescribed in the regulations. The regulations prescribe several conditions with respect to the composition of the Committee and its discussions: (a) The Committee shall consist of at least 3 members;

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(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) 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 1 -57

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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, External Director and Audit Committee member in EMI (as of 3.3.2011), 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, Elrov Israel (as of (excluding the Group's companies): 23.1.11), Director and Audit Committee member of Hem-let (from July 2011) and Tempo drinks (from January 2012). 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.

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, chairman of the Audit Committee, member of the Procedures Committee, chairman of the Committee for Transactions with Principal Shareholders, member of the Credit Committee and of the Committee for the Review of the Financial Statements of Bank Leumi LeIsrael Ltd6 Chairman of the management committee of the National Institute for Testing and Evaluation. Full Professor, Faculty of Laws, and member of various committees at the Hebrew University, Jerusalem. Corporations in which she serves as director External director and member of the audit committee of Harel (excluding the Group's companies): Insurance Company 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. 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.

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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 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. 4.1.2. Procedure for approval of the financial statements: To approve the financial statements at March 31, 2012, the Committee convened on May 22, 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 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 May 22, 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 1 -59

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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 May 22, 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. 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 1 -61

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments & Financial Board of Directors'' Report Services Ltd three-months period ended march 31, 2011 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 led by the risk manager who is responsible for implementing the provisions of the Directive. In addition, the audit committee of the 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 company's deployment each quarter, ensuring that it progresses according to the detailed, long-term plan for implementing the Directive which was approved by this board of director. 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. The Company 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, 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 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 the Company's various boards of directors prior to the submittal of report to the Commissioner. Concurrent with the submittals, the companies 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 the 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 1 -61

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments & Financial Board of Directors'' Report Services Ltd three-months period ended march 31, 2011

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 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, began the process to build up the database needed for these calculations. 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. 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, the Company 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, The Company 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

May 23, 2012

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HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS As at March 31, 2012 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c

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 March 31, 2012 and the condensed interim consolidated statements of income, comprehensive income, changes in capital and cash flows for the three months then ended. The Board of Directors and management are responsible for the preparation and presentation of the financial information for this interim period in accordance with international accounting standard IAS 34 “Financial reporting for interim periods”, and they are responsible for the preparation for the preparation of financial information for this interim period under Chapter D of the Securities Regulations (Periodic and Immediate Reports) - 1970. To the extent that these regulations apply to insurance companies 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 period, based on our review.

We did not review the condensed financial information for the interim period of consolidated companies whose assets included in the consolidation comprise 9.03% of all the consolidated assets as at March 31, 2012 and whose revenues included in the consolidation comprise 1.9% of all the consolidated revenues for the period of 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 134,328 thousand as at March 31, 2012, and the Group’s shares of their profit aggregated NIS 3,403 thousand for the periods of 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) May 23, 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 three months ended For the year ended December March 31 31 2012 2011 2011 (Unaudited) (Unaudited) (Audited) Assets NIS thousands NIS thousands NIS thousands Intangible assets 1,454,771 1,504,393 1,467,694 Deferred tax assets 11,827 6,329 14,951 Deferred acquisition costs 1,339,893 1,269,550 1,288,211 Fixed assets 637,118 616,530 640,808 Investments in investees treated using the balance sheet value method 320,344 214,660 316,875 Real estate investments - yield dependent contracts 878,832 733,118 873,554 Other real estate investments 1,281,021 1,048,569 1,231,808 Reinsurance assets 5,133,817 5,195,813 5,114,630 Current tax assets 89,665 43,005 102,278 Other receivables 318,749 285,229 318,943 Outstanding premiums 1,149,558 1,092,172 1,082,705 Outstanding premiums 19,833,957 18,545,302 18,618,758 Financial assets – yield dependent contracts 3,881,201 2,863,190 3,414,992 Other financial investments: Marketable debt assets 6,761,530 6,659,197 6,686,029 Non-marketable debt assets 9,008,606 8,010,471 8,665,087 Shares 472,297 591,531 511,594 Other investments 1,487,376 1,874,878 1,512,729 Total other financial investments 17,729,809 17,136,077 17,375,439 Cash and cash equivalents pledged for ETFs holders 393,013 632,484 265,511 Cash and cash equivalents - yield dependent contracts 1,243,173 987,339 1,247,598 Other cash and cash equivalents 1,566,183 1,163,220 1,550,330 Total assets 57,262,931 53,336,980 54,925,085 Total assets - yield dependent contracts 22,301,794 20,631,091 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 three months ended For the year ended December March 31 31 (Unaudited) (Unaudited) (Audited) NIS NIS thousands thousands NIS thousands Equity and liabilities Equity Share capital and share premium 306,296 307,203 306,895 Treasury stock (137,285) (137,789) (138,582) Capital reserves 162,416 191,807 63,925 Retained earnings 3,484,832 3,236,046 3,293,013 Total equity attributed to company shareholders 3,816,259 3,597,268 3,525,250 Minority rights 4,419 1,654 4,033 Total equity 3,820,678 3,598,922 3,529,283 Liabilities Liabilities in respect of non-yield dependent insurance and investment contracts 21,828,590 21,004,167 21,548,259 Liabilities in respect of yield dependent insurance and investment contracts 21,929,679 20,308,554 20,665,270 Deferred tax liabilities 371,233 309,161 308,497 Net liabilities for employee benefits 231,987 216,061 229,419 Current tax liabilities 10,641 10,133 7,400 Creditors and credit balances 2,358,265 2,159,848 2,366,178 ETF's liabilities 4,045,705 3,082,080 3,510,226 Financial liabilities 2,666,152 2,648,054 2,760,554 Total liabilities 53,442,252 49,738,059 51,395,802 Total equity and liabilities 57,262,930 53,336,980 54,925,086

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: May 23, 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 three months ended For the year ended March 31 December 31 (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands Premiums earned, gross 2,213,896 2,084,981 8,617,213 Premiums earned by reinsurers 369,317 367,763 1,516,608 Premiums earned in retention 1,844,579 1,717,218 7,100,605

Net profit (loss) from investments and financial income 1,317,385 568,913 562,823 Income from management fees 177,259 192,262 725,271 Income from commissions 94,246 97,235 437,099 Other income 2,501 215 5,849

Total income 3,435,970 2,575,843 8,831,647 Payments and changes in liabilities for insurance and investment contracts, gross 2,738,841 2,141,270 6,987,377 Reinsurers' share in payments and changes for insurance contracts liabilities 244,557 312,009 1,115,860 Payments and changes in liabilities for insurance and investment contracts, in retention 2,494,284 1,829,261 5,871,517 Commission, marketing and other acquisition expenses 388,245 329,103 1,493,118 General and administrative expenses 214,099 205,299 832,833 Other expenses 15,731 11,906 74,740 Financing expenses 26,175 40,730 193,348

Total expenses 3,138,534 2,416,299 8,465,556 Company share of profit (loss) of investee companies recorded by the equity method 7,032 10,570 31,368

Profit (loss) before income taxes 304,468 170,114 397,459 Income taxes (benefits) 112,389 60,462 179,298

Net profit (loss) for the year 192,079 109,652 218,161 Attributed to: Company shareholders 191,819 109,633 217,835 Minority interests 260 19 326

Net profit (loss) for the year 192,079 109,652 218,161

Basic profit (loss) per share (shekel) 9.08 5.41 10.31

Diluted profit (loss) per share (shekel) 9.08 5.37 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 three months ended For the year ended March 31 December 31 (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands

Profit for the year 192,079 109,652 218,161 Other comprehensive incomes: Revaluation of fixed assets, net 41,438 2,448 2,698 Net changes in fair value of financial assets available for sale 121,655 (23,212) (284,042) Net changes in fair value of financial assets available for sale transferred to statement of income (30,283) (40,962) (88,580) Loss from impairment in value of financial assets available for sale transferred to statement of income 13,811 4,177 94,406 Foreign currency transaction's difference in respect of overseas operations (1,848) 3,628 9,406 Taxes on income for other components of comprehensive profit (loss) (49,170) 23,073 92,746 Other comprehensive incomes, net of income tax 95,604 (30,848) (173,366) Total comprehensive profit for the year 287,683 78,804 44,795 Attributed to: Company shareholders 287,297 78,825 44,517 Minority rights 386 (21) 278 Total comprehensive profit for the year 287,683 78,804 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 the Company’s owners

Attributed to company shareholders fund for Transactions revaluation Capital Capital Translation reserve for reserve with non- of Share financing 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 NIS NIS NIS thousands thousands thousands thousands thousands Thousands Thousands Thousands Thousands Thousands Thousands (For the three months ended March 31, 2012 (Unaudited Balance as at December 31, 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 ------191,819 191,819 260 192,079 Total other comprehensive income (loss) - 69,567 (999) - - - 26,910 - 95,478 126 95,604 Total comprehensive income for year - 69,567 (999) - - - 26,910 191,819 287,297 386 287,683

Transactions with owners credited directly to equity Dividends paid ------Share based payment ------Reissuing of treasury stock (599) - - 3,013 (1,205) - - - 1,209 - 1,209 Purchase of treasury stock - - - - 2,503 - - - 2,503 - 2,503 Sale of non-controlling interests ------Acquisition of minority interests ------

Balance as at march 31, 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

The notes accompanying the condensed interim consolidated financial statements are an integral part thereof. 2-8 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c

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

Attributed to the Company’s shareholders

Attributed to company shareholders fund for Transactions revaluation Capital Translation Capital reserve for reserve with non- of Share financing 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 NIS NIS NIS thousands thousands thousands thousands thousands Thousands Thousands Thousands Thousands Thousands Thousands (For the three months ended March 31, 2012 (Unaudited Balance as at December 31, 2011 306,961 263,835 (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 ------109,633 109,633 19 109,652 Total other comprehensive income (loss) - (36,237) 3,422 - - - 2,007 - (30,808) (40) (30,848) Total comprehensive income for year - (36,237) 3,422 - - - 2,007 109,633 78,825 (21) 78,804

Transactions with owners credited directly to equity Dividends paid ------(63,137) (63,137) - (63,137) Share based payment - - - 1,861 - - - - 1,861 - 1,861 Reissuing of treasury stock - - - - (3,321) - - - (3,321) - (3,321) Purchase of treasury stock 512 - - - 4,157 - - - 4,669 - 4,669 Balance as at march 31, 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

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 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 (Audited)Balance as at December 31, 2011

Balance as at January 1, 2011 306,691 263,835 (14,240) 18,810 (138,625) (45,660) 6,381 3,181,178 3,578,370 1,675 3,580,045

Comprehensive income for year Profit for year ------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 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 ended For the year ended March 31 December 31 (Unaudited) (Unaudited) (Audited) Append NIS NIS ix thousands thousands NIS thousands

Cash flows from operating activities Before taxes on income A (652,448) 357,009 404,624 Income tax (paid) refund (79,799) (53,684) (212,775)

Net cash provided by operating activities (732,247) 303,325 191,849

Cash flows from investing activities Investment in investee companies 624 - (86,412) Investment of fixed assets (9,779) (19,425) (73,353) Investment in intangible assets (14,766) (13,233) (72,119) Dividends from investee company - - 14,483 Proceeds from sale of fixed assets 328 462 2,549

Net cash used for investing activities (23,593) (32,196) (214,852)

Cash flows for financing activities Dividend paid to minority interests - - 305,583 Proceeds from issue of liability notes 698 1,348 246 Acquisition of Treasury stock 841,010 93,777 979,937 Proceeds from issue of ETF's 7,571 (312,833) (255,492) Loans from banks and others - 180,000 - Repayments of loans from banks and others (93,265) (23,959) (64,944) Dividends paid - - (106,000)

Net cash provided by (used for) financing activities 756,014 (61,667) 859,330

Effect of fluctuations in currency exchange rate on balances of cash and cash equivalents 11,254 (1,086) 19,418

Increase in cash and cash equivalents 11,428 208,376 855,745

Cash and cash equivalents, beginning of the year B 2,797,928 1,942,183 1,942,183

Cash and cash equivalents, end of the year C 2,809,356 2,150,559 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 three months ended For the year ended December March 31 31 (Unaudited) (Unaudited) (Audited) NIS NIS thousands thousands NIS thousands (Appendix A - Cash flows from operating activities before taxes on income (1), (2), (3) Profit for period 192,079 109,652 218,161 Items not involving cash flows Company’s share of loss (profit) of investee companies recorded on the equity basis (7,032) (10,570) (31,368) Losses (profit) - financial investments - yield dependent insurance policies and investment contracts, net (764,746) (48,222)* 1,404,963 Net losses (profits) from other financial investments Marketable debt assets (32,278) (72,112) (152,707) Non-marketable debt assets 2,413 (70,300) (181,413) Shares (2,818) (4,509) (14,907) Other investments (125,602) 10,200 192,556 Financing expenses (income) for financial liabilities (311,042) (112,701)* (807,438)* Net losses (profits) from realizations - Fixed assets 145 (30) (272) Changes in fair value of real estate for investment - for yield dependent contracts (194) (2,567) (27,967) Changes in fair value of other real estate investment (2,979) (60) (85,718) Depreciation and amortization - Fixed assets 13,103 13,233 40,864 Intangible assets 27,714 23,574 119,073 Change in liabilities for non yield dependent insurance and investment contracts 277,333 524,401 1,075,192 Change in liabilities for yield dependent insurance and investment contracts 1,264,409 650,848 1,007,564 Change in reinsurance assets (18,492) (90,072) (10,319) Change in deferred acquisition costs (51,317) (71,488) (90,944) Share based payment 3,013 1,861 11,365 Income taxes 112,389 60,462 179,298 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 (5,085) (19,224) (134,260) Proceeds from the sale of real estate for investment (492,090) (362,088) (1,820,329) Other financial investments and real estate for investment Acquisition of real estate for investment (4,841) (75,063) (195,145) Proceeds from the sale of real estate for investment - 340 22,845 Acquisitions net, of financial investments (166,707) (155,826) (411,451) Outstanding premiums (65,841) (172,768) (165,255) Other receivables (61,880) (21,476) (15,988) Investment for ETFs holders (466,209) 626,950 75,148 Cash and cash equivalents pledged for ETFs holders (127,502) (310,569) 56,404 Other payables 159,066 (50,395) 147,726 Liabilities for employee benefits, net 2,543 (14,472) (1,054) Total adjustments required to present cash flows from operating activities (844,527) 247,357 186,463 Total cash flows from operating activities, before taxes on income (652,448) 357,009 404,624

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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 323 million (for the 3 months ended March 31, 2011 an amount of NIS 331 million and for 2011 an amount of NIS 669 million) and the interest paid of NIS 53 million (for the 3 months ended March 31, 2011 an amount of NIS 18 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 27 million (for the period of 3 months ended March 31, 2011 of NIS 30 million and for 2011 an amount of NIS 34 million).

