HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD.
Interim Statement As at march 31, 2011
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, 2011
Board of Directors' Report on the state of the Company at March 31, 2011: 1-1
Auditors' Review 2-2
Condensed Interim Consolidated Financial Statements March 31, 2011 (Unaudited):
Condensed interim consolidated statements on the financial position 2-3
Condensed interim consolidated statement of income 2-5
Condensed interim consolidated Statements of comprehensive income (loss) 2-6
Condensed interim consolidated statements of changes in capital 2-7
Condensed interim consolidated statements of cash flows 2-10
Notes to the Condensed interim consolidated Financial Statements 2-13
Annex to the Condensed Consolidated Financial Statements: 2-50
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 Report concerning Embedded Value in long-term policies issued by Harel Insurance Company Ltd. (including pension funds' management companies). Report concerning Embedded Value in long-term policies issued by Dikla Insurance Company Ltd.
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Board of Directors' Report
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Harel Insurance Investments & Financial Services Ltd.
Board of Directors' Report For the three months ended March 31, 2011
The Board of Directors' Report for the three months ended March 31, 2011 ("the Reporting Period"), reflects the principal changes in the business situation of Harel Insurance Investments & Financial Services Ltd. ("Harel Investments" or "The Company") during this period, and it was prepared taking into account that the reader is also in possession of the Group's full Periodic Report for 2010 which was published on March 23, 2011 ("the Periodic Report").
The Board of Directors' Report in this chapter of the Periodic Report, also contains forward-looking information, as defined in the Securities Law, 5728-1968. Forward-looking information is uncertain information regarding the future, based on information that the Company has at the time of preparing the report and including the Company's estimates or intentions at the date of the report. Actual performance may differ substantially from the results estimated or inferred from this information. In certain instances, sections can be found that contain forward-looking information, where words such as: "the Company/the Group estimates", "the Company/the Group believes", "the Company/the Group anticipates", and the like appear, and such forward-looking information may also be worded differently. 1. Description of the Company
1.1. General Harel Insurance Investments and Financial Services Ltd. ("Harel Investments" or "the Company") is a public company, whose shares have been traded on the Tel Aviv Stock Exchange since 1982. The Company, together with its subsidiaries ("the Group") operates principally in the following areas: a) In various sectors of the insurance industry, the Company operates through the subsidiaries: Harel Insurance Company Ltd.(wholly controlled) ("Harel Insurance"); Dikla Insurance Company Ltd. ("Dikla"); Interasco Societe Anonyme General Insurance Company S.A.G.I. (in which the Company owns 97.25% stake ("Interasco"), which operates in Greece in non-life insurance; Turk Nippon (in which the Company owns a 97% 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)). The Group has been active in the insurance industry for more than 70 years. According to the financial statements for 2010, the Group is Israel's third-largest Insurance Group, with a market share of approx. 18.5%. In health insurance the Group is the largest and most prominent in the market, in the non-life sectors the Group is the second-largest insurance group, and it holds third place regarding the volume of life-assurance premiums. The Group accounts for approximately 12.4% of the pension funds management market, 7.7% of the provident funds management market, 13.3% of the mutual funds management market and 5% of the ETF market. The Company's own operations center on the management, control and supervision of the subsidiaries, on-going planning of the Group's operations, and the initiating of activity and investments both directly and through the Group's companies.
1.2. Companies share holders The Hamburger family (Yair Hamburger, Gideon Hamburger and Nurit Manor, through a holding company) holds 49.61% of the Company's shares. 2. Financial situation and results of operations, shareholders' equity and cash flow 2.1. Material changes in the Company's business during the Reporting Period 2.1.1. License to engage in life assurance – Dikla Insurance Company In March 2011 Dikla's insurer's license was extended to include life assurance – pure risk only. Likewise, Dikla received approval for two insurance plans in the life assurance (risk) branch. 2.1.2. Distribution of dividends On November 23, 2011, the Company's Board of Directors decided to distribute a dividend of NIS 64 million. The decision of the board of directors was reached after the financial results of the Company for the year 2011 was presented before it and was taken under consideration. The board of directors was presented with surpluses that were suitable for distribution by the Company as of December 31, 2010, at the sum of approx. NIS 3 billion. The board of directors examined the Company's net profit criteria and the solvency criteria as prescribed in Section 203 (A) to the Companies Law and following this examination it approved the compliance of the Company with the criteria for distribution. The distribution of dividends was carried out on April 28, 2011.
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2.1.3. Allotment of share options to employees Pursuant to the outline plan, which was published by the Company on may 25, 2010, on march 15, 2011, after first obtaining recommendation from the Company's Compensation Committee, the Company's Board of Directors approved an allotment of 47,047 stock options to 11 recipients. The options can be exercised according to the closing price of the Company's shares on the TASE, immediately prior to the Board of Directors decision, that is – NIS 191.6 per share. The fair value of the stock options allocated in the allotment is estimated at NIS 2.8 million, taking into account the possibility that some recipients may terminate their employment at an earlier date (excluding the Group's senior executives). The economic value of each stock option offered to the recipients, with an exercise price of NIS 191.6 linked to the CPI, as set by the Board of Directors, is NIS 60 on the date of the allotment, march 15, 2011. The value of the stock options will be charged as an expense in the Company's financial statements, over the anticipated vesting period of the options, from the beginning of 2011 2.1.4. Agreement and partnership agreement to acquire land in Tel-Aviv. On January 27, 2011, subsidiaries of the Company that are financial institutions (hereinafter together:" the Subsidiaries"), together with companies that belong to the Migdal Group and other private investors ("Private Investors"), entered into an agreement to acquire the rights in respect of a plot of land with a registered area of 20,000 sq.m. located between Yigal Alon Road on the west and Hasolelim Street to the east in Tel Aviv (the Purchase Agreement and the Ha'argaz Lot), from Ha'argaz Ltd. (Ha'argaz). At the time of signing the Purchase Agreement, Migdal Group, the Subsidiaries and all the purchasers and owners of the rights in the southern tower (the "Purchase Group"), signed a cooperation agreement arranging the partnership relationship between the members of the Purchase Group (the "Partnership Agreement)". As part of the Partnership Agreement, the Subsidiaries together with the Migdal Group, acquired among themselves in equal parts, all the office space in the northern tower and the adjacent shops, the public car park, as well as the commercial section (excluding an area of 1,580 sq.m. on the eastern side) of the project. Two buildings, each with 38 floors of office space and 83,000 sq.m. of floor space, are planned for the Ha'argaz Lot, above a double commercial floor with 6,250 sq.m. of space, as well as 37,000 sq.m. of service areas above an underground car park with 4 or 5 levels and an area of 70,000 sq.m. for parking and other auxiliary space (the Project). The Subsidiaries intend to invest NIS 310 million in the purchase and construction of their share of the Project. The Subsidiaries will finance their share of the purchase and construction of the Project from independent sources. Period The Subsidiaries' investment is mostly for yield-dependent investment portfolios, provident funds and pension funds, and therefore the transaction is not expected to have any material impact on the financial performance of the Company or the Subsidiaries. 2.1.5. As specified in Section 1.1.5.3.21 of the Periodic Report, Chapter 1, on July 20, 2008, the Commissioner and Clalit Health Services ("Clalit") reached agreement on the sale of Clalit's 1 - 3
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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. As the conditions of the tender are not known, at this stage it is impossible to estimate the anticipated impact of the outcome of the tender on Dikla's financial results. 2.2. Material changes in the Company's business after the Reporting 2.2.1. Allocation of options to Employees On April 28, 2011 the board of directors of the Company decided to publish an outline for a securities offering to employees in accordance with the Securities Regulations (outline details of securities offering to employees) 5770 - 2000 and the Securities Regulations (private offering of securities in a registered company) 5770 - 2000. The outline plan is based on the outline plan published by the Company on June 4, 2009. The outline plan is for an allocation of up to 250,000 option notes for the exercise of up to 250,000 shares par value NIS 1 each of the Company. Pursuant to the outline plan ,on May 26 2011, after first obtaining approval from the Company's Compensation Committee, the Company's Board of Directors approved an allotment of 161,924 stock options to 13 recipients, with an exercise price of 161,924 shares par value NIS 1 each. The options can be exercised according to the closing price of the Company's shares on the TASE, immediately prior to the Board of Directors decision, that is – NIS 172.5 per share. The fair value of the stock options allocated in the allotment is estimated at NIS 9.6, taking into account the possibility that some recipients may terminate their employment at an earlier date (excluding the Group's senior executives). The economic value of each stock option offered to the recipients, with an exercise price of 172.5 linked to the CPI, as set by the Board of Directors, is NIS 59 on the date of the allotment, May 26, 2011. The value of the stock options will be charged as an expense in the Company's financial statements, over the anticipated vesting period of the options from the year of 2011. 2.2.2. Approval of an internal credit rating model On May 15, 2011, the Commissioner authorized Harel Insurance's use of an internal credit rating model that was developed by Harel Insurance This model will serve Harel Insurance's and other financial institutions in group. According to the terms of the authorization, the rating under the internal model shall be construed as a rating that corresponds with a rating company's rating from the risk perspective. At this stage, the authorization is in force until December 31, 2012. The authorization is subject to meeting the following conditions: (a) The rating is valid for evaluating credit given to companies, excluding credit given to banks, insurance companies, credit backed by an underlying asset and credit for project financing; (b) the internal model will be used within the context of the structure, methodology and procedures presented by way of the model review process; (c) any significant change in the structure of the model must be approved in advance by the Commissioner; (d) rating according to model shall not be used for determining the rate of capital required on account of a credit risk. Furthermore, the 1 - 4
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authorization prescribes provisions concerning immediate and periodic reports that Harel Insurance must submit to the Commissioner in connection with the ratings. 2.2.3. Distribution of dividends On November 26, 2011, the Company's Board of Directors decided to distribute a dividend of NIS42.4 The decision of the board of directors was reached after the financial results of the Company for the Reporting Period was presented before it and was taken under consideration. The board of directors was presented with surpluses that were suitable for distribution by the Company as of December 31, 2010, at the sum of approx. NIS3.6 The board of directors examined the Company's net profit criteria and the solvency criteria as prescribed in Section 203 (A) to the Companies Law and following this examination it approved the compliance of the Company with the criteria for distribution. 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. Companies Law (Amendment no. 16), 5711-2011 – streamlining of corporate governance
On March 7, 2011, the Knesset passed Amendment 16 of the Companies Law that prescribed, inter alia, the following provisions: (a) recommended instructions were prescribed in connection with corporate governance to be detailed in an annex to the law (such as appointing independent directors, directors who are directly accountable to the CEO shall not be officeholders , a training plan shall be prepared for directors, the work of the CEO and senior executives shall be discussed each quarter, etc.) that a company may adopt as part of its articles, and should it fail to do so – it must explain the reasons for this; (b) provisions pertaining to the board of directors and its work – a director shall apply independent discretion when voting as part of the board of directors and its committees and he shall not vote based on the instructions of another person, situations must be prevented where a person who is not a director serves as a "shadow" director, a relative of the chairman shall not be appointed as CEO; (c) provisions pertaining to the audit committee – the committee chair shall be an outside director and most of the committee's members must be independent directors; instructions concerning the legal quorum and a person who is not a committee member shall not be permitted to attend the committee's meetings as an observer; (d) the status of minority shareholders is to be strengthened – the majority required to approve an appointment and to extend the term of office of an outside director was changed as well as for approving transactions with the controlling shareholder; (e) the civil enforcement mechanism was improved by improving the mechanism in a derivative claim
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and the Israel Securities Authority was empowered to impose financial sanctions.
2.3.1.2. Streamlining of Enforcement Laws by the Israel Securities Authority (Legislative Amendments) Law, 5771-2010.
On January 27, 2010, the Streamlining of Enforcement Procedures by the Israel Securities Authority Law was published in which context the Securities Law, Investment Advice Law and Joint Investment Trust Law were amended. These amendments confer on the ISA powers to impose significant sanctions in respect of violations prescribed in the legislative amendments. The principal changes are described below. (a) the ISA may impose monetary sanctions of up to NIS 500,000 on a reporting corporation or on a non-reporting corporation that offers its securities to the public, and up to NIS 1,000,000 on a corporation whose main business is the issuance of financial products; (b) the amounts of the monetary sanctions shall only be less than the amounts specified in the annex to the law, in the instances, circumstances and considerations stipulated by the Minister of Finance in respect of which the amount of the sanction may be reduced. Furthermore, the Minister of Finance may, inter alia, change by order the annex to the law and increase the amount of the monetary sanctions up to one million shekels for a reporting or non-reporting corporation that offers its securities to the public, and to up to NIS 2 million for a corporation engaged in the issuance of financial instruments; (c) for a continuing violation, two percent shall be added to the aforesaid monetary sanction for each day on which the violation continues, while for a recurring violation, an amount equal to half the aforesaid monetary sanction will be added. In addition, the ISA was granted administrative enforcement powers through an administrative enforcement committee whose task is to discuss and decide with respect to violations, as defined in the law; (d) the administrative enforcement committee was empowered to apply various enforcement measures, including: a fine that may amount to NIS 5 million for a corporation and NIS 1 million for an individual, payment to the victims of the violation, provisions concerning action to be taken to correct the violation and prevent a recurrence, prohibition on serving as a senior officer of a supervised entity, revocation or suspension of a license, authorization or permit, etc.; (e) ISA investigators were granted various powers for investigating a violation of the provisions of the law, including issuing a subpoena to give and issuing a subpoena to present an object, as well as the power to apply for a court order to enter premises, conduct a search of the premises and to seize effects that are required for investigating the violation; (g) the CEO is responsible to oversee and to take all reasonable steps under the circumstances to prevent the corporation from violating the law, and a presumption was determined that if the provisions are violated (excluding specific provisions that were defined in advance), then the CEO has violated his aforementioned obligation as a result of which one or more of the enforcement measures may be applied to him that could have been imposed on him as if he himself had been the violator. Nevertheless, the law stipulates that if the corporation established procedures that are adequate for preventing the violation, if it appointed an official to oversee the upholding of the regulations, 1 - 6
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including training and it also took reasonable steps to correct the violation and prevent a recurrence, it is presumed that the CEO or the partner fulfilled their obligations, as noted above; (h) none of the foregoing procedures can be insured directly or indirectly, and the corporation and its controlling shareholder may not indemnify a corporation, senior officer or employee of the corporation in respect of a monetary sanction imposed on them. However, a person may be indemnified or insured in respect of payment to the victim of a violation and in respect of expenses incurred in connection with a proceeding conducted in his regard. Circulars
2.3.1.3. On March 28, 2011, the Commissioner published a circular concerning the investigation and settlement of claims and the handling of public complaints (a circular that replaces Financial Institutions Circular 2009-9-18). The circular prescribes the modus operandi of a financial institution during the process of settling claims. Among other things, the circular prescribes the following: (a) a financial institution shall establish standards for the investigation and settling of claims and for dealing with complaints from the public pursuant to provisions that appear in the circular. If the financial institution's standards do not include any of the rules that appear in the draft circular, the regulations prescribed in the draft circular shall apply. The standards shall be considered part of the policy conditions and the management companies shall include them in the management fund articles; (b) a financial institution shall verify that any person acting on its behalf in the settlement of claims must have the requisite qualifications, must be familiar with the relevant provisions of law and the financial institution's relevant products; (c) rules were set for the investigation and settlement of claims and for handling complaints from the public, stipulating the documents that a financial institution must give to any person who files a claim, the notification to be given to the claimant, within 30 days of the financial institution receiving any information and documents that are required for investigating the claim, a follow-up of the investigation or termination of the investigation or notice of payment or announcement of a settlement or rejection of the claim. Furthermore, the circular prescribes rules for the submittal of notice with respect to prescription of the claim, notice concerning the right of appeal, investigation of a claim with the help of an expert, documents and information that are to be saved for at least seven years, replying in writing to any request from an insured or claimant within a reasonable period, and no later than three days from receiving the request.
The financial institution's board of directors must approve policy concerning the settlement of claims and handling of complaints by the public by April 30, 2011, and the financial institution's management must approve the standards in respect of each class of claim and any change in the standards. The circular applies to pension insurance with respect to death and disability risks, to life assurance – with respect to P.H.I. and death, to personal accident insurance, illness and hospitalization insurance (excluding dental insurance and health insurance for foreign workers foreigners residing in Israel), motor property 1 - 7
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vehicle insurance, comprehensive household insurance, cargo insurance, accidents, illness and hospitalization during overseas travel. The provisions of the circular are applicable from June 1, 2011, and with respect to third-party insurance that is part of comprehensive household and insurance according to the requirements of the Motor Vehicle Insurance Ordinance [New Version], 5730-1970 – from March 1, 2012
2.3.1.4. On March 28, 2011, the Commissioner published a circular concerning the collection of statistical information with respect to claims settlement (the circular replaces Financial Institutions Circular 2009-9-19). The purpose of the circular is to collect statistical information that will facilitate the publication of indices with respect to the method of settling claims and the handling of requests to withdraw money, the transfer of money and receipt of old-age pensions by financial institutions, to serve as an instrument for potential policyholders and planholders in their choice of financial institution. The principal change in the circular is that in addition to claims, it also addresses requests to withdraw money, to transfer money, to transfer money between tracks and to receive an old-age pension. As a direct consequence of all this, the circular also applies to provident funds and life assurance plans that are not insurance funds. Nevertheless, the circular does not apply to central provident funds that are managed by the financial institutions. As part of the circular, a financial institution must collect and save the previous year's claims data and data on applications, it must report them to the Commissioner ever year in the format stipulated in the circular and present the information pertaining to the last 4 years on its website. The circular's general provisions will become applicable on June 1, 2011 (there are transitory provisions regarding claims in accordance with the Motor Vehicle Insurance Ordinance [New Version], 5730- 1970 and in respect of the aforementioned requests).
2.3.1.5. On March 23, 2011, the Commissioner published a circular clarifying the instructions for investments made by financial institutions in non-governmental bonds (as prescribed in Financial Institutions Circular 2010-9-3). The circular prescribes instructions concerning the purchase of non-marketable bonds issued as part of the extension of a series prior to October 1, 2010, they define a "reporting corporation" and a "non-reporting corporation", and they also establish which documents are included in the definition of "issuance documents".
2.3.1.6. March 16, 2011 the Commissioner published a circular concerning a model for determining the fair value of a non-marketable debt asset. Pursuant to the Control of Financial Services (Provident Funds) (Calculation of Asset Value) Regulations, 5769-2009, a financial institution must calculate the fair value of an asset that is not a marketable security according to fair value in line with the Commissioner's instructions, and the Commissioner may instruct the financial institution to enter into agreement with a company chosen through a tender, that specializes in determining the interest rates for discounting cash flows for the purpose of calculating the fair value. The Commissioner issued a tender, the results of which were published in July 2010, in which Mirvah Hogen Ltd. was 1 - 8
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chosen to provide individual price quote and interest rate services for financial institutions. The financial institutions must therefore prepare for the onset of Mirvah Hogen's activity and enter into agreement with it in accordance with the conditions of the tender.
2.3.1.7. On February 8, 2011, the Commissioner published a circular revising the instructions concerning the format for disclosure required in the financial statements of the insurance companies consistent with International Financial Reporting Standards (IFRS), further to Insurance Circular 2010-1-4 (Format for the disclosure required in the annual financial statements of the insurance companies consistent with IFRS). The circular stipulates that a company that chooses early implementation of the new international accounting standards, must inform the Commissioner to this effect before implementation and if the Commissioner has expressed no objection within 60 days, the company may introduce early implementation of the standards. Furthermore, provisions were prescribed that address the following: comprehensive profit, the company's share of the profits of investees that are treated using the accounting value method, shareholders equity and capital requirements, risk management and a summary of the data relating to the financial reports required of the company (separate reports) for the purpose of calculating the capital requirements. The provisions of the circular apply from the financial reports for 2010. Draft circulars
2.3.1.8. On March 20, 2011, the Commissioner published a draft circular concerning data optimization of the rights of members of financial institutions. The draft circular details the activity framework that a financial institution must carry out to ensure that members' rights are reliably, and fully recorded in the information systems, and that they are available and retrievable. The financial institution must conduct a gap analysis about the existing information at product, member and employer level, it must formulate a model for mapping and rating the gaps that are found in the analysis, and it must prepare a detailed work plan to deal with any failures that are found. Likewise, the financial institution's board of directors must approve the optimization plan and discuss the subject at least once every six months. In addition, a steering committee shall be set up, that is accountable to the CEO to formulate a work plan and report on progress in the optimization project to the board of directors. The financial institution must keep documentation of the work plan and monitor progress of the optimization project, and it must also send the Commissioner reports on the subjects specified in the draft circular. The Commissioner and the financial institutions are discussing the draft circular.
2.3.1.9. On February 21, 2011, the Commissioner published a draft circular concerning a list of the nostro assets of financial institutions at individual asset level. The draft circular prescribes that an insurance company shall report a list of the assets divided into three groups: (a) non-profit sharing life assurance; (b) non- life insurance, surplus capital and other obligations; (c) all the aforementioned liabilities together. A management company shall report the list of assets 1 - 9
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without dividing them into groups. The report is to be submitted each quarter and up to 7 days after the last date for submitting the financial institutions in each quarter. The reports shall be made pursuant to the provisions prescribed on this matter in the draft circular from the reports in respect of the third quarter of 2011, and for a management company – from the annual report for 2011.The Commissioner and the financial institutions are discussing the draft circular.
2.3.1.10. On February 8, 2011, the Commissioner published a draft circular clarifying Financial Institutions Circular 2010-9-3 – "Provisions concerning investments by financial institutions in non-government bonds".The draft circular prescribes provisions relating to the purchase of a marketable or non-marketable bond that was issued in the context of expanding an existing series. A "reporting corporation" was defined as a corporation whose securities are offered to the public through a prospectus, a corporation whose securities are traded on the TASE or are registered on the TASE for trade, a corporation that is traded on a stock exchange outside Israel. The draft circular also stipulates that a financial institution that manages the investments of another entity by outsourcing shall regularly monitor compliance with the provisions of the circular by the outsourcing entity and shall approve the relevant policy according to the provisions of the circular that the outsourcing entity must comply with. The Commissioner and the financial institutions are discussing the draft circular.
2.3.1.11. On January 3, 2011, the Commissioner published a third draft circular concerning the composition of an insurer's shareholders' equity. The draft circular stipulates that the recognized equity of an insurer shall be composed of the amounts of the components and instruments included at three levels: (a) primary capital – the principal and most qualitative level of an insurer's capital which consists of components and instruments that have matured, which are subordinated with regard to any of the insurer's other obligations (financial or insurance), are available to absorb the insurer's losses during the normal course of business and in case of insolvency or liquidation, and which are perpetual and are not governed by any restrictions, conditions or allocations; (b) secondary capital – the layer of capital which consists of matured components and instruments, which are subordinated in the with regard to any other obligation (financial or insurance), excluding primary capital, are perpetual or have been issued for a long period relative to the insurer's obligations, are capable of absorbing losses during the normal course of the insurer's business and in a state of insolvency or liquidation, and do not include any restrictions or allocations; (c) tier-three capital – consisting of matured instruments and components which are subordinated with regard to any other obligation (financial or insurance) excluding primary and secondary capital, which have been issued for the intermediate term, are capable of absorbing losses in a state of insolvency or liquidation and which do not contain restrictions, conditions or allocations. The draft circular stipulates that an insurer's equity is the sum of the components and instruments included in the different layers, at the following rates and conditions: with regard to primary 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 1 -10
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of capital components and capital instruments that are included in "basic primary capital" shall not fall below 80% of the total primary capital; 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 also prescribes that for the purpose of calculating an insurer's recognized equity, the complex capital instrument (complex primary capita, complex secondary capital and complex tier-three capital as defined in the draft circular) shall be amortized in a straight line over the last few years before its maturity date. To include a complex primary capital instrument, a secondary capital instrument and a tertiary capital instrument in the equity, approval is required in advance from the Commissioner. An insurer shall inform the Commissioner at least three months before any maturity date of a complex capital instrument. The draft circular prescribes temporary provisions regarding the composition of an insurer's equity which shall apply for the period from December 31, 2010 and until the Solvency II Directive has been implemented. The Commissioner and the financial institutions are discussing the draft circular.
On May 10, 2010, the Commissioner's approval regarding the issue of complex secondary capital in the Company that will be recognized as a complex secondary equity by Harel Insurance. In this framework the composition of equity of the Company in accordance with the said in the aforesaid draft circular.
On March 2010, the Commissioner published criteria for approving the distribution of a dividend by insurance companies ("Criteria Document"). The criteria were published further to a letter issued by the Commissioner on March 9, 2009 in which he specified that a dividend may only be distributed after obtaining prior approval from the Commissioner.
According to the Criteria Document, an insurer may apply to the Commissioner for permission to distribute dividends subject to meeting, on the various dates listed in the document, certain rates which were also detailed in the document, of supplementing the required capital, in view of the new Capital Regulations ("Supplement Rates"). In addition, a different method of calculation was defined for existing capital with respect to the distribution of dividends, whereby secondary capital as defined immediately prior to the amendment of the regulations, will be recognized in full as long as it does not account for more than 40% of the primary capital. If the secondary capital accounts for more than 40%, then half of the balance in excess of the 40% will be recognized. Complex capital instruments will be recognized in full subject to the rates permitted under the provisions of the law. For the purpose of obtaining the approval, the insurer must submit an annual profit outlook for the years 2010 and 2011, a revised debt service plan approved by the board of directors of the insurer's holding company, and the minutes of the board of directors meeting at which distribution of the dividend was discussed, including comments on the Commissioner's draft circular concerning a plan of action for managing the insurance company's shareholders equity. 1 -11
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The Criteria Document further stipulates that an insurer whose total shareholders' equity, after distribution of the dividend is higher than 110% of the required capital, taking into account the supplement rates, may distribute a dividend without obtaining the Commissioner's prior approval, provided that the Commissioner has been notified in advance and that the documents listed above have been submitted.