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

2-03 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c

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

For the three months ended For the year ended March 31 December 31 (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands

Appendix B - Cash and cash equivalents, beginning of the period Cash and cash equivalents for yield dependent contracts 1,247,598 746,829 746,829 Other cash and cash equivalents 1,550,330 1,195,354 1,195,354 Cash and cash equivalents, beginning of period 2,797,928 1,942,183 1,942,183

Appendix C - Cash and cash equivalents, end of period Cash and cash equivalents for yield dependent contracts 1,243,173 987,339 1,247,598 Other cash and cash equivalents 1,566,183 1,163,220 1,550,330 Cash and cash equivalents, end of year 2,809,356 2,150,559 2,797,928

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

2-04 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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 March 31, 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 May 23, 2012. b. Use of estimates and discretion 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.

2-05 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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- month period ended March 31, 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. Furthermore, in the cash flow report, under the change item, current and deferred taxes were reclassified to financing expenses (income) in respect of financial liabilities. This reclassification did not have any significant 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.

Up to the date of implementing the Amendment, in calculating deferred tax liabilities, the Group applied a "mixed" approach, whereby the deferred taxes in respect of the land component were calculated in accordance with the tax base and the tax rate applicable to the sale of real estate assets, whereas the deferred taxes in respect of the building component were calculated according to the manner in which the Company expects to consume the economic benefits inherent in the investment property assets. Accordingly, before the Amendment took effect, some of the deferred taxes in respect of depreciable assets were recognized according to the tax rate and tax base relating to the on-going consumption of the asset and not the tax rate and tax base relating to the gain from the sale.

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

Following to note 3Y at the Annual Statements, the Group has not yet adopted the standards, as described in the notes above. c. Seasonality 1. Life and health insurance The revenues from life and health insurance premiums are not characterized by seasonality. Nevertheless, due to the fact that the provisions for life assurance enjoy tax benefits, a considerable part of new sales is affected mainly at the end of the year.

2-06 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 3 – Significant accounting principles (contd.)

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

2-07 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 4 - Operating segments (contd.) 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.

2-08 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 4 - Operating segments (contd.) a. Information regarding reporting segments A. Information regarding segment reporting (For the three months ended March 31 2012 (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 NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands Thousands Thousands Thousands Premiums earned, gross 802,765 656,435 712,749 44,632 - - (2,685) 2,213,896 Premiums earned by reinsurers 28,351 43,509 285,358 14,784 - - (2,685) 369,317 Premiums earned in retention 774,414 612,926 427,391 29,848 - - - 1,844,579 Net profit (loss) from investments and financial income 1,071,953 82,538 67,750 (923) 5,520 89,600 948 1,317,386 Income from management fees 137,429 2,809 - - 35,754 1,267 - 177,259 Income from commissions 2,148 18,342 53,505 4,843 8,412 15,276 (8,279) 94,247 Other income 3 - - - - 3,340 (843) 2,500 Total income 1,985,947 716,615 548,646 33,768 49,686 109,483 (8,174) 3,435,971 Payments and changes in liabilities for insurance and investment contracts, gross 1,631,058 542,030 522,159 44,942 - - (1,349) 2,738,840 Reinsurers' share in payments and changes for insurance contracts liabilities 26,122 17,998 175,939 25,847 - - (1,349) 244,557 Payments and changes in liabilities for insurance and investment contracts, in retention 1,604,936 524,032 346,220 19,095 - - - 2,494,283 Commission, marketing and other acquisition expenses 142,380 114,295 122,468 16,234 - 1,147 (8,279) 388,245 Management and general expenses 88,748 43,152 7,109 3,006 42,639 30,287 (843) 214,098 Other expenses 13,998 - 241 137 293 1,062 - 15,731 Financing expenses 1,761 1,507 (4,719) - 1,262 26,370 (6) 26,175 Total expenses 1,851,823 682,986 471,319 38,472 44,194 58,866 (9,128) 3,138,532 Company share of profit of investee companies recorded by the equity method 648 373 2,243 - - 3,768 - 7,032 Profit (loss) before income taxes 134,772 34,002 79,570 (4,704) 5,492 54,385 954 304,471 Other comprehensive incomes, before income tax 48,929 10,641 27,825 3,180 (8) 54,207 - 144,773 Total comprehensive profit (loss) before income tax 183,701 44,643 107,395 (1,524) 5,484 108,592 954 449,244

Liabilities in respect of non-yield dependent insurance and investment contracts 9,610,801 2,263,774 9,744,295 218,673 - - (8,953) 21,828,590 Liabilities in respect of yield dependent insurance and investment contracts 20,125,659 1,804,021 - - - - - 21,929,680

2-09 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 4 - Operating segments (contd.) a. Information regarding reporting segments (contd.)

A. Information regarding segment reporting (Cont'd) (For the three months ended March 31 2011 (Unaudited 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 NIS Thousands Thousands Thousands Thousands Thousands NIS Thousands Thousands Thousands Premiums earned, gross 777,188 581,961 696,906 30,449 - - (1,523) 2,084,981 Premiums earned by reinsurers 29,174 41,314 288,054 10,744 - - (1,523) 367,763 Premiums earned in retention 748,014 540,647 408,852 19,705 - - - 1,717,218 Net profit (loss) from investments and financial income 405,033 49,482 84,655 5,866 5,310 21,507 (2,940) 568,913 Income from management fees 138,384 2,931 - - 49,675 1,272 - 192,262 Income from commissions 8,207 18,303 49,097 3,750 10,429 17,654 (10,205) 97,235 Other income - - - - - 847 (632) 215 Total income 1,299,638 611,363 542,604 29,321 65,414 41,280 (13,777) 2,575,843 Payments and changes in liabilities for insurance and investment contracts, gross 1,001,299 465,710 656,728 18,963 - - (1,430) 2,141,270 Reinsurers' share in payments and changes for insurance contracts liabilities 18,768 29,454 260,544 4,673 - - (1,430) 312,009 Payments and changes in liabilities for insurance and investment contracts, in retention 982,531 436,256 396,184 14,290 - - - 1,829,261 Commission, marketing and other acquisition expenses 127,631 88,337 110,326 12,408 - 606 (10,205) 329,103 Management and general expenses 76,906 37,502 6,607 4,184 52,367 28,365 (632) 205,299 Other expenses 11,069 - 238 - - 599 - 11,906 Financing expenses 4,324 3,177 (3,298) - 1,755 37,361 (2,589) 40,730 Total expenses 1,202,461 565,272 510,057 30,882 54,122 66,931 (13,426) 2,416,299 Company share of profit of investee companies recorded by the equity method 666 855 4,837 - - 4,212 - 10,570 Profit (loss) before income taxes 97,843 46,946 37,384 (1,561) 11,292 (21,439) (351) 170,114 Other comprehensive incomes, before income tax (16,468) (6,635) (27,778) (2,156) (244) (640) - (53,921) Total comprehensive profit (loss) before income tax 81,375 40,311 9,606 (3,717) 11,048 (22,079) (351) 116,193

Liabilities in respect of non-yield dependent insurance and investment contracts 9,172,168 1,946,015 9,718,478 173,629 - - (6,123) 21,004,167 Liabilities in respect of yield dependent insurance and investment contracts 18,806,340 1,502,214 - - - - - 20,308,554

2-21 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 4 - Operating segments (contd.) Information regarding reporting 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 Thousand NIS NIS NIS Thousands Thousands Thousands Thousands s NIS Thousands Thousands 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, 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 2-20 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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 March 31 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 191,816 313,299 209,789 183,408 8,126 906,438 Premiums earned by reinsurers 38,931 64,215 151,544 88,474 - 343,164 Retention premiums earned 152,885 249,084 58,245 94,934 8,126 563,274 Changes in premium balances that have not yet been earned, retention 42,262 83,589 12,419 5,598 (7,986) 135,882 Retention premiums earned 110,623 165,495 45,826 89,336 16,112 427,392 Profits from investments, net, and financing income 34,575 6,392 1,424 17,934 7,425 67,750 Commission income 4,339 10,625 26,546 11,995 - 53,505 Total income 149,537 182,512 73,796 119,265 23,537 548,647 Payments and changes in liabilities for insurance contracts, gross 123,112 182,192 68,561 142,434 5,859 522,158 Reinsurer's share of payments and changes in liabilities for insurance contracts 25,435 36,482 48,518 65,504 - 175,939 Payments and changes in liabilities for insurance contracts, retention 97,677 145,710 20,043 76,930 5,859 346,219 Commission, marketing expenses and other acquisition costs 13,379 35,479 40,692 31,601 1,317 122,468 Management and general expenses 868 1,090 667 631 3,853 7,109 Other expenses - - - - 241 241 Financing expenses (income), Net (2,703) (500) (111) (1,402) (3) (4,719) Total expenses 109,221 181,779 61,291 107,760 11,267 471,318 Company share of profit (loss) of investee companies recorded by the equity method 1,286 238 53 667 - 2,244 Profit (loss) before income taxes 41,602 971 12,558 12,172 12,270 79,573 Other comprehensive incomes, before income tax 12,829 2,372 529 6,654 5,440 27,824 Total comprehensive profit (loss) before income tax 54,431 3,343 13,087 18,826 17,710 107,397

Liabilities for insurance policies, gross, as at March 31, 2012 2,812,244 700,886 573,377 5,015,966 641,822 9,744,296

* Property braches and others include mainly results from property loss insurance and comprehensive apartments insurance, whose activities comprise 80% of total premiums in these branches. ** Other liabilities branches include mainly results from third-party insurance and professional liability whose activities comprise 76% of total premiums in these branches. 2-22 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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.)

(For the three months ended March 31 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 205,765 336,356 187,907 188,945 14,887 933,860 Premiums earned by reinsurers 42,333 70,030 139,523 98,906 - 350,792 Retention premiums earned 163,432 266,326 48,384 90,039 14,887 583,068 Changes in premium balances that have not yet been earned, retention 52,712 97,760 4,621 20,464 (1,341) 174,216 Retention premiums earned 110,720 168,566 43,763 69,575 16,228 408,852 Profits from investments, net, and financing income 49,604 8,553 306 19,266 6,926 84,655 Commission income 4,031 10,956 23,974 10,136 - 49,097 Total income 164,355 188,075 68,043 98,977 23,154 542,604 Payments and changes in liabilities for insurance contracts, gross 152,761 200,755 99,249 190,273 13,690 656,728 Reinsurer's share of payments and changes in liabilities for insurance contracts 24,988 38,821 82,106 114,629 - 260,544 Payments and changes in liabilities for insurance contracts, retention 127,773 161,934 17,143 75,644 13,690 396,184 Commission, marketing expenses and other acquisition costs 13,072 34,927 38,780 22,193 1,354 110,326 Management and general expenses 659 565 629 546 4,208 6,607 Other expenses - - - - 238 238 Financing income, Net (58) (367) (1,448) (1,425) - (3,298) Total expenses 141,446 197,059 55,104 96,958 19,490 510,057 Company share of profit (loss) of investee companies recorded by the equity method 2,965 532 105 1,235 - 4,837 Profit (loss) before income taxes 25,874 (8,452) 13,044 3,254 3,664 37,384 Other comprehensive incomes, before income tax (13,732) (2,465) (485) (5,721) (5,375) (27,778) Total comprehensive profit (loss) before income tax 12,142 (10,917) 12,559 (2,467) (1,711) 9,606

Liabilities for insurance policies, gross, as at March 31, 2011 2,825,632 712,698 567,725 4,981,913 630,510 9,718,478

* Property braches and others include mainly results from property loss insurance and comprehensive apartments insurance, whose activities comprise 84% of total premiums in these branches. ** Other liabilities branches include mainly results from third-party insurance and professional liability whose activities comprise 78% of total premiums in these branches. 2-23 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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 (18,120) 44,630 Retention premiums earned 437,291 681,043 161,591 301,722 63,015 1,644,662 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 2,179,204 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 104,472 144,360 210,026 439,845 - 898,703 Payments and changes in liabilities for insurance contracts, retention 454,613 588,945 70,180 300,660 47,527 1,461,925 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 2,080,129 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 8,585 110,476 Other comprehensive incomes, 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) 16,586

Liabilities for insurance policies, gross, as at March 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.

2-24 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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 March 31 2012 (Unaudited March 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 - - 802,765 802,765 - - 777,188 777,188 Premiums earned by reinsures - - 28,351 28,351 - - 29,174 29,174 Retention premiums earned - - 774,414 774,414 - - 748,014 748,014 Profits from investments, net, and financing income 245 1,475 1,070,233 1,071,953 209 957 403,867 405,033 Management fee income 55,779 44,829 36,820 137,428 59,340 40,050 38,994 138,384 Commission income - - 2,148 2,148 - - 8,207 8,207 Total income 56,024 46,304 1,883,615 1,985,943 59,549 41,007 1,199,082 1,299,638 Payments and changes in liabilities for insurance contracts and investment contracts, gross 445 1,767 1,628,846 1,631,058 481 1,582 999,236 1,001,299 Reinsurer's share of payments and changes in liabilities for insurance contracts - - 26,122 26,122 - - 18,768 18,768 Payments and changes in liabilities for insurance contracts and investment contracts, retention 445 1,767 1,602,724 1,604,936 481 1,582 980,468 982,531 Commission, marketing expenses and other acquisition costs 15,457 20,557 106,366 142,380 13,901 18,494 95,236 127,631 Management and general expenses 18,367 12,554 57,826 88,747 21,198 9,779 45,929 76,906 Other expenses 7,566 1,118 5,314 13,998 4,596 1,159 5,314 11,069 Financing expenses , net 37 175 1,550 1,762 66 838 3,420 4,324 Total expenses 41,872 36,171 1,773,780 1,851,823 40,242 31,852 1,130,367 1,202,461 Company share of profit (loss) of investee companies recorded by the equity method - - 648 648 - - 666 666 Profit (loss) before income taxes 14,152 10,133 110,483 134,768 19,307 9,155 69,381 97,843 Other comprehensive incomes, before income tax 148 (269) 49,050 48,929 (166) (831) (15,471) (16,468) Total comprehensive profit (loss) before income tax 14,300 9,864 159,533 183,697 19,141 8,324 53,910 81,375

2-25 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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 (loss) before income taxes 36,404 44,725 61,376 142,505 Other comprehensive incomes, before income tax 226 (934) (106,662) (107,370) Total comprehensive profit (loss) before income tax 36,630 43,791 (45,286) 35,135

2-26 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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. Memorandum 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

In January 2012, a memorandum 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 purpose of the memorandum of law is to advance goals in connection with encouraging provident funds to invest in residential real estate. Accordingly, under the conditions prescribed in the law, a tax exemption will be given to income from the leasing of residential apartments by provident funds, with the purpose of supplementing the package of incentives to encourage long-term rental projects. The government has authorized the Ministerial Legislative Committee to submit the final text of the draft law for the approval of the Knesset in the near future.

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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-27 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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-28 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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-29 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 subsidiaries was that for the purpose of purchase tax, the value of the land acquired includes only the land component, while the tax authorities claim that the land value should include the total cost of the property. 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 16 million. 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 applies 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;%

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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-31 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

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. 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. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-30 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 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 17, 18 and 19 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. 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. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-32 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.) 2. (contd.)

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.

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. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-33 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. (contd.)

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. 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. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-34 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.)

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.

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.

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. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-35 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. (contd.)

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.

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 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.

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. Dikla should respond to that request.

10. 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. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-36 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.) 10. (contd.)

Pursuant to the Court's decision from February 23, 2012, the compromise settlement was submitted to the Attorney General and the Commissioner of Insurance for their response. On March 1, 2012 it was published in the newspaper that a request for compromise settlement was submitted.

11. 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.

12. 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. 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.

13. 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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-37 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.)

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.

14. 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 has yet to submit his position.

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

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

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

The plaintiffs estimate the total loss from all the respondents for all members of the group in the amount of NIS 350 million. The plaintiffs estimate the total loss against Harel Insurance in the amount of NIS 72 million. 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 case has been scheduled for oral summings up. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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.)

16. 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.

17. 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.

18. 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.

19. 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. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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.) 19. (contd.)

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. The Company has yet to submit its response to the application for certification as a class action.

20. 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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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.)

Class actions filed 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. Harel Insurance has yet to submit its response to the application for certification.

2. 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.

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.

3. On May 13, 2012, a claim was filed in the Tel Aviv District Court against Harel Insurance and the Tax Authority with an application for its recognition as a class action. 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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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.) 3. (contd.)

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 did not specify the amount of the action for himself and/or for the members of the group he wishes to represent. A preliminary review of the action shows that it was filed not in accordance with the provisions of the law. Furthermore, a preliminary review of the action shows that the plaintiff himself alleges that Harel Insurance operated in accordance with the Tax Authority directives, including following a specific referral regarding his affairs, but he argues that the Tax Authority's instructions are incorrect, despite the provisions stipulated in the Regulations. Based on these circumstances, Harel Insurance believes that it has good arguments for dismissing the action at the outset and alternatively for rejecting it in essence.

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 ;4;>94;6< Prosecution refers to several companies and was allocated a specific amount of the company and/ or subsidiaries 8 >9>4665 Claim amount is not specified 6 Other significant claims 6 6=4<=7 Note 6 - Contingent liabilities and commitments (contd.)

The total provision amount of claims filed against the Company and / or consolidated companies, as described above amounts to about NIS 10,991 thousand.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-42 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. In June 2004, a claim was filed with the Tel Aviv District Court and an application to approve it as a derivative claim against the subsidiary Yedidim Holdings Management (1994) Ltd. (hereinafter: "Yedidim"), the former Chairman and CEO of Yedidim, and against an additional subsidiary, Harel Pension Funds Management Services (1987) Ltd., which is the controlling shareholder in Yedidim by the minority shareholders Leatid Pension Fund Management Ltd., a subsidiary of Yedidim (hereinafter: "Leatid") for an amount of NIS 15,605 thousand. The subject of the claim is compensation to Atidit Pension Fund Ltd. (hereinafter: "Atidit"), a pension fund managed by Leatid, for the use of Atidit’s various resources, such as: the use of the operating infrastructure and reputation, the use of Adidit property, for taking a continuing pension fund and the loss of profits. The hearing on the file is in the stage of summaries in the application to approve the claim as a derivative claim. In addition the plaintiffs claim commissions of NIS 3,177 thousand in the framework of their personal claim .

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

Mediation process, 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 .

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

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

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

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-43 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.) 1. (contd.)

The plaintiff estimates the total loss claimed from all the respondents for all members of the group in the amount of NIS 901 million. The plaintiff estimates the total loss for all member of the group from Harel Insurance in the amount of NIS 157 million.

On January 15, 2012, the District Court dismissed the claim and the application for certification as a class action. The claim was dismissed with the consent of the plaintiffs after the court determined that the insurance companies may price their services according to the cost components imposed on them, including taxes and mandatory payments, and as long as there is no legal impediment to rolling these costs onto the customers, there is no room for complaint.

2. In August 2010, a claim was filed at the Jerusalem District Court against the subsidiary Harel Insurance, with an application to recognize it as a class action. The subject of the class action is the allegation that Harel Insurance should have prevented a situation in which its policyholders allegedly have several health insurance policies with the company. The Group that the claimant seeks to represent is all holders of more than one health policy issued by Harel Insurance, who were not expressly informed before being charged for the additional insurance, that they already have more than one policy and who did not give their express consent to be included in the additional health insurance policy.

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

On January 24, 2012, the Jerusalem District Court handed down a ruling approving the parties' agreed application for abandonment from the application to certify the claim as a class action and it ordered that the application for certification as a class action be struck out and that the class representative's personal claim be dismissed. As part of the application for abandonment, Harel Insurance undertook to broaden the text of the disclosure to policyholders in connection with the possibility of there being several health insurance policies.

3. 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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-44 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

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

1. Allotment of options to Mr. Shimon Alkabetz

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 binomial 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.

2. 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.

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

3. Reform of management fees on long-term savings products

Pursuant to the Commissioner's plan to increase the competition for pension savings products, in February 2012, the Commissioner published draft 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. After discussions between the Commissioner and the Knesset Finance Committee, on February 27, 2012, the following key 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 a higher rate if the member is found.

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. To the best of the Company's knowledge, these maximum rates will not apply to pension funds and study funds, except with respect to management fees on the accounts of members with whom contact has been severed.

At the date of closing this report, it is impossible to gauge the results of the discussions regarding the possibility of making changes in legislation, to the effect that in addition to the setting of maximum management fees, as detailed above, minimum amounts will also be determined and provisions will be prescribed regarding limiting the difference between the minimum and maximum fees collected by management companies. At this stage, it is therefore impossible to estimate what the final provisions to become applicable will be. Harel Insurance is reviewing the possible impact of the implementation of the regulations and is also examining measures it may take so as to moderate the effect of the regulations .

Implementation of this 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.

Following publication of the regulations, in 2011 the value of the provident fund activity recorded in Harel Insurance's books was reduced by NIS 25 million, before tax.

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.

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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-46 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 6 - Contingent liabilities and commitments (contd.) d. Commitments (contd.) 4. (contd.)

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.

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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-47 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:

March 31 2012 December 31 2011 Harel Harel Insurance Dikla EMI Insurance Dikla EMI NIS NIS NIS NIS NIS thousand NIS thousands thousands thousands thousands s thousands Amount required according to new capital regulations and the Supervisor's instructions (A) 4,016,159* 306,251 172,695 3,926,311 294,656 174,292

Including: Primary capital 2,975,434 285,674 406,831 2,691,848 257,138 383,147 Secondary capital Subordinated secondary capital 694,525 - - 763,642 - - Complex secondary capital 916,773 99,775 - 916,527 99,770 - Existing amount computed according to capital regulations 4,586,732 385,449 406,831 4,372,017 356,908 383,147 Surplus 570,573 79,198 234,136 445,706 62,252 208,855

events after the reporting date Issue of complex third-tier capital 250,000 - - - - - Obsolescence of tier-2 capital (23,000) - - - - - total events after the reporting date 227,000 - - - - -

Unavailable capital included in the surplus according to the Supervisor's provisions 797,573 79,198 234,136 445,706 62,252 208,855 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-48 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:

March 31 2012 December 31 2011 Harel Harel Insurance Dikla EMI Insurance Dikla EMI NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands

Primary capital required in general insurance 549,825 87,322 - 546,601 87,322 - Activities in nursing insurance 63,010 112,080 - 61,948 106,588 - Capital requirements for yield secured programs 41,414 - - 40,101 - - Investment assets and other assets (b 903,879 33,105 - 892,176 34,450 - Catastrophe risks in general insurance 143,102 - - 51,480 - - Operating risks 268,740 35,580 - 264,131 33,492 -

Deferred acquisition expenses in life assurance and health insurance and acquisition expenses in respect of insurance portfolio 895,850 38,015 - 890,424 32,719 - Investments in consolidated companies and management rights of provident funds and pension funds 868,317 - - 794,836 - - extraordinary life assurance risks (c 244,783 111 - 239,299 38 - Assets unrecognized as their definitions in capital regulations (d (e 36,410 38 - 50,049 47 - Special share capital requirements according Commissioner's instructions - - - 94,469 - - brodgate 828 - - 798 - -

4,016,159 306,251 - 3,926,312 294,656 -

(*) 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 225 million at March 31, 2012. (**) Pursuant to the Capital Regulations, the subordinated liability notes will no longer serve as recognized tier- 2 capital two years before their final maturity date. Based on the foregoing, after the reporting date, an amount of NIS 25 million was derecognized from the tier-2 capital. b. The capital requirements of assets for a total value of NIS 767 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 86 million in Harel Insurance and an amount of NIS 3 million in Dikla.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-49 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. e. In December 2010, Ireland's credit rating was lowered, so that it is no longer considered an "approved foreign country", as this term is defined in the Investment Regulations and in the regulations that apply to provident funds. The Company's subsidiaries that are financial institutions have investments in Ireland. On February 21, 2011, the Commissioner published a letter granting a six-month extension, from the date of the letter, for disposing of the investments in Ireland. During this period, the continuing holding of these investments will not be construed as a holding that is contrary to the Income Tax Regulations and Investment Regulations. On August 14, 2011, the Commissioner published another letter granting a further six month extension during which further holding of investments in Ireland will not be construed as a holding that is contrary to the Income Tax Regulations and Investment Regulations . An extension was granted based on the Control of Financial Services (Provident Funds) (Rules of investment that apply to management companies and insurers) Regulations, 5771-2011. The draft regulations will allow financial institutions to invest in foreign countries that have a rating of BBB- or higher in countries that are members of the OECD. On February 14, 2012, the Commissioner published another letter granting a further three month extension. Accordingly, a financial institution must convene a meeting of its investment committee to discuss these investments. Among other things, the meeting will address 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 it received a review of the assets registered in Ireland, taking into account that most of these assets are registered in Ireland for certain operational considerations of the issuing company and they do not involve credit exposure or significant exposure to Ireland, it was decided that 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.

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 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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-51 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 7 - Management and capital requirements (contd.) 3. (contd.)

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).

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.

4. 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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-50 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 7 - Management and capital requirements (contd.)

5. In February 2009 a directive was published by the Capital Markets Division on the subject of registering deferred acquisition expenses in a company which manages pension funds, according to which it was determined that a deferred acquisition 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 7 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.

6. 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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-52 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 7 - Management and capital requirements (contd.) 6. (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 increased by NIS 15.9 million.

The capital requirements for the Group's pension fund management companies reduced by NIS 70 million.

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, the Company'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 Company. 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.

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.

7. 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. From the commencement of implementation the new investment regulations, half of the deferred acquisition costs of the management companies that are created from that date, will create a capital requirement for Harel Insurance. As at the reporting date, the new investment regulations not yet approved.

8. 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 3 above.

9. In February 2012, the Commissioner of Insurance sent the insurance company managers clarifications regarding discrepancies that were found in the method of implementation by the different companies and 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. 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. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-53 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 7 - Management and capital requirements (contd.) 9. (contd.)

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 7.5% 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 second 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.

G. Capital surplus/deficit of an insurance company for activity between the reporting date and the date of publication

Any significant active or passive equity activity that takes place after the reporting date (including changing subordinated tier-2 capital or hybrid capital into unrecognized capital, the issue of shares or distribution of a dividend) will affect the insurance company's capital surplus/deficit at the publication date of the report.

Sections A to E will be implemented for computing the required capital at the reporting date. Furthermore, the Commissioner of Insurance and the insurance companies are discussing the aforementioned clarifications F and G, which have yet to take effect or are irrelevant to the current report.