2.3.1.12. On January 04, 2011, the Commissioner published a draft circular concerning digital signatures. The purpose of the draft circular is to regulate the use of a digital signature – a signature saved digitally as a graphic file, on documents used for insurance brokerage transactions and on a transaction between a customer and a financial institution, on savings through a pension product in which the financial institution has an interest, and on action taken in that pension product. The draft circular prescribes various provisions that the licensee or insurance agent must comply with when a digital signature is used on such documents. These provisions include the following: the obligation to take reasonable measures to identify the customer and verify his signature, the obligation to allow the customer to scrutinize the document before it is signed and to give the customer a fixed layout copy of the signed document at the time of the signing, the obligation to save the signed document in a format that cannot be changed, and various obligations pertaining to the archiving of documents signed with a digital signature and the taking of various protective measures in the information systems in which they are stored. In addition, the circular prescribes an obligation to include an option for using an electronic signature in an agreement between a financial institution and a licensee or insurance agent. The Commissioner and the financial institutions are discussing the draft circular. Instruction
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.
Draft regulations
2.3.1.13. On April 13, 2011, the Commissioner published draft Control of Financial Services (Provident Funds) (Rules of Investment that apply to management companies and insurers) Regulations, 5771-2011.
The draft regulations propose a standard framework for the rules of investments
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made by the different financial institutions (provident funds, pension funds, and yield-dependent liabilities of insurers), including nostro money, and they also propose changing some of the existing investment rules in an effort to adapt them to the modes of operation of the capital market and the activity of the institutional investors. Among other things, the regulations propose removing the currently existing quantitative restrictions and increasing the involvement of the investment committees and their external representatives. Likewise, the regulations address restrictions that will apply to transactions conducted between financial institutions and their related companies.
In addition to the draft regulations, the Commissioner published a draft circular concerning the investment rules that apply to management companies and insurers. The draft circular prescribes the following provisions: (a) provisions concerning a deviation from the investment rates – amendment to the deviation by an institutional investor in accordance with a procedure to be determined, defining the dates for amending the investment deviation, reporting to the Commissioner, refund of management fees during the deviation period, and a refund of capital gains during the deviation period; (b) appointment of a director by a financial institution – in a particular corporation by virtue of holding the means of control therein that is approved by the investment committee. Wages and other benefits to which the director is entitled, shall be transferred to the financial institution's assets; (c) an institutional investor or group of investors may invest in a partnership when the conditions prescribed in the draft circular are met (e.g. – the financial institution is a limited partner in the partnership, the partnership is registered, the rate of the investment in the partnership does not exceed 49%); (d) investing in a right to land through a corporation that is not a partnership – up to 49% of a particular category of the means of control in the corporation if the corporation engages in the holding of land or a rate of more than 49% if there is no pledge or mortgage on the corporation's assets; (e) giving loans under the conditions specified in the draft circular (e.g. – a loan rated BBB- or A-3, the loan is for housing, the amount of the loan does not exceed 10% of the estimated value of the financial institution's assets and must not be more than the amount that the insured has in the provident fund); (f) transactions with a related entity – provided that the transaction has been approved in advance and in writing by a majority of the external representatives on the investment committee and the transaction took place in accordance with a procedure prescribed by the investment committee; (g) investing in a related party – under conditions prescribed for this purpose in the draft circular, and inter alia, provided that the institutional investor's total investment in all the related entities is no more than 5% of the estimated value of its assets. The Commissioner and the financial institutions are discussing the draft regulations and the circular.
2.3.1.14. In February 2011, draft Securities (Periodic and Immediate Reports) Regulations, 5711-2011, were published that prescribed, inter alia, that a corporation that consolidates or proportionately consolidates a banking corporation or financial institution may, with respect to the internal control in a financial institution or banking corporation only, apply the format for the 1 -13
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reviewing the effectiveness of the internal control prescribed in the applicable law in this instance, provided that the conditions specified in the draft regulations are met. Furthermore, the changes were defined that must appear in the board of directors and management's report subsequent to the corporation's choice of the option described above. 2.3.2. Life assurance & long-term saving The Commissioner's plan to increase competition in the pension savings market
2.3.2.1. In November 2010, the Commissioner published a document detailing a plan prepared by the Capital Markets, Insurance and Savings Division of the Ministry of Finance to increase competition in the pension savings market, in an effort to enhance the pension market. Following are the main points of the plan.
At the level between the financial institutions and customers: a. A standard model with maximum management fees will be introduced integrating the collection of management fees from deposits and accrual management. Concerning a draft Control of Financial Services (Provident Funds) (Management Fees) Law, 5771-2011,see Section 2.3.2.16. b. A management company will be given the option of marketing insurance products related to pension savings – regulating the method of marketing the insurance coverages and the method of paying for them. c. Increased transparency when management fees are changed – specific rules will be prescribed concerning notification sent to customers regarding an increase in management fees and the agent or advisor will also be advised of any change in management fees. concerning a draft circular concerning management fees on pension savings instruments, see Section 2.3.2.10 d. Management fees that are agreed with a customer may not be increased for at least two years. At the level between distributors and customers: a. Salaried employees will have the right to choose an agent. concerning a memorandum of the Control of Financial Services (Advice, Marketing and Pension Clearing System) Law, 5771-2011, see Section 2.3.2.10 b. A standard, simple and brief wording of the documents that a pension advisor and pension agent must submit to a customer is to be determined as part of the pension advice or pension marketing process, and regulation must be introduced for direct marketing activity by financial institutions. c. A standard, binding format is to be determined of the forms used in the pension advice and pension marketing process and a procedure will be determined mandating the use of a digital signature on advice and marketing forms, so that securely signed forms can be saved and transferred between financial institutions and distributors. At the level between financial institutions and distributors: 1 -14
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a. A financial institution shall not pay a commission to more than one distributor on a particular date, including in respect of a transfer between different distributors; payment of a commission shall only be permitted to the last distributor appointed by the customer. b. Non-monetary benefits given by financial institutions to insurance agents shall be limited to a cumulative amount of NIS 600 a year, and certain conditions were set that when met, a financial institution may compensate agents for a sales target. c. Standard distribution fees were set for pension advice in respect of advice for all pension savings products, to be collected in respect of current deposits (to the savings component and the related insurance cover) and in respect of an accrued balance. concerning the draft amendment to the Control of Financial Services (Provident Funds) (Distribution Fees) Regulations, 5771-2011, see Section 2.3.2.15below. Provisions of law
2.3.2.2. Control of Financial Services (Advice on Pensions and Pension Marketing) (Third Amendment) Law, 5771-2011
On March 10, 2011, the Control of Financial Services (Advice on Pensions and Pension Marketing) (Third Amendment) Law, 5771-2011 was published, concerning the pension clearing house. Among other things, the Amendment prescribes the permitted uses of the pension clearing system, that are: (a) to transfer information about customers, at their request, from all financial institutions to any pension advisor or pension agent for the purpose of rendering pension advice or marketing; (b) to transfer information to customers, at their request, regarding pension products or insurance plans from the financial institutions; (c) performing one of the following actions: Transferring information about a customer, at his request, from a pension advisor or agent to a financial institution for the purpose of performing a transaction for the client, transferring a customer's request to a financial institution to perform transactions for a customer, transferring a report on balances from a financial institution to an employer as per the conditions prescribed by law, transferring additional information, as prescribed by the minister, at the customer's request, about activity that is subject to the Commissioner's control, transferring money between financial institutions and transferring information about the transfer of money, depositing money with a financial institution and transferring information about the deposit by an advisor, agent or employer, additional money transfers, as prescribed by the minister, at the customer's request, regarding activity that is subject to the Commissioner's control, transferring feedback for control between the users about such transactions that have been performed. Furthermore, the Amendment prescribes rules concerning the holding of the means of control in a company that operates a pension clearing system, including that a person may not hold more than 5% of a particular class of the means of control in such a company without a permit issued by the Commissioner, and that if that person is a user (excluding an employer), 1 -15
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permission will not be granted to hold more than 15% of a particular class of the means of control. The Amendment also states that a person shall not control such a company without a permit issued by the Commissioner, and that most of the instructions prescribed with regard to the control of and holding the means of control in an insurer shall apply, with the relevant changes, to such holding of this category of company. Moreover, the law prescribes a provision whereby the Commissioner may obligate a financial institution, pension advisor, pension agent or company of this kind to receive and transmit information or money through a central pension clearing system.
Provisions were also prescribed regarding the following: conditions for obtaining a license to operate a pension clearing system; provisions concerning an application to obtain a license; provisions concerning the other organs and officeholders of a company that operates a central pension clearing system; an option to determine the minimum capital required of such a company; the company's liability, including to determine a set of rules, to maintain information security measures and to formulate back-up and continuity arrangements; obligations to provide service for any financial institution, pension advisor, pension agent, employer or other company, as well as for any customer; duties of trust and caution in operating the aforesaid system, the possibility of issuing instructions regarding a fee to use the system; confidentiality obligations; instructions concerning information security, the protection of and access to information, instructions concerning the imposition of sanctions and other enforcement measures; a prohibition on the use of the words "pension clearing system" or "pension clearing house" without a permit from the Commissioner and an indirect amendment allowing a class action to be filed against a company that operates a central pension clearing system.
The provisions of the amendment concerning the use of the central pension clearing system will become applicable on the date that the regulations to be promulgated by virtue of the law take effect (no later than December 31, 2011), and up to this date the Commissioner will also issue preliminary instructions under Section 27(B)(7) of the Law.
2.3.2.3. On February 2011, the Control of Financial Services (Provident Funds) (Partial Withdrawal of Money from a Study Fund) Regulations, 5771-2011, were published. The regulations prescribe the default order of withdrawing money from a study fund by a member who wishes to withdraw part of the money that has been accrued to his credit, as follows: (a) that part of the fund account consisting of payments made into the fund from December 21, 2002, and in a fund for the self-employed from November 30, 2002 (the Effective Date) onwards, that are not deemed a beneficiary deposit as this term is defined in Sections 9(16A)(c) or (16B) of the Income Tax Ordinance [New Version]; (b) that part of the fund account consisting of payments made before the Effective Date; (c) that part of the fund account consisting of tax-exempt payments, in view of these being considered a beneficiary deposit, as noted above. The member may apply to the management company and ask to withdraw the money from his account in an order that differs from the aforementioned. The 1 -16
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regulations will take effect 90 days after their publication. Circulars
2.3.2.4. On April 13, 2011, the Commissioner published a circular clarifying the circular on agreements for the rendering of services. The circular prescribes the following provisions pertaining to services that a bank with a pension advice license may give on behalf of a management company: (a) receiving a request to withdraw an amount of no more than NIS 50,000 – this cannot be given if the money is to be withdrawn by a beneficiary; (b) accepting a request to deposit money from a member or employer – money may be deposited by a member in his account, including a lump-sum deposit, as long as the deposit can be made at any branch of the bank at which the member has a current account and the deposit does not involve filling out a form by the management company; (c) it must be possible to identify a member and confirm his signature for the purpose of rendering the services listed in the circular on agreements for the rendering of services (2011-10-3) only; (d) the circular on agreements for the rendering of services (2011-10-3) applies to all provident funds, including an education fund and a provident fund that does not have a distribution agreement with the bank
2.3.2.5. 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. The Commissioner issued a tender, the results of which were published in July 2010, in which Mirvah Hogen Ltd. was chosen to provide individual price quote and interest rate services for financial institutions. The financial institutions must therefore prepare for the onset of Mirvah Hogen's activity and enter into agreement with it in accordance with the conditions of the tender.
2.3.2.6. On March 15, 2011, the Commissioner published a circular concerning compensation for a delay in withdrawing money or for a delay in transferring money between provident funds or investment tracks. The circular prescribes the following rules: (a) if there is a delay in withdrawing money from a provident fund, the management company must pay the member the following amounts: (i) money belonging to the member as credited to him on the date specified for receiving the money; (ii) the interest in arrears set in Article 41G1 of the Provident Funds Regulations. Where the amount that the member has in credit on the date on which the money was actually paid is higher than the amount payable by the company as noted above, the difference between these two amounts is also to be paid; (b) if there is a delay in transferring money between provident funds after October 1, 2008, then the management company must: (i) pay interest in arrears for the period of the delay; (ii) transfer the
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amount that was actually in the member's account on the date of the transfer (including any loss or profit); (iii) if the difference between the yield in the receiving fund and the yield in the transferring fund is positive, then the receiving fund shall credit the positive difference to the member's account. (c) in the event of a delay in transferring money between provident funds up to October 1, 2008, and in the event of a delay in transferring money between tracks, the management company shall pay the member: (i) money belonging to the member as credited to him on the date set for transferring the money; (ii) the interest in arrears prescribed up to the date of the actual transfer; (iii) the yield obtained by the receiving fund during the overdue period (positive or negative). If the amount that the member has in credit on the date on which the money was actually transferred is more than the amount that the company must compensate the member for, the difference between these two amounts must also be paid. Likewise, if the management company is in violation of the provisions of the law concerning the transfer of money and due to the violation the transfer of the money is delayed, as a result of which the amount that the member has in credit in the fund is less than the amount he should have had if the transfer had taken place on time, the member is entitled to the difference between these two amounts. The financial institution must pay the money owed under the aforementioned provisions from the management fees insofar as the total amount owed to the member under the provision is more than the money that has accrued in the member's account. The financial institutions must implement the foregoing provisions with respect to applications that were received between June 1, 2008 and December 31, 2008 not through an operating bank, and with respect to complaints that members filed with the management company before March 15, 2011 regarding a delay in implementing their request. The unpaid money must be refunded pursuant to the aforementioned provisions in accordance with the dates specified in the circular.
The Group's management companies are studying the instructions contained in the ruling and reviewing its repercussions. The Company is of the opinion that implementation of the instructions in the ruling may have financial and operational repercussions for the Group's management companies. At this stage, the Company is unable to estimate the aforesaid repercussions
2.3.2.7. .On March 14, 2011, the Commissioner published a circular concerning the prohibition on giving a benefit to a pension advisor. The draft circular prescribes the following clarifications: (a) a financial institution or any person acting on its behalf must not give a benefit to a pension advisor, including to an entity who is able to influence the pension advice system of a corporation that has a pension advice license; (b) a pension advisor may not accept any benefit from a financial institution or any person acting on its behalf. There is no prohibition on giving a discount on management fees provided that the following conditions are met: The discount is similar to discounts that the financial institution gives to private customers or other entities that are not pension advisors, and have similar market characteristics, and with respect to a pension advisor who is a corporation – the discount proposed for pension advisors employed by the corporation, is similar to the discounts that the 1 -18
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financial institution gives to other groups of workers in the corporation with similar characteristics. Likewise, the circular stipulates that a pension advisor may participate in activities organized by a financial institution if they meet the following conditions: (a) the activity involves the presentation of the pension products or the financial institution, including professional lectures; (b) the main content has been advertised in advance and does not include entertainment; (c) the financial institution does not pay for transportation or accommodation expenses; (d) the activity does not include any benefits other than the professional added value, excluding reasonable refreshments. A pension advisor may also attend a general event to which he is invited not in connection with his work or on account of his being a pension advisor, even if the financial institution does not share the cost of the event. The circular takes effect on its date of publication.
2.3.2.8. On March 14, 2011, the Commissioner published a circular concerning an agreement for the rendering of services – an update, the purpose of which is to revise the provisions of Circular 2006-10-2 which prescribed, inter alia, that any engagement between a pension advisor and a financial institution in the form of a management or operating agreement shall be construed as an agreement that creates a relationship prohibited under Section 19 of the Pension Advice Law, unless the conditions stipulated in the circular are met. Likewise, transitory provisions were prescribed that allow an agreement between a bank and a management company, when the conditions specified in the circular are met. This provision expired and new provisions must now be determined. The draft circular prescribes that until December 21, 2011, a management company may render the following services through a bank corporation: give information to members, including through the internet, receive information directly from members, including updating the members' details, receive information directly from employers regarding money deposited in connection with their employees, receive a request from a member to withdraw money for an amount that is less than NIS 50,000, receive a request to make on-going deposits credited to a member, from a member or employer (not including enrolling a member in a pension product for the first time, making a one-time deposit or submitting an application to transfer money to a different pension product or another track in the pension product). The circular takes effect on its date of publication.
2.3.2.9. On February 28, 2011, the Commissioner published a circular concerning a standard format for the transfer of information and data in the long-term pension savings market – (the circular cancels Financial Institutions' Circular 2010-9-5). The purpose of the circular is to define the format for a "standard record" through which the financial institutions, licensees, and the consumers of information in the pension savings sector, will be able to communicate. The circular defines a standard format for the transfer of data and information, the structure of the data, diagram of the data, and the circumstances under which such information is to be transferred. The information will be transferred in a standard format as an XML file that provides flexibility regarding the content of the data. The information will be formulated in a cross section of interfaces specified in the circular. The information to be transferred shall include all the 1 -19
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fields specified in the relevant appendix and the information shall be the most up-to date available and required in accordance with the provisions of the circular. The financial institution shall only transfer information to a licensee after a valid power of attorney has been received for accepting or submitting the information, as the case may be, by the licensee in the customer's name. The sender shall save the information to be transferred for at least 14 days from the transfer date and during this period a second request may be submitted for this information. Appendix A details the instructions concerning the holdings interface – the information that a financial institution must transfer to a licensee in order to present the current status of a customer's data correct at a particular cut-off date. Appendix B – pre-consultation interface. This details the information to be transferred for the purpose of presenting the status of the customer's data before pension advice or marketing is rendered. The provisions of the circular regarding Appendices A and B shall apply from October 1, 2011. Concurrent with the publication of the aforementioned circular, the Commissioner published a draft circular concerning Appendix C – portability interface. This interface specifies the information that managing entity of a transferring fund must send to the management entity of the receiving fund when money is transferred between provident funds. The Commissioner and the financial institutions are discussing the draft circular. Draft Circulars
2.3.2.10. Further to the Commissioner's plan to increase competition for pension savings products (see Section 2.3.2.1), on March 27, 2011 the Commissioner published a draft circular concerning management fees on pension savings instruments. The draft circular stipulates that a financial institution shall be entitled to offer a member a management fee rate that is lower than the maximum rate prescribed by law, provided that the offer is valid for at least two years from the onset of the collection of the lower management fees. Moreover, a financial institution must send the member and the licensee who gives the member the pension advice or pension marketing notice of any change in the management fees collected from the member no later than two months and no earlier than four months before the expected date of the change, pursuant to the wording that that appears in the draft circular. The Commissioner and the financial institutions are discussing the draft circular.
2.3.2.11. On March 9, 2011, a second draft circular was published concerning a procedure for locating members and beneficiaries. The purpose of the circular is to create an effective mechanism which can be easily implemented by the financial institutions for locating members with whom contact has been severed and with beneficiaries after the death of the member, as well as to inform members and beneficiaries that money exists to which they are entitled. The draft circular stipulates that the financial institution must apply to the Population Registry (pursuant to the provisions of the draft regulations detailed below) and establish an internal procedure for updating the member's identifying details within 10 days of receiving information about members. In addition, the financial institution must establish detailed work procedures regarding the
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location of members they have lost contact with and the location of beneficiaries of deceased members. The financial institution must save documentation of any action taken to locate the members with whom contact has been severed with and to locate beneficiaries. The circular prescribes rules for informing the Administrator General of money belonging to members with whom contact has been severed and of members who have died, every quarter from nine years after the time that such contact was severed or from the date on which the financial institution is informed of the member's death and it has been unable to contact the beneficiaries, with respect to all the details that the financial institution has in its possession. In addition, the financial institution must send the Superintendent a computerized annual report concerning members with whom contact has been severed and about members who have died, as specified in the draft circular. The board of directors must appoint an entity to take charge of implementing the provisions of the procedure, the circular, and the regulations, and discuss its compliance with the aforesaid provisions every two years. Likewise, it must examine compliance with the provisions as part of the annual audit plan every three years. In addition to the draft circular, draft Control of Financial Services (Provident Funds) (Finding members and beneficiaries) Regulations, 5771-2011, was published. The draft regulations prescribe that a financial institution must apply to the Ministry of the Interior's Population Registry each quarter to verify basic identification details about its members with those that appear in the Registry. In addition, every six months, a financial institution shall apply to the Population Registry for the surname, address and date of death of members and policyholders. Likewise, a financial institution shall work with reasonable diligence to locate members with whom contact has been severed, including contacting entities that may have information that can help locate such members, including – contacting contact people (the licensee that registered the member or who was appointed by the member and persons who appear in the financial institution's records as being in contact with the member when the transaction was made – the most recent of these), the employer, and in a sectoral provident fund – the entity representing the members, and applying to various databases. On its website, the financial institution must publish an interface enabling members with whom contact has been severed to check, using ID numbers or any detail instructed by the Superintendent, whether the financial institution has any money belonging to them. Regarding members for whom the financial institution has received notice of death, the financial institution must contact the beneficiaries within 90 days, and if it is unable to do so – it must send notice to the member's address, and contact the Population Registry, various databases, and concerning an address and telephone number for the beneficiary – to the licensee whose name appears in the financial institution's records as the person who enrolled the member or the licensee who was appointed by the member to handle the account – whichever is more recent. If the financial institution has no information pertaining to the deceased member's beneficiaries within 6 months, the financial institution must contact the Registrar of Inheritances and the Rabbinical Courts administration to obtain details of any person who has applied for an inheritance order or probate of the
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will. The regulations stipulate that management fees will be collected at a monthly rate of no more than one-twelfth of 0.2% of all the assets in the member's account or at a monthly rate that was collected from the member's account – the lower of the two, from one after the date on which contact with the member was severed.
The Commissioner and the financial institutions are discussing the draft circular and regulations.
2.3.2.12. On January 12, 2011, the Commissioner published a further draft circular concerning capital requirements for management companies. Concurrently, a further draft of the Control of Financial Services (Provident Funds) (Minimum Capital Required of a Management Company) Regulations, 5771-2011, were published (see par. 2.3.2.17). Accordingly, the management company of an old fund shall reduce the minimum capital amount required of it at the reporting date by 30% of the amount prescribed in Article 3(A)(1)(b) of the Capital Regulations, a provident fund management company that guarantees a yield shall reduce the minimum capital amount it must hold at the reporting date by 30% of the amount prescribed in Article 3(A)(1)(b)(1) of the Capital Regulations, the management company of a central provident fund company for annuity shall reduce the minimum equity it is required to hold at the reporting date so that it holds only the initial shareholders' equity required of it under Article 3(A) of the Capital Regulations. Moreover, a management company that draws up professional liability insurance or insurance to cover an abuse of confidence by its employees for an amount that is higher than that required in Article 41E(1) of the Income Tax (Rules for the Approval and Management of Provident Funds) Regulations, 5724-1964, may reduce the minimum equity by 20% of the amount of surplus insurance, subject to restrictions prescribed in the draft circular. The provisions of the circular shall apply on the date on which the Capital Regulations take effect, and the provision concerning a reduction in the amount of shareholders' equity in respect of insurance that has been drawn up shall apply as of December 31, 2014, or on the day on which the management company supplements the amount of minimum shareholders' equity it is required to hold, the earlier of the two. The Commissioner and the management companies are discussing the draft circular. Regarding the supplementary capital that the management companies in the Harel Group require as per the draft circular, see Note 7 to the Financial Statements. Draft memorandum of law and regulations
2.3.2.13. The Economic Efficiency (Legislative Amendment for the Implementation of the Economic Plan for 2009 and 2010) Law from July 2009, prescribes Amendment no. 4 to the Control of Financial Services (Provident Funds) Law, 5765-2005, whereby from January 1, 2011, a provident fund management company shall no longer manage more than one of each category of the provident funds listed in the law. This provision will not apply to individual retirement account, to provident funds that guarantee a fixed or minimum yield, 1 -22
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to central annuity provident funds, or to a provident fund whose articles restrict enrollment in the fund to a particular sector. The Economic Efficiency (Legislative Amendments for the Implementation of the Economic Plan for 2009 and 2010) (Amendment no. 6) Law, 5771-2011, from January 2011, prescribes that the aforesaid provisions shall become applicable on July 1, 2011. A memorandum of law published on May 15, 2011, proposed amending Section 2 of the Provident Funds Law so that a central severance pay provident fund will be deleted from the categories of provident fund that a management company may not manage more than one of. In addition, the memorandum proposes postponing the taking effect of the aforesaid provisions until January 1, 2012,
2.3.2.14. Pursuant to the Commissioner's plan to intensify the competition for pension savings products (see Section 2.3.2.1), on March 27, 2011, the Commissioner published a memorandum of the Control of Financial Services (Advice, Marketing and Pension Clearing System) Law, 5771-2011, that addresses allowing the customer to choose the licensee who will recommend the pension savings plan. The memorandum of law proposes determining that an employer will not be able to make a transaction involving a pension product contingent on it being performed by a particular licensee, including a licensee who renders operating services to the employer. In addition, an employer will not be able to condition performance of the transaction upon any other service that he renders for the employee (such as the actual operating services or granting of a benefit to an employee). It is also proposed that the Commissioner shall have the authority to establish criteria when giving permission to a pension advisor that is a corporation for entering into agreement with an employer or employers' organization for the rendering of pension advice to an employee of that employer or to an employee of one who is a member of the employers' organization. The memorandum of law also proposes imposing on a licensee the obligations that apply to an insurer with respect to the submission of reports to the Commissioner, and prohibiting a licensee from conditioning the purchase of one pension product on the purchase of another product. The Commissioner and the financial institutions are discussing the draft memorandum.
2.3.2.15. Pursuant to the Commissioner's plan to increase the competition for pension savings products (see Section 2.3.2.1), on March 27, 2011, the Commissioner published a draft amendment to the Control of Financial Services (Provident Funds) (Distribution Fees) Law, 5771-2011, the purpose of which is to apply a standard distribution fee model to all pension savings products. The draft regulations propose that an insurer will be able to pay a distribution fee in respect of pension products that it manages for which the customer has received pension advice. The proposed monthly rate of the maximum distribution fee is: one twelfth of 0.2% of the accrual on the last business day of each month and 2% of the deposits made each month. With respect to a customer who receives a discount on the management fees, a 40% reduction shall apply to the rate of the distribution fees actually collected from the accrual and the on-going deposits. It is proposed that the rate of the distribution fees for education funds 1 -23
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shall remain as one-twelfth of 0.25% of the balance of the assets each month. The regulations shall become applicable on January 1, 2012, and regarding existing customers who received pension advice for which they paid a distribution fee prior to publication of the regulations – the commencement date shall be January 1, 2014. The Commissioner and the financial institutions are discussing the draft regulations.