10. 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. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-54 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 7 - Management and capital requirements (contd.) 10. (contd.)

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.

11. 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.

12. 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 December 31, 2011, 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. In view of the fact that the subsidiary is in compliance with the requirements as at March 31 2012, the schedule for supplementing the equity is irrelevant and it must comply with the requirements of the new model from June 30, 2011.

The capital requirement under the new model may change significantly and is noticeably affected by the volume of activity and seasonality, as well as by credit and the manner of the liquid asset investments at the date of the review. As a result, a line of credit 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.

13. 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?

A requirement to allocate equity in proportion to the actual risk level and the volume of the managed asset starting at NIS 30 million. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-55 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 7 - Management and capital requirements (contd.) 13. (contd.)

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.

14. 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.

15. 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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-56 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 7 - Management and capital requirements (contd.) 15. (contd.)

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.

16. On December 28, 2009 the Commissioner published a draft circular, which deals with a plan of action for the management of the shareholders' equity of an insurance company. The objective of the circular is to ensure that an insurance company has an organized plan of action of the management and the monitoring of its capital position and to cope with changes therein.

The draft circular determines that the board of directors of an insurance company is to approve a framework of guidelines in respect of the capital adequacy of the insurance company, the capital structure, its composition and its quality, and in respect of the routine monitoring and control processes, for ensuring capital adequacy, Moreover, the management of an insurance company is to set a detailed multi-annual plan of action, which is to be presented to the board of directors for approval, for the continuous management of the capital and to make preparation for changes in it in accordance with the guidelines that were approved by the board of directors. The plan of action is to be presented to the board of directors for the first time no later than July 1, 2010. The draft circular is the subject of discussions between the Commissioner and the insurance companies. Regarding the adoption of capital management policy approved by the Board of Directors and Board of Directors of Dikla and Harel Insurance - see par. 18 and 19 below.

17. 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 .

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-57 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 7 - Management and capital requirements (contd.) 17. (contd.)

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.

18. 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.

19. 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.

20. 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.

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

Pursuant to an amendment to the Capital Regulations, as specified in Section 9 below, no further requirements are expected to apply to EMI.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-58 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 7 - Management and capital requirements (contd.) 21. (contd.)

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.

22. 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 March 31, 2012, there is a capital deficiency of NIS 11 million, which was supplemented by the Company in April, as described above.

23. 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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-59 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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-61 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.

As at March 31, 2012, the balance of the liability notes amounts to NIS 1,489 million. As at the reporting date, no delaying circumstances have occurred.

Balance of the liability component is net of issuance expenses of NIS 13.8 million reduced by the effective interest method.

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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-60 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.

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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-62 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 8 - Financial liabilities (contd.) 7. (contd.)

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 March 31, 2012, the balance of the capital note is in the amount of NIS 100.4 million. As at the reporting date, no delaying circumstances have occurred.

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 March 31, 2012, this ratio was 0.09; (4) the ratio of the net financial debt to shareholders equity will be no more than 0.5. At March 31, 2012, this ratio was 0.08. 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 March 31, 2012, the Company is in compliance with the aforementioned conditions. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-63 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 8 - Financial liabilities (contd.) 8. (contd.)

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 March 31, 2012, the Company is in compliance with the aforementioned conditions. At March 31, 2012, there are outstanding loans in the amount of NIS 371 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 72 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 March 31, 2012, the equity was NIS 51.2 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 March 31, 2012, there are outstanding loans and credit undertaken by Harel Financial Products in connection with the aforementioned undertaking in the amount of NIS 72 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. 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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-64 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 8 - Financial liabilities (contd.) 11. (contd.)

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) 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 March 31, 2012, the EBITDA ratio was 1.2.; (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. The amount of the volume of assets multiplied by its management fee rate amounted to NIS 136 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 March 31, 2012, this ratio is 77.9%; (9) the equity, including capital notes, shall not be less than an amount equal to NIS 250 million. At March 31, 2012, the equity, including capital notes, was NIS 343 million. At March 31, 2012, the outstanding loan was NIS 62.6 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 March 31, 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 March 31, 2012, Harel Trade & Securities was in compliance with the aforementioned criteria.

13. 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 March, 31 2012 was NIS 30 million (of which a used credit line of NIS 11 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 March 31, 2012, the subsidiary is in compliance with all the financial criteria included in the master agreement.

14. 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 .

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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-65 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 9 - Significant events during the reporting period

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.

The General Meeting approved all the subjects on the agenda.

2. 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.

3. Allotment of share options

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.

4. Thirteenth annual salary

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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-66 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 9 - Significant events during the reporting period (condt.)

5. Double management fees

In February 2012, the Control of Financial Services (Provident Funds) (Direct Expenses on account of Transactions Performed) Regulations (Amendment), 5771-2011, were revised so that subsequent to the revision, supervised entities are prohibited from paying management fees from the balance of the money in the fund to certain external managers, including index-linked certificate companies, excluding on certificates to which both the following 2 conditions apply ?

A. At least 75% of the exposure obligation of the certificate 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 revision was passed as a temporary provision for a two-year period commencing July 1, 2012.

Notwithstanding the fact that the amendment has not yet taken effect, a subsidiary which is an index-linked certificate company anticipates that at present the revision will adversely affect its future revenues from the management of index-linked certificates, but it is unable to quantify the effect due to several variables, most of which are not dependent on the subsidiary.

The amendment is not expected have a significant effect on the Group's equity or profit.

6. 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.

7. 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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-67 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 9 - Significant events during the reporting period (condt.) 7. (contd.)

At March 31, 2012, this capital requirement was not included in the calculation of the capital required of the Company's subsidiaries, due to the fact that implementation of the pension arrangement had not yet begun.

The pension arrangement consists of a combination of pension and insurance products, to be managed by Harel Insurance and Harel Pension, consistent with the outline defined by the Minister of Defense, with the consent of the Minister of Finance. The transaction is expected to entail a one-time movement of hundreds of millions of shekels as well as on-going deposits of additional hundreds of millions of shekels each year .

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

8. 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 the lower of: USD 500,000 or supplementing half the management fees and the success in respect of the balance of the as yet unraised amount, based on the fund's performance, for the period up to the date scheduled for completion of the raising of US 20 million .

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. This amount accounts for part of Harel Products' commitment in the amount of USD 20 million, so that the outstanding amount required is USD 17 million.

So far, Harel Financial Products has not raised the outstanding amount required, in part as the process of opening the fund took longer than planned.

9. 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 - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-68 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 9 - Significant events during the reporting period (condt.) 9. (contd.)

The outstanding exposure of Harel Trade & Securities and its customers to MF Global is NIS 11 million in cash and NIS 1.7 million in shares (including amounts that Harel Trade & Securities asked to withdraw before the bankruptcy proceedings began and which it has not yet received).

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. 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.

10. 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. Up to their date of classification, these assets were held as available-for-sale.

11. 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.

12. Debt of variable management fees

At March 31, 2012, Harel Insurance will be unable to collect variable management fees for yield-dependent policies in the amount of NIS 29 million until the outstanding investment losses have been covered. At April 30, 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 18 million.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-69 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. 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.

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 will 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. 2. 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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-71 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 10 - Events after the date of the financial statements (condt.) 2. (contd.)

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 .

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 .

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. 3. 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.

4. Concerning a raising of tier-3 capital by Harel Insurance after the reporting date, see Notes 8(5) and (6) above.

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 woud stepping down from his position, effective July 1, 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.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-70 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements

Note 10 - Events after the date of the financial statements (condt.)

6. Update of management and operating agreements - Harel Pension

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.

7. 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%.

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 2-72

HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD

APPENDIXES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

2-37

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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 three months ended For the year ended December March 31 31 2012 2011 2011 (Unaudited) (Unaudited) (Audited) NIS NIS thousands thousands NIS thousands Fixed assets 878,832 733,118 873,554

financial investments Marketable debt assets 8,783,322 7,668,572 7,965,536 Non marketable debt assets 4,084,191 3,346,085 3,842,768 Shares 3,346,469 3,753,604 3,279,772 Other financial investments 3,094,793 3,264,679 2,993,046

Total financial investments 19,308,775 18,032,940 18,081,122 Cash and cash equivalents 1,243,173 987,342 1,247,598 accounted for as loans and payables including bank deposits Non marketable debt assets* 525,181 512,361 537,636 Other 345,833 365,330 342,293

22,301,794 20,631,091 21,082,203 Other payables 2,508 1,825 2,021 **Financial liabilities 70,499 30,777 104,688

Financial liabilities in respect of yield dependent 73,007 32,602 106,709

* 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 March 31, 2012, is NIS 525,452 thousand (as at March 31, 2011 and as at December 31, 2011, NIS 526,986 thousand and NIS 524,314 thousand respectively). ** Mainly derivatives and future contracts.

2-37

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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) March 31 2012 Reported at fair value, through profit and Available Held to Loans and loss for sale maturity Receivables Total NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands

Marketable debt assets 1,087,400 5,043,790 492,918 - 6,624,108 Non marketable debt assets - - - 9,102,769 9,102,769 Shares - 450,590 - - 450,590 Others 341,242 811,690 - - 1,152,932 Total 1,428,642 6,306,070 492,918 9,102,769 17,330,399

(Unaudited) March 31 2011

Reported at fair value, through profit Available for Held to Loans and and loss sale maturity Receivables Total NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands

Marketable debt assets 979,494 5,304,409 204,361 - 6,488,264 Non marketable debt assets - - - 8,128,958 8,128,958 Shares - 591,404 - - 591,404 Others 510,310 1,011,468 - - 1,521,778

Total 1,489,804 6,907,281 204,361 8,128,958 16,730,404

( Audited) December 31 2011

Reported at fair value through profit Available for Held to Loans and and loss sale maturity Receivables Total NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands 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 492,712 thousands, as at March 31, 2012. (as at March 31, 2011 and as at December 31, 2011, NIS 205,824 thousand and NIS 96,066 thousand respectively). 2-37

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements

Book Value Amortized Cost (**) For the three months For the three months ended ended ended March 31 December 31 March 31 ended December 31 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands NIS thousands

Government bonds 2,683,790 2,698,413 2,539,074 2,656,589 2,700,370 2,508,373

Other debt instruments Total other debt instruments, non convertible 3,913,165 3,764,820 3,984,544 3,876,787 3,660,450 4,049,607 Other debt instruments convertible (*) 27,153 25,032 24,450 29,457 23,258 28,633

Total marketable debt 6,624,108 5,425,730 6,548,068 6,562,834 6,384,078 6,586,613 Fixed impairments recognized in aggregate in profit and loss 14,997 14,027 21,951

* Convertible bonds presented at cost and not at amortized cost. ** Amortized cost - cost less principal payments plus (less) accumulated amortization by the effective interest method on any difference between cost and the repayment amount less any reduction due to impairment in value recorded to the statement of income.

2-37

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements

Book Value Fair Value For the three months For the three months ended ended ended ended December March 31 December 31 March 31 31 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands NIS thousands

Government bonds Designated bonds 4,018,451 3,773,549 3,989,589 4,738,287 4,499,775 4,692,777 Other bonds 19,077 17,878 19,297 19,182 18,944 19,643

Total government bonds 4,037,528 3,791,427 4,008,886 4,757,469 4,518,719 4,712,420 Other debt instruments other debt instruments, non convertible 5,065,241 4,337,531 4,756,916 5,115,259 4,576,110 4,660,747

Total non marketable debt 9,102,769 8,128,958 8,665,087 9,872,728 9,094,829 9,373,167 Fixed impairments recognized in aggregate in profit and loss 46,108 46,108 46,108

3. Shares

Book Value Cost For the three months For the three months ended ended ended ended March 31 December 31 March 31 December 31 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands

Marketable Shares 353,754 491,534 383,636 312,664 338,868 355,411 Non marketable Shares 96,836 99,871 106,309 83,664 86,718 90,378

Total Shares 450,590 591,405 489,945 396,329 425,586 445,789 Impairment balances - other financial investments reported as available for sale 91,441 111,354 96,671

2-33

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c 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 For the three months For the three months ended ended ended December ended March 31 31 March 31 December 31 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands NIS thousands

Marketable Financial investments 576,758 892,986 720,029 525,527 814,528 686,217 Non marketable Financial investments 576,174 628,792 558,826 474,655 515,290 471,150 Total other Financial investments 1,152,932 1,521,778 1,278,855 1,000,181 1,329,818 1,157,367 Fixed impairments recognized in aggregate in profit and loss 81,547 78,684 85,939

Derivative instruments, reported as financial liabilities 55,101 12,295 118,467

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.

2-37

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c

Harel Insurance Investments and Financial Services Ltd.

Financial data from the interim consolidated statements relating to the Company itself As at March 31, 2012

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c

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 March 31, 2012 and for three months period ended on that date. The separate interim financial information is the responsibility of the Company’s Board of Directors and Management. Our responsibility is to express a conclusion on the separate interim financial information for the interim period, based on our review.

We did not reviewed the condensed financial information to the interim period of investee companies, and of consolidated companies that are consolidated by the proportional consolidation, in which the investment in them is NIS 501,210 thousand as at March 31, 2012, and the Company’s share in their profits is NIS 2,121 thousand and NIS to the three months period ended on that date. The condensed interim financial information of these companies was reviewed by other auditors, whose reviewed reports were furnished to us, and our conclusion, to the extent that it relates to the amounts included for those subsidiaries, is based on the reviewed reports of the other auditors.

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

Conclusion Based on our review 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 May 23, 2012

3-1

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements on the financial position as at

March 31 December 31 2012 2011 2011 (Unaudited) (Unaudited) (Audited) NIS Thousands NIS Thousands NIS Thousands Assets Intangible assets 144 576 240 Fixed assets 2,976 2,085 1,921 Investments in investee companies 3,587,771 3,530,815 3,391,389 Loans to investee companies 184,747 37,632 180,265 Real estate for investment 17,766 17,370 17,766 Other receivables 28,559 22,076 26,145 Other financial investments Marketable debt assets 30,723 51,270 29,840 Non marketable debt assets 3,611 3,400 3,634 Others 322,961 327,594 222,229 Total financial investments and others 357,295 382,264 255,703 Cash and cash equivalents 62,843 116,665 63,923 Total assets 4,242,102 4,109,483 3,937,352

Capital Share capital and premium on shares 306,296 307,203 306,895 Treasury stock (137,285) (137,789) (138,583) Capital reserves 162,416 200,179 63,925 Retained earnings 3,484,832 227,674 3,293,013 Total capital 3,816,259 3,597,267 3,525,250

Liabilities Liabilities for deferred taxes 4,554 6,265 5,093 Liabilities for benefits to employees, Net 12,082 3,528 8,880 Other payables 33,372 103,350 20,679 Liabilities for current taxes 3,022 1,823 2,520 Financial liabilities 372,813 397,250 374,930 Total liabilities 425,843 512,216 412,102 Total liabilities and capital 4,242,102 4,109,483 3,937,352

3-2

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements of income

For the three months ended For the year ended March 31 December 31 2012 2011 2011 (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands Profits from investments, net, and financing revenues 1,890 2,275 22,964 Revenues from management fees 18,537 18,031 69,473 Other revenues - - 5,021

Total revenues 20,427 20,306 97,458

General and administrative expenses 8,712 8,567 45,265 Other expenses 145 8 - Financing expenses 4,751 4,860 20,088

Total expenses 13,608 13,435 65,353

Company's shares in profits (losses) of investee companies 186,443 104,758 193,300

Income (loss) before taxes on income 193,262 111,629 225,405

Taxes on income 1,443 1,996 7,570 Income (loss) for period ended 31 March relating to the Company's shareholders 191,819 109,633 217,835

3-3

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements on the comprehensive profit

For the three months ended For the year ended December March 31 31 2012 2011 2011 (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands

Income (loss) for the year 191,819 109,633 217,835

Other comprehensive income (loss): Valuation due to revaluation of fixed assets, net (673) 2,408 8,120 Net changes in fair value of financial assets classified as available for sales (218) 121 (14,692) Loss from impairment in value of financial assets available for sale transferred to the statement of income - - 1,014 Taxes on income relating to components of other comprehensive income (loss) 224 (389) 522 Foreign currency translation differences for foreign operations (1,848) 1,600 9,406 The Grop share in the comprehensive income (loss) of investee companies 97,994 (34,548) (177,688) Other comprehensive income (loss) for the year 95,478 (30,808) 173,318 Total income (loss) for the year Attributed to the company's owners 287,297 78,825 44,517

3-4

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments and Financial Services Ltd. Financial data from the condensed interim financial statements of changes in capital

Capital Transactions Translation Capital Capital reserve for with reserve reserve for financing non- reserve from for share revaluation Balance of Share capital assets controlling of investment retained and available for overseas based Treasury premium sale interests operations payments stock Fixed assets earnings Total NIS NIS NIS NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands thousands thousands thousands For the three months ended March 31, 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 ------191,819 191,819 Total other comprehensive income (loss) - 69,567 - (999) - - 26,910 - 95,478 Total comprehensive income for year - 69,567 - (999) - - 26,910 191,819 287,297

Transactions with owners credited directly to equity

Dividends paid ------Share based payment - - - - 3,013 - - - 3,013 Reissuing of treasury stock (599) - - - - (1,205) - - (1,804) Purchase of treasury stock - - - - - 2,503 - - 2,503

Balance as at march 31, 2012 306,296 148,654 (48,908) (5,833) 33,188 (137,285) 35,315 3,484,832 3,816,259

3-5

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments and Financial Services Ltd. Financial data from the condensed interim financial statements of changes in capital (cont'd)

Capital Transactions Translation Capital Capital reserve for with reserve reserve for financing non- reserve for share revaluation of Balance of Share capital assets controlling from investment retained available for overseas based Treasury and premium sale interests operations payments stock Fixed assets earnings Total NIS NIS NIS NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands thousands thousands thousands

For the three months ended March 31, 2011 (Unaudited)

Balance as at December 31, 2010 306,691 263,835 (45,660) (14,240) 18,810 (138,625) 6,381 3,181,178 3,578,370 Comprehensive income for year Profit for year ------109,633 109,633 Total other comprehensive income (loss) - (36,237) - 3,422 - - 2,007 - (30,808) Total comprehensive income for year - (36,237) - 3,422 - - 2,007 109,633 78,825

Transactions with owners credited directly to equity Dividends paid ------(63,137) (63,137) Share based payment - - - - 1,861 - - - 1,861 Purchase of treasury stock 512 - - - - 4,157 - - 4,669 Acquisition of treasury stock - - - - - (3,321) - - (3,321)

Balance as at march 31, 2011 307,203 227,598 (45,660) (10,818) 20,671 (137,789) 8,388 3,227,674 3,597,267

3-6

Capital Transactions Translation Capital Capital reserve for with reserve reserve for financing non- reserve revaluation Balance of for share Share capital assets controlling from of investment retained available for overseas based Treasury and premium sale interests operations payments stock Fixed assets earnings Total NIS NIS thousands NIS thousands NIS thousands 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 - - - - 11,364 - - - 11,364 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) 30,174 (138,583) 8,405 3,293,013 3,525,249

3-7

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments and Financial Services Ltd. Financial data from the interim consolidated statements of cash flows

For the three months ended For the year ended December March 31 31 2012 2011 2011 (Unaudited) (Unaudited) (Audited) NIS NIS Appendix thousands thousands NIS thousands Cash flows from operating activities Before taxes on income A (30,275) (9,816) 9,370 Income tax (paid) refund (1,480) (1,220) (8,100)

Net cash provided by operating activities 28,795 (11,036) 1,270

Cash flows from investing activities Investment in investee companies (22,355) (36,000) (22,372) investment in fixed assets (1,454) - (368) Proceeds from realizing fixed assets 326 100 (25) Investment in intangible assets - (18) (396) Acquisition of real estate for investment - - 268 Dividends from investee companies - 55,000 129,808 Net Financial investments (101,147) (103,807) 26,954 Loans to investee companies (16,000) (24,897) (183,188) Repayment of loans given to investee companies 110,755 137,394 158,043 Net cash provided by (used for) investing activities (29,875) 27,772 108,724 Cash flows from financing activities Dividends paid - - (106,000)

Repayment of loans to banks and others - - (40,000) Net cash provided by (used for) financing activities - - (146,000) Increase (decrease) in cash and cash equivalents (1,080) 16,736 (36,006)

Cash and cash equivalents at beginning of year 63,923 99,929 99,929

Cash and cash equivalents at end of the period 62,843 116,665 63,923

3-8

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements of cash flows

For the three months ended For the year ended December March 31 31 2012 2011 2011 (Unaudited) (Unaudited) (Audited) NIS thousands NIS thousands NIS thousands

Appendix A – Cash flows from operating activities before taxes on income 191,819 109,633 217,835

Items which are not connected with cash flows Company's shares in revenues of investee companies (186,443) (104,758) (193,300) Net loss (profits) from financing activities (1,337) (504) (12,762) Financing expenses (income), net 3,939 548 9,279 Taxes on income (tax benefit) 1,443 1,996 7,570 Depreciation and amortization 148 264 929 Gains from realizing fixed assets 20 (8) 34 Share-based payment 346 433 2,448

Changes in other balance sheet items Other receivables (2,414) (12,661) (8,730) Other payables 19,551 (4,076) (18,603) Liabilities for benefits to employees, net 3,202 (683) 4,670

Total adjustments required to present cash flows from operating activities (161,544) (119,449) (208,465)

Total cash flows from operating activities before taxes on income 30,275 (9,816) 9,370

3-9

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements

Note 1 - Method of preparing the financial information from the Company's consolidated financial statements relating to the Company itself a. General

The financial information from the consolidated interim statements relating to the Company itself are presented in accordance with Regulation 38D of the Securities Regulations (Periodic and Immediate Reports) - 1970, and do not include all the information required in Regulation 9C and in the details required in the Tenth Addendum of the Securities Regulations (Periodic and Immediate Reports)-1970 regarding corporate separate financial information. The financial information from the condensed consolidated interim statements relating to the Company itself must be read together with the financial information from the condensed consolidated interim statements relating to the Company itself for the day and year ended on December 31, 2010, and together with the condensed consolidated financial statements for September 30, 2011. b. Definitions The Company - Harel Insurance Investments and Financial Services Ltd. Investee companies - Subsidiaries, subsidiaries by proportional consolidation and companies in which the Company's investment in them is included, directly or indirectly, in the financial statements by the equity method. Date of report - Date of the statement of financial condition. c. Method of preparing the financial data The separate financial data was prepared in accordance with the accounting principles detailed in Note 1 to the separate yearly financial statements of the Company. d. Reclassified In addition to the classifications described above, reclassifications were included for the period of three months ended on March 31 and for the year ended on December 31, 2011. The main classifications refer 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.

2. On January 26, 2012, a document was signed clarifying the conditions of the capital note that Harel Insurance gave to Manof Pension on October 26, 2012 in the amount of NIS 13 million. The repayment date is November 1, 2015. According to the amendment, the interest specified in the capital note was changed to interest to be determined from time to time by virtue of Section 3(j) of the Income Tax Ordinance.

3. 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 3.2 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.

4. On January 1, 2012, the Company provided Harel Finance with a capital note in the amount of NIS 22 million. The capital note is with no interest.

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Note 2 - Relation, commitments and significant transactions with investee companies (cont'd)

5. 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.

6. 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.

Note 3- Significant events during the period of report

1. General meeting

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. 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 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.

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Note 3- Significant events during the period of report (cont'd)

However the decision is expected to result in an insignificant saving in payroll expenses over the next two years.

Note 4 - Events after the date of the financial statements

1. On May 23, 2012, the Company'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 Company. 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.

2. 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.

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Harel Insurance Investments & Financial Services Ltd.

Chapter 4

Report concerning the effectiveness of internal control over financial

reporting and disclosure

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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 measure of assurance certainty regarding the reliability of financial reporting and the preparation of the financial statements pursuant to the provisions of the law, and to ensure that the information that the Corporation is required to disclose in its published reports in accordance with the provisions of the law, is collected, processed, summarized and reported on the dates and in the format prescribed by law. Among other things, the internal control consists of controls and procedures designed to ensure that the information that the corporation is required to disclose, as noted, is accumulated and transferred to the Corporation's management, including to the CEO and most senior financial officer, or to the person who actually performs these duties, in an effort to ensure that decisions aremade at the appropriate time, with respect to the disclosure requirement. Due to its inherent limitations, internal control over financial reporting and disclosure may not provide absolute assurance regarding the prevention or detection of misstatements. Harel Insurance Company Ltd. and Dikla Insurance Company Ltd., subsidiaries of the Corporation, are financial institutions governed by the instructions of the Superintendent of the Capital Market, Insurance and Savings Division at the Ministry of Finance,

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regarding the assessment of the effectiveness of the internal control over financial reporting. With respect to internal control in the aforementioned subsidiaries, the corporation implements the following instructions:  Financial institutions Circular 2010-9-7 from November 2010 – "Internal control over financial reporting – attestations, statements, and disclosures";  Financial institutions Circular 2010-9-6 from November 2010 – "Management's responsibility for the internal control over financial reporting – Amendment" (amendment to Financial institutions Circular 2009-9-10);  Financial institutions Circular 2009-9-10, from June 2009 – "Management's responsibility for the internal control over financial reporting"; In the annual report concerning the effectiveness of the internal control over financial reporting and disclosure that is included in the Periodic Report for the period ended December 31, 2011 (hereinafter – the last annual report on internal control), the Board of Directors and management assessed the Corporation's internal control. Based on this evaluation, the Corporation's board of directors and management concluded that the internal control at December 31, 2011, is 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 presented in the last annual report on the subject of internal control. At the reporting date, based on the assessment of the effectiveness of the internal control as it appears in the last annual report, and based on information presented to the management and the Board of Directors, as noted above, the internal control is effective.

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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 first 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.

May 23, 2012 ______

Michel Siboni Joint CEO

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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 first 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.

May 23, 2012 ______

Shimon Alkabetz Joint CEO

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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 first 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.

May 23, 2012 ______Ronen Agassi CFO

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Report Regarding Embedded Value Of Harel Insurance Company Ltd. (Including Pension Fund Management Companies and Dikla)

as at 31.12.2011

WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Company Ltd. Embedded Value (EV) Report As of December 31, 3122

Table of contents

1. General 1.1 Background and extent of disclosure 3 1.2 Clarification regarding forward looking information 4 1.3 Major chapters in document 4 1.4 Definitions 5 1.5 Comments, clarifications and exceptions 6 1.5.1 General 6 1.5.2 Reforms and legislation 6 1.5.3 Risk handling 7 1.5.4 Revaluation of asset assessment at fair value 9 1.5.5 Pension fund governmental subsidization arrangements 9 1.5.6 Embedded value not designed to represent financial value or market value of the company or its holding company 9

2. Embedded value calculation methodology 2.1 General 10 2.2 Handling risks 10 2.3 Financial assumptions 11 2.3.1 Yields, capitalization interest and inflation 11 2.3.2 Taxation 11 2.4 Demographic and operational assumptions 11 2.4.1 Demographic assumptions 12 2.4.2 Future management and general expenses 12 2.5 Calculation method 2.5.1 Adjusted Equity (ANW) 12 2.5.2 Present value of future profits (PVFP) 12 2.5.3 Cost of capital (CoC) 12 2.5.4 Value of new business (VNB) 13 2.6 Handling options and financial pledges 13 2.7 Analysis of the EV change and the profit on an EV basis 13 2.8 Sensitivity tests 17 2.9 Embedded value report review 17 3. Results 3.1 Embedded value as at 31.12.2010 18 3.2 Value of new business for sales in 2011 18 3.3 Correspondence between adjusted equity and equity in financial reports 18 3.4 Analysis of the changes in EV and Profit 20 3.5 Adjustments between Changes in Equity and Net Profit 24 3.6 Sensitivity analysis in respect of included business As of December 31, 2011 25

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1. General

1.1. Background and extent of disclosure According to the Commissioner for Insurance‟s circular dated 12 August 2007 (insurance circular 1-11-2007) (“the circular”), together with financial reports for the first quarter, insurance companies must publish annual information regarding embedded value (EV or embedded value) of long term insurance policies (life and medical insurance) for the end of the previous year. In accordance with the circular, Harel Insurance Co. Ltd. (“the company”) hereby publishes the embedded value of company long term insurance business as at 31 December 2011.