2.3.2.16. Pursuant to the Commissioner's plan to increase the competition for pension savings products (see Section 2.3.2.1), on March 27, 2011, the Commissioner published the draft Control of Financial Services (Provident Funds) (Management Fees) Law, 5771-2011, the purpose of which is to apply a standard model to the management fees on pension savings products by collecting management fees from on-going deposits from the accrual. The draft regulations propose that the management fees on provident funds and managers insurance for the years 2012-2014 – will be at an annual rate of up to 1.5% of the accrual or up to 1.2% of the accrual and up to 5% of the deposits, from 2015 onwards –will be at an annual rate of up to 1.2% of the accrual and up to 5% of the deposits. The management fees on a pension fund will be at an annual rate of up to 0.5% of the accrual and up to 6% of the deposits.
2.3.2.17. On January 12, 2011, a second draft of the Control of Financial Services (Provident Funds) (Minimum Capital Required of a Management Company) Regulations, 5771-2011, were published. Concurrently, a third draft circular was published concerning capital requirements for management companies. (See section 2.3.2.12). The draft regulations prescribe that the initial equity required of a management company shall be NIS 10 million, and the minimum equity required of a management company at the date of the report (annual and quarterly) shall be no less than a combination of the following: (a) the higher of the following: (I) initial capital as noted, of NIS 10 million; (II)the cumulative amount of 0.1% of the assets under management and 0.25% of the managed expenses; (b) the amount of the assets held contrary to the regulation that prescribes the ways of investing the required equity or contrary to the Commissioner's provisions. A management company whose equity is less than that mentioned in the regulations, must increase its equity by the date of the report (transitory provisions were prescribed for a management company that received a license before the onset of the regulations). Furthermore, the regulations prescribe ways of investing shareholders equity. The Commissioner and the financial institutions are discussing the draft regulations. Regarding the supplementary capital that the management companies in the Harel Group require as per the draft circular, see Note 7 to the Financial Statements. 2.3.3. Health insurance Draft circular
2.3.3.1. On April 5, 2011, the Commissioner published a draft circular concerning details of the insurance benefits in health insurance plans. The circular will 1 -24
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replace Insurance Circular 2009-1-4 which stipulates that if an insurance plan states that the insured will be paid maximum insurance benefits not at face value, the insurer must present on its website the amount of the maximum insurance benefits at face value in respect of each of the insured events. The draft circular proposes establishing that the amount that appears on the insurer's website will be several amounts that form the variables comprising the total benefit (such as number of days of hospitalization, the surgeon's fee, and the cost of the operating theater) and that only if variables are not specified in the insurance plan will the amount appear as a lump sum. The Commissioner and the financial institutions are discussing the draft circular. Circular Drafts and Bills
2.3.3.2. On February 15, 2011, the Commissioner published draft Control of Financial Services (Conditions of an Insurance Contract) (Provisions concerning limitation in an insurance contract that includes disability cover) Regulations, 5771-2011. The draft regulations stipulate that an insurance contract that includes insurance cover for disability shall contain a condition whereby if the date on which the disability occurred is after the date of the accident or diagnosis of illness, as the case may be, the limitation period shall not be calculated from before the date on which the disability occurred. The regulations shall apply to insurance contracts that include cover for disability, including contracts for insuring accidental disability and personal accident insurance, where the claims in respect of these events have not expired when the regulations become applicable.
2.3.3.3. In January 2011, a private bill was passed in a preliminary hearing to include long-term care hospitalization in the basket of health services, against an increase in health tax of 0.5%. Draft position paper
2.3.3.4. On April 5, 2011, the Commissioner published a draft position paper that addresses issues in long-term care insurance. The position paper presents the problems of pricing personal and group long-term care insurance, as follows: Personal-lines insurance – in personal long-term care insurance with a variable premium that is set consistent with the insured risk on the date of payment, policyholders are likely to give up the insurance at a more advanced age when the risk is high and the premium is highIf the premium is fixed at age 65, there is concern of the insurance being abandoned due to the high level of premiums paid. In group long-term care insurance – the premiums are expected to increase when the insurance is renewed until it becomes impossible to find policyholders who will agree to renew the insurance, or due to the level of the premiums insureds will simply give up the plan. In addition, there is a problem of cross- subsidization between younger and older policyholders – when there are no new applicants, the ability to subsidize is eroded so that when the policy is renewed the premiums rise significantly the position paper proposes the following solutions to resolve the pricing problem: For personal lines policies – (a) preserving the present situation – a variable premium that is fixed at the age of 1 -25
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65 – until the premium is fixed it is relatively low and the costs of running the policy are low; (b) fixed premium only – allows for a stable premium but may affect the availability of the insurance for younger policyholders due to a premium that is significantly higher than the risk premium (the premium is derived from the insurance risk), and high operating costs; (c) limiting the pace at which the premium is increased – the initial premium is higher than the risk premium but lower than the fixed premium (an increased premium that does not change throughout the life of the policy), the premium increases over time at a rate lower than the increase in the risk premium; (d) the marketing of policies with two components and different premium structures – policies for younger people will be priced according to the risk premium and policies for older people will be priced on a fixed premium. Group policies - (a) maintaining the present situation – pricing in the short term - allows for low cost, sometimes without underwriting, and availability for older policyholders who are unable to purchase a personal lines policy due to the high premium; (b) only "personal lines policies under group management" will be marketed - this is a policy covered by all the conditions of a personal lines policy and is marketed to a group of insureds through a policyholder - offers a saving on operating costs that will also affect the level of the premium. in addition, at the end of the policy period, the insured will be able to choose whether to move over to a new policy or keep the existing policy under pre-defined conditions agreed upon with the policyholder In this case, the premium level would be certain; (c) the marketing of group policies with long-term pricing only, with controlled cross subsidization – the insurer will accrue the premium surpluses accumulated from surplus collection in a special fund to be used to finance the insurance in the long term. This will facilitate certainty of the premiums in the long term and also preserve the advantage of the group policy which is low in operating costs. 2.3.4. General insurance
2.3.4.1. Restriction of the housing loan component with variable interest
On April 27, 2011, the Supervisor of Banks published a draft instruction concerning housing loans with variable interest that will apply to loans that are approved in principle from May 5, 2011 onwards.
The instruction restricts the part of the loan (mortgage) with variable interest to one third of the total amount of the housing loan given to a borrower by a bank. The restriction applies to new mortgages on all the variable interest tracks in which the interest may change during a period of less than five years.
The instruction also regulates the disclosure obligation for customers who previously took mortgages on an unlinked, variable interest track based on prime, where the component taken on this track is one third or more of the loan. The purpose of the disclosure is to increase the awareness of these borrowers to the possible repercussions of an increase in the rate of interest on the monthly repayments they have undertaken, and to enable them to sensibly examine this risk and the possibilities for minimizing it. 1 -26
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This instruction is in addition to the previous instructions published by the Supervisor of Banks during 2010, aimed at calming the residential real-estate market:
An instruction from July 11, 2010 stipulating that a bank shall hold additional provision of at least 0.75% in respect of the balance of the housing loans that were given as of July 1, 2010, and for which the rate of financing when the loans were extended is higher than 60%.
An instruction from October 28, 2010, whereby the banks are required to increase the allocation of capital for variable-interest mortgages that were approved from October 26, 2010, for loans with more than 60% financing when the loan was extended, and the ratio between the part of the housing loan extended at variable interest and the total loan is 25% or more. The variable interest part of the loans that meet such conditions and that were weighted at 35% or at 75% will, for the purpose of the capital allocation requirements, be weighted at 100% from this date.
These instructions led to extreme caution by the mortgage banks when issuing highly financed mortgages and to a decline in the demand for highly financed mortgages. Consequently, the demand for highly-financed mortgage insurance dropped, resulting in a decline in the Company's revenues from premiums from the second half of 2010.
In addition to the foregoing, after the reporting date, there was a further decline in demand for highly financed mortgages referred to EMI. This in turn expected to lead to a decline in EMI's revenues from premiums over the coming months.
2.3.4.2. On February 27, 2011, the Bank of Israel published a clarification for the banking system (questions and answers file relating to proper banking management practice that addresses the capital adequacy requirements). According to the clarification, an agreement to insure a housing loan, in which the insurance company undertakes to pay the sum assured only after the property has been sold, may be recognized as an appropriate credit risk mitigate if a mechanism is established for advance payments to be made on account of the insurance benefits that meets the three conditions specified in the clarification. EMI received a letter from the Bank of Israel confirming that it finds the mechanism for advance payments it put forward acceptable, which includes a clear definition of those instances in which the recipient of protection loses his right to receive the insurance benefits. This mechanism will be a substitute for the requirement to receive "the full sum assured" on time.
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2.3.5. Financial Services and the Capital Market Provisions of law
2.3.5.1. In April 2011, the ISA published Draft Securities (Prospectus Details and Draft Prospectus – Structure and Form) Regulations, 5771-2011. The draft proposes abolishing the exclusion prescribed in Article 51(B) that allow supervised corporations with an investment rating to raise capital through SPCs for this purpose, to avoid providing details in a prospectus with respect to the supervised corporation.
2.3.5.2. In March 2011, the Israel Securities Authority issued a press release in connection with a new outline for the oversight of ETFs, to be anchored in Amendment no. 16 to the Joint Investments in Trust Law. The outline will include requirements in principle from those engaged in this sector, such as the allocation of equity to be deposited in custody in proportion to the actual risk level and the volume of the managed asset, owners' guarantees, the holding of liquid assets consistent with the required volume, restrictions pertaining to the investment policy and rules for enhancing the status of the safe keepers.
2.3.5.3. On January 31, 2011, the Securities Authority published a proposal to amend the Joint Investment Trust Law and the Joint Investment Trust (Distribution Fee) Regulations, 5766-2006. Among other things, the amendment proposes canceling the classification in respect of the units in a share-based fund and determining that units in a share-based fund as well as units in a foreign fund shall be classified as units of another fund, and that the rate of distribution fees payable in respect of the units of other said fund shall be 0.45% (instead of: 4%). Likewise, a distributor may determine different rates of distribution fees for the same category of fund, based on characteristics relating to their investment policy or classify them under a particular classification heading, subject to obtaining the approval of the Securities Authority and informing all the fund managers to this effect. A distributor may also collect a fee from the manager of a foreign fund that is higher than the permitted fee, provided that the distributor pays the surplus fee to the unit owners.
2.3.5.4. On August 5, 2010, the Board of Directors of the TASE approved a proposed amendment to the TASE Articles pertaining to the application of a new model for capital requirements of nonbanking TASE members (NBMs).Within the context of this model, the requirements for equity and liquidity and the rules for extending credit to customers by NBMs will be revised. According to an estimate prepared by a subsidiary that is a TASE member, based on the data for its operations during the Reporting Period, and according to the existing balances on December 31, 2010, the Minimum Capital Requirement (primary and secondary capital – as defined in the proposal) at the reporting date increased in NIS 6 million according to the model approved for the future, 1 -28
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compared with the requirement under the existing model. Nevertheless, the new model was significantly influenced by the volume and seasonality of activity, as well as by credit and the nature of the investment of liquid assets at the date of the review, in contrast with the previous model which was based mainly on the average data over the period. This figure may therefore change significantly within a short time, depending on the date of the review, and the subsidiary's management believes that the increase in the first and second tier capital requirement at the date on which implementation of the new model is completed may be in the region of NIS 25 million. The model which is yet to be approved in the Finance Committee, is expected to be implemented from January 1, 2011, gradually until June 30, 2012.
2.4. Capital market developments A . General During the first quarter of 2011, the global economy continued to recover, notwithstanding the revolutions and turmoil in some Arab countries, the strong earthquake in Japan (resulting in damage to nuclear reactors), and a deterioration in the debt crisis that has affected some Eurozone countries. Output during the first quarter grew at an annual rate of 1.8% in the US,3.2% in the erozone, 2% in the UK, and 8.7% in China. In most other countries too, economic indicators point to an expansion of economic activity. At the same time, there is increased concern for rising inflation around the world (particularly in the developing economies and emerging markets), against the backdrop of a increase in the price of oil, food and other raw materials. B. Economic Developments The Group operates in the Israeli economy, where the political, security and economic situation affect its activity in various sectors. Changes in the state of the Israeli economy may lead to changes in the volume of premiums and other revenues and to a change in the operating costs of the Group's companies. A change in employment levels in the Israeli economy may affect the volume of activity in life insurance and long-term savings. According to initial estimates, growth in the first quarter of 2011 was 4.7% annualized, and the composition of the growth was extremely positive: output in the business sector grew by 5.8%, private consumption grew 7%, public consumption declined by 6%, the investment in fixed assets increased by 24%, and exports (excluding diamonds and startups) rose by 15%.. Nevertheless, at the end of January and beginning of February, due to the demonstrations in Egypt and the overthrow of President Mubarak, the perception of the geo-political threat facing Israel was once again considered more serious. Among other things, the risk premium as measured in the CDS market, rose. C. Stock markets The general share index falling by 3% in the first quarter of 2011, and the TA 100 index falling by 1%. Performance in the stock markets worldwide was positive, although the markets fluctuated considerably. The MSCI world index rose 5% and the MSCI for emerging markets rose 2% during the quarter. 1 -29
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Performance of the leading indices Change during Change during Change during 1-3/2011 1-3/2010 2010 General shares (2.6%) 10.4% 12.6% index TA 100 (1.3%) 8.5% 14.9% TA 25 (0.4%) 7.3% 15.8% Yeter shares (3.4%) 21.2% 32.9% MCSI World 4.9% 3.4% 12.3% index MCSI Emerging 2.1% 2.5% 19.2% Markets index
The average daily turnover of trade in stocks in the Israeli stock exchange was NIS 2.2 billion in the first quarter of 2011, a rise of 7% in relation to 2010.
D. Bonds Market The general bonds market Unchanged during the first quarter of 2011 when the government bond index decreased by 1.2% and the corporate bonds rose by 1.9% . Performance of leading indices: Change during Change during Change during 1-3/2011 1-3/2010 2010 Bonds - general -- 2.6% 8.0% index Government bonds 1.2% 1.8% 6.3% index Corporate bonds 1.9% 3.8% 10.9% index Index linked 1.3% 1.7% 8.0% government bonds Index linked 1.9% 5.3% 13.0% corporate bonds Non-linked 1.0% 1.8% 5.0% government bonds index F/C indexed (2.1%) 2.8% 0.9% government bonds index 1 -30
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The business sector raised NIS 12 billion through bonds during the first quarter of 2011 compared to NIS 43 billion in 2010 and NIS 36 billion in 2009. The average bond daily turnover was NIS 3.8 billion in the first quarter of 2011, a increase of 16% as compared to the average turnover in 2010. E. Foreign Currency Market Shekel weakened at the beginning of the first quarter of 2011. Later on, the excellent figures for growth and the increase in inflation and Bank of Israel interest contributed to strengthening the shekel. The Shekel gained strength during the first quarter of 2011 by 1.9% in comparison to US dollar (to a level of NIS 3.481 per US dollar) and dropped by 4.9% in comparison to the Euro (to a level of NIS 4.99 per Euro). F. Inflation During the 12 months until March 2011 inflation amounted to 4.3%, above the inflation target (1% to 3%).During the first quarter of 2011 the consumer price index rose by 0.7%.
Following are figures on changes in the CPI:
Change during Change during Change during 1-3/2011 1-3/2010 2010 Change in CPI (0.9%) (%1.0 ) 2.3% increase (known index) Change in CPI (0.7%) (0.9% ) 2.7% increase (applicable index)
G. Bank of Israel Interest The bank of Israel continued to raise interest during the first quarter of 2011 when it raised the interest in February by 0.25% and in March by 0.25% to a level of 2.5%. At the end of March, against a marked increase in expectations of inflation, the Bank of Israel raised the interest rate for April by 0.5% to 3%. H. Material market events after the reporting date At the end of March, against a marked increase in expectations of inflation, the Bank of Israel raised the interest rate for April by 0.5% to 3%, a surprisingly high increase. Following the announcement concerning the interest rate at the end of March, the shekel strengthened and expectations for inflation in the long and medium term inherent in the bond market fell sharply. The Bank of Israel left the interest rate for May unchanged at 3%.
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Consumer Price Index rose in April by 0.6% and inflation rate at 12 months dropped to 4%.At the end of April, the Bank of Israel announced that it was restricting the mortgage component governed by variable interest to one third of the total housing loan.
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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 Change for the year ended March 31 % December 31' 2011 2010 2010 Life assurance and long- term savings segment Gross premiums earned 777,188 689,994 12.6 2,965,671 Income from management fees 138,384 193,144 (28.4) 619,159 Profit (loss) from life assurance business 69,381 123,277 (43.7) 314,917 Profit from provident fund management 19,307 18,115 6.6 68,936 Profit from pension fund management 9,155 5,242 74.6 28,703 Total profit from life assurance and long-term savings 97,843 146,634 (33.3) 412,556 Total comprehensive income from life assurance and long-term savings 81,375 187,476 (56.6) 449,344 Non-life insurance segment Gross premiums earned 696,906 729,318 (4.4) 2,852,243 Premiums earned on retention 408,852 406,463 0.6 1,632,909 Total profit from non-lie insurance 37,384 59,527 (37.2) 141,685 Comprehensive income from non-life insurance 9,606 77,626 (87.6) 130,035 Health insurance segment Gross premiums earned 581,961 468,170 24.3 2,061,432 Premiums earned on retention 540,647 425,404 27.1 1,875,266 Total profit from health insurance 46,946 53,900 (12.9) 220,368 Comprehensive income from health insurance 40,311 64,191 (37.2) 227,183 Insurance companies overseas segment 1 -33
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Gross premiums earned 30,449 22,297 36.6 95,925 Premiums earned on retention 19,705 13,854 42.2 60,818 Total profit (loss) from insurance companies overseas (1,561) (9,026) - (31,910) Total comprehensive profit (loss) from insurance companies overseas (3,717) (7,052) - (33,212) Capital market and financial services segment Revenues from capital market and financial services 65,414 56,772 15.2 238,858 Total expenses from capital market and financial services 54,122 47,162 14.8 204,285 Total profit (loss) from capital market and financial services 11,292 9,445 19.6 34,408
Finance 11,048 9,519 16.1 34,516 Items not included in operating segments Net profit from investments and financing income 21,407 43,126 (50.4) 194,520 Income from commissions 17,654 11,666 51.3 57,863 Other income 847 760 11.4 3,498 General & administrative expenses not charged to reports for operating segments 28,691 18,774 51.1 92,304 Financing expenses 37,511 5,102 - 113,412 Pre-tax profit 169,288 293,793 (42.4) 830,183 Net profit for the period 109,652 187,235 (41.4) 534,930 Other comprehensive profit for the period (30,848) 52,911 - 27,118 Total comprehensive profit for the period 78,804 240,146 (67.2) 562,048 Net profit for the period attributed to the Company's shareholders 109,633 181,358 (39.5) 529,825 Net profit attributed to non- controlling interests 19 5,877 (99.7) 5,105 Return on equity in terms of annual comprehensive income in percent 9% 27% 16%
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Summary of data from the consolidated balance sheets of Harel Investments (in NIS millions):
at December 31 at march 31
2011 2010 % change 2010
Total balance sheet 53,337 46,264 15.3 52,312
Assets for yield-dependent contracts 20,631 17,888 15.3 19,946
Other financial investments 17,136 15,321 11.8 16,903
Intangible assets 1,504 1,523 (1.2) 1,515
Reinsurance assets 5,196 4,765 9.0 5,105 Insurance liabilities (insurance reserves and outastanding claims) in life assurance for yield-dependent investment contracts and insurance contracts 18,806 16,228 15.9 18,211 for insurance contracts that are not yield dependent 9,172 8,519 7.7 9,070
In non-life insurance 9,718 9,001 8.0 9,397 In health insurance (yield dependent and non- yield dependent) 3,448 2,993 15.2 3,302 Foreign insurance companies (yield dependent and non-yield dependent) 174 151 14.9 158
Total insurance liabilities 41,319 36,892 12.0 40,138
Equity attributedt to holders of the Company's equity 3,597 3,459 4.0 3,578
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Assets managed for the Group's members and policyholders (NIS millions) :
at December 31 at march 31 2011 2010 % 2010 For yield dependent invetsment contracts and insurance contracts 20,631 17,888 15.3 19,946 12.7 35,161 For members of provident funds and pension funds * 35,972 31,872 For mutual fund customers * 20,729 16,183 28.1 20,754
**
2,453 1,996 22.9 * 2,283 For customers portfolios * Index linked certificates (ETFs) 3,106 1,914 62.3 3,058
Total assets under management for the Group's policyholders and members 82,891 69,853 18.6 81,202
* Total assets managed by provident fund, pension funds, mutual funds and in portfolio management. Are not included in the Company's consolidated financial statements ** reclassifiid
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2.6. Additional figures regarding outcomes of activity The total amount of the premium earned from insurance business during the Reporting Period amounted to NIS 2.1 billion compared with NIS 1.9 billion during the corresponding period last year, a growth of 9% compared with the corresponding period last year.
The net profit at the Reporting Period amounted to NIS 110 million compared with a profit of NIS 187 million during the corresponding period last year. a 41% decrease. The decrease in profit stems mainly from the fact that yields on the capital market during the Reporting Period were lower than during the corresponding period last year.
Comprehensive profit, 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 79 million for the Reporting Period, compared with comprehensive profit of NIS 240 million for the corresponding period last year. The decrease in Comprehensive profit at 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 lower than during the corresponding period last year and that inflation was positive as against negative inflation during the corresponding period last year.
Pre-tax profit during the Reporting Period amounted to NIS 170 million compared with a pre-tax profit that amounted to NIS 294 million during the corresponding period last year, a decrease of 42% .
Pre-tax profit in life assurance and long term savings branch amounted to NIS 98 million compared with a pre-tax profit of NIS 147 million during the corresponding period last year. The decrease in profit in relation to the corresponding period last year stems mainly from the fact that yields on the capital market during the Reporting Period were lower than during the corresponding period last year and that inflation was positive as against negative inflation during the corresponding period last year. The financial margin during the Reporting Period was therefore lower than the financial margin for the corresponding period last year.The variable management fees collected during the Reporting Period in respect of yield-dependent policies amounted to NIS 5 million, compared with NIS 74 million for the corresponding period last year. Disparity that explains most of the change in the operating results.
Comprehensive profit in the life insurance and long-term savings sector was NIS 81 million, compared with comprehensive profit of NIS 187 million in the corresponding period last year, a 57% decrease .The decrease stems mainly from the fact that yields on the capital market during the Reporting Period were lower than during the corresponding period last year and that inflation was positive as against negative inflation during the corresponding period last year. The financial margin during the Reporting Period was therefore lower than the financial margin for the corresponding period last year.
Pre-tax profit in the health insurance sector during the reporting year was NIS 47 million, compared with NIS 54 million relative the corresponding period last year, a 13% decrease. Comprehensive profit in the health insurance sector during the reporting year was NIS 40 million, compared with comprehensive profit of NIS 64 during the corresponding period last year, a 37%
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decline in comprehensive profit relative to the corresponding period last year. The decline stems from the fact that yields on the capital market during the Reporting Period were lower than during the corresponding period last year and due to an increase in claims, particularly in long-term care insurance.
Pre-tax profit in the non-life insurance segment during the reporting year was NIS 37 million, compared with pre-tax profit of NIS 60 relative the corresponding period last year, a 37% decrease. Comprehensive profit in the non-life insurance sector was NIS 10 million, compared with comprehensive profit of NIS 78 million corresponding period last year, a 88% decrease. The decrease stems from the fact that yields on the capital market during the Reporting Period were lower than during the corresponding period last year from positive inflation during the Reporting Period, as against negative inflation during the corresponding period last year, that affects the reserves (which are index linked) and due to an increase in claims. . The overseas insurance companies segment posted a pre-tax loss of NIS 2 million for the Reporting Period, as against a pre-tax loss of NIS 9 million in 2010, a 83% decrease. The insurance companies in the overseas operating segment posted a comprehensive loss of NIS 4 million for the Reporting Period, compared with a comprehensive loss of NIS 7 million for 2010. The losses in respect of the activity of the insurance companies abroad can be attributed to the fact that these subsidiaries began their insurance activity fairly Recently so that their fixed expenses are high relative to their volume of activity.
Pre-tax profit in the capital market and financial services branch during the Reporting Period amounted to NIS 11 million compared with pre-tax loss in the amount of NIS 9 million during the corresponding period last year. The increase in stems from the continuation of the growth in the managed assets and especially the trust funds.
during the Reporting Period profits from net investments and funding income amounted to NIS 569 million compared with profit of NIS 793 million during the corresponding period last year, a 28% decrease. The decrease stems from the fact that yields on the capital market during the Reporting Period were lower 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 35 million compared with NIS 4 million during the corresponding period last year. The increase in financing expenses during the Reporting Period can be attributed to the issuance of liability notes in May 2010 that Harel Insurance uses as complex, second-tier capital.
The Company's equity as of March 31, 2011, relating to the Group shareholders amounts to NIS 3,597 million in compared to equity of NIS 3,578 million as of December 31, 2010. The increase in equity stems from: (a) profit attributed to the Group shareholders of NIS 79 million; (b) distribute a dividend of NIS 64 million and additional influences in immaterial amounts for translation fund of external activities, holding company shares by a subsidiary running an exchange traded note and issue of options to employees.
2.7. Life Assurance and Long Term Savings
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Pre-tax profit in life assurance branch and long term savings during the Reporting Period amounted to NIS 98 million compared to pre-tax of NIS 147 million during the corresponding period last year, a 33% decrease. The decrease stems mainly from the fact that yields on the capital market during the Reporting Period were lower than during the corresponding period last year and to an erosion of the financial margin due to a positive index during the Reporting Period, as against a negative index for the corresponding period last year. Consequently, the variable management fees collected during the Reporting Period in respect of yield-dependent policies amounted to NIS 5 million, compared with NIS 74 million for the corresponding period last year.