This report has been made according to the rules and principles determined by the Commissioner for Insurance who adopted the rules and principles in the report of a joint committee for the insurance companies and Commissioner for Insurance, assisted by Israeli and foreign consultants (hereinafter: “the committee” and the “committee report”), except for the matter of handling particular risks described in paragraph 1.5.3 below, as specified in said paragraph.

Within the context of a restructuring carried out by the Group on December 31, 2011, Harel Investments transferred all its holdings in Dikla to Harel Insurance, against an allocation of shares. Consequently, the equity of Harel Insurance increased by NIS 260 million and for the first time, the Embedded Value of the insurance operations of Dikla Insurance Company Ltd. ("Dikla") was included in the EV of Harel Insurance.

Apart from insurance businesses whose publication is obliged by the circular, this report also includes the embedded value of Harel Pension Fund Management Ltd. and Yedidim Holding and Management (1984) Ltd., subsidiaries that are fully owned by the company, which were calculated according to the aforementioned principles, mutatis mutandis.

The rules and principles determined in the committee report are published on the Ministry of Treasury website – Capital Market, Insurance and Savings Division (www.mof.gov.il).

The method of disclosure in this report is in accordance with the general disclosure regulations prescribed in the committee report and the instructions specified in the "disclosure format" prepared by the committee, in conjunction with the commissioner. The "disclosure format" has yet to be published by the commissioner as an addition to the circular.

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1.2. Clarification regarding forward looking information

Determination of embedded value and value of new business (in accordance with the definition of this term hereunder) is based on forecasts, estimates and valuations of future events whose realization is not certain and not controlled by the company and must be regarded as “forward looking information” as defined in paragraph 32a of the Securities Law – 1968. The above forecasts, estimates and valuations may, all or part thereof, not be realized or be realized in a manner differing from the manner presented in the embedded value report, therefore causing actual results to differ from the forecast.

1.3. Major chapters in the document  General background and explanation of calculation method  Discussion of assumptions on which calculations were based  Embedded value and new business value results  Analysis of change in the embedded value  Results of embedded value sensitivity analysis

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1.4. Definitions The following definitions provide a concise explanation of major terms used to understand the following report. Complete descriptions and explanations are to be found in the Committee Report Rules and Principles.

Present value of Capitalization of the future anticipated flow of profit, future profits emanating from the existing portfolio on the date of the (PVFP) included business‟ report (see paragraph 2.5.2 hereunder).

Adjusted Net The company equity, after adaptation in order for same to be Worth (ANW) consistent with the in force portfolio value (see paragraph 2.5.1).

Cost of required The influence on the embedded value – from company capital shareholders point of view – following the minimal equity holding requirement imposed on the company (see paragraph 2.5.3 hereunder).

Value In Force Current value of future profits, less the required capital cost. (VIF)

Embedded value Comprised of a combination of the in force portfolio value (EV) (VIF) and the adjusted equity. It is to be clarified that the adjusted equity is the company equity relating to the array of the activities of the entire company and not only in respect of the businesses included in the embedded value. It should also be clarified that the in force portfolio value does not include: a. General (elementary) insurance business. b. Other company fields of operation controlled by the company, such as insurance agencies and provident fund management. c. The ability to generate future business (reputation).

Value of new Current value of profits of businesses sold during the 12 business (VNB) months preceding the report date.

Included businesses Businesses included in calculation of in force portfolio value: a. Long term personal policies in life and medical insurance portfolios, valid on 31 December 2010, including increases in premium and one-time future deposits emanating from an increase in wages in respect of the aforementioned policies.

b. Group life and medical insurance policies valid on 31 December 2010. According to the rules and principles in the committee report, the profits of these policies have only been valued until the next renewal date of these policies.

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c. The pension fund management business which are managed by management companies which are owned by the company (including 79% of La‟atid Pension Fund Management Company Ltd.)

1.5. Comments, clarifications and exceptions

1.5.1. General As mentioned above, the embedded value was calculated by methodology, rules and principles determined in the committee report. The assumptions in the model are based on best estimate assumptions, i.e. assumptions which emanate from extrapolation of existing experience in respect of the future in the framework of the environment in which insurance companies operate without conservative coefficients. Naturally, since we are relating to long term future estimates, actual results may differ from the estimates made when calculating the embedded value.

Deviation from the parameters and assumptions made in predicting the embedded value may have substantial influence over the result. Inter alia, these parameters include:

1. Financial factors (e.g. – capitalization interest, yields) 2. Demographic factors (e.g. – changes in mortality and morbidity) 3. Legislation and legislative arrangements on relevant matters 4. Taxation 5. Changes in the business environment

Future results deviating from assessments based on „best estimate assumptions‟ are natural and expected to occur, even if no change whatsoever occurs in the aforementioned parameters. Therefore, it is expected that the actual annual results will differ from the results forecast in the embedded value model, if only due to regular random fluctuations.

1 .5.2. Reforms and legislation There is uncertainty regarding the expected influence of recent legislative reforms and consumer processes including the following reforms and processes: A. Product reform – provident fund regulations Amendment Number 3 B. Mobilization reform – amendment of regulations regarding mobilization of pension saving money among different pension savings channels and between pension savings channels themselves. C. Entry of banks into pension consultation activities.

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Reform to Encourage Competition In February 2012, the Finance Committee approved the Control of Financial Services (Provident Funds) (Management Fees) Regulations, 5772-2012 ("the Regulations"), after the Commissioner of Insurance had published a position paper in November 2010 concerning the plan to encourage competition in the pension savings market. Accordingly, the Commissioner intends to take a series of measures to improve the market and enhance competition and transparency in an effort to improve the quality and price of the products offered and to allow savers to better adapt the products to their needs. According to the regulations, there will be a gradual change in the maximum annual management fee rates for managers' insurance (for new policies) and in provident funds and in a supplementary pension fund (also for existing members as well). In addition, the rates of management fees on the accounts of deceased members or members whom contact has been severed will also be reduced. The reform described above should lead to a significant reduction in the management fees collected by the Company due to a reduction in the management fees that will be collected on insurance products which are sold from January 1, 2013, and to a reduction in the management fees to be collected for existing and new policyholders with whom the Company has no contact. Likewise, the entering into force of the reform may cause an increase in the cancellation rate of existing policies, with high management fees that were sold in the past, instead of which new policies with lower management fees will be purchased. As a direct result of the foregoing, the management fee reform may also affect the value of new business (VNB) to be sold in the future, and the embedded value (EV) in respect of its life assurance and pension fund activity. The embedded value calculations relate to the aforementioned reforms in the following manners: 1) The calculations take account of management actions related to these legislations. 2) The calculations include assumptions for the future effect of the regulations. 3) The calculations include assumptions related to the more significant entry of the banks into the area of pension advice according to accumulated experience since the legislation was enacted. 4) The calculations include assumptions related to reduction in future management fees following the above-mentioned reform to encourage competition

1.5.3. Handling risks Hereunder, are exceptions regarding the estimated embedded value detailed in this report emanating from the manner in which the company calculated the embedded value:

The embedded value calculation did not take extreme risks into account, having extremely low probability of occurrence in regard to which the company cannot estimate the probability of the occurrence of such risks, as well as other risks, whose impact the company cannot estimate, such as operational risks. Furthermore, the demographic assumptions on which the model is based were developed mainly on

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the basis of studies and analyses which rely on the company experience over recent years, which do not include extreme events. Therefore, there is a possibility of extreme events occurring in the future which the company did not take into account when determining the assumptions on which the model is based, notwithstanding the attempt to determine real assumptions which correspond with the actual long term experience.

 The model is based on the assumption that there is no correlation between the model assumptions regarding risks which are not market risks and market risks which may significantly impact embedded value. Due to lack of sufficient data to inspect the above correlation, the company did not examine this assumption.

 According to the committee instructions and rules, inter alia, the determination of assumptions must be based on the expectancy of the embedded value share owners will obtain. In the absence of clear statistical data for which is appropriate to value the distribution of the embedded value for all demographic and operational factors, the company used realistic assumptions for each parameter separately, according to the expectancy of each relevant factor.

 The embedded value is based on the theory in terms of which investors do not require compensation in respect of risks which are not market risks, provided that they are hedgeble or the investors are able to distribute the uncertainty by possessing a diverse and distributed investment portfolio. In actual fact, it is possible that part of the demographic and operational risks will be impossible to be distributed or which investors cannot hedge ("non hedgeable risks"). In the absence of a deep liquid market which will serve to estimate the „risk price‟ given to these risks by the market, and in the absence of an agreed methodology to quantify the theoretical market price of these risks –The EV in respect of these risks was not reduced

 It should be noted that in recent months, prior to the publication date of this report, the Committee entered into agreement with foreign actuarial consultants to formulate an appropriate, practical methodology whereby the EV will be adjusted to reflect the cost of non-hedgeable risks. This adjustment is expected to be reflected in a reduction of the EV, both in relation to the value of the portfolio in force (VIF) and to the value of new business (VNB), so that they will more appropriately reflect their value when taking all the risks into account, including the unhedged risks, and this consistent with accepted practice for EV reporting around the world. At the publication date of this report, no detailed or final recommendations have been received from the aforementioned

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consultants, and the Committee has therefore not yet formulated a proper methodology on this matter. In view of the foregoing, it was impossible to make the adjustment in this report.

In order to reflect the estimation of the risks which have not been taken into account as aforementioned, the readers of the report may adapt the presented embedded value at their discretion, by means of the sensitivity analyses presented in paragraph 3.5. It should be emphasized that, as already noted above, the company cannot estimate from a quantity, scientific and objective point of view, the influence of the aforementioned matters on the embedded value and therefore the sensitivity analysis presented by the company does not constitute an estimate by the company, but rather is intended to serve as a tool for the readers of the report in order to assess the possible influence of the realization of the risks detailed above and other matters, at their discretion.

1.5.4. Asset revaluation by fair value According to committee report rules and principles, the accounting value of all company assets has not been adjusted to fair value, rather only the assets overlapping with the included businesses have been adjusted in the embedded value. It should be noted that dedicated debentures (both in life insurance and in the new pension funds) were estimated for technical reasons in accordance with their adjusted cost in the books, taking into account the interest due to the holders of these debentures, in a manner which caused their fair value to be included in the embedded value.

1.5.5. Pension fund governmental subsidization arrangements In calculating the embedded value and the value of pension management business‟ new businesses, the company assumed that no changes will occur in the various governmental subsidization arrangements, expressed in the guaranteed yield rates on existing dedicated debentures and/or which are anticipated to be issued in the future in the new and the veteran pension funds, in addition to the yield on assets in the veteran pension fund.

1.5.6. Embedded value is not intended to represent the company‟s - or its holding company‟s financial or market value

As aforementioned the in force portfolio value does include not include general (elementary) insurance business and does not other fields of operation by companies controlled by the company or the ability to generate future business (reputation). Furthermore, it should be emphasized that the embedded value does not relate to Harel Insurance Investments and Financial Services Ltd., the company‟s holding company which has additional operations and businesses.

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Furthermore, embedded value does not include certain risks specified in paragraph 1.5.3 above.

Therefore, in light of the above, embedded value does not represent the market value or the inclusive economic value of the company and its subsidiaries, and market value or the economic value of Harel Insurance Investments and Financial Services Ltd.

2. Embedded value calculation methodology

2.1. General Embedded value calculation principles are based on committee report rules and principles, subject to the matter of handling certain risks described above in paragraph 1.5.3, as specified in the above paragraph. The assumptions in the model are based on best estimate assumptions, i.e. without conservative coefficients. The model does not include future sales value, however, from a level of expenses point of view etc., the calculation assumes that business activities will continue.

2.2. Handling risks  Financial (or market) risks – every flow is capitalized according to the capitalization interest, conforming to the risk entailed therein. In effect the model makes use of a financing technique known as Certainty Equivalent Approach, in which cash flows area adjusted to market risks embedded therein and therefore same are capitalized according to risk-free interest. This risk-free interest also serves to assess the anticipated yield on investments.

 As part of the consultation being carried out by the Committee and the foreign consultants, as noted above, the Committee and the consultants, have begun for formulate a methodology which will reflect the fact that surplus yields may be assumed on risk-fee interest, in view of the fact that investments can be made in non-negotiable assets against non-liquid insurance liabilities. An assumption can therefore be made that there will be a supplement to the risk-free interest rate which is appropriate for negotiable assets ("non-liquid premium"), as accepted for EV reports worldwide, and in other areas of the global insurance industry. An adjustment of the risk-free interest rate for the non-liquid premium is expected to produce an increase in the EV. At the publication date of this report, the Committee has not yet formulated detailed and final recommendations, and the non-liquid premium is therefore not reflected in this report.