Gross profit in life assurance and long term savings during the Reporting Period amounted to NIS 81 million compared to gross profit of approximately NIS 187 million during the corresponding period last year, The decrease stems mainly from the fact that yields on the capital market during the Reporting Period were lower than during the corresponding period last year.
Life assurance Total premiums earned during the Reporting Period amounted to NIS 777 million compared with NIS 690 million during the corresponding period last year, a 13% increase compared to the corresponding period last year. Premiums earned during the Reporting Period constituted 37% 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 34 million, received from the employees who retired from Bezeq, as opposed to single premiums at the amount of NIS 17 million during the corresponding period last year. Neutralizing the influence of single premiums from Bezeq there is an 10% increase in the premiums earned in life assurance.
On February 14, 2008, Harel Insurance and Bezeq – Israel Communications Company Ltd. ("Bezeq") signed an amendment to the agreement from June 2005 (see par. 3.1.1.5.2 in Chapter 1 of the Periodic Report – "Description of the Company's Business"). Under the amendment, the agreement from June 2005 was also applied to employees due to retire from Bezeq before December 31, 2013. Following the said amendment, younger Bezeq retirees (over the age of 45 with at least 15 years of seniority at Bezeq) are expected to join the retirement plan through Harel Insurance, and they will be entitled to a plan that guarantees a monthly income up to the formal retirement age.
Pre-tax profit in life assurance during the Reporting Period amounted to NIS 69 million compared with pre- tax profit of NIS 123 million during the corresponding period last year, a 44% decrease. The decrease stems mainly from the fact that yields on the capital market during the Reporting Period were lower than during the corresponding period last year and to an erosion of the financial margin due to a positive index during the Reporting Period, as against a negative index for the corresponding period last year. Consequently, the variable management fees collected during the Reporting Period in respect of yield- dependent policies amounted to NIS 5 million, compared with NIS 74 million for the corresponding period last year. During the Reporting Period revenues amounted to NIS 176 million and constituted approximately 2.67% of the average reserve in life assurance, compared to revenues for the amount of approximately NIS 142.5 million during the corresponding period last year, that constituted 2.45% from the average reserve in 2010. The total amount of life assurance reserves as of March 31, 2011, amounted to NIS 28 billion.
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2.7.1. Yield-dependent policies:
Policies issued between 1992-2003 1-3/2010 1-3/2011 (in (in percent) percent) Real yield before payment of management fees 5.02 0.46 Real yield after payment of management fees 4.26 0.27 Nominal yield before payment of management fees 4.03 1.33 Nominal yield after payment of management fees 3.27 1.15
Following are the yield rates for yield-dependent policies - General Track: 1-3/2010 1-3/2011 (in (in percent) percent) Real yield before payment of management fees 5.27 0.28 4.97 Real yield after payment of management fees (0.01) Nominal yield before payment of management fees 4.27 1.15 0.87 Nominal yield after payment of management fees 3.97
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):
1-3/2010 (in 1-3/2011 (in percent) percent) Profit (loss) after management fees 499 175 Total management fees 102 39
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Pension funds 2.7.2. The number of members in the pension funds managed by the Group as of March 31, 2011, is 529,941 members, 322,324 of which are active members, a 38% increase in the number of active members compared with March 31, 2010. The extent of assets managed by pension funds as of March 31, 2011, amounted to NIS 12.474 billion compared with NIS 9.576 billion on March 31, 2010, a 30% increase and compared with the extent of assets of NIS 11.8 billion as of December 31, 2010, an increase of 6%. The increase stems from, inter alia, an increase in the number of active members and increase in members' provisions to their compulsory pension. Contribution fees that were collected by the Group's pension funds during the Reporting Period amounted to NIS 530 million compared with NIS 394 million on March 31 2010, a 35% increase. The total amount of the assets of the pension funds and the contribution fees deposited therein are not included in the consolidated financial statements of the Group . The total amount from management fees (with a deduction of returns and bonuses) collected from pension funds managed in the Group during the Reporting Period amounted to NIS 40 million compared with NIS 33 million in the corresponding period last year, a 22% increase. Expenses in the pension funds amounted to NIS 32 million compared to NIS 28 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 9 million compared with pre-tax profit of NIS 5 million during the corresponding period last year. During the Reporting Period positive yields were recorded in most of the investment tracks in the capital market. The rates of the nominal yields obtained by the new pension funds managed by the Group are as follows:
Comprehensive yield Investment yield (in Demographic Name of fund (in percent) percent) yield (in percent)
Harel Pension 1.68% 1.57% 0.11% Harel - Manof 1.95% 1.48% 0.46%
Provident funds 2.7.3. As of the Reporting Date the Group manages 16 provident funds (provident funds, education funds, central and personal severance pay funds, a provident fund for sick pay and budgetary pension fund). Some of the provident funds have several investments tracks of which the members can choose. The volume of assets in the provident funds managed by the Group as of March 31, 2011, amounted to NIS 23.5 billion compared with NIS 22.3 billion as of March 31, 2010, and compared with NIS 23.4 billion as of December 31, 2010, a 5% increase in relation to March 31, 2010, and an increase at the rate of 0.4% compared to 31 December 2010 . The provident funds' assets and benefit contributions are not included in the Company's 1 -41
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consolidated statements. Income from management fees collected from the provident funds managed by the Group during the Reporting Period amounted to NIS 59.4 million, compared with NIS 58.8 million for the corresponding period last year, a 1% increase that stems from increase in the volume of assets managed during the Reporting Period in relation to the corresponding period last year.Expenses in provident funds amounted to NIS 40.2 million compared with NIS 40.7 million during the corresponding period last year. The total pre-tax profit of the provident funds management companies included in the consolidated profit and loss statement in the life assurance and long term savings branch during the Reporting Period amounted to NIS 19 million compared with NIS 18 million during the corresponding period last year. The provident funds' net accumulation (excluding profits from investments) during the Reporting Period was negative and amounted to NIS 118 million compared with negative accrual of NIS 46 million for the corresponding quarter last year. 2.8. Health Insurance Premiums earned in the health insurance sector totaled NIS 582 million for the Reporting Period, compared with NIS 468 million for the corresponding period last year, an 24% increase. Total premiums earned in health insurance during the Reporting Period, accounted for 28% of all premiums earned by the Group . Pre-tax profit in health insurance sector totaled NIS 47 million for the Reporting Period, compared with NIS 54 million in the corresponding period last year, a 13% increase . During the Reporting Period the health insurance sector posted comprehensive profit of NIS 40 million compared with a comprehensive profit of NIS 68 million in the corresponding period last year, a 37% decrease. The decrease in comprehensive profit during the Reporting Period compared with the comprehensive profit in the corresponding period last year stems mostly from the influence of the capital market in which yields were lower than yields obtained during the corresponding period last year and from the positive index during the Reporting Period, as against the negative index for the corresponding period last year, which affects the reserves (that are index linked) and due to an increase in claims, particularly in long-term care insurance. Total payments and change in gross liabilities in respect of insurance contracts in the health insurance sector during the Reporting Period amounted to NIS 466 million, compared with NIS 349 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 broadening of the insurance cover undertaken in the plan during the Reporting Period, 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 Pre-tax profit % % 1-3/2011 1-3/2010 change 2010 1-3/2011 1-3/2010 change 2010 Compulsory Motor 205,765 222,674 (7.6 ) 572,141 25,874 28,271 (8.5 ) 49,511
Motor property 336,356 370,812 (9.3 ) 894,028 (8,452 ) 8,655 (197.7 ) 24,625 Property and other branches 187,907 173,585 8.3 641,467 13,044 11,788 10.7 41,988 Other liabilities (17.2) branches: 188,945 210,401 (10.2 ) 695,107 3,254 3,929 9,909
Credit 14,887 12,019 23.9 59,545 3,664 6,884 (46.8) 15,652
Total 933,860 989,491 (5.6 ) 2,862,288 37,384 59,527 (37.2) 141,685
Gross premiums during the Reporting Period totaled to approx. NIS 934 million compared with NIS 989 million during the corresponding period last year, an 6% decrease. Premiums in retention during the Reporting Period totaled to approx. NIS 583 million compared with NIS 601 million in the corresponding period last year, a 3% decrease. The decrease mostly stem from a decline in Harel Insurance's share of the insurance of state employees' motor vehicles (see Section 2.9.1below) and to the effect of non-recurring premiums during the corresponding period last year in the liabilities and other operations branch. Pre-tax profit in general (non-life) insurance during the Reporting Period amounted to NIS 37 million compared with NIS 60 million in the corresponding period last year, a 37% decrease.decrease in pre- tax profit during the Reporting Period compared with the corresponding period last year stems mostly from the influence of the capital market in which yields were lower than yields in the corresponding period last year and to the positive index during the Reporting Period as against the negative index for the corresponding period last year, which led to an increase in the reserves (that are linked to the CPI. Comprehensive profit in general (non-life) insurance during the Reporting Period, amounted to NIS 10 million compared with comprehensive profit of NIS 78 million in the corresponding period last year. decrease 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 lower than yields in the corresponding period last year.
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2.9.1. Motor property In motor-vehicle property insurance gross premiums during the Reporting Period amounted to NIS 336 million compared with gross premiums of NIS 371 million during the corresponding period last year, a 9% 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 266 million compared with NIS 294 million in the corresponding period last year, a 9% decrease. Pre-tax loss in motor-vehicle property insurance in the Reporting Period amounted to NIS 8 million compared with NIS 9 million in the corresponding period last year. Decrease stems from erosion in premiums due to the competitiveness in the market. Comprehensive loss in motor-vehicle property insurance in the Reporting Period amounted to NIS 11 million compared with NIS 10 million profit in the corresponding period last year. Decrease in Comprehensive profit during the Reporting Period compared with the corresponding period last year stems mostly from the influence of the capital market in which yields were lower than yields in the corresponding period last year. In October 2010, the Accountant General announced the results of the tender to insure the vehicles of state employees for 2011. Accordingly, the tender for 2011 was divided among three insurers, as against two in 2010. Harel Insurance's share of the insurance for state employees' vehicles is therefore expected to fall to 33% in 2011, compared with 85% in 2010. This decline in the number of state employees' vehicles that Harel insurance's will insure in 2011 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 206 million compared with gross premiums of NIS 223 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 163 million compared with NIS 177 million in the corresponding period last year. Pre-tax profit for compulsory motor insurance during the Reporting Period amounted to NIS 26 million compared with NIS 28 million during the corresponding period last year, a 8% decrease. Decrease stems mostly from the influence of the capital market in which yields were lower than yields in the corresponding period last year. Comprehensive profit in Compulsory motor insurance in the Reporting Period amounted to NIS 12 million compared with NIS 37 million profit in the corresponding period last year. Decrease in Comprehensive profit stems mostly from the influence of the capital market in which yields 1 -44
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were lower than yields in the corresponding period last year. 2.9.3. Liabilities branches and others During the Reporting Period gross premiums in liabilities insurance and others amounted to NIS 189 million compared with NIS 210 million during the corresponding period last year. decrease in gross premiums stems mostly from the influence of the capital market in which yields were lower than yields in the corresponding period last year. Premiums in retention in the Reporting Period amounted to NIS 90 million compared with NIS 71 million during the corresponding period last year, a 27% increase. Increase in retention stems mostly from increasing the share of the Company in professional liability insurance. Pre-tax profit in others liabilities insurance in the Reporting Period amounted to NIS 3 million compared with NIS 4 million during the corresponding period last year. Comprehensive loss in Liabilities insurance and others in the Reporting Period amounted to NIS 2 million compared with NIS 7 million profit in 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 188 million compared with NIS 174 million during the corresponding period last year, an 8% increase.Premiums in retention during the Reporting Period amounted to NIS 48 million compared with NIS 46 million during the corresponding period last year, a 5% increase. Pre-tax profit in property insurance and other branches during the Reporting Period amounted to NIS 13 million compared with NIS 12 million profit in the corresponding period last year. Comprehensive profit in property and other branches in the Reporting Period amounted to NIS 13 million compared with NIS 12 million 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 15 million compared with NIS 12 million profit in the corresponding period last year, a 24% increase. The Company does not have reinsurance agreements in this branch. Pre-tax profit in credit risks inherent in mortgage assets during the Reporting Period amounted to NIS 4 million compared with NIS 7 million profit in the corresponding period last year, a 47% decrease. Decrease stems mostly from the influence of the capital market in which yields were lower than yields in the corresponding period last year. due to a positive index during the Reporting Period, as against a negative index for the corresponding period last year, which leads to an increase in reserves (which are index linked) Comprehensive loss in credit risks inherent in mortgage assets during the Reporting Period amounted to NIS 2 million compared with NIS 11 million profit in the corresponding period last year. Decrease in Comprehensive profit stems mostly from the influence of the capital market in which yields were lower than yields in the corresponding period last year. 2.10. Insurance companies overseas
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The Company is the owner of Interasco Societe Anonyme General Insurance Company S.A.G.I (Interasco), an insurance company operating in Greece in the health and non-life insurance sectors, and holds the controlling interest in Turk Nippon (95%) which operates in Turkey. On April 6 2009, Turk Nippon received a license to issue insurance policies in Turkey in all branches of non- life insurance, and it commenced its insurance activity a short time later. During the Reporting Period, the operating segment for insurance companies overseas earned premiums of NIS 30 million, compared with NIS 22 million for the corresponding period last year, an increase of 37%. Total premiums earned by the insurance companies operating overseas segment for the Reporting Period account for 1% of all premiums earned by the Group.
During the Reporting Period, the insurance companies abroad posted a pre-tax loss of NIS 2 million, compared with a pre-tax loss of NIS 9 million for the corresponding period last year, a decrease of 83%.
The insurance companies in the overseas operating segment posted a comprehensive loss of NIS 4 million for the Reporting Period, compared with a comprehensive loss of NIS 7 million for the corresponding period last year.
The loss posted by the overseas insurance companies segment can be attributed to the fact that these companies commenced their insurance activity a relatively short time ago, so that they are in the early stages of operation and penetration of the local markets in which they operate.
In accordance with Turk Nippon's business plan and in an effort to meet the capital requirements that apply to Turk Nippon as an insurer operating in Turkey.Subject to further growth of Turk Nippon's activity, the Company expects that by the end of 2011 it will be required to invest NIS25 million in Turk Nippon's equity.
The Company's management believes that since the holding of Greek government bonds is insignificant, the crisis in Greece will not essential affect the Group's performance. 2.11. Capital market and financial services During the Reporting Period, revenues in the capital market and financial services sector amounted to NIS 65 million, compared with NIS 56 million for the corresponding period last year, a 16% increase compared with the corresponding period last year. This increase in revenues during the Reporting Period compared with the corresponding period last year can be attributed mainly to an increase in the average volume of assets under management during the Reporting Period relative to the average volume of assets under management during the corresponding period last year in the mutual funds, Mutual funds, ETFs and Managed Cases.
Total Management fees from the mutual funds and Managed Cases during the Reporting Period totaled NIS 50 million, compared with NIS 41 million for the corresponding period last year. During the Reporting Period revenues from mutual fund management rose steadily, corresponding with the increase in the volume of assets under management.
The volume of assets under management in the capital market and financial services segment at March 31, 2011, was NIS 26.3 billion, compared with NIS 20.1 billion at March 31, 2010, and compared with NIS 26.1 billion at December 31, 2010. This is a 31% increase at March 31, 2011 and a 1% increase at December 31, 2010. 1 -46
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Most of this increase in the volume of assets under management in this operating segment 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 20.7 billion at March 31, 2011, compared with NIS 16.2 billion at March 31, 2010, as well as ETF assets, which at March 31, 2011 amounted to NIS 3.1 billion. 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 11.3 million, as against a pre-tax loss of NIS 9.4 million for the corresponding period last year. The increase in profit can be attributed to an increase in management fees due to an increase in the volume of assets under management in the mutual funds. These results include financing expenses in respect of a loan from an associate which amounted to NIS 1 million for the Reporting Period, compared with NIS 1.7 million for the corresponding period last year. 2.12. Income tax Income tax During the Reporting Period amounted to an expense of NIS 60 million, compared with revenues under the income tax item of NIS 107 million compared with the corresponding period last year. 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 303 million. Net cash flows used for investment activity amounted to NIS 32 million. Net cash flows used to activity and Fluctuations in exchange rate amounted to NIS 62 million. The result of all the aforesaid activity is reflected in an increase in cash balances in the amount of NIS 208 million. 2.13.2. Financing of operations For details concerning the For details concerning the issuance of subordinated liability notes that are recognized as second-tier capital and/or complex second-tier capital by Harel Insurance – see Section2.12.2 in Chapter 2 – Board of Directors' Report in the Periodic Report. In addition to the aforementioned loan, at March 31, 2011 the Company and companies in the Group have a short-term loan in the amount of NIS 1'635 million. The subsidiary Harel Insurance has long-term subordinated liability notes the balance of which at March 31, 2011 is NIS 100 million. The subsidiary Dikla has long-term subordinated liability notes the balance of which at March 31, 2011 is NIS 100 million. The subordinated liability notes who were recruited in 2006 have an AA rating from Maalot, and The subordinated liability notes who were recruited in May 2010 and used as secondary capital by Harel Insurance have an AA rating from Maalot.
In February 2011, Dikla raised a capital note from a bank in the amount of NIS 100 million to 1 -47
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Board of Directors'' Report Services Ltd three-months period ended march 31, 2011 be used as complex secondary capital by Dikla. The capital note was raised subsequent to obtaining the Commissioner's approval, including so that the capital note will be recognized as second-tier capital for Dikla, consistent with its conditions. The capital note bears variable shekel interest, based on prime plus a margin. The principal of the capital note will be repaid as a lump sum after 11 years ("original repayment date"). The interest will be paid every 6 months. The capital note includes certain circumstances that when met, payment of the principal or the interest will be suspended ("delaying circumstances"). Payment of the principal may be suspended for a maximum period of three years from the original repayment date. If payment of the interest is suspended, the Company undertook to pay the bank the delayed interest against assigning the right to receive the said interest from Dikla, when the delaying circumstances are released.
The delaying circumstances are the presence of one or more of the following: (1) a decision passed by Dikla's board of directors to the effect that Dikla has no profits worthy of distribution, as referred to in the Companies Law, 5759-1999, and this in accordance with the last financial statements (annual or quarterly) preceding the relevant repayment date for the interest and/or principal; (2) in accordance with a decision made by Dikla's board of directors, Dikla's recognized shareholders' equity has fallen below the capital it is required to hold (pursuant to the provisions of law applicable to Dikla and as per the instructions of the Commissioner of Insurance), and this according to the last financial statements (annual or quarterly) preceding the relevant repayment date for the interest and/or principal; (3) Dikla's board of directors issues an instruction to delay payment of the interest and/or principal, should it determine that there is genuine concern over Dikla's ability to comply with capital it is required to hold (pursuant to the provisions of law applicable to Dikla and/or as per the instructions of the Commissioner of Insurance), provided that the Commissioner of Insurance approves such action in advance; (4) Dikla's board of directors issues an instruction to delay payment of the of the interest and/or principal should it determine that there is immediate genuine concern for Dikla's ability to repay on time obligations that take precedence over that of the debt that is the subject of this liability, provided that the Commissioner of Insurance has approved such action in advance; (5) the Commissioner of Insurance has issued an instruction concerning a delay in payment of the principal and/or interest due to significant impairment to Dikla's shareholders' equity or if he considers that there is genuine, immediate concern over Dikla's ability to comply with the capital it is required to hold (pursuant to the provisions of law applicable to Dikla and/or as per the instructions of the Commissioner of Insurance).
According to the capital note, when delaying circumstances are present with regard to the payment of interest, the Company will repay the interest against an assignment to the Company of the bank's right to receive payment of the interest, when the delaying circumstances have passed.
Dikla has the right to make an early repayment of the capital note, without incurring an early repayment charge, 3 years before the original repayment date ("early repayment date"), and this subject to obtaining the Commissioner's approval or to Dikla holding a capital surplus at the rates prescribed in the capital note. If Dikla does not make an early repayment of the capital note, in respect of the period commencing on the early repayment date and ending on the original repayment date, supplementary interest shall be paid at a rate of 50% of the original interest margin ("the increased interest").
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If the principal is suspended (as noted, for a maximum period of 3 years from the original repayment date), supplementary interest shall be paid to the bank for the period of the delay at a rate of 50% of the increased interest margin.
On February 1, 2011, Dikla received the Commissioner's approval to issue liability notes that will be recognized as complex, second-tier capital. In this context, the composition of the company's capital was also approved.
A loan taken by Harel-Pia
In February 2011, Harel Pia raised a loan of NIS 80 million from a bank. The loan is for a 5- year period, where the principal and interest are to be repaid in quarterly installments, as of June 2011. The loan was taken to repay a loan that Harel Pia took from the Company. To obtain the credit, Harel Pia and Harel Finance gave liens to the bank. Moreover, the loan agreement prescribes financial criteria, which if violated, entitle the bank to demand immediate repayment of the loan. These financial criteria mostly address the volume of revenues from management fees and the rate of available cash flow relative to repayment of the loan. 3. Market Risk Exposure and Management There were no material changes during the Reporting Period in the exposure to the Company's market risks and their management compared with the periodical report. 4. Corporate governance 4.1. Details concerning the process for approving the Company's financial statements The Companies (Provisions and conditions concerning the procedure for approval of the financial statements) Regulations, 5770-2010, include mandatory rules that public companies must apply in the process of approving financial statements. The provisions of the regulations apply from the financial statements at December 31, 2010. The regulations stipulate that before the annual financial statements are presented for the approval of the company's board of directors, the reports are to be discussed and approved by a special committee known as "the Committee for the Review of the Financial Statements" ("the Committee"). The Committee is responsible for discussing the financial statements and formulating a recommendation to the board of directors regarding those matters prescribed in the regulations. The regulations prescribe several conditions with respect to the composition of the Committee and its discussions: (a) The Committee shall consist of at least 3 members; (b) Members of the Committee shall not be employees of the company, permanent service providers of the company, a controlling shareholder or relative of such a person (like the audit committee); (c) The Committee's chair shall be an outside director; (d) Only directors shall be members of the Committee; (e) A majority of the Committee's members shall be independent directors; (f) All members of the Committee must have the ability to read and understand financial statements;
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(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". In view of the restrictions prescribed in the regulations with respect to the composition of the Committee, at a meeting on February 3, 2011, the Board of Directors resolved that the members of the Committee for the review of the financial statements shall be: (a) David Granot, Chairman (b) Doron Cohen (c) Liora Kavoras-Hadar 4.1.1. As noted above, the Committee is a special purpose committee appointed for the purpose of approving the financial statements and the Audit Committee will not serve as the Committee for the approval of the financial statements. 4.1.2. Following are details concerning the members of the Committee for the review of the financial statements:
Name : David Granot I.D. no.:045333739 External Director: Yes Independent Director As noted in Section 4.2, the Company has yet to adopt a change in its articles, in view of the eighth amendment to the Companies Law and to that stated in Section 219 of the Companies Law, 5759-1999. Nevertheless, as an outside director of the Company, Mr. David Granot also meets the criteria for recognition as an independent director. Chairman of the committee: Yes Has accounting and financial expertise Yes Education: BA in Economics, MA in Business Management, Hebrew University of Jerusalem Occupation over the last five years: Chairman of the nostro investment committee of Harel Insurance and Dikla, Chairman of the nostro investment committee of E.M.I. (as of March 16, 2011) Chairman of the Credit committee of the institutional entities in Harel Group, Director in Harel Insurance and Dikla, External Director in EMI (as of March 3, 2011) Director and Chairman in companies of BSG Group, CEO of HaBank HabeinLeumi Harishon and chairman of subsidiaries of HaBank HabeinLeumi Harishon (Fibi London, Fibi Swiss, Bank Otsar Ha-Hayal Ltd.). 1 -50
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Corporations in which he serves as director Chairman of Scorpio Real-Estate, member and chairman of the board (excluding the Group's companies): of BSG, BIC, and Elrov Holdings (as of 23.1.11). Has provided a statement in accordance with the Yes. regulations prior to his appointment: The Company's Board of Directors was previously acquainted with Mr. Granot as a director with accounting and financial expertise – see Section 4.2 above, and this based on his extensive professional experience and qualifications. In any event, based on the aforementioned resolution of the Board of Directors, and based Mr. Granot's qualifications, experience and knowledge as noted above, the Company regards Mr. Granot as being capable of reading and understanding financial statements.
Name : Liora Kavoras Hadar I.D. no.: 55600159 External Director: No. Independent Director As noted in Section 4.2, the Company has yet to adopt a change in its articles, in view of the eighth amendment to the Companies Law and to that stated in Section 219 of the Companies Law, 5759-1999. Nevertheless, Mrs. Liora Kavoras Hadar eligible to serve as an independent director. Chairman of the committee: No. Has accounting and financial expertise Was recognized as a director with expertise Education: LL.B. Faculty of Law, Hebrew University, Jerusalem Occupation over the last five years: Director of Harel Insurance, Harel Gemel, Harel Atidit Gemel, Tzva Hakeva, Harel Pension, Manof, Gilad Pension. CEO of Antal Management & Commerce Ltd., Director, Telad Jerusalem Studios Ltd. and Telad Broadcasting Channels Ltd. until August 2006, director at Natour until November 2005. Corporations in which she serves as director Antal Management & Commerce Ltd. (excluding the Group's companies): Has provided a statement in accordance with the Yes. regulations prior to his appointment: The Company's Board of Directors was previously acquainted with Mrs. Liora Kavoras Hadar as a director with accounting and financial expertise – see Section 4.2 above, and this based on his extensive professional experience and qualifications. In any event, based on the aforementioned resolution of the Board of Directors, and based Mrs. Liora Kavoras Hadar's qualifications, experience and knowledge as noted above, the Company regards Mrs. Liora Kavoras Hadar as being capable of reading and understanding financial statements.
Name : Doron Cohen I.D. no.: 069418945 Outside Director: No Independent Director: As noted in Section 4.2, the Company has yet to adopt a change in its articles, in view of the eighth amendment to the Companies Law and to that stated in Section 219 of the Companies Law, 5759-1999. Nevertheless, Mr. Doron Cohen eligible to serve as an independent director Chairman of the board: No. Has accounting and financial expertise: Yes. Education: BA in Economics and Business Management, MA in Business Management (majored in financing), Hebrew University of Jerusalem. 1 -51
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Occupation over the last five years: CEO Blue Square Co-op Ltd. Services Association Ltd. (in Liquidation), Business and economic consultant, Permanent observer nostro Investment Committee of Harel Insurance, Director of Minrav Holdings Ltd. (until April 2006), Mercantile Discount Bank Ltd. (until April 2006). Chairman of the board of directors of H.A.L Tshura Ltd (a company owned by Histadrut Haovdim Hleumit) and its' subsidiaries (Until July 2010). Corporations in which he serves as director Bank Leumi LeIsrael Ltd., Consumer Cooperation Fund Ltd., Trigger (excluding the Group's companies): D.C. Ltd., Trigger D.C. Holdings Ltd. Has provided a statement in accordance with the Yes. regulations prior to his appointment: The Company's Board of Directors was previously acquainted with Mr. Doron Cohen as a director with accounting and financial expertise – see Section 4.2 above, and this based on his extensive professional experience and qualifications. In any event, based on the aforementioned resolution of the Board of Directors, and based Mr. Doron Cohen's qualifications, experience and knowledge as noted above, the Company regards Mr. Doron Cohen as being capable of reading and understanding financial statements. 4.1.3. Procedure for approval of the financial statements: To approve the financial statements at March 31, 2011, the Committee convened on May 23, 2011. In addition, the Company's CPA are invited to and attend meetings of the Committee and Board of Directors' meetings that discuss and approve the financial statements, and they present the principal findings, if there are such, that emerged during the course of the audit or the review. The meeting was also attended by the Company's CFO, Ronen Agassi CPA, and legal advisor, Adv. Hanan Fridman. A meeting of the Committee held on May 23, 2011 was attended by Avraham Fruchtman CPA together with Dvora Wiesel CPA and the internal auditor was also invited to the meeting. At the committee meeting, information relating to the data included in the financial reports was reviewed, including information pertaining to the Company's financial and operating situation, and the actuaries' statements on the different insurance sectors. The Committee also reviews various aspects of risk management and control, those that are reflected in the financial statements, as well as those that affect the credibility of the financial statements. In addition, the Committee may request that other subjects are also reviewed, at the discretion of the committee's members. The Committee is also advised of the results of the SOX procedure implemented by the Company and its subsidiaries that are financial institutions, and it reviews the effectiveness of the internal control. To formulate its recommendations to the Board of Directors, the draft financial statements are submitted to the members of the Committee several days before the meeting scheduled to discuss them. The Committee meets prior to the Board of Directors' meeting which discusses and approves the Financial Statements. The Committee's recommendations are submitted to the Board of Directors as soon as the Committee's meeting is over. At a meeting of the committee held on May 23, 2011, the committee members held a detailed discussion of the Company's estimates and assessments on which the financial reports were based, addressing the discretion applied by management on various issues. Furthermore, the committee members were given a study conducted by the appointed actuaries on the various 1 -52
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areas of activity of the subsidiaries that are insurers. The committee's members were also advised regarding the internal control process, they examined material issues in the financial reports, the completeness and reasonability of the financial reporting, the accounting policy and figures in the financial statements. During the meeting of the Company's Board of Directors which approves the financial statements, the Committee's recommendations, insofar as there are any, are reviewed, in connection with the approval of the financial statements, the Company's financial performance is reviewed and the changes that have occurred during the reported period are presented. During the course of the deliberations of the Company's Board of Directors, questions are raised by the members of the board on issues that arose during the audit and whether the financial statements faithfully reflect the Company's financial position. The questions and issues discussed are answered by management. After the discussion, the Chairman of the Board calls for a vote to approve the financial statements. 4.2. Independent directors The Company has not yet adopted changes in its articles, in light of Amendment no. 8 to the Companies Law and to that noted in Section 219 of the Companies Law, 5759-1999. At the reporting date, other than the outside directors who serve in the Company (Mssrs. David Granot and Dr. Eliezer Wolf), the following directors are in office who have the qualifications to serve as independent directors: Joseph Ciechanover, Doron Cohen, and Liora Kavoras Hadar. 5. Disclosure instructions in connection with financial reporting by the Corporation 5.1. Events after the reporting date on the financial situation Regarding changes that took place after the Reporting Period - see par. 2.2 above.
The Board of Directors wishes to express its thanks to
the Group's employees and agents
Y. Hamburger M. Siboni S. Alkabetz Chairman of the Board of Company's joint Company's joint Directors CEO CEO May 26, 2011
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HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS As at March 31, 2011 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd
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, 2011 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, according to the disclosure requirements issued by the Supervisor of Insurance according to the Law for the Supervision of Financial Services (Insurance) - 1981 and according to the Regulations issued in accordance therewith. Our responsibility is to express a conclusion on the financial information for the interim period, based on our review.
We did not review the condensed financial information for the interim period of consolidated companies whose assets included in the consolidation comprise 8.07% of all the consolidated assets as at March 31, 2011 and whose revenues included in the consolidation comprise 3.04% 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 214,660 thousand as at March 31, 2011, and the Group’s shares of their profit aggregated NIS 10,570 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.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd
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 and according to the Regulations issued in accordance therewith.
Without qualifying our above conclusions we direct attention to Note 6A to the interim condensed consolidated financial statements regarding exposure to class actions and applications to approve class actions.
Somekh Chaikin Certified Public Accountants (Isr) March 26, 2011
KPMG Somekh Chaikin , a partnership registered under the Israeli Partnership Ordinance, is the Israeli member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd
Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements on the financial position
March 31 December 31 2011 2010 2010 (Unaudited) (Unaudited) (Audited) NIS NIS NIS Thousands Thousands Thousands Assets Intangible assets 1,504,393 1,522,682 1,514,636 Deferred tax assets 6,329 14,301* 7,073 Deferred acquisition costs 1,269,550 1,199,339 1,197,798 Fixed assets 616,530 410,669 618,345 Investments in investees treated using the balance sheet value method 214,660 144,936 200,288 Investment in company held for sale - 18,554 - Real estate investments - yield dependent contracts 733,118 620,676 711,327 Other real estate investments 1,048,569 958,113 963,791 Reinsurance assets 5,195,813 4,764,731 5,104,877 Current tax assets 43,005 25,160 11,844 Other receivables 285,229 315,371 263,752 Outstanding premiums 1,092,172 1,052,284 918,677 Financial assets – yield dependent contracts 18,545,302 16,518,526 18,142,365 Financial investments for holding ETFs 2,863,190 1,730,937 3,490,140* Other financial investments: - - - Marketable debt assets 6,659,197 5,763,630 6,537,267* Non-marketable debt assets 8,010,471 7,458,274 7,869,270 Shares 591,531 459,157 612,466* Other investments 1,874,878 1,639,709 1,883,877* Total other financial investments 17,136,077 15,320,770 16,902,880 Cash and cash equivalents pledged for ETFs holders 632,484 220,304 321,915 Cash and cash equivalents - yield dependent contracts 987,339 421,498 746,829 Other cash and cash equivalents 1,163,220 1,005,560 1,195,354 Total assets 53,336,980 46,264,411 52,311,891 Total assets - yield dependent contracts 20,631,091 17,888,099 19,946,196
* Regarding reclassification see Note 2 (c). The notes accompanying the condensed interim consolidated financial statements are an integral part thereof. 2-4 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd
Harel Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements on the financial position March 31 December 31 2011 2010 2010 Equity and liabilities (Unaudited) (Unaudited) (audited) NIS NIS NIS Thousands Thousands Thousands Equity Share capital and share premium 307,203 305,974 306,691 Treasury stock (137,789) (94,155) (138,625) Capital reserves 200,179 243,700 229,126 Retained earnings 3,227,674 3,003,363 3,181,178 Total equity attributed to company shareholders 3,597,267 3,458,882 3,578,370 Minority rights 1,654 (1,393) 1,675 Total equity 3,598,921 3,457,489 3,580,045 Liabilities Liabilities in respect of non-yield dependent insurance and investment contracts 21,004,167 19,358,664 20,475,319 Liabilities in respect of yield dependent insurance and investment contracts 20,308,554 17,530,206 19,657,706 Deferred tax liabilities 309,161 315,470* 325,144 Net liabilities for employee benefits 216,061 196,676 230,474 Current tax liabilities 10,133 11,265 29,085 Creditors and credit balances 2,159,849 2,078,605 2,141,679 ETF's liabilities 3,082,080 1,886,458 3,024,819 Financial liabilities 2,648,054 1,429,578 2,847,620 Total liabilities 49,738,059 42,806,922 48,731,846 Total equity and liabilities 53,336,980 46,264,411 52,311,891
Y. Hamburger M. Siboni S. Alkabetz R. Agassi Chairman of the Board of Company's joint CEO Company's joint CEO Deputy Chief Executive Directors Officer and Chief Financial Officer Date of approval of the financial statements: May 26, 2011 * Regarding reclassification see Note 2 (c). The notes accompanying the condensed interim consolidated financial statements are an integral part thereof. 2-5 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd
Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements of income For the three months ended for the year ended March 31 December 31 2011 2010 2010 (Unaudited) (Unaudited) (audited) NIS NIS Thousands Thousands NIS Thousands Premiums earned, gross 2,084,981 1,908,501 7,969,707 Premiums earned by reinsurers 367,763 401,059 1,547,748 Premiums earned in retention 1,717,218 1,507,442 6,421,959 Net profit (loss) from investments and financial income 568,913 793,353 3,036,950 Income from management fees 192,262 236,475 812,583 Income from commissions 97,235 104,680 421,515 Other income 215 539 1,573 Total income 2,575,843 2,642,489 10,694,580 Payments and changes in liabilities for insurance and investment contracts, gross 2,141,270 2,196,507* 8,987,422 Reinsurers' share in payments and changes for insurance contracts liabilities 312,009 347,181 1,439,826 Payments and changes in liabilities for insurance and investment contracts, in retention 1,829,261 1,849,326 7,547,596 Commission, marketing and other acquisition expenses 329,103 303,181 1,358,486 General and administrative expenses 205,299 185,439 809,167 Other expenses 11,906 14,402* 48,396 Financing expenses 40,730 (536) 117,406 Total expenses 2,416,299 2,351,812 9,881,051 Company share of profit (loss) of investee companies recorded by the equity method 10,570 3,116 16,654 Profit (loss) before income taxes 170,114 293,793 830,183 Income taxes (benefits) 60,462 106,558 295,253 Net profit (loss) for the year 109,652 187,235 534,930 Attributed to: - - - Company shareholders 109,633 181,358 529,825 Minority interests 19 5,877 5,105 Net profit (loss) for the year 109,652 187,235 534,930 Basic profit (loss) per share attributed to the Company's shareholders (in NIS) 5.41 8.82 25.95 Weighted number of shares used for calculating the above (in thousands) 20,277 20,555 20,421 Diluted profit (loss) per share attributed to the Company's shareholders (in NIS) 5.37 8.82 25.48 * Regarding reclassification see Note 2 (c). The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.
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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statement of comprehensive income
For the three months ended for the year ended March 31 December 31 2011 2010 2010 (Unaudited) (Unaudited) (audited) NIS NIS Thousands Thousands NIS Thousands Profit (loss) for the year 109,652 187,235 534,930 Other comprehensive incomes: - - - Revaluation of fixed assets, net 2,448 - 2,601 Net changes in fair value of financial assets available for sale (23,212) 95,630 102,002 Net changes in fair value of financial assets available for sale transferred to statement of income (40,962) (19,798) (90,695) Loss from impairment in value of financial assets available for sale transferred to statement of income 4,177 3,808 37,048
Foreign currency transaction's difference in respect of overseas operations 3,628 (4,520) (10,531)
Taxes on income for other components of comprehensive profit (loss) 23,073 (22,209) (13,307)
Other comprehensive incomes, net of income tax (30,848) 52,911 27,118
Total comprehensive profit (loss) for the year 78,804 240,146 562,048 Attributed to: - - - Company shareholders 78,825 233,012 555,649 Minority rights (21) 7,134 6,399 Total comprehensive profit (loss) for the year 78,804 240,146 562,048
The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.
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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements of changes in capital Attributed to the Company’s owners
Capital reserve in Capital fund Share respect of Translation Capital reserve Transactions for capital assets of foreign in respect of with non- revaluation of and available operations share 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 Thousands NIS Thousands NIS Thousands NIS Thousands Thousands NIS Thousands NIS Thousands Thousands Thousands Thousands Thousands
Balance as at December 31, 2010 306,691 263,835 (14,240) 18,810 (138,625) (45,660) 6,381 3,181,178 3,578,370 1,675 3,580,045 Comprehensive income for year ------Profit for year ------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 recognized directly in equity ------(63,137) (63,137) - (63,137) Dividends paid - - - 1,861 - - - - 1,861 - 1,861 Share based payment - - - - (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 and consolidated statements of changes in capital - (contd.)
Attributed to the Company’s shareholders
Capital Capital reserve in reserve in Capital fund respect of Translation respect of Transactions for Share assets of foreign share with non- revaluation of capital 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 Thousands NIS Thousands Thousands Thousands Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands Thousands Thousands Balance as at December 31, 2010 140,196 229,645 (3,741) 4,329 (90,231) 0 4,248 2,822,005 3,106,451 111,409 3,217,860 Comprehensive income for year Profit for year ------181,358 181,358 5,877 187,235 Total other comprehensive income (loss) - 56,104 (4,450) - - - - - 51,654 1,257 52,911 Total comprehensive income for year - 56,104 (4,450) - - - - 181,358 233,012 7,134 240,146 Transactions with owners recognized directly in equity Share based payment - - - 3,225 - - - - 3,225 104 3,329 Purchase of treasury stock - - - - (4,103) - - - (4,103) - (4,103) Reissuing of treasury stock 78 - - - 179 - - - 257 - 257 Acquisition of rights do not grant control 165,700 - - - - (45,660) - - 120,040 (120,040) - Balance as at March 31, 2011 305,974 285,749 (8,191) 7,554 (94,155) (45,660) 4,248 3,003,363 3,458,882 (1,393) 3,457,489
* Regarding reclassification see Note 2 (c). The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.
2-9 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd
Harel Insurance Investments & Financial Services Ltd. Condensed interim and consolidated statements of changes in capital - (contd.)
Capital Capital reserve in Capital fund for respect of Translation reserve in Transactions revaluation Share assets of foreign respect of with non- of capital and available operations share 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 Thousands Thousands Thousands Thousands NIS Thousands NIS Thousands Thousands Thousands Thousands Thousands Thousands
Balance as at January 1, 2010 140,196 229,645 (3,741) 4,329 (90,231) - 4,248 2,822,005 3,106,451 111,409 3,217,860 Comprehensive income for the year Profit (loss) for period ------Other comprehensive income (loss) ------529,825 529,825 5,105 534,930
Total comprehensive income for the year - 34,190 (10,499) - - - 2,133 - 25,824 1,294 27,118
Transactions with owners recognized directly in equity Dividends paid ------(170,652) (170,652) - (170,652) Share based payment - - - 14,481 - - - - 14,481 104 14,585 Purchase of treasury stock - - - (60,534) - - - (60,534) - (60,534) Reissuing of treasury stock - - - - 12,140 - - - 12,935 - 12,935 sale of Subsidiary ------1,058 1,058 Acquisition of rights do not grant control 165,700 - - - - (45,660) - - 120,040 (117,295) 2745 Balance as at December 31, 2010 306,691 263,835 (14,240) 18,810 (138,625) (45,660) 6,381 3,181,178 3,578,370 1,675 3,580,045
The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.
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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements on the financial position For the three months for the year ended ended March 31 December 31 2011 2010 2010 (Unaudited) (Unaudited) (Audited) NIS Appendix Thousands NIS Thousands NIS Thousands Cash flows from operating activities before taxes on income A 356,393 (702,363) (1,741,359) Income tax paid (53,684) (68,423) (125,625) Net cash provided by (used for) current activities 302,709 (770,786) (1,866,984) Cash flows from investing activities - - - Investment in investee companies - - (66,532) Proceeds from sale of investment in a company treated using the balance sheet value method - - 18,750 Cash used for the acquisition of a consolidated company, consolidated for the first time D - (125,387) (125,387) Cash Used for the acquisition of a consolidated company, consolidated by the proportional consolidation method E - (3,161) (3,161) Loan given to an investee company - - (1,575) Payment of loan given to an investee company - - 10,000 Investment of fixed assets (19,425) (5,950) (38,203) Investment in intangible assets (13,233) (12,952) (73,953) Dividends from investee company - - 4,375 Proceeds from sale of fixed assets 462 64 1,235
Net cash used for investing activities (32,196) (147,386) (274,451) Cash flows for financing activities Proceeds from issue of liability notes - - 691,538 Acquisition of Treasury stock 1,348 (3,846) (47,599) Proceeds from issue of ETF's 93,777 594,457 1,522,746
Short-term Loans from banks (312,833) 19,693 357,473 Long-term Loans from banks 180,000 - - Repayments of loans from banks and others (23,959) (24,150) (29,816) Dividends paid - - (170,652) Net cash provided by (used for) financing activities (61,667) 586,154 2,323,690 Effect of fluctuations in currency exchange rate on balances of cash and cash equivalents (470) 407 1,259 Increase in cash and cash equivalents 208,376 (331,611) 183,514
Cash and cash equivalents, beginning of the year B 1,942,183 1,758,669 1,758,669 Cash and cash equivalents, end of the year C 2,150,559 1,427,058 1,942,183
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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements cash flows (contd.)
Appendix A' - Cash flows from operating activities before taxes on income (1)
for the year For the three months ended ended March 31 December 31 2011 2010 2010 (Unaudited) (Unaudited) (Audited) NIS NIS Thousands Thousands NIS Thousands Appendix A - Cash flows from operating activities before taxes on income (1) Profit (loss) for period 109,652 187,235 534,930 Items not involving cash flows Company’s share of loss (profit) of investee companies recorded on the equity basis (10,570) (3,116) (16,654) Losses (profit) - financial investments - yield dependent insurance policies and investment contracts, net (48,838) (486,832) (1,044,451) Net losses (profits) from other financial investments Marketable debt assets (72,112) (4,052) (167,685) Non-marketable debt assets (70,300) 69,568 (147,648) Shares (4,509) (56,618) (6,351) Other investments 10,200 (91,967) (182,185) Financing expenses for financial liabilities (66,866) (221,911) 352,544 Net losses (profits) from realizations Fixed assets (30) - (185) Changes in fair value of real estate for investment - for yield dependent contracts (2,567) 3,971 (20,103) Changes in fair value of other real estate investment (60) 8,723 (25,071) Depreciation and amortization Fixed assets 13,233 9,247 34,677 Intangible assets 23,574 26,180 95,385 Change in liabilities for non yield dependent insurance and investment contracts 524,401 418,608 1,552,594 Change in liabilities for yield dependent insurance and investment contracts 650,848 943,314 3,062,659 Change in reinsurance assets (90,072) (160,655) (503,008) Change in deferred acquisition costs (71,488) (75,001) (74,143) Share based payment 1,861 3,329 14,585 Income taxes 60,462 106,558 295,253 Changes in other balance sheet items: Financial investments and real estate for investment for yield dependent - insurance policies and investment contracts Acquisition of real estate for investment (19,224) (187,998) (254,602) Net acquisitions of financial investments (362,088) (322,584) (1,387,060) Other financial investments and real estate for investment Acquisition of real estate for investment (75,063) (125,920) (305,323) Proceeds from the sale of real estate for investment 340 1,180 9,280 Acquisitions net, of financial investments (155,826) (1,004) (1,140,950) Outstanding premiums (172,768) (130,535) 2,350 Other receivables (21,476) (6,796) 55,149 Financial Investments for ETFs holders 626,950 (534,354) (2,293,557) Cash and cash equivalents pledged for ETFs holders (310,569) (168,651) (270,262) Other payables (50,395) 101,685 150,527 Changes in other tax items (45,835) (8,569) (100,211) Liabilities for employee benefits, net (14,472) 4,602 38,157 Total adjustments required to present cash flows from operating activities 246,741 (889,598) (2,276,289) Total cash flows from operating activities, before taxes on income 356,393 (702,363) (1,741,359)
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Harel Insurance Investments & Financial Services Ltd. Condensed interim consolidated statements cash flows (contd.)
(1) Cash flows from operating activities include net purchases and sales of financial investments resulting from activities in insurance contracts and investment contracts. (2) In the framework of operating activities, interest received was presented of NIS 331 million (for the 3 months ended March 31, 2010 an amount of NIS 301 million and for 2010 an amount of NIS 658 million) and the interest paid of NIS 18 million (for the 3 months ended March 31, 2010 an amount of NIS 16 million and for 2010 an amount of NIS 72 million). (3) In the framework of operating activities a dividend was presented which was received from other financial investments of NIS 6 million (for the period of 3 months ended March 31, 2010 of NIS 27 million and for 2010 an amount of NIS 30 million).
* Regarding reclassification, see Note 2 c. The notes accompanying the condensed interim consolidated financial statements are an integral part thereof
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Harel Investments in Insurance & Financial Services Ltd. Condensed interim consolidated statements cash flows - (contd.) For the three months ended for the year ended March 31 December 31 2011 2010 2010 (Unaudited) (Unaudited) (Audited) NIS NIS Thousands Thousands NIS Thousands
Appendix B - Cash and cash equivalents, beginning of the period Cash and cash equivalents for yield dependent contracts 746,829 472,674 472,674 Other cash and cash equivalents 1,195,354 1,285,995 1,285,995 Cash and cash equivalents, beginning of year 1,942,183 1,758,669 1,758,669
Appendix C - Cash and cash equivalents, end of the period Cash and cash equivalents for yield dependent contracts 987,339 421,498 746,829 Other cash and cash equivalents 1,163,220 1,005,560 1,195,354 Cash and cash equivalents, end of the period 2,150,559 1,427,058 1,942,183
Appendix D - Cash used on acquisition of consolidated companies Assets and Liabilities, at the time of control: Intangible assets - (31,423) (28,614) Fixed assets - (1,071) (1,071) Other receivable - (1,958) (1,958) Outstanding premiums - (4,697) (4,697) Other financial investments - (709,904) (709,904) Liabilities in respect of non-yield dependent insurance and investment contracts - 583,321 583,321 Deferred tax assets - 27,055 27,055 Net liabilities for employee benefits - 25 25 Other payables - 13,265 10,456 - (125,387) (125,387)
Appendix E - Cash withdrawn due to the acquisition of subsidiary consolidated in the past by proportional consolidation Assets and Liabilities, at the time of control: Intangible assets - (7,880) (7,880) Fixed assets - (104) (104) Current tax assets - (84) (84) Other receivable - (345) (345) Loans from related companies - 3,731 3,731 Net liabilities for employee benefits - 359 359 Other payables - 1,162 1,162 - (3,161) (3,161)
The notes accompanying the condensed interim consolidated financial statements are an integral part thereof.
2-14 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 1 - General a. The reporting entity Harel Investments in Insurance and Financial Services Ltd. (hereinafter: "the Company") is an Israeli resident company, which was incorporated in Israel, and whose shares are traded on the Tel Aviv Stock Exchange. Its official address is 3 Abba Hillel Silver Street, Ramat Gan. The Company is a holding company whose main holdings are in subsidiaries comprising insurance and financial companies. The condensed interim consolidated financial statements, as at March 31, 2011, include those of the Company and of its subsidiaries, and the Group's rights in affiliated companies and entities with joint control (hereinafter: "the Group"). The condensed interim consolidated financial statements mainly reflect assets and liabilities and operations of the subsidiary insurance companies and, therefore, were prepared in a similar format.
Note 2 - Basis for preparing the financial statements a. Declaration on compliance with International Financial Reporting Standards The condensed interim consolidated financial statements were prepared in accordance with IAS 34 - Financial Reporting for Interim Periods and in accordance with the requirements of the Pronouncements issued by the Supervisor of Insurance and in accordance with the Law for the Supervision of Financial Services (Insurance) - 1981, and does not include all of the information required in full annual financial statements. One must read them together with the financial statements as at and for the year ended December 31, 2010 (hereinafter: "the Annual Statements"). Moreover, these statements were prepared in accordance with the provisions of Chapter D of the Securities Regulations (Periodic and Immediate Reports) - 1970. The condensed interim consolidated financial statements were approved for publication by the Company's Board of Directors on May 26, 2011. b. Use of estimates and discretion In the preparation of the condensed interim financial statements in accordance with IFRS and in accordance with the Supervision Law and the Regulations issued under it, the Group's management is required to use its discretion in evaluations, estimates and assumptions, including actuarial assumptions and estimates (hereinafter: "Estimates") which affect the implementation of the accounting policy and the value of assets and liabilities, and of amounts of revenues and expenses. It should be clarified that actual results are liable to be different from these estimates. The main estimates included in the financial statements are based on actuarial evaluations and on external evaluations. On formulating these accounting estimates used in the preparation of the Group's financial statements, the Company's management is required to assume assumptions regarding circumstances and events which are connected with considerable uncertainty. When using their discretion in determining the estimates, the Company's management bases itself on past experience, various factors, external factors, and reasonable assumptions in accordance with the relevant circumstances for every estimate. The estimates are reviewed on a current basis. Changes in accounting estimates are recognized during the period in which the estimates were amended and in every future affected period. The evaluations and discretion that management uses in order to implement the accounting policy and prepare the condensed consolidated interim financial statements are mainly consistent with those used in the preparation of the consolidated financial statements as at December 31, 2010. Interest Rates Used for Determining the Fair Value of Non marketable Debt Assets The fair value of non marketable assets measured at fair value through the income statement, and of non-marketable financial assets for which information regarding their fair value is presented for the purposes only is determined through a discounting of their expected cash flows. Invert rates used for discounting are based on government bond yields and margins on corporate bonds as measured on the Tel Aviv Stock Exchange plus a premium for non- marketability. The interest rates used for discounting the cash flows are determined by a certain company that provides interest rate quotes for various risk ratings.