 Risks which are not market risks – embedded value is calculated based on the financial theory whereby investors do not require additional compensation in the form of capitalization interest for risks which are not market risks, provided they are able to distribute the uncertainty by keeping a diversified, varied investment portfolio. Therefore, on the basis of this assumption, the embedded value was calculated on the basis of demographic and operational assumptions which are „the best estimated assumptions‟ and by capitalization

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of the cash flows by the rate of the risk-free interest, without adding margins for discounts or capitalization interest rates in respect of these risks.

2.3. Financial assumptions

2.3.1. Yield, interest, capitalization and inflation Future yield and capitalization interest were determined according to the yield curve of the index linked risk-free interest. The risk free (spot) interest rates at the end of 2011 were:

Interest Interest Interest End of Rate End of Rate End of Rate 2012 0.91% 2022 2.36% 2032 2.84% 2013 0.75% 2023 2.46% 2033 2.87% 2014 0.75% 2024 2.54% 2034 2.89% 2015 0.89% 2025 2.60% 2035 2.91% 2016 1.18% 2026 2.65% 2036 2.93% 2017 1.48% 2027 2.69% 2037 2.95% 2018 1.72% 2028 2.73% 2038 2.97% 2019 1.92% 2029 2.76% 2039 2.98% 2020 2.08% 2030 2.79% 2040 3.00% 2021 2.24% 2031 2.82% 2041 3.01%

It is to be noted that there is no need for an expressed assumption regarding future inflation since all sums in the model are linked. When it is anticipated that a particular parameter will vary not in accordance with future inflation, an expressed assumption has been taken into account regarding the anticipated deviation from the future inflation.

2.3.2. Taxation Statutory tax applied to financial institutions (including profit tax) (*)

Year 2011 2012 2013 2014 2015 2016 2017 2018+ Tax 34.48% 53.53% 53.53% 53.53% 53.53% 53.53% 53.53% 53.53% rate

(*) Profit tax rate included above is 16.0% for 2011-2012 and 15.5% from 2013 thereafter.

2.4. Demographic and operational assumptions All assumptions with significant impact on embedded value were determined according to the company‟s best estimates for each demographic and operational factor and reflect company future expectations for such factors (also see section 1.5).

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2.4.1. Demographic assumptions The demographic assumptions included in the calculations were based on internal company studies and conclusions stemming from professional discretion, based both on relevant experience and also information integrated from external sources, e.g. information from reinsurers and published mortality and morbidity tables.

2.4.2. Future management and general expenses The management and general expenses were calculated according to results of an internal pricing model generated by the company for expenses relating to the included businesses, including: allocation of expenses by different spheres (life and health insurance) and loading expenses onto different activities (production, ongoing administration, investments, etc.). The company assumed that in the future, the expenses will rise by the index rate, the rate of rise in premiums/ benefits or by the rate of increase in the asset portfolio, in accordance with the loading of expenses in respect of the various activities.

2.5. Calculation method

2.5.1. Adjusted equity (ANW) Equity value is taken from the financial reports of the company as at 31 December 2011. This sum was reduced by the deferred purchase expenses according to the balance appearing in the balance sheet, minus the reserve for deferred tax in respect thereof. In addition, the value of the insurance portfolios which were purchased, were deducted from the equity according to their value in the company financial reports – less tax in respect thereof and less the reputation of the purchased pension funds, according to the value in the company financial reports.

2.5.2. Present value of future profits (PVFP) The present value of future profits was calculated using an actuarial model based on policy data, management of the pension rights of the pension fund members and other data in the possession of the company and the pension fund management companies. This model enables generating projected future cash flows and capitalization of these cash flows.

2.5.3. Cost of capital (CoC) A forecast of the required capital was compiled according to the existing demands and the anticipated future development of included businesses. The cost of capital is capitalization of taxes on investment profits in respect of the required capital for the included businesses. In 2010, capital requirements were modified in respect of insurance companies and the cost of capital is calculated consistent with the new requirements. There exists a draft of new requirements for companies

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that manage pension businesses. These draft requirements have as of yet been adopted and have not been included in the embedded value of the pension business. 2.5.4. Value of new business (VNB) As mentioned above, the value of new business is calculated as the present value of profits from the time of sale, until the lapse of the transaction (the policy or pension plan). The present value of profits was calculated using an actuarial model based on policy data, details regarding the pension fund members and other data, all in order to reflect the contribution of the year‟s production to embedded value.

VNB was calculated for the following populations:  All the policies which were issued in 2011  New coverage issued in 2011 as an addition to policies which were issued before 2011.  Group policies which were renewed in 2011.  One-time premiums on existing policies which do not emanate from a wage increase.  New members of the pension funds during 2011.

It should be clarified that the present value of future profits (PVFP) includes the value of profits from the end of 2011 onwards in respect of new businesses as aforementioned.

2.6. Handling options and financial guarantees

There are no substantial options and financial guarantees in the included businesses in favor of the insureds.

2.7. Analysis of the EV change and the profit on an EV basis

The table in paragraph 3.4 hereunder presents the change in the embedded value, distributed into the adjusted capital and portfolio value components (less the capital cost), including transfers between these two components. All the sums are presented after deduction of tax. The change is broken down into its various influential causes as follows: 1. Adjustments to embedded value as at 31 December 2010 – this paragraph includes corrections in respect of the opening data, The amendments include, inter alia, refinement of the model regarding of policies in arrears and data regarding annuity recipients.

2. Changes in operational and demographic assumptions – each year the company updates the various assumptions according to which it assesses the embedded value, inter alia, on the basis of new data regarding the actual experience and the changes in the company management‟s expectations. The main changes in these spheres were:

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a. life assurance: a reduction arising from the expected decline in future management fees, and an increase stemming from a revision of the assumption for expenses, cancellations and mortality. b. health insurance: a reduction arising from a revision of the assumptions for mortality and morbidity.

c. pension: an increase arising from a revision of the assumption for cancellations and a reduction stemming from a revision of the assumption for expenses and an estimate of the decline in future management fees.

3. Anticipated profit which is included in the embedded value – the embedded value includes profits which the company is anticipated to gain, even if it does not sell new businesses and does not operate in additional spheres which are not included in the embedded value. These profits emanate from three sources:

a. The anticipated yield on the in-force portfolio value, valid at the end of the previous period – this anticipated income is based on the real yield rate (above the index) anticipated at the beginning of the year, including margins above the no- risk interest which was anticipated to be received.

b. The anticipated yield on the adjusted equity – the anticipated income on investments from assets placed against the adjusted capital - this anticipated income is based on the real yield rate (above the index) anticipated at the beginning of the year, including margins above the anticipated no-risk interest to be received.

c. Profit anticipated to transfer from the in force portfolio value to the adjusted equity during 2011 – during 2011the anticipated profit for the year 2011 was removed from the portfolio value and added to the adjusted capital so that in total, this source did not influence the sum of the embedded value in its entirety, but rather brought about a transfer from the in force portfolio value component to the adjusted capital component. In accordance with the method of determining the adjusted equity, this profit did not include the influence of reduction of the DAC.

4. The influence of the deviations from the operational and demographic assumptions during this period the actual experience regarding the rate of claims, cancellations, expenses, etc. were different than the assumptions based on section 2 above for the purpose of calculating the embedded value. These deviations also influence the anticipated profits from the end of the year and the profits of the year itself. The influences are presented separately in this paragraph in respect of the in force portfolio value and the adjusted capital respectively. In

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addition, this paragraph includes the influence from a number of causes, each of which is immaterial in the company estimate which include inter alia, changes in existing insurance policies, reinsurance conditions or commission agreements with agents.

5. Profit from new businesses – the embedded value does not include the value which is anticipated to be added from new businesses which will be sold in the future. Therefore, this paragraph presents the addition to the embedded value as at the end of the previous period, following the sale of new insurance policies during the year and the joining of new members to the pension funds. The addition is distributed into actual influence of new businesses on profits during the period itself (presented in the framework of the adjusted capital) and anticipated profits from new businesses in the future (presented in the framework of the in force portfolio value).

The summary of the changes appearing in paragraphs 2-5 above are usually referred to as „the operational real profit on an embedded value basis‟. This sum reflects the value which was added to the embedded value, or the profit in value terms emanating from the company‟s current activities, except the influence from businesses which are not included in the embedded value (such as general insurance) before the influence of inflation and unexpected economic factors, such as unanticipated changes in the market interest rates, the capital market and inflation.

6. Development expenses not included in the embedded value – the influence on the actual profits during the year is reflected due to extraordinary expenses which were not included in the embedded value but rather were attributed to future sales. During 2011, there were no expenses which were not included in the embedded value.

7. Profit from special items – there were no special items for 2011.

8. Influence of inflation during 2011 – this paragraph includes the influence of inflation during 2011 (2.6%) on the opening balance of the embedded value. The influence of inflation was mainly in respect of linking the policies to the index, a fact which influences the in force value of the portfolio and the influence of the expected yield in the index rate on the adjusted capital.

9. Profit resulting from deviation from the economic assumptions during 2011 and changes in the economic assumptions – this paragraph includes three components:

a. Influence on the portfolio value from changes occurring in the economic assumptions which are based on the market

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interests. Such assumptions include the capitalization interest and anticipated yields.

b. Influence from the deviations of the actual economic parameters during the year as opposed to expected yields including expected spreads over risk free rates. The influence is in two of the embedded value components:

1. In the adjusted capital – due to the influence on the profit, mainly from yields which were different from those anticipated on the company assets which are placed vis-à-vis the capital and against the insurance reserves in respect of the included businesses.

2. In the value of the portfolio – due to the changes in the anticipated profits from the portfolio caused by the change in the risk free yield curve.

c. Increase in future tax rates. The effect of this increase amounts to NIS 338 million in the insurance segment and to NIS 95 million in pension segment.

It is customary to refer to the changes appearing in paragraphs 2-9 above as „the operational real profit on an embedded value basis‟. This sum reflects the value which was added to the embedded value, or the profit in value terms emanating from the company‟s current activities, including the influences of economic factors and including special items, however, excluding the influence businesses not included in the embedded value (such as general insurance).

10. Profit from non-included businesses – the embedded value sum includes the company‟s entire equity and therefore a part of the increase/ decrease of the embedded value is explained by the profits/ losses of spheres of activity which are not included in the portfolio value. Also included in this paragraph (increase to capital adapted) are financing expenses in a sum of NIS 77 million (after taxes).

The summary of the changes in paragraphs 2-10 constitutes the „sum of the profit on an embedded value basis‟ (including inflation effect).

11. Capital movements – this paragraph presents the change in the embedded value emanating from capital movements, including payment of dividends during the year.

12. Inclusion of Dikla's operations - during the year, the entire ownership of Dikla was transferred from Harel Investments to Harel Insurance. Dikla's operations only appear in these opening data as an addition in the analysis of changes in the Embedded Value (see Table 3.4 below).

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2.8. Sensitivity tests

The sensitivity tests presented in paragraph 3.6 hereunder have adopted the following approaches:

a. Unless stated otherwise, the sensitivity relates to all included businesses.

b. The sensitivity tests relate to each assumption separately without measuring accumulating or offsetting influences or derivative changes on other factors, etc.

c. The sensitivity in respect of the value of new businesses relates to changes from the end of 2011 onwards, not to the period from the time of sale until the end of 2011.

d. Mortality before retirement age – mortality rate sensitivity tests (including death by accident) not including mortality of insureds who are receiving retirement pensions or monthly restitution for loss of ability or nursing.

e. Mortality among retirement pension recipients – sensitivity test of mortality rate among retirement pension recipients only, not including mortality among other pension recipients.

f. Morbidity – sensitivity tests include all claims except for mortality included in section 4 above, including morbidity from severe diseases, loss of ability to work, nursing, surgery and hospitalization, disability from accidents, etc. The test relates to frequency of claims and not period of payment for inability in respect of work or nursing claims.

g. Interest – sensitivity test results include:

1. Impact of changes in interest rate serving as capitalization interest and the expected yield on company asset investments on present value of future profits (PVFP).

2. Impact of changes in interest rate on value of assets bearing Shekel or linked interest, placed vis-à-vis the included businesses.

2.9 Embedded value report review Annexed to this report is an external reviewer‟s report that performed a review of the report regarding the embedded value as at 31.12.2011 and value of new businesses for the year ending on that date, as well as the sensitivity analysis presented in this report.

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3. Results

3.1. Embedded value on 31.12.2011* (in NIS millions)

Included Pension fund Adjustment to Total Embedded businesses in life management joinder of Value of and health businesses pension fund life and health insurance management insurance and businesses into pension fund the company‟s management Embedded Value businesses Adjusted equity (see paragraph 3.3 2,014 41 (266) 1,789 below) Present value of future profits, less 4,426 1,338 0 5,764 taxes (see paragraph 1.5.3) Less cost of (184) (3) 0 (187) required capital Embedded value 6,255 1,376 (266) 7,366 *Includes Dikla.

3.2. Value of new businesses for sales during 2011 (in NIS millions)*

VNB for included life VNB for pension fund Total VNB for and health insurance management insurance and pension businesses businesses Value of new businesses before 408 156 563 required capital cost Value of required capital in respect of (12) (0) (13) new businesses Total value of new 395 155 550 businesses * Does not include Dikla VNB of NIS 121 million.

3.3. Adjustment between adjusted equity and the equity in the financial reports

Table 3.3a – insurance business* NIS millions Equity (company's balance) 2,692 Reevaluation of overlapping assets of included businesses and displayed in (67) financial reports by cost of fair value, less taxes Less deferred acquisition costs (DAC) (942) Plus reserves for deferred tax on DAC 331 Adjusted equity in respect of long-term insurance included businesses 2,014 *Includes Dikla

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Table 3.3b – pension fund management companies NIS millions Equity (company's balances) 108 Less deferred acquisition costs (DAC) (94) Plus reserves for deferred tax and future tax benefits on DAC 28 Less reputation in respect of purchased pension funds, appearing in the company‟s (1) balance sheet of the pension fund management company Adjusted equity in respect of pension businesses 41

Table 3.3c – Harel Insurance Company: inclusion of pension fund management business*

NIS millions Adjusted equity in respect of long-term insurance policies (life and health 2,014 insurance), from table 3.3a above Less deferred acquisition costs (balance sheet DAC) in respect of pension (94) Plus reserves for deferred tax and future tax benefits on DAC, Pension 28 Less the value of purchased pension fund management companies and reputation in (158) respect thereof included in the equity Adjusted equity of Harel Insurance, taking pension fund management 1,789 businesses into account *Includes Dikla.