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Note 2 - Basis for preparing the financial statements (cont'd) b. Use of estimates and discretion (cont'd) On February 24, 2011, the Ministry of Finance published a press release announcing that the Mirvah Hogen Group (Fair Margin) had won a tender to set up and operate a price quote and interest rates database for financial institutions. As of March 20, 2011, the Mirvah Hogen Group will provide price and capitalized interest rate quotes for financial institutions for revaluing their non-marketable debt assets (here and after "the new model"). From that date, Shaarey Ribit will no longer provide these quotes for financial institutions. In principle, the new model is not based on a credit rating of the asset, but on an allocation of the negotiable market into deciles consistent with the yield to maturity of the debt asset, and determining the position of the non-marketable asset according to the deciles, and this in accordance with the risk premium stemming from the prices of transactions/issues on the non-negotiable market. The new model is more up-to date expression of changes in the debt assets risk premium, as such changes are reflected in the negotiable market in line with changes in that decile. Company's opinion, the new model meets the Commissioner of Insurance accounting rules on fair value measurement of financial assets. Transition to the new model will be applied as a change in estimate. Implementation of the new model first time on the transition is not expected to have a significant effect on the financial statements. c. Reclassification 1. Assets held for the ETF holders. During the Reporting Period, the Company changed the method of classifying the assets held against liabilities for the holders of ETF units, that were issued by a subsidiary (hereinafter – EFT assets), in the interim consolidated reports on the financial situation. ETF assets that were presented under "other financial investments" were reclassified under "financial investments for the bearers of ETFs", and this in an effort to provide a fairer presentation of the ETF assets held against liabilities for the bearers of the ETFs. The comparative figures were reclassified for consistency purposes: at 31 March, at 31 December 2011 2010 NIS thousands NIS thousands Other financial investments: Tradable debt asset 644,393 1,023,398 Shares 1,047,866 2,396,380 Other 38,678 70,362 Total assets held for the ETF holders 1,730,937 3,490,140 2. Other Classifications In addition, reclassifications were included in respect of the three-month period ended March 31, 2010. The principal classifications refer to the reclassification of deferred tax assets and liabilities and to the classification of other comprehensive profit before income tax in the note on segments, from the health insurance segment and non-life insurance segment to a segment not attributed to operating segments, the cancellation of revenues from management fees against general and administrative expenses in the gemel segment, as well as a reclassification of a capital fund in respect of the revaluation of investment real estate that was reclassified to a separate fund in the report on changes in equity. The reclassification had no effect on the Group's equity or profit.
Note 3 – Significant accounting principles Excluding those details in clause a. and b. 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.
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Note 3 - Significant accounting principles (cont'd) a. First implementation of new standards
Financial reporting in interim periods
On January 1, 2011, the Group introduced implementation of the amendment to IAS 34, financial reporting for interim periods, significant events and transactions ("the Amendment"), which was published as part of the improvements project for 2010. Accordingly, the list of events and transactions that must be disclosed in the financial reports for interim periods was expanded. In addition, the materiality threshold that existed prior to the amendment was removed from the minimum disclosure requirements. The disclosures required due to the amendment are expressed in these concise interim financial statements.
Related party disclosures
From January 1, 2011, the Group has implemented IAS 24 (2009) – Related party disclosures ("the Standard"). The Standard includes changes in the definition of a related party and changes with respect to the disclosures required by government-related entities. The Standard was implemented retrospectively.
Treatment of non-vesting conditions in share-based payment transactions
The grant date fair value of share-based payment bonuses to employees is recognized as a payroll expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the bonuses. In estimating the fair value of capital instruments that are given in respect of share-based payment, that are contingent on non-vesting conditions, the Group takes these conditions into account and therefore recognizes the expense in respect of these bonuses without considering whether or not the conditions are met. b. New standards and interpretations not yet adopted
IFRS 9 (2010) – Financial Instruments ("the Standard")
Pursuant to that mentioned in the Note on Principal Accounting Policies in the annual reports, with respect to new standards and interpretations that have yet to be adopted, the Group has begun to review the possibility of early adoption of the Standard and the expected repercussions of its adoption on the financial statements.
Amendment to IAS 12, Tax on Income, Deferred Taxes in respect of Investment Property ("the Amendment")
According to the Amendment, a rebuttable presumption was prescribed whereby deferred taxes in respect of investment property assets that are measured using the fair value model pursuant to the provisions of IAS 40 Investment Property will be calculated under the assumption that the carrying amount of the underlying asset will be recovered solely through a sale. Nevertheless, the presumption is rebutted in those instances where the investment property is depreciable and the purpose of the Company's business model in holding the asset is to consume substantially all the economic benefits inherent in the investment property over time. The Amendment shall also apply to deferred tax calculated in respect of investment property acquired as part of a business combination that is treated according to IFRS 3 Business Combinations, if the entity uses the fair value method when subsequently measuring that investment property. The Amendment is to be implemented retrospectively, from January 1, 2012 onwards. Early adoption is permitted, with disclosure. The amendment is not expected to have a significant effect on the financial statements.
IFRS 10, Consolidated Financial Statements ("the Standard")
The Standard replaces IAS 27, Consolidated and Separate Financial Statements, and instructions of SIC 12, Consolidation - Special Purpose Entities (SPEs) concerning the consolidation of financial statements, such that the instructions of IAS 27 will remain in force only with respect to separate financial statements.
The Standard sets forth a new control model for the purpose of determining whether an investor controls an SPE so that the entity should be included within the consolidated financial statements of the parent company. This model is to be 2-17 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 3 - Significant accounting principles (cont'd) b. New standards and interpretations not yet adopted (cont'd) implemented with respect to all SPEs. According to the model, an investor controls an SPE where it is exposed or entitled to variability of returns stemming from its involvement in the SPE, and it has the ability to influence these returns through its power in that entity.
Following are several key changes:
- The Standard presents a model that requires discretion to be exercised and all the relevant facts and circumstances to be analyzed in an effort to determine who is the controller is and whether it is required to consolidate an SPE. Among other things, this is reflected in the need to understand the structure and objectives of the SPE and to take into account indicators of power. Furthermore, the model specifically requires that the SPE's activities be identified as part of the assessment of the substance of control.
- The Standard presents a single control model to be applied with respect to all the SPEs, both SPEs that are currently governed by IAS 27 and those currently governed by SIC 12.
- De facto circumstances will be taken into account for the purpose of assessing control, so that in practice the Standard includes a model of effective control. Thus, if there is a substance of effective control, reports must be consolidated.
- In assessing the substance of control, all significant, potential voting rights, even if they cannot be immediately exercised, will be taken into account. With respect to potential voting rights, their structure, the reasons they are in place and the conditions of those rights, must be examined.
- The Standard includes instructions for application and a list of indicators for the purpose of reviewing whether the decision maker acts as a manager or agent when directing the SPEs activity.
- The Standard provides guidelines for those instances in which an investor reviews control with respect to silos (specific assets) instead of reviewing control with respect to legal entitles. - The Standard defines protective rights, whereas the existing standard did not address this issue. Control is determined according to exposure or entitlement to variability of returns. Variability in returns is a much broader concept than ownership-type benefits and is not solely a risk and reward analysis.
The Standard will be applied retrospectively to annual periods commencing on or after January 1, 2013. Early implementation is possible, subject to providing disclosure and subject to the early adoption of two other standards published concurrently – IFRS 11, Joint Arrangements and IFRS 12, Disclosure of Interests in Other Entities.
IFRS 11, Joint Arrangements ("the Standard")
The Standard replaces IAS 31, Interests in Joint Ventures ("IAS 31"), and amends some of the instructions in IAS 28, Investments in Associates (Equity Method). The standard defines Joint Arrangements as arrangements over which there is joint control (as defined above in IFRS 10), and divides them into two categories: joint operations and joint ventures.
Following are the principal changes:
- Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
- Joint operations - the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.
- The accounting for joint operations is similar to the accounting under IAS 31 in jointly controlled assets and jointly controlled ventures, i.e. – the recognition of assets and liabilities and their treatment under the relevant standards. 2-18 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 3 - Significant accounting principles (cont'd) b. New standards and interpretations not yet adopted (contd.)
- Joint operations consist of joint arrangements that are not incorporated in a separate vehicle (similar to jointly controlled assets and jointly controlled ventures, as defined in IAS 31), and they also include joint arrangements that are incorporated as a separate entity, but the legal or contractual form or other indicators indicate that the parties to the joint control have rights to the assets and obligations for the liabilities relating to the arrangement.
- Joint ventures - the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
- Joint ventures shall be treated using the balance sheet value method only, i.e. – the proportionate consolidation method is null and void.
- Joint ventures are all the joint arrangements that are incorporated as a separate entity and do not constitute "joint operations". Thus, joint ventures are joint arrangements incorporated as a separate entity, and the legal or contractual form or other indicators indicate that the parties to the joint control have no rights to the assets or obligations for the liabilities relating to the arrangement.
- Accounting for the loss of joint control which leaves substantive influence – the standard voids the existing instruction to assign a value to the fair value of the remaining investment in the associate when joint control is lost. The standard is applicable retrospectively for annual periods commencing on or after January 1, 2013, although there are separate instructions regarding retrospective application in certain instances. Early application is possible, subject to providing disclosure and subject to the early adoption of two other standards published concurrently – IFRS 10, Consolidated Financial Statements and IFRS 12, Disclosure of Interests in Other Entities.
IFRS 12, Disclosure of Interests in Other Entities ("the Standard")
The Standard contains comprehensive disclosure requirements with respect to interests in subsidiaries, in joint arrangements (Jointly controlled entities and Joint Ventures), in associate companies and structured entities.
Structured entities are entities that are designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. The Standard has a broad definition of rights that includes contractual and/or non-contractual involvement that exposes the company to changes in returns as a result of the investee's performance.
The purpose of the new disclosure requirements is to allow the users of the financial statements to understand the significance and risks stemming from the company's interests in other entities, and to understand the effect that those rights have on the Company's financial situation, the results of its operations and cash flows. This is reflected in extensive, comprehensive disclosure requirements, including: Significant judgments and assumptions made in determining the nature of interests in entities and arrangements, interests in subsidiaries, interests in joint arrangements and associates, and interests in structured entities.
The Standard is applicable to annual reporting periods beginning on or after January 01, 2013. Early application is possible subject to the early adoption of two other standards that were published concurrently – IFRS 11, Joint Arrangements, and IFRS 10 – Consolidated Financial Statements. Nevertheless, the additional disclosure requirements required under IFRS 12 can be included early without the early adoption of the other standards.
The Group has not yet begun to examine the impact of the adoption of the standards on the financial statements.
IFRS 13, Fair Value Measurement ("the Standard")
This Standard replaces the instructions regarding the method of measuring fair value that appear in various IFRS standards so that it will constitute the sole source of instructions regarding the measurement of fair value under IFRS. To this end, the Standard defines fair value, determines a framework of guidelines for measuring fair value, and determines new disclosure requirements relating to fair value measurement. The Standard does not determine when fair value is to 2-19 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 3 - Significant accounting principles (cont'd) b. New standards and interpretations not yet adopted (contd.) be measured so that the need for fair value measurement will continue to be determined as per currently existing standards.
The Standard applies to the assets, liabilities and capital instruments of entities when another relevant IFRS requires or permits fair value measurements or disclosures about fair value measurements. Nevertheless, the Standard does not apply to share-based payment transactions within the scope of IFRS 2 or to leasing transactions within the scope of IAS 17. Likewise, the Standard does not apply to measurements that have some similarities to fair value but are not fair value (such as: net realizable value of inventories).
The Standard is applicable to annual reporting periods commencing January 1, 2013. Early application is possible subject to disclosure. The Standard is applicable retrospectively, although the disclosure requirements do not apply to comparative information for periods preceding first-time application of the Standard.
The Group has not yet begun to examine the effects of adopting the Standard on the financial statements. c. Seasonality 1. Life and health insurance The revenues from life and health insurance premiums are not characterized by seasonality. Nevertheless, due to the fact that the provisions for life assurance enjoy tax benefits, a considerable part of new sales is affected mainly at the end of the year.
2. General insurance The turnover of the gross premium revenues in general insurance is characterized by seasonality, resulting mainly from vehicle insurance of various groups of employees and vehicle fleets of businesses, where the date of their renewal are generally in January and from various policies of businesses where the renewal dates are generally in January or in April. The effect of this seasonality on the reported profits is neutralized through the provisions of premiums not yet earned. The components of other expenses such as claims, and the components of other revenues such as revenues from investments do not have a definite seasonality and, therefore, also there is no definite seasonality in profits. Nevertheless, it should be mentioned that the winter season is likely to cause an increase in claims, mainly in the vehicle property branch and in the first and last quarters of the year, as a result of a decline in reported profits. d. Deferred tax expenses in respect of the inclusion of members in the provident and education funds
Additional acquisition expenses (commissions paid to agents, acquisition supervisors and marketing agents), that are attributed directly to the inclusion of members in the provident and education funds, are recorded as Deferred Acquisition Costs (DAC) if they can be identified separately and measured reliably and if they are expected to be repaid.
From 2011, the Company has started to record DAC. These expenses are amortized at equal annual rates over the period in which the Company will generate revenues from the members who have joined, but no more than 5 years. In previous periods, the Company had no additional DAC, or their amounts were negligible, in respect of members who had joined the provident and education funds.
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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. Regarding reclassification of this segment see section 7 below. 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. 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. Regarding reclassification of this segment see section 7 below. 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. Restatement of this sector, see note 3(E) above. 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;
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Note 4 - Operating segments (contd.) - Issue to the public of index products; - Exchange traded notes; Regarding reclassification of this segment see section 7 below. 6. Not allocated to operating segments Activities relating to the operating segment include mainly activities of insurance agencies and of capital activities in consolidated insurance companies. 7. Restatement Insurance companies overseas The Company is the full owner of Interasco Societe Anonyme General Insurance Company S.A.G.I ("Interasco"), an insurance company operating in Greece in the health and non-life insurance sectors, and also holds the controlling interest in Turk Nippon (97%) which operates in Turkey. Turk Nippon received a license to issue insurance policies in Turkey in all branches of non-life insurance on April 6, 2009, and it commenced its insurance activity a short time later. In view of the Group's organizational structure, in which context the Group manages the operations of its subsidiaries which are insurers abroad in one management unit which is segregated from the management of its insurance business in Israel, and the reports to the Group's management are separate from those of the operating segments in Israel, the Company decided to view insurance activity abroad as a separate operating segment. Accordingly, from the financial statements in respect of June 30, 2010, the Company adjusted, by way of restatement, the segment reporting. Later on, financial statement in respect of Reporting Period the company adjusted the segment reporting for the three month periods ending March 31, 2010, this in an effort to reflect retrospectively the information about the operating segments as reviewed by the decision makers, segregating the data concerning insurance activity overseas in a separate operating segment.
The impact of a subsidiary in the financial services sector holding the Company's securities A subsidiary of the Company engaged in ETFs (Harel Sal) holds, as part of its obligations towards the bearers of the ETFs, shares of the Company and bonds that were issued by Harel Finance and Issues. The profits or losses stemming from these holdings were set off against the results of the financial services segment. In view of the ever increasing volume of ETFs in which the Company's securities are held, the Company's management is re-examining the method of offsetting this profit (or loss) and has concluded that in order to better reflect performance in the financial services sector, this set off (in respect of the effect of the holding of the Company's securities) should be performed in the column "adjustments and set off" in the Note on segments. This form of statement more correctly reflects performance in the finance segment. This restatement does not affect the Company's overall financial performance (including no effect on the Company's equity).
2-22 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 4 - Operating segments (contd.) a. Information regarding reporting segments
A. Information regarding segment reporting (Unaudited)For the three months ended March 31, 2011 Insurance Not Allocated To Life Insurance and Health General companie Financial Any Specific Adjustments Long-Term Savings Insurance Insurance overseas Services Segment and Offsets Total NIS NIS NIS NIS Thousands Thousands NIS Thousands NIS Thousands Thousands NIS Thousands Thousands NIS 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 Part of the profits (losses) of investee companies treated 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 other comprehensive incomes, 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 2-23 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 4 - Operating segments (contd.) a. Information regarding reporting segments (contd.)
A. Information regarding segment reporting (Cont'd) (Unaudited)For the three months ended March 31, 2010 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 Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands NIS Thousands Premiums earned, gross 689,994 468,170 729,318 22,297 - - (1,278) 1,908,501 Premiums earned by reinsurers 28,273 42,766 322,855 8,443 - - (1,278) 401,059 Premiums earned in retention 661,721 425,404 406,463 13,854 - - - 1,507,442 Net profit (loss) from investments and financial income 688,346 42,154 28,314 (8,593) 1,428 43,126 (1,422) 793,353 Income from management fees 193,144 1,462 - - 40,681 1,188 - 236,475 Income from commissions 10,351 18,518 52,684 3,550 14,161 11,666 (6,250) 104,680 Other income - - - - 502 760 (723) 539 Total income 1,553,562 487,538 487,461 8,811 56,772 56,740 (8,395) 2,642,489 Payments and changes in liabilities for insurance and investment contracts, gross 1,206,360 348,979 636,266 5,563 - - (661) 2,196,507 Reinsurers' share in payments and changes for insurance contracts liabilities 13,111 23,448 308,760 2,523 - - (661) 347,181 Payments and changes in liabilities for insurance and investment contracts, in retention 1,193,249 325,531 327,506 3,040 - - - 1,849,326 Commission, marketing and other acquisition expenses 124,642 76,806 96,119 10,591 - 1,273 (6,250) 303,181 Management and general expenses 79,069 31,397 8,024 4,206 44,692 18,774 (723) 185,439 Other expenses 11,043 - 1,469 - 674 1,216 - 14,402 Financing expenses (1,075) (96) (5,184) - 1,796 5,102 (1,079) (536) Total expenses 1,406,928 433,638 427,934 17,837 47,162 26,365 (8,052) 2,351,812 Part of the profits (losses) of investee companies treated by the equity method - - - - (165) 3,281 - 3,116 Profit (loss) before income taxes 146,634 53,900 59,527 (9,026) 9,445 33,656 (343) 293,793 Other comprehensive incomes, before income tax 40,842 10,291* 18,099* 1,974 74 3,840* - 75,120 Total other comprehensive incomes, before income tax 187,476 64,191 77,626 (7,052) 9,519 37,496 (343) 368,913 Liabilities in respect of non-yield dependent insurance and investment contracts 8,518,912 1,690,983 9,000,836 151,113 - - (3,180) 19,358,664 Liabilities in respect of yield dependent insurance and investment contracts 16,228,203 1,302,003 - - - - - 17,530,206
*. Regarding reclassification see Note 2(E). ** Regarding restatement see Note 7(4).
2-24 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 4 - Operating segments (contd.) Information regarding reporting segments (contd.)
A. Information regarding segment reporting (Cont'd) for the year ended December 31, 2010 Life Insurance and Insurance Not Allocated Adjustment Long-Term Health General companies Financial To Any Specific s Savings Insurance Insurance overseas Services Segment and Offsets Total NIS NIS NIS Thousand NIS NIS NIS NIS Thousands Thousands Thousands s Thousands NIS Thousands Thousands Thousands Premiums earned, gross 2,965,671 2,061,432 2,852,243 95,925 - - (5,564) 7,969,707 Premiums earned by reinsurers 112,705 186,166 1,219,334 35,107 - - (5,564) 1,547,748 Premiums earned in retention 2,852,966 1,875,266 1,632,909 60,818 - - - 6,421,959 Net profit (loss) from investments and financial income 2,381,576 213,085 249,582 1,944 15,173 194,520 (18,930) 3,036,950 Income from management fees 619,159 7,872 - - 181,095 4,457 - 812,583 Income from commissions 27,740 78,933 232,495 12,893 42,017 57,863 (30,426) 421,515 Other income - - - - 573 3,498 (2,498) 1,573 Total income 5,881,441 2,175,156 2,114,986 75,655 238,858 260,338 (51,854) 10,694,580 Payments and changes in liabilities for insurance and investment contracts, gross 4,680,941 1,573,420 2,672,958 63,952 - - (3,849) 8,987,422 Reinsurers' share in payments and changes for insurance contracts liabilities 78,710 105,583 1,242,189 17,193 - - (3,849) 1,439,826 Payments and changes in liabilities for insurance and investment contracts, in retention 4,602,231 1,467,837 1,430,769 46,759 - - - 7,547,596 Commission, marketing and other acquisition expenses 487,303 332,386 522,538 44,797 - 1,888 (30,426) 1,358,486 Management and general expenses 323,139 149,291 35,563 15,490 195,878 92,304 (2,498) 809,167 Other expenses 43,890 - 965 519 710 2,312 - 48,396 Financing expenses 12,986 5,274 (7,417) - 7,697 113,412 (14,546) 117,406 Total expenses 5,469,549 1,954,788 1,982,418 107,565 204,285 209,916 (47,470) 9,881,051 Part of the profits (losses) of investee companies treated by the equity method 664 - 9,117 - (165) 7,038 - 16,654 Profit (loss) before income taxes 412,556 220,368 141,685 (31,910) 34,408 57,460 (4,384) 830,183 Other comprehensive incomes, before income tax 36,788 6,815 (11,650) (1,302) 108 9,666 - 40,425 Total other comprehensive incomes, before income tax 449,344 227,183 130,035 (33,212) 34,516 67,126 (4,384) 870,608 Liabilities in respect of non-yield dependent insurance and investment contracts 9,069,866 1,855,053 9,396,990 158,046 - - (4,636) 20,475,319 Liabilities in respect of yield dependent insurance and investment contracts 18,211,153 1,446,553 - - - - - 19,657,706 2-25 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 4 - Operating segments (contd.) a. Additional data regarding general insurance segment
(Unaudited)For the three months ended March 31, 2011 Property Other Compulsory Motor and Liability Mortgage Other Motor Property Segments* Segments** insurance Total NIS NIS NIS NIS NIS NIS thousands thousands 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 expenses (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.
2-26 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment (contd.)
(Unaudited)For the three months ended March 31, 2010 Property Other Compulsory Motor and Other Liability Mortgage Motor Property Segments* Segments insurance Total NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands Thousands Thousands Premiums earned, gross 222,674 370,812 173,585 210,401 12,019 989,491 Premiums earned by reinsurers 45,203 76,822 127,488 139,350 - 388,863 Retention premiums earned 177,471 293,990 46,097 71,051 12,019 600,628 Changes in premium balances that have not yet been earned, retention 58,605 122,236 6,148 17,958 (10,782) 194,165 Retention premiums earned 118,866 171,754 39,949 53,093 22,801 406,463 Profits from investments, net, and financing income 18,770 3,197 (902) 5,188 2,061 28,314 Commission income 4,268 8,895 23,473 16,048 - 52,684 Total income 141,904 183,846 62,520 74,329 24,862 487,461 Payments and changes in liabilities for insurance contracts, gross 126,478 181,006 108,528 209,384 10,870* 636,266 Reinsurer's share of payments and changes in liabilities for insurance contracts 25,440 33,338 92,337 157,645 - 308,760 Payments and changes in liabilities for insurance contracts, retention 101,038 147,668 16,191 51,739 10,870 327,506 Commission, marketing expenses and other acquisition costs 12,085 27,327 35,341 20,456 910 96,119 Management and general expenses 944 792 784 252 5,252 8,024 Other expenses - - - - 1,469* 1,469 Financing expenses (434) (596) (1,584) (2,047) (523) (5,184) Total expenses 113,633 175,191 50,732 70,400 17,978 427,934 Profit (loss) before income taxes 28,271 8,655 11,788 3,929 6,884 59,527 Other comprehensive incomes, before income tax 8,874 1,752 315 3,343 3,815 18,099 Total comprehensive profit (loss) before income tax 37,145 10,407 12,103 7,272 10,699 77,626
Liabilities for insurance policies, gross, as at march 31 2010 2,588,879 730,092 502,082 4,598,275 581,508 9,000,836 * Property braches and others include mainly results from property loss insurance and comprehensive apartments insurance, whose activities comprise 85% of total premiums in these branches. ** Other liabilities branches include mainly results from third-party insurance and professional liability whose activities comprise 84% of total premiums in these branches. *** Regarding restatement see Note 7(4).
2-27 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 4 - Operating segments (contd.) b. Additional data regarding general insurance segment (contd.) for the year ended December 31, 2010 Other Property Liability Compulsor Motor and Other Segments* Mortgage y Motor Property Segments* * insurance Total NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands Thousands Thousands Premiums earned, gross 572,141 894,028 641,467 695,107 59,545 2,862,288 Premiums earned by reinsurers 116,744 187,423 486,067 425,160 - 1,215,394 Retention premiums earned 455,397 706,605 155,400 269,947 59,545 1,646,894 Changes in premium balances that have not yet been earned, retention (21,051) 2,755 4,628 37,043 (9,390) 13,985 Retention premiums earned 476,448 703,850 150,772 232,904 68,935 1,632,909 Profits from investments, net, and financing income 144,186 24,434 3,097 53,639 24,226 249,582 Commission income 21,165 49,058 104,256 58,016 - 232,495 Total income 641,799 777,342 258,125 344,559 93,161 2,114,986 Payments and changes in liabilities for insurance contracts, gross 625,299 712,910 353,943 927,126 53,680 2,672,958 Reinsurer's share of payments and changes in liabilities for insurance contracts 105,013 141,121 294,920 701,135 - 1,242,189 Payments and changes in liabilities for insurance contracts, retention 520,286 571,789 59,023 225,991 53,680 1,430,769 Commission, marketing expenses and other acquisition costs 73,668 176,802 156,713 110,695 4,660 522,538 Management and general expenses 4,435 5,883 3,487 3,452 18,306 35,563 Other expenses - - - - 965 965 Financing expenses (268) (769) (2,961) (3,317) (102) (7,417) Total expenses 598,121 753,705 216,262 336,821 77,509 1,982,418 Company share of profit (loss) of investee companies recorded by the equity method 5,833 988 125 2,171 - 9,117 Profit (loss) before income taxes 49,511 24,625 41,988 9,909 15,652 141,685 Other comprehensive incomes, before income tax (5,346) (447) (202) (2,477) (3,178) (11,650) Total comprehensive profit (loss) before income tax 44,165 24,178 41,786 7,432 12,474 130,035 Liabilities for insurance policies, gross, as at December 31, 2010 2,722,806 579,186 543,909 4,931,625 619,464 9,396,990 * Property braches and others include mainly results from property loss insurance and comprehensive apartments insurance, whose activities comprise 86% of total premiums in these branches. ** Other liabilities branches include mainly results from third-party insurance and professional liability whose activities comprise 80% of total premiums in these branches. *** Regarding reclassification see Note 2(E). 2-28 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 4 - Operating segments (contd.) c. Additional information regarding life assurance and long-term savings segment
For the three months ended For the three months ended March 31, 2011 (Unaudited) March 31, 2011 (Unaudited) Life- Life- Provident Pension assurance Total Provident Pension assurance Total NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Premiums earned, gross - - 777,188 777,188 - - 689,994 689,994 Premiums earned by reinsures - - 29,174 29,174 - - 28,273 28,273 Retention premiums earned - - 748,014 748,014 - - 661,721 661,721 Profits from investments, net, and financing income 209 957 403,867 405,033 76 412 687,858 688,346 Management fee income 59,340 40,050 38,994 138,384 58,750 32,727 101,667 193,144 Commission income - - 8,207 8,207 - - 10,351 10,351 Total income 59,549 41,007 1,199,082 1,299,638 58,826 33,139 1,461,597 1,553,562
Payments and changes in liabilities for insurance contracts and investment contracts, gross 481 1,582 999,236 1,001,299 494 1,750 1,204,116 1,206,360
Reinsurer's share of payments and changes in liabilities for insurance contracts - - 18,768 18,768 - - 13,111 13,111 Payments and changes in liabilities for insurance contracts and investment contracts, retention 481 1,582 980,468 982,531 494 1,750 1,191,005 1,193,249 Commission, marketing expenses and other acquisition costs 13,901 18,494 95,236 127,631 14,563 14,984 95,095 124,642 Management and general expenses 21,198 9,779 45,929 76,906 20,799 9,299 48,971 79,069 Other expenses 4,596 1,159 5,314 11,069 4,828 902 5,313 11,043 Financing expenses (income), net 66 838 3,420 4,324 27 962 (2,064) (1,075) Total expenses 40,242 31,852 1,130,367 1,202,461 40,711 27,897 1,338,320 1,406,928 Company share of profit (loss) of investee companies recorded by the equity method - - 666 666 - - - - Profit (loss) before income taxes 19,307 9,155 69,381 97,843 18,115 5,242 123,277 146,634 Other comprehensive incomes, before income tax (166) (831) (15,471) (16,468) 62 593 40,187 40,842 Total comprehensive profit (loss) before income tax 19,141 8,324 53,910 81,375 18,177 5,835 163,464 187,476
2-29 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the interim consolidated financial statements
Note 4 - Operating segments (contd.) c. Additional information regarding life assurance and long-term savings segment
for the year ended December 31, 2010 Life- Provident Pension assurance Total NIS NIS NIS NIS thousands thousands thousands thousands Premiums earned, gross - - 2,965,671 2,965,671 Premiums earned by reinsures - - 112,705 112,705 Retention premiums earned - - 2,852,966 2,852,966 Profits from investments, net, and financing income 648 3,217 2,377,711 2,381,576 Management fee income 230,708 146,388 242,063 619,159 Commission income - - 27,740 27,740 Total income 231,356 149,605 5,500,480 5,881,441 Payments and changes in liabilities for insurance contracts and investment contracts, gross 1,938 5,962 4,673,041 4,680,941 Reinsurer's share of payments and changes in liabilities for insurance contracts - - 78,710 78,710 Payments and changes in liabilities for insurance contracts and investment contracts, retention 1,938 5,962 4,594,331 4,602,231 Commission, marketing expenses and other acquisition costs 53,468 63,166 370,669 487,303 Management and general expenses 88,228 44,866 190,045 323,139 Other expenses 18,727 3,908 21,255 43,890 Financing expenses (income), net 59 3,000 9,927 12,986 Total expenses 162,420 120,902 5,186,227 5,469,549 Company share of profit (loss) of investee companies recorded by the equity method - - 664 664 Profit (loss) before income taxes 68,936 28,703 314,917 412,556 Other comprehensive incomes, before income tax 51 684 36,053 36,788 Total comprehensive profit (loss) before income tax 68,987 29,387 350,970 449,344
2-30 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 5 - Taxes on income Agreement with the Tax Authorities In March 2011, an agreement was signed between the Association of Insurance Companies and the Tax Authority for the years 2009 and 2010. The agreement was an extension of the 2008 agreement for an additional two year period.
Note 6 - Contingent liabilities and commitments a. Class actions and applications to approve class actions
There is a general exposure which cannot be evaluated and/or quantified resulting, inter alia, from the complexity of the services provided by the Group to its insured. The complexity of these arrangements conceal, inter alia, potential of allegations, interpretations and others, due to the differences in information between the Group and other parties to the insurance contacts, relating to the long series of commercial and regulatory conditions. It is not possible to anticipate in advance the types of allegations, which will be raised in this field, and the exposure resulting from these and other allegations in connection with the insurance contract raised, inter alia, through a mechanism of hearings set forth in the Class Actions Law. In addition, there is a general exposure due to complaints issued from time to time to the Director of Capital Markets, Insurance and Savings in the Ministry of Finance against institutional bodies in the Group, regarding the rights of insured relating to the insurance policies and/or the law. These complaints are handled on a current basis by the public complaints division in the Institutional bodies. The decisions of the Supervision on these complaints, if and to the extent that any decision is made, are liable to be given across the board and apply to large groups of insured. Sometimes, the complaining factors are even threatening to take steps regarding their complaints in the framework of a class action. At this time, it is not possible to evaluate if there is an exposure for such complaints and it is not possible to evaluate if a wide-ranging decision will be given by the Director regarding these complaints and/or if class actions will be filed as a result of such processes, and it is not possible to evaluate the potential exposure to such complaints; therefore, no provision for this exposure has been included. The following are details of the exposure for class actions and applications to recognize them as class actions filed against the Company and/or companies in the Group. Applications to approve legal actions as class actions as detailed below, which are, in management’s opinion based inter alia on legal opinions that it received, more likely than not that the defense contentions of the Company or the appeal contentions that the Company or a subsidiary filed or a compromise arrangement proposed will be accepted and the application for approving the legal action as a class action will be rejected, so no provisions have not been included in the financial statements. Applications to approve a legal action as class action regarding a claim, fully or partly, it is more reasonable that the defense contentions on the Company are likely to be rejected, the financial statements have a provision to cover the exposure estimated by the Company's management and/or the managements of subsidiaries. In the opinion of the Company's management, inter alia, based on legal opinions it received, the financial statements have suitable provisions, where provisions are required, to cover the estimated exposure by the Company and/or subsidiaries. The total provisions included in the financial statements to cover the exposure are not an immaterial amount. With regards to applications to approve actions as class actions filed as specified in sections 13 and 16-18 below, it is not possible at this early stage to estimate the chances of the applications to be approved as a class action, and therefore no provisions have been included in the financial statements for these claims. 1. In April 2003 a statement of claim was filed in the Tel Aviv District Court against a subsidiary of Harel Insurance and against three additional insurance companies, to which an application to approve it as a class action was attached. The subject of the claim and the application to approve it as a class action is the allegation that over the year Harel Insurance illegally collected from its insured stamp tax paid on insurance agreements by virtue of the Stamp Tax Law on Documents – 1961. The plaintiff alleges, inter alia, that the collection of stamp tax from which Harel Insurance illegally profited at his expense, and therefore it is liable to reimburse the amounts collected. The amount of the total claim that the plaintiff stated in the letter of claim is NIS 166 million. The hearings on the application to approve the claim as a class action was joined to the hearings of other applications which are pending against the other defendants to approve class actions on subjects identical to the application against Harel Insurance, which was submitted against other defendants in other civil files. On June 7, 2009, a decision was issued in the framework of which the class action was approved and relief being the reimbursement of half of the amount of the stamp tax paid to the insured was approved. Harel Insurance and the three other defendant companies filed an application for approval to appeal to the Supreme Court on this decision. The response to the applications for approval to appeal were filed in December 2009. WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-31 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)
In May 2010 the District Court approved the application of the defendants to delay the hearings on the action until the decision of the Supreme Court on the application to appeal which was filed on behalf of the defendants. 2. In April 2006, a claim was filed with the Tel Aviv District Court against the subsidiary Harel Insurance together with an application to approve it as a class action. The claim was filed against five insurance companies, including Harel insurance, and this by five plaintiffs who were insured with the various companies in loss of work ability insurance. The plaintiffs allege that they paid insurance premiums for loss of work ability insurance policy until the end of the insurance period, and this included the last three months of the insurance period according to the policy. The plaintiffs allege in their claim that during the last three months of the insurance period, the defendants collected premiums despite the fact that for that period the plaintiffs were not entitled to receive insurance compensation, even if they suffered work disability (due to the waiting period set in the policy). The plaintiffs allege that the defendants did not give them information on this and they intend to collect the insurance premiums for the last three months of the insurance period, in accordance with the policy. The relief claimed in the legal action is the issue of a binding order to all the plaintiffs to discontinue collecting insurance premiums for the said period, and to instruct all the defendants to reimburse all the insurance premiums that the defendants collected from members of the Group, who the plaintiffs request to present in the framework of the class action, for the last three months of the insurance period, plus linkage differences and interest as mentioned in Section 28 c of the Insurance Contract Law as from the date of collecting the said payments until the date of actual reimbursement. The plaintiffs allege that the damage to all the plaintiffs caused by all the defendants and estimated by them, according to an expert opinion, in an amount of NIS 47.61 million. The damage alleged by the plaintiffs against Harel insurance aggregates, in their opinion, NIS 1.54 million. On February 3, 2009, the court approved the class action. Harel insurance filed an application for approval to appeal the decision to approve the class action.
3. In February 2007, a claim against the subsidiary Dikla and against Clalit Health Services (hereinafter: "Clalit") was filed with the Tel Aviv District Court, and an application to approve the claim as a class action (hereinafter respectively: "the legal action and application for approval"). A summary of the plaintiff's allegation is that since 2001 monthly payments were collected for it, both for the complementary insurance policy (hereinafter: "Clalit Complementary"), and also for the additional health services program (hereinafter: "Clalit Mushlam). The plaintiff alleges that this relates overlapping insurance, which is double insurance, and both of them together have no advantages. On the basis of the aforesaid, the plaintiff alleges, inter alia, a breach of contract of an engagement signed between him and between Clalit, on Clalit joining the additional insurance services, a violation of the law; a misrepresentation and a breach of the obligation of disclosure according to the Consumers Protection Law, according to the Law of the Supervision for the Financial Services (Insurance) 1981 and the illegal enrichment by Dikla and Clalit. The plaintiff wishes to represent anyone who purchased the Dikla Comprehensive Insurance Policy and who was insured by Clalit Health Fund and concurrently with the Clalit Mushlam Medical Insurance for any insurance period. In the plaintiff's opinion, the members of the Group comprise at least 50,000 insured and he estimates that the average damage caused to each of them at NIS 1,500 (the plaintiff alleges that the personal damage to him is NIS 2,714). Therefore, the plaintiff says that the value of the whole claim is NIS 75 million. On August 7, 2008 the response of Clalit and Dikla was submitted regarding the application for approval. In July 2008 the plaintiff filed a response to the application for approval for a class action. In the framework of the pre hearings for the application of approval, which took place in November 2008, the District Court instructed the Supervisor to issue his position regarding the legal action. This position was received in February 2009 and in response Dikla filed an affidavit supporting its position. In September 2009 a hearing took place on the application to approve the legal action and thereafter the final summaries were submitted in writing.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-32 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)
On 2 January 2011 the court approved the class action while significantly reduces the period to which the claim relates to the class action. Parties are negotiating in an attempt to end the action by compromise.
4. In April 2007 a legal action was filed with the Tel Aviv District Court and an application to approve it as a class action against the subsidiary Harel Investment House. The class action was submitted against Bank Hapoalim B.M., Bank Leumi Le'Israel B.M., Israel Discount Bank Ltd., First International Bank of Israel Ltd. (hereinafter: "the Banks"), Clal Finance Betucha Investments Management Ltd., the Central Company for Stock Exchange Services (N.E) Ltd., and Harel Insurance House (the three last ones will hereinafter be called: "the Funds Managers").
The grounds of the claim is the reimbursement of brokerage commissions which were allegedly paid by the plaintiff from the beginning of 2004, in connection with their holdings of units of various mutual funds, as detailed in the statement of claim, and this for debits of brokerage commissions and commissions connected with the trading of foreign currency at a higher rate than allegedly the defendants should have collected. The plaintiff alleges that from 2004 the defendants collected from a number of private bodies commissions at rates less than those collected regarding mutual funds which were controlled by the banks. According to the statement of claim, the relevant period for Harel Insurance House is November 15, 2006 until March 2007. In addition, it is alleged that in the framework of the sale of control by the banks of the mutual funds to the managers of the mutual funds, it was determined that the banks will continue, allegedly, to provide the managers of the funds trading services on the Tel Aviv Stock Exchange and/or banking services (buying/selling of foreign currency) and collect the same high commission that they collected until the sale, where this is expressed, allegedly, in a reduced price paid in consideration for purchasing control of the mutual funds on account of preventing profits of mutual funds managers from collecting brokerage commissions. The legal action was filed according to the Class Actions Law – 2006. The legal action alleges, inter alia, an apparent violation of the Provisions of Section 69 of the Joint Trust Investment Law, an apparent violation of the obligation of trust which the fund managers of the mutual funds owe to the holders of participating units, an apparent violation of the Banking Law (Service to Customer) – 1981, and an apparent violation of the Directives of the Supervisor of Banks, the Directives of Standard Bank Procedures No. 7 (1.01) " Banking Activities System in the Capital Market), an apparent misrepresentation of the holders of the mutual funds units, apparent illegal enrichment. The amount of the total claim of all the plaintiffs, including those that the plaintiffs requested to represent in the class action against all the defendants, is estimate by the plaintiffs initially at an amount of NIS 386 million. The group that all the plaintiffs wish to represent is anyone who purchased and/or holds and/or held during the relevant periods to this claim, participating units in mutual funds managed by the mutual fund managers, which were and/or controlled by the defendants or any of them. The amount of the legal action of all the plaintiffs, including the plaintiffs that they requested to represent, in the framework of the class action, against Harel Insurance House, is estimated by the plaintiffs at NIS 5,676 thousand. The relief requested in the claim is to order the defendants to reimburse the commissions which they allegedly collected in excess from members of the group from the beginning of 2004. In addition, the plaintiffs a mandatory injunction which instructs the defendants to change the way in which they behave in everything connected with collecting commissions. In January 2010, Harel Insurance Investments House response was submitted regarding the application to approve the class action, and on January 1, 2011 the plaintiff submitted its response to the defendant's response.
5. 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 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-33 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)
collected "payment of sub-annual factor" unjustly as follows: (a) collection of payment in proportion to the component of the policy, collected and calculated on a monthly basis, which according to the claimants forms "management fees"; (b) collection of a rate exceeding the maximum rates permitted according to provisions of
the Commissioner of Insurance ; (c) collection in reference to the savings component, allegedly done contrary to the provisions of the Commissioner in this matter; (d) collection for a policy which is not a life assurance policy, although according to that claimed, insurance companies are only entitled to charge such a payment for life assurance. The claimants asked to represent anyone who was part of an insurance policy with the respondents and paid "payment of sub-annual factor" under circumstances or amounts exceeding permitted amounts. According to the claimants, the damage caused (to seven claimants) amounts to NIS 1,683.54 for every year of insurance. The claimants estimate that the amount of claim for all members of the group that they wish to represent against all respondents (5 insurance companies) is NIS 2.3 billion, of which NIS 307 million is against Harel Insurance. 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.
6. 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 has not yet filed its response to the application to approve a class action.
7. 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. WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-34 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)
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.
8. 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.
9. 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.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-35 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)
10. 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 an application described in clause C(2) below, the parties came to an agreement according to which the application for permission to represent will be "frozen" until after a decision on the application described in clause C(2) below.
11. 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.
12. In November 2009, a claim was filed against the subsidiary EMI at the Jerusalem District Court together with an application to recognize it as a class action. The action alleges that EMI calculates premium refunds in cases of early full repayment of the loan based on the date on which EMI received the lending bank's notice of repayment of the loan, and not on the basis of the actual date of the loan repayment, that EMI only adds linkage differentials to the amount of the premium refunds without interest differentials at the lawful rate, and that EMI refunds surplus premium payments that were collected without adding linkage and interest differentials by law.
The applicant's personal claim is estimated at NIS 739, while the loss claimed to have been caused to the group as a whole is estimated at NIS 4,300,000.
On April 18, 2010, EMI submitted its response to the application for approval.
13. 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. WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-36 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)
The group that the plaintiff 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 has not yet submitted its response to the legal action.
14. In July 2010, a claim was filed at the Tel Aviv-Jaffa District Court with an application to approve it as a class action, against the subsidiary Harel Insurance.
The claim alleges that in a group long-term care insurance policy for members of the Kagam Pensioners Association, the insurance benefits paid to the insured under the policy when an insured event occurs are not linked to the CPI and are not updated, whereas in the policy conditions the premiums do change .
The group which the claimant wishes to represent is any person insured through the aforesaid group policy, who has suffered the event insured according to the policy .
According to the claimant, the overall loss claimed for all members of the group amounts to NIS 18 million. Harel Insurance has filed its response to the legal action. And the claimant has filed his response to Harel's response.
In February 2011 the Court ordered the plaintiff to attach the organization Akgi"m further proceedings as a respondent, and submit a claim application for approval of revised class action.
15. 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.
16. In February 2011, a claim was filed at the Tel Aviv District Court against the subsidiary Harel Insurance and five other insurance companies, with an application to recognize it as a class action.
The subject of the action concerns allegations that when an insured event occurs, the respondents apparently do not compensate their policyholders and pay comprehensive motor insurance in respect of an impairment of value that reflects the damage caused to the vehicle in market terms, but compensate them in respect of a technical impairment of value that, allegedly, is not based on market conditions and is less than the real impairment. The claimants allege that the respondents do not clarify this to the policyholder before the insurance is purchased, and they therefore, inter alia, mislead the policyholder, allegedly violate the duty of disclosure, allegedly violate a statutory obligation, and allegedly practice unjust enrichment .
In estimating the amount of the claim against Harel Insurance, the claimants included 3 methods of calculating the amount of the claim, in which the claim against Harel Insurance ranges from NIS 2,530,987,200 and NIS 189,824,250. Harel Insurance has not yet submitted its response to the application for recognition. WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-37 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 6 - Contingent liabilities and commitments (contd.) a. Class actions and applications to approve class actions (contd.)
17. 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 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 30 million. The Company has yet to submit its response to the application for approval.
18. 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 has yet to submit its response to the application for recognition.
The following table summarizes the amounts claimed as part of the contingent applications for the approval of class actions, actions that were approved as a class action, and other significant claims against the Company and/or subsidiaries, as specified by the claimants in the suits they filed. It should be clarified that the amount claimed does not necessarily constitute the amount of exposure estimated by the Company, given that these are the claimants' estimates and they will be investigated during the litigation process Amount claimed NIS Type Amount of claims thousands
Class certified a class action: amount pertaining to the Company and/ or subsidiaries 1 1,540 Prosecution refers to several companies and was allocated a specific amount of the company and/ or subsidiaries 2 241,000
Claim amount is not specified 0 Pending requests for approval of class actions: amount pertaining to the Company and/ or subsidiaries 12 5,221,880 Prosecution refers to several companies and was allocated a specific amount of the company and/ or subsidiaries 2 289,190 Claim amount is not specified 1 Other significant claims 1 18,782 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-38 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
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 10,061 thousand (31.12.2010 – NIS 10,209 thousand). b. Other contingent liabilities
1. In June 2004, a claim was filed with the Tel Aviv District Court and an application to approve it as a derivative claim against the subsidiary Yedidim Holdings Management (1994) Ltd. (hereinafter: "Yedidim"), the former Chairman and CEO of Yedidim, and against an additional subsidiary, Harel Pension Funds Management Services (1987) Ltd., which is the controlling shareholder in Yedidim by the minority shareholders Leatid Pension Fund Management Ltd., a subsidiary of Yedidim (hereinafter: "Leatid") for an amount of NIS 15,605 thousand. The subject of the claim is compensation to Atidit Pension Fund Ltd. (hereinafter: "Atidit"), a pension fund managed by Leatid, for the use of Atidit’s various resources, such as: the use of the operating infrastructure and reputation, the use of Adidit property, for taking a continuing pension fund and the loss of profits. The hearing on the file is in the stage of summaries in the application to approve the claim as a derivative claim. In addition the plaintiffs claim commissions of NIS 3,177 thousand in the framework of their personal claim .
On July 29, 2010, after interrogations had been conducted and written summaries had been submitted as part of the application to approve the derivative claim, the Court accepted the application and granted the claimants the option of suing the defendants in Leatid's name in respect of rights which they claim Leatid is entitled to .
Mediation process, 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.
On September 15, 2010, LeAtid filed an action with the court by way of an originating summons with an application to recognize LeAtid as an entity entitled to restructure Atidit Pension Fund Ltd., and to determine that the change of Atidit Pension Fund's name in the Companies Register in 2006 is invalid. The respondents to the originating summons are the minority shareholders Mr. Abraham Sachs and Mr. Israel Meiri, the Superintendent of the Capital Markets Division at the Ministry of Finance, and the Companies Regisrar. Several preliminary hearings have taken place within the context of the legal proceeding .
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.
2. Claims are pending against Turk Nippon Sigorta A.S. (Turk Nippon), a company controlled by the Company in which four former employees of Turk Nippon filed in connection with terminating employee-employer relations. For the amounts of these claims a provision was made for an immaterial amount based on the opinion of the lawyers of Turk Nippon in Turkey.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-39 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Contingent liabilities and commitments (contd.) c. Claims which have been completed
1. In March 2010, a claim was filed at the Petach TIkva District Court against the subsidiary Harel Insurance and four other insurance companies, with an application to recognize it as a class action. The subject of the class action is the assertion that according to circulars issued by the Commissioner of Insurance, when the policyholder pays the insurance premiums in monthly installments, the policy factor is to be measured only once a quarter, and that the respondents are not entitled to link the monthly policy factor to the new index every month, thus allegedly overcharging in respect of the policy factor. The Group that the claimants wish to represent consisted of all the respondents' policyholders from 1982.
Pursuant to the action, the claimant's personal claim against Harel Insurance was in the amount of NIS 0.80 for 2009. The claimants estimated the amount of the action for all members of the group they sought to represent against all the respondents (5 insurance companies) at NIS 114 million. Harel Insurance has submitted its response to the application to approve the suit as a class action .
On March 3, 2011, the court approved an application submitted by the claimants to withdraw from the action, after the claimants confirmed that there is no grounds for the suit. The court therefore deleted the suit.
2. During May 2007, a claim was filed against Harel Insurance (consolidated company), Dikla (consolidated company) and another insurance company, which are the insurers of a complementary insurance for pensioners, together with a request to approve it as a class action, in District Court of Tel-Aviv. The claim was submitted by a policyholder covered by "Mashlim LaGimlay," which is a group long-term care policy. According to the claimant, he was charged insurance premiums even after occurrence of an insurance event, that is, after he required long-term care and began receiving insurance compensation according to the policy. The claimant claimed that charging the insurance premiums as said, was allegedly done illegally, since there is no provision in the policy, requiring continuation of charging premiums after occurrence of any insurance event and also, supposedly contradicts provisions published by the Commissioner of Insurance regarding the release from paying insurance premiums for long-term care insurance, once the policyholders is in need of long-term care. The claimant asked to represent all policyholders of "Mashlim LaGimlay" and/or other long-term care policies with similar conditions.
The personal claim amount is NIS 8,202. The claimant estimates that the claim for all claimants in the group that he wishes to represent is NIS 166 million.
On June 29, 2009, a decision to approve the claim as a class action was giving. Harel Insurance and Dikla submitted a request to appeal this decision and the plaintiff has filed his response to the application for leave to appeal. On April 21, 2011 the Supreme Court accepted the appeal and rejected the request to recognize the claim as a class action. d. Commitments
Signing an Agreement and Partnership Agreement to acquire a plot of land in Tel Aviv
On January 27, 2011, subsidiaries of the Company that are financial institutions (hereinafter together: the Subsidiaries), together with companies that belong to the Migdal Group and other private investors (Private Investors), entered into an agreement to acquire the rights in respect of a plot of land with a registered area of 20,000 sq.m. located between Yigal Alon Road on the west and Hasolelim Street to the east in Tel Aviv (the Purchase Agreement and the Ha'argaz Lot), from Ha'argaz Ltd. (Ha'argaz).
At the time of signing the Purchase Agreement, Migdal Group, the Subsidiaries and all the purchasers and owners of the rights in the southern tower (the Purchase Group), signed a cooperation agreement arranging the partnership relationship between the members of the Purchase Group (the Partnership Agreement).
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-40 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Contingent liabilities and commitments (contd.) d. Commitments (contd.)
As part of the Partnership Agreement, the Subsidiaries together with the Migdal Group, acquired among themselves in equal parts, all the office space in the northern tower and the adjacent shops, the public car park, as well as the commercial section (excluding an area of 1,580 sq.m. on the eastern side) of the project..
In consideration of the purchase of 23.8% of the Ha'argaz Lot, the Subsidiaries undertook to pay Ha'argaz NIS 55 million (plus VAT). NIS 23.8 million is to be paid by February 28, 2011.The balance will be paid after 18 months have elapsed from the first payment date and against vacation of the Haargaz Lot. The Subsidiaries are expected to pay purchase tax in respect of the purchase, consistent with the Land Tax Law, in the amount of NIS 15 million.