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3.4. Analysis of the change in embedded value and profits on an embedded value basis (in NIS millions)

Table 3.4a –Insurance business

Reference Adjusted Net Value In Embedded Worth Force Value Embedded value as at 31.12.2010 (opening balance) 30119 4068: 5,587 Adjustment to embedded value in 3.8.2 1 :9 98 respect of the opening balance Embedded value adjusted to the opening 2,008 3,677 5,685 balance Operational profit from the in-force portfolio to the opening balance - Changes in operational and demographic assumptions 3.8.3 )25( 397 273 - Anticipated profit on the value in force 3.8.4 66 344 288 - Inclusive profit predicted in 2011, transferred from portfolio value to equity 3.8.4 568 )568( 0 - Influence of deviations from the operational and demographic 3.8.5 )227( 4: (76) assumptions during 2011, plus other changes to the inforce portfolio Total 383 102 485 Profit from new businesses 3.8.6 )328( 723 395 Real operational profit according to 166 714 880 embedded value Development expenses not included in 3.8.7 1 1 0 the embedded value Profit from special items 3.8.8 1 1 0 Influence of inflation in 2011 3.8.9 45 211 134 Profit (loss) from deviations from the economic assumptions during 2011 and 3.8.: )4:5( )692( (975) amendments of the economic assumptions Total real profit on an embedded value basis (195) 234 39 Profit from pension businesses 36 1 25 Profit from non-included businesses 3.8.21 )78( 1 (67) Total real profit on an embedded value basis - including all business of )733( 732 (3) the company Capital Movements 377 1 266 Embedded value as at 31.12.2011 2,038 3,911 5,948 Reduction of Investment in Dikla (257) (257) Addition of Dikla Embedded Value 233 331 564 Embedded value of Insurance 2,014 4,241 6,255 business including Dikla

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Table 3.4b - Pension fund management businesses

Reference Adjusted Value In Embedded

Net Worth Force Value Embedded value as at 31.12.2010 (opening 33 :82 553 balance) Adjustment to embedded value in respect of the 3.8.2 1 54 23 opening balance Embedded value adjusted to the opening balance 22 1,014 1,036 Operational profit from the in-force portfolio to the

opening balance - Changes in operational and demographic 3.8.3 1 286 531 assumptions - Anticipated profit on the value in force 3.8.4 2 32 75 - Inclusive profit predicted in 2011, transferred 3.8.4 57 )57( 0 from portfolio value to equity - Influence of deviations from the operational and demographic assumptions during 2011, plus 3.8.5 )4( 66 15 other changes to the inforce portfolio Total 44 203 723 Profit from new businesses 3.8.6 )37( 292 511 Real operational profit according to 18 385 403 embedded value Development expenses not included in the embedded 3.8.7 1 1 0 value Profit from special items 3.8.8 1 1 0 Influence of inflation in 2011 3.8.9 1 37 72 Profit (loss) from deviations from the economic assumptions during 2011 and amendments of the 3.8.: 5 )45( )44( economic assumptions Total real profit on an embedded value basis 19 321 341

Capital Movements )2( 1 )5( Embedded value as at 31.12.2011 41 1,335 1,376

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Table 3.4c - Total Insurance and Pension fund management businesses

Reference Adjusted Value In Embedded Net Force Value Worth Embedded value as at 31.12.2010 (opening 59355 29110 6,340 balance) Adjustment to embedded value in respect of the 3.8.2 )0( 527 141 opening balance Embedded value adjusted to the opening balance 1,790 4,691 6,481 Operational profit from the in-force portfolio to the opening balance - Changes in operational and demographic 3.8.3 )52( 225 447 assumptions - Anticipated profit on the value in force 3.8.4 25 712 302 - Inclusive profit predicted in 2011, transferred 3.8.4 103 )103( 0 from portfolio value to equity - Influence of deviations from the operational and 3.8.5 )555( 52 (25) demographic assumptions during 2011, plus other changes to the inforce portfolio Total 420 305 725 Profit from new businesses 3.8.6 )723( 353 551 Real operational profit according to embedded 177 1,099 1,276 value Development expenses not included in the 3.8.7 0 0 0 embedded value Profit from special items 3.8.8 0 0 0 Influence of inflation in 2011 3.8.9 30 572 156 Profit (loss) from deviations from the economic 3.8.: )347( )230( (1,052) assumptions during 2011 and amendments of the economic assumptions Total real profit on an embedded value basis (175) 555 380 Profit from non-included businesses )23( 0 (67) Capital Movements 722 0 266 Total Change in EV 73 111 578 Embedded value as at 31.12.2011 1,813 5,246 7,059 Reduction of Investment in Dikla )713( 0 (257) Addition of Dikla Embedded Value 733 335 564 Embedded value of Harel including Dikla 1,789 5,577 7,366

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Table 3.4 D - Dikla's operations

Reference Adjusted Value Embedded Net In Value Worth Force Embedded value as at 31.12.2010 (opening balance) 752 742 140

Adjustment to embedded value in respect of the opening 3.8.2 0 )53( )53( balance Embedded value adjusted to the opening balance 296 272 568

Operational profit from the in-force portfolio to the opening balance - Changes in operational and demographic assumptions 3.8.3 0 4 4 - Anticipated profit on the value in force 3.8.4 4 2 57 - Inclusive profit predicted in 2011, transferred from portfolio value to equity 3.8.4 12 )12( 0 - Influence of deviations from the operational and demographic assumptions during 2011, plus other changes 3.8.5 )2( )55( )51( to the inforce portfolio Total 58 (54) 4

Profit from new businesses 3.8.6 )1( 572 575 Real operational profit according to embedded value 53 72 125

Development expenses not included in the embedded 3.8.7 0 0 0 value Profit from special items 3.8.8 0 0 0 Influence of inflation in 2011 3.8.9 1 3 57 Profit (loss) from deviations from the economic assumptions during 2011 and amendments of the 3.8.: )52( )70( )32( economic assumptions Total profit on an embedded value basis 42 59 101

Profit from non-included businesses 3.8.21 70 0 70 Total profit on an embedded value basis including all 62 59 121 company business Capital Movements 3.8.22 )572( 0 )572( Embedded value as at 31.12.2011 233 331 564

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3.5. Adjustment between the changes in adjusted equity and the net profit of the company for 2011 (in NIS millions)

a. Insurance business

Net profit for 2011 130 Items attributed directly to equity (156) Total After-Tax Profit (25) Changes in DAC, before tax (49) Tax in respect of changes in DAC not included in the in force portfolio value 50 Changes in the difference of fair value, less tax (214) Total Profit Adjusted to EV Basis (237) Capital Movements 266 Adjustment to Dikla Capital (24) Total Change in Adjusted Equity 6

b. Pension management businesses

Net profit for 2011 30.1 Items attributed directly to equity -0.6 Total After-Tax Profit 29.4 Changes in DAC, before tax -17.1 Tax in respect of changes in DAC not included in the in force portfolio value 6.9 Changes in the difference of fair value, less tax 0 Total Profit Adjusted to EV Basis 19.3 Capital Movements -0.6 Total Change in Adjusted Equity 18.7

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3.6. Sensitivity analysis for included businesses as at 31.12.2011

a. Insurance businesses (Excluding Dikla) Change in embedded value Change in value of new business NIS % NIS % millions millions Base result 5,948 100% 395 100% 0.5% reduction in risk-free interest 45 0.8% 5 1.4% 10% increase in administration and (167) (2.9%) (20) (5.3%) general expenses Relative 10% increase in cancellation rate (including redemptions and (234) (4.0%) (41) (10.7%) settlements) 10% increase in mortality rates among (49) (0.8%) (22) (5.6%) pre-retired insureds 10% increase in morbidity rates (398) (6.8%) (59) (15.4%) Relative 10% decrease in mortality rate among recipients of old-age (157) (2.7%) (4) (1.1%) pensions Relative 10% increase in risk-free (40) (0.7%) (6) (1.7%) interest 10% decrease in administration and 167 2.9% 20 5.3% general expenses Relative 10% decrease in cancellation rate (including redemptions and 259 4.4% 46 12.0% settlements) 10% decrease in mortality rates 38 0.7% 17 4.5% among pre-retired insureds 10% decrease in morbidity rates 348 6.0% 63 16.5% Relative 10% increase in mortality rate among recipients of old-age 141 2.4% 8 2% pensions b. Dikla business Change in embedded value Change in value of new business NIS % NIS % millions millions Base result 564.0 100% 121 100% 0.5% reduction in risk-free interest (8.0) (1.4%) (0.9) (0.7%) 10% increase in administration and (12.5) (2.2%) (3.7) (3.0%) general expenses Relative 10% increase in cancellation (9.5) (1.7%) (4.8) (4.0%) rate 10% increase in mortality rates 5.4 1.0% 0.9 0.7% 10% increase in morbidity rates (22.7) (4.0%) (5.1) (4.2%) Relative 10% increase in risk-free 5.4 1.0% 0.2 0.2% interest 10% decrease in administration and 12.5 2.2% 3.7 3.0% general expenses Relative 10% decrease in cancellation 9.6 1.7% 5.9 4.9% rate 10% decrease in mortality rates (5.8) (1.0%) (1.0) (0.8%) 10% decrease in morbidity rates 23.7 4.2% 5.4 4.4%

25 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c Harel Insurance Company Ltd. Embedded Value (EV) Report As of December 31, 3122

c. Pension businesses Change in Change in value of new embedded value business NIS % NIS millions % millions Base result 1,376 100% 155 100% 0.5% reduction in risk-free interest 68 4.9% 11 7.0% 10% increase in administration and general expenses (73) (5.3%) (11) (7.4%) Relative 10% increase in cancellation rate (including (132) (9.6%) (31) (19.7%) redemptions and freezing) 1% decrease in wages rises (75) (5.4%) (15) (9.8%) Increase in governmental interest by 0.5% (62) (4.5%) (10) (6.5%) 10% decrease in administration and general expenses 73 5.3% 11 7.4% 10% decrease in cancellation rate (including 151 10.9% 37 23.7% redemptions and freezing) 1% increase in wages rises 84 6.1% 17 11.0%

______Michel Siboni Ronen Agassi Dan Bar-on CEO Deputy CEO and CFO Deputy CEO and Chief Actuary

26 WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c

Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv 67067, Israel Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

May 23, 2012

To: The Board of Directors Harel Insurance Company Ltd.

Dear Sir or Madam,

Re: Review of embedded value report dated 31.12.2011

A. In accordance with your request, we reviewed the information prepared by Harel Insurance Company Ltd. (hereinafter the „company‟) regarding its embedded value as at 31.12.2011, value of new business for the year ending on the above date, analysis of movement in embedded value and sensitivity tests regarding them, relating to long term life and health insurance policies and pension fund management businesses (hereinafter “embedded value report”).

B. Inter alia, our review included:

1. Discussions and inquiries with relevant staff within the company, execution of analytical procedures relating to the results displayed in the embedded value report and to other financial and statistical information.

2. Reconciliation between calculated results and company financial information.

3. Comparison of demographic and operational assumptions according to which the embedded value report was prepared, with past company experience and relevant external information.

4. Examination of the compliance of the methodology, assumptions and method of presentation, according to which the embedded value report was prepared, with Circular No. 2007-1-11 issued by the Commissioner for Insurance and its appendices (hereinafter: Commissioner‟s circular). The Commissioner‟s circular adopted the rules and principles established in the report of the joint committee of the insurance companies and the Commissioner for Insurance (hereinafter the „committee‟) which operated together with Israeli and foreign consultants.

C. On the basis of our review and relying on the information and data provided by the company, we note as follows: WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c

Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv 67067, Israel Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

1. The methodology and assumptions described in the embedded value report substantively comply with the Commissioner‟s circular, subject to item D(3) below.

2. The method of disclosure in the embedded value report substantively complies with the Commissioner‟s circular and with instructions specified in the “Disclosure Format” which was prepared by the committee, in coordination with the Insurance Commissioner.

3. Nothing came to our attention indicating that the demographic and operational assumptions presented to us during the review were unreasonable in relation to the company‟s past and present experience and the management‟s expectations regarding the future, subject to paragraph D(2) hereunder.

4. Nothing came to our attention indicating that the embedded value of NIS 7,366 million, value of new business of NIS 550 million, the sensitivity tests in respect thereof and the analysis of movement in embedded value were improperly evaluated according to the methodology and assumptions specified in the embedded value report and which were presented to us during the review.

D. We draw your attention to the following issues:

1. The embedded value report was based on assumptions which are derived from the extrapolation of existing experience to the future, in reference to the environment in which the company operates. Naturally, when dealing with long term future estimations, actual results may be expected to differ from those assumed when calculating the embedded value.

2. There is uncertainty regarding the ramifications of the reforms in the long- term savings market. The calculation of the embedded value does not include the possible effects, if any, as detailed in paragraph 1.5.2 of the embedded value report.

3. Comments, clarifications and limitations relating to the treatment of risks described in paragraph 1.5.3 of the embedded value report.

4. The embedded value also includes the embedded value of the businesses of Dikla Insurance Company Ltd. ("Dikla") owned by the company from December 31, 2011. However, the value of new businesses stated above does not include the value of new businesses of Dikla.

Yours faithfully,

Kost Forer Gabbay & Kasierer C.P.A. Certified Public Accountants. WorldReginfo - aedb5ad8-8a31-4ce4-8523-f5314907d50c