Two buildings, each with 38 floors of office space and 83,000 sq.m. of floor space, are planned for the Ha'argaz Lot, above a double commercial floor with 6,250 sq.m. of space, as well as 37,000 sq.m. of service areas above an underground car park with 4 or 5 levels and an area of 70,000 sq.m. for parking and other auxiliary space (the Project).
The Subsidiaries intend to invest NIS 310 million in the purchase and construction of their share of the Project. The Subsidiaries will finance their share of the purchase and construction of the Project from independent sources.
The Subsidiaries' investment is mostly for yield-dependent investment portfolios, provident funds and pension funds, and therefore the transaction is not expected to have any material impact on the financial performance of the Company or the Subsidiaries
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-41 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 calculated capital of the subsidiaries which are insurance companies according to Supervision Regulations of Insurance Businesses (Minimum Shareholders' Equity required from an Insurer) (Amendment) – 2004 (hereinafter: "the Capital Regulations") and the Supervisor’s directives:
at 31 March, 2011 at 31 December 2010 Harel Harel Insurance Dikla EMI Insurance Dikla EMI NIS NIS NIS NIS NIS thousands thousands thousands NIS thousands thousands thousands Amount required according to new capital regulations and the Supervisor's instructions (A) 3,926,352* 256,460 176,709 3,831,375* 246,698 176,450 Amount required according to capital regulations and the Supervisor's instructions before the new instructions 2,644,733 197,765 176,709 2,624,281 192,609 176,450 Difference 1,281,619 58,695 - 1,207,094 54,089 ------Amount required according to capital regulations and the Supervisor's instructions before the new instructions 2,644,733 197,765 176,709 2,624,281 192,609 176,450 difference required to complete on the date of report 768,971 35,217 - 724,256 32,453 - Amount required according to new capital regulations and the Supervisor's instructions at December 31 2009 (B) 3,413,704 232,982 176,709 3,348,537 225,062 176,450 Including:
Primary capital 2,502,765 225,748 354,330 2,450,780 225,748 341,757 Secondary capital ------Subordinated secondary capital 775,202 - - 835,512 - -
Complex secondary capital 704,935 100,378 - 700,950 - - Existing amount computed according to capital regulations 3,982,902 326,126 354,330 3,987,242 225,748 341,757
Surplus 569,198 93,144 177,621 638,705 686 165,307 Unavailable capital included in the surplus according to the Supervisor's provisions - 52,142 - - 83,608 -
* According to the regulations, there is a stipulation that the Supervisor will be entitled to permit, a reduction in capital requirements, up to 35% of the original difference resulting on the acquisition of provident fund operations or a company managing provident funds, should the shareholders' equity of the insurer on the date of the report be less than the minimum shareholders' equity required from it according to regulations (without the transitory provisions). Such reduction, should it be approved by the Supervisor, is expected to reduce the capital requirements in Harel Insurance by about NIS 242 million. WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-42 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.) 2. (contd.)
at 31 March, 2011 at 31 December 2010 Harel Harel Insurance Dikla EMI Insurance Dikla EMI NIS NIS NIS NIS NIS thousands thousands thousands NIS thousands thousands thousands Primary capital required in general insurance 522,217 85,895 - 511,886 85,151 - Activities in nursing insurance 56,066 90,429 - 53,290 86,969 - Capital requirements for yield secured programs 36,872 - - 36,595 - - c) Investment assets and other assets 920,231 29,215 - 880,429 27,105 - Catastrophe risks in general insurance 126,812 - - 98,528 - - Operating risks 263,698 29,481 - 256,960 26,983 - Deferred acquisition expenses in life assurance and health insurance and acquisition expenses in respect of insurance portfolio 847,828 21,345 - 832,572 20,364 - Investment in subsidiary management companies and insurers 791,704 - - 809,014 - - extraordinary life assurance risks 223,695 - - 218,988 - - Assets unrecognized as their definitions in capital regulations (D) 49,278 95 - 55,747 126 - Special share capital requirements according Commissioner's instructions 87,951 - - 77,366 - -
3,926,352 256,460 - 3,831,375 246,698 -
b. According to the amendment, the insurer will be obliged to increase its shareholders' equity at the rates detailed below, out of the difference of the shareholders' equity required from it according to regulations, prior to and after the amendment, (hereinafter: " the difference") for each of the dates stated therein at the following rates: − Up to the date of publishing the financial statements, as at December 31, 2009, at least 30% of the difference. − Up to the date of publishing the financial statements, as at June 30, 2010, at least 45% of the difference. − Up to the date of publishing the financial statements, as at December 31, 2010, at least 60% of the difference. − Up to the date of publishing the financial statements, as at June 30, 2011, at least 75% of the difference. − Up to December 31, 2011 the balance will complete the full amount of difference.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-43 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.) 2. (contd.) c. The capital requirements of assets for a total value of NIS 203 million in Harel Insurance and NIS 5.6 million in Dikla, which were rated in an internal rating and according to the directive of the Ministry of Finance, until receiving the approval of the Supervisor to the Company's internal rating model, 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 12.5 million in Harel Insurance and an amount of NIS 0.7 million in Dikla. d. Unrecognized assets in an insignificant amount, in respect of a passive exceeding, which was not approved in the investment regulations – the holding of an asset in a foreign country which was unapproved. The balance of the investment at a time close to the publication of this report shows no significant change. 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 that apply to an insurer and in the Income Tax Regulations that apply to management companies. The Company's subsidiaries that are financial institutions have investments in Ireland. On 21 February 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. 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. As part of the draft regulations, the permitted rating for an investment outside Israel was changed from an investment in countries with a rating of at least A- to investment in countries with a rating of at least BBB-. 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. Subject to the existence of certain circumstances, as detailed below, the Company has undertaken, within the framework of the license that was granted to it by the Commissioner, for the control over subsidiary companies that are insurers, to top-up the shareholders' equity that is required of the consolidated insurance companies up to 50% of the shareholders' equity that is required in accordance with the regulations, but in no event more than NIS 527 million (linked to the index that was published in June 2006), in respect of Harel Insurance, NIS 64 million (linked to the index that was published in June 2006), in respect of Dikla and NIS 44 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). As of the date of these financial statements, the insurance companies in the Group are in compliance with the capital regulations.
4. In accordance with a letter published by the Commissioner in January 2009 regarding relief in capital requirements of insurance companies, an asset held contrary to investment regulations, which the exception for said is passive and was accrued subsequent to October 1, 2008, will not be considered as an inadmissible asset, as defined by the capital regulations, subject to prior approval by the Commissioner. As at December 31, 2010, the company has a number of passive exceptions, which are not considered to be inadmissible assets in accordance with the Commissioner's approval. WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-44 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 expense is an asset which is not recognized in order to calculate minimum shareholders' equity required from a management company. In 2009 the Company provided the management company of pension funds whose capital notes of NIS 33 million are to be repaid on April 1, 2014, or on an earlier date to be decided by the subsidiary. The capital notes are linked and do not bear interest.
6. In October 2010, Harel Insurance gave another subsidiary, which is a company that manages pension funds, a capital note of NIS 13 million to enable the subsidiary to meet the capital requirements applicable to it. The capital note is due to mature in November 2015 or at an earlier date to be decided upon by the subsidiary. The capital note is linked to the CPI and bears no interest.
7. In the framework of the Supervisor's approval for the acquisition of mutual funds operations by Harel Insurance, it was stipulated that the reduced balance of the cost of the purchase will be added to the capital requirements and presented in the statements of assets and liabilities against minimum shareholders' equity. A relief is expected due to the above, see section 2 above.
8. In November 2009 the amendment to the Supervision of Financial Services Regulations (Minimum Shareholders' Equity required from an Insurer) (Amendment) – 2009 (hereinafter: "the Amendment") was published.
In the framework of the amendment, additional capital requirements were added to the existing capital requirements for the following categories: a. Operating risks b. Market and credit risks as a percentage of the assets according to the level of the risk which characterizes the various assets. c. Catastrophe risks in general insurance. d. Expanding the capital requirements for yield assured plans in life assurance against which there are no designated bonds or against part of which there are no designated bonds.
In addition, the following exemptions were granted: − An exemption in the method of calculating the capital required due to expenses for developing information systems, subject to the approval of the Supervisor. − A deduction of a tax reserve created for non recognized assets which are held contrary to the investment regulations or contrary to the Supervisor's directives. − It was determined that the Supervisor will be entitled to permit a reduction of the capital required of up to 35% of the original difference resulting from the purchase of provident funds operations or a management company of provident funds, should the shareholders' equity of the insurer on the date of the report be at least the minimum shareholders' equity required from it in accordance with the Regulations (without the transitory provisions).
Within the framework of the amendment, the definition of basic capital was deleted, the definitions of primary capital and of secondary capital were changed and a definition of tertiary capital was added. The definitions of secondary capital and tertiary capital have been made subject to such terms and rates as the Commissioner instructs. In continuation of this and in accordance with the Commissioner's intention to adopt the directives of the European Union on the subject of the assurance of the ability of insurers to make payments, Solvency II, in the future, a draft circular for institutional bodies was published in March 2010 on the subject of the composition of recognized shareholders' equity for an insurer. The draft determines principles for the structure of the recognized shareholders' equity of an insurer as well as principles for the recognition of the various components of capital and their classification to the different bands of capital (see para. 12 below).
On September 20, 2010, the Commissioner published an instruction in connection with implementing the above mentioned definitions. Accordingly, the reinsurers' share of the capital requirement in respect of exposure to catastrophes shall be calculated according to a loss rate of at least 1.75%. The wording of the regulations prior to the instruction states that the reinsurers' share shall be calculated "according to the maximum loss rate defined by the insurer, provided that it is calculated for an event that takes place once every 250 years at most". This instruction led to an increase in the capital requirements for Harel Insurance. This amount will be added to the capital requirements for completion. WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-45 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
In this instance, the Commissioner published a temporary order whereby during the period from the commencement of the amendment to the regulations until a date to be announced by the Commissioner, the definitions, structure and calculation of the existing capital will remain unchanged.
9. On January 3, 2011, the Commissioner published a third draft circular concerning the composition of an insurer's shareholders' equity. The draft circular stipulates that the recognized equity of an insurer shall be composed of the amounts of the components and instruments included at three levels: (a) tier-one 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 draft 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 80% of the total tier-one capital as per the temporary order, until the Commissioner instructs otherwise, this rate was set at 85%; 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.
The Commissioner and the insurance companies are discussing the draft circular.
On May 10, 2010, Harel Insurance received the approval of the Commissioner to carry out an issue of liabilities which will be recognized for Harel Insurance as complex Secondary Capital. In this framework, the component of Harel Insurance capital was approved according to detailed clause 14 below.
On February 1, 2011 Dikla received the approval of the Commissioner to carry out an issue of liabilities which will be recognized for Dikla as complex Secondary Capital. In this framework, the component of Dikla capital was approved according to detailed clause 18 below.
10. On August 5, 2010, the Board of Directors of the TASE approved a proposed amendment to the TASE Articles pertaining to the application of a new model for capital requirements of nonbanking TASE members (NBMs).Within the context of this model, the requirements for equity and liquidity and the rules for extending credit to customers by NBMs will be revised. According to an estimate prepared by a subsidiary, based on the data for its operations during the Reporting Period, and according to the existing balances on March 31, 2011, the Minimum Capital Requirement (primary and secondary capital - as defined in the proposal) at the reporting date did not increase significantly in the model approved for the future, compared with the requirement under the existing model. Nevertheless, the new model was significantly influenced by the volume and seasonality of activity, as well as by credit and the nature of the investment of liquid assets at the date of the review, in contrast with the previous model which was based mainly on the average data over the period.
This figure may therefore change significantly within a short time, depending on the date of the review, and the subsidiary's management believes that the increase in the capital requirement at the date on which the new model is first implemented may be in the region of NIS 25 million.
The model, which was yet to be finalized in the finance committee, is expected to be applied gradually until June 30, 2012.
This estimate may change significantly depending on the subsidiary's operations - the scope and nature of the activity and the nature of the transactions it performs.
11. In accordance with Stock Exchange regulations, trade registration of each series offered ETFs subsidiary which have been prospectuses conditional, inter alia, that the equity of the subsidiary after the trade registration of ETFs
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-46 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
is not less than NIS 36,000 thousand. Correct as of the date of the financial statements the subsidiary meet is this requirement.
12. On January 12, 2011, the Commissioner published a further draft circular concerning capital requirements for management companies. Concurrently, a further draft of the Control of Financial Services (Provident Funds) (Minimum Equity Required of a Management Company) Regulations, 5711-2011, was published (hereinafter: the instructions").
Pursuant to the instructions, the minimum capital required of a management company at the reporting date shall be no less than the following amount:
a. The capital requirement consistent with the volume of assets under management, but no less than NIS 10 million. b. Capital requirements at a rate of 25% of the fund's annual expenses. c. Pursuant to the instruction, intangible assets may not be held against the minimum required equity.
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 41E(f1) of the Income Tax (Rules for the Approval and Management of Provident Funds) Regulations, 5724-1964, may reduce its minimum equity by 20% of the amount of surplus insurance, subject to restrictions prescribed in the draft circular. The provisions of the circular shall apply on the date on which the Capital Regulations take effect, and the provision concerning a reduction in the amount of shareholders' equity in respect of insurance that has been drawn up shall apply as of December 31, 2014, or on the day on which the management company supplements the amount of minimum shareholders' equity it is required to hold, the earlier of the two.
The provisions of the circular shall apply to all management companies excluding a company that manages a Sectoral provident fund and an old pension fund management company that is owned by the members
The Commissioner and the management companies are discussing the draft circular.
According to the calculation of the capital requirements under the new draft regulations, the provident fund management companies owned by the Group will be required to add NIS 24 million.
Capital requirements of the management companies of pension funds in the group are expected to decrease in amount of NIS 42 million.
The capital requirements for the Group's pension fund management companies are expected to be reduced by NIS 42 million, however in contrast, it will no longer be possible to hold DAC against these capital requirements.
13. The proposed Solvency II Directive ("the Directive") constitutes a fundamental, comprehensive change in the regulations pertaining to guaranteeing the adequacy of the capital of insurance companies. The purpose of the directive is to protect the money of policyholders, to enhance the integration between markets and to increase competition in this sector. The circular on the deployment for Solvency II, which was published in July 2008, is designed to ensure that the insurance companies in Israel make the necessary organizational preparations to implement the Directive, subject to a comprehensive, long-term work plan. Full implementation of the circular is forecast for 2012.
To help formulate the quantitative requirements according to the standard model in the first pillar of the instruction, quantitative impact studies (QIS) are conducted to consolidate the structure and calibration of the standard model for calculating the capital requirements and these enable the insurance companies themselves to prepare for the taking effect of the instruction from the organizational, operational and automation perspectives. On September 30, 2009, the Group's insurance companies submitted to the Commissioner of Insurance the first quantitative impact study conducted on the basis of data at December 31, 2008. The study was prepared in accordance with the instructions of the QIS4 document published in Europe and consistent with the adjustments required by the Commissioner in Israel.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-47 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
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.
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.
14. As part of the permit received by Harel Insurance on May 10, 2010 to issue liability certificates through Harel Financing and Issues, that will be recognized as complex secondary (Tier 2) capital held by Harel Insurance, the Commissioner approved various parameters pertaining to the composition of Harel Insurance's equity, consistent with the New Capital Regulations, and pursuant to the Commissioner's draft circular concerning the composition of an insurer's equity.
The composition of Harel Insurance's equity, as approved, shall be as follows:
Definitions (in this section):
Complex secondary capital - shall meet all the following conditions, at least:
(a) It is subordinated to any obligation of the issuing insurer, excluding primary (Tier 1) capital;
(b) The first maturity date is no earlier than 8 years from its date of issue;
(c) It is not dependent on any other transaction by the insurer;
(d) According to its conditions, it includes loss-absorbing mechanisms, as follows:
a. Regarding the payment of interest - the insurer may defer payment of all or part of the interest, without this infringing upon its right to make other payments that have higher priority, provided that on the effective date for payment of the interest delaying circumstances are present, as defined below, and settlement of the interest payment is deferred to the date specified in the following clause; b. Regarding payment of the principal - the insurer may defer payment of the all or part of the principal, without this infringing upon his right to make other payments that have higher priority, provided that on the effective date for payment of the principal delaying circumstances are present, as defined below, and settlement of the principal payment is deferred to the date specified below.
Delaying circumstances - regarding payment of the principal and interest are:
(a) The insurer has no profits worth distributing, as referred to in the Companies Law;
(b) If the insurer's equity, as reported in the financial statement preceding the date of payment, fell below that required of it in the minimum capital requirement pursuant to the Capital Regulations;
(c) The insurer's board of directors has instructed that payment of interest or payment of the principal be deferred, if it determined that there is real, immediate concern for the insurer's ability to comply with the minimum capital required of it, under the provisions of the law that apply to the insurer and/or in accordance with instructions issued by the Commissioner of Insurance, provided that the Commissioner has given prior approval for such;
(d) The insurer's board of directors instructed that payment of interest or the principal be deferred, if it determined that there is real, immediate concern for the insurer's ability to repay liabilities on time which take precedence WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-48 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
over those of the bonds that serve as complex secondary capital, provided that the Commissioner has give prior approval for such;
(e) The insurer's board of directors has instructed that payment of interest or payment of the principal be deferred, due to significant harm to the insurer's recognized equity or if it considers that there is real, immediate concern for the insurer's ability to comply with the minimum capital required of it, under the provisions of the law that apply to the insurer and/or in accordance with instructions issued by the Commissioner of Insurance.
Composition of the equity:
Primary capital - shall be no less than 60% of the total equity required of Harel Insurance and shall consist of share capital, premium on shares, capital funds and accrued profits ("basic primary capital") and complex debt instruments ("complex primary capital"). The comprehensive rates of equity components and capital instruments included in "basic primary capital" shall be no less than 85% of the total primary capital.
Secondary capital, complex secondary and tertiary (Tier 3) capital – up to a maximum limit of 67% of the primary capital (or 40% of the total capital required); tertiary capital up to a maximum limit of 15% of the total equity required of the insurer.
It shall be clarified that "recognized equity" includes the changes in equity in accordance with Section 10 of the Capital Regulations. Further condition are as follows:
1. An issue to a related party/controlling shareholder - a complex capital instrument that was issued to a related party shall bear interest that is not higher than the interest that the instrument would bear if it was issued to a non-related party. 2. Deductions for the purpose of calculating the equity a. Complex primary capital – for calculating the recognized capital, from the fifth year before its maturity date, shall be amortized at a cumulative rate of 20% annually. b. Complex secondary capital – for calculating the recognized capital, from the third year before its maturity date, shall be amortized at a cumulative rate of 33.3% annually. c. Complex tertiary capital – for calculating the recognized capital, from the second year before its maturity date, shall be amortized at a cumulative rate of 50% annually. d. A component that is repaid in installments shall be amortized according to the payment date of each of the principal payments.
15. On December 28, 2009 the Commissioner published a draft circular, which deals with a plan of action for the management of the shareholders' equity of an insurance company. The objective of the circular is to ensure that an insurance company has an organized plan of action of the management and the monitoring of its capital position and to cope with changes therein. The draft circular determines that the board of directors of an insurance company is to approve a framework of guidelines in respect of the capital adequacy of the insurance company, the capital structure, its composition and its quality, and in respect of the routine monitoring and control processes, for ensuring capital adequacy, Moreover, the management of an insurance company is to set a detailed multi-annual plan of action, which is to be presented to the board of directors for approval, for the continuous management of the capital and to make preparation for changes in it in accordance with the guidelines that were approved by the board of directors. The plan of action is to be presented to the board of directors for the first time no later than July 1, 2010. The draft circular is the subject of discussions between the Commissioner and the insurance companies. Regarding the adoption of capital management policy approved by the Board of Directors and Board of Directors of Dikla and Harel Insurance – see par. 17-18 below.
16. On March 3, 2010, the Commissioner published criteria for approving the distribution of a dividend by insurance companies ("Criteria Document"). The criteria were published further to a letter issued by the Commissioner on March 9, 2009 in which he specified that a dividend may only be distributed after obtaining prior approval from the Commissioner.
According to the Criteria Document, an insurer may apply to the Commissioner for permission to distribute dividends subject to meeting, on the various dates listed in the document, certain rates which were also detailed in the document, for supplementing the required capital, in view of the new Capital Regulations ("Supplement WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-49 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 7 - Management and capital requirements (contd.)
Rates"). In addition, a different calculating matter was set for current equity regarding dividend distribution, according to secondary capital, as defined right before the regulations' amendment, will be fully recognized provided that its' rate do not exceed 40% from preliminary capital. If the secondary capital accounts for more than 40%, then half of the balance in excess of the 40% will be recognized. Complex capital instruments will be recognized in full subject to the rates permitted under the provisions of the law.
For the purpose of obtaining the approval, the insurer must submit an annual profit outlook for the years 2010 and 2011, a revised debt service plan approved by the board of directors of the insurer's holding company, and the minutes of the board of directors meeting at which distribution of the dividend was discussed, including comments on the Commissioner's draft circular concerning a plan of action for managing the insurance company's shareholders equity.
The Criteria Document further stipulates that an insurer whose total shareholders equity, after distribution of the dividend, is higher than 110% of the required capital, taking into account the Supplement Rates, may distribute a dividend without obtaining the Commissioner's prior approval provided that the insurer informed the Commissioner in advance and the documents mentioned above.
17. At meetings held on March 24, 2010 and June 15, 2010, the Board of Directors of Harel Insurance adopted a policy for management of its equity, based on the principles prescribed in the Commissioner's draft circular from December 28, 2009, concerning a plan of action for management of an insurer's equity. Accordingly, it was decided that, at all times, Harel Insurance will strive to meet the volume of equity recognized under the Capital Regulations, by an amount that exceeds NIS 150 million of the capital requirement that applies to it from time to time, pursuant to the aforesaid regulations. Furthermore, it was decided that reports would be submitted to the Board of Directors from time to time regarding compliance with the capital requirements and regarding developments that may affect Harel Insurance's compliance with the applicable capital requirements. The CFO was appointed as responsible for managing, monitoring, and reporting of capital requirements.
18. On March 23, 2010, the Board of Directors of Dikla adopted an equity management policy based on the principles prescribed in the Commissioner's draft circular from December 28, 2009, concerning a plan of action for management of an insurer's equity. Accordingly, it was decided that, at all times, Dikla will strive to meet the volume of equity recognized under the Capital Regulations, at a rate of 105% of the capital requirement that applies to it from time to time, pursuant to the aforesaid regulations. Furthermore, it was decided that reports would be submitted to the Board of Directors from time to time regarding compliance with the capital requirements and regarding developments that may affect Dikla's compliance with the applicable capital requirements. The CFO was appointed as responsible for managing, monitoring, and reporting of capital requirements.
19. As to the raising of secondary capital by Dikla after the reporting date see Note 8.
20. The capital requirements for EMI are calculated in accordance with the Control of Insurance Business (Minimum Equity Required of an Insurer) Regulations. Accordingly, EMI must hold capital as derived from the rate of cover and rate of financing of the loans that it guarantees. In addition, according to the regulations, the reserve for extraordinary risks is recognized as equity for the purpose of compliance with the capital regulations.
Pursuant to an amendment to the Capital Regulations, as specified in Section 9 below, no further requirements are expected to apply to EMI.
In accordance with the control permit that Harel Insurance received on January 7, 2010, the capital required of Harel Insurance in respect of its holdings in EMI is the amount of capital required of EMI, less EMI's reserve for extraordinary risks net of tax and minus tax assets in respect of the losses accumulated by EMI, up to the maximum limit of the reserve for deferred tax.
21. On May 10, 2010 Standards & Poors Maalot (hereinafter: "Maalot") published the rating of AAil to EMI.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-50 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 8 - Financial liabilities
1. Dikla complex secondary capital
In February 2011, Dikla raised a capital note from a bank in the amount of NIS 100 million to be used as complex secondary capital by Dikla. The capital note was raised subsequent to obtaining the Commissioner's approval, including so that the capital note will be recognized as second-tier capital for Dikla, consistent with its conditions. The capital note bears variable shekel interest, based on prime plus a margin. The principal of the capital note will be repaid as a lump sum after 11 years ("original repayment date"). The interest will be paid every 6 months. The capital note includes certain circumstances that when met, payment of the principal or the interest will be suspended ("delaying circumstances"). Payment of the principal may be suspended for a maximum period of three years from the original repayment date.
The delaying circumstances are the presence of one or more of the following: (1) a decision passed by Dikla's board of directors to the effect that Dikla has no profits worthy of distribution, as referred to in the Companies Law, 5759-1999, and this in accordance with the last financial statements (annual or quarterly) preceding the relevant repayment date for the interest and/or principal; (2) in accordance with a decision made by Dikla's board of directors, Dikla's recognized shareholders' equity has fallen below the capital it is required to hold (pursuant to the provisions of law applicable to Dikla and as per the instructions of the Commissioner of Insurance), and this according to the last financial statements (annual or quarterly) preceding the relevant repayment date for the interest and/or principal; (3) Dikla's board of directors issues an instruction to delay payment of the interest and/or principal, should it determine that there is genuine concern over Dikla's ability to comply with capital it is required to hold (pursuant to the provisions of law applicable to Dikla and/or as per the instructions of the Commissioner of Insurance), provided that the Commissioner of Insurance approves such action in advance; (4) Dikla's board of directors issues an instruction to delay payment of the of the interest and/or principal should it determine that there is immediate genuine concern for Dikla's ability to repay on time obligations that take precedence over that of the debt that is the subject of this liability, provided that the Commissioner of Insurance has approved such action in advance; (5) the Commissioner of Insurance has issued an instruction concerning a delay in payment of the principal and/or interest due to significant impairment to Dikla's shareholders' equity or if he considers that there is genuine, immediate concern over Dikla's ability to comply with the capital it is required to hold (pursuant to the provisions of law applicable to Dikla and/or as per the instructions of the Commissioner of Insurance).
According to the capital note, when delaying circumstances are present with regard to the payment of interest, the Company will repay the interest against an assignment to the Company of the bank's right to receive payment of the interest, when the delaying circumstances have passed.
Dikla has the right to make an early repayment of the capital note, without incurring an early repayment charge, 3 years before the original repayment date ("early repayment date"), and this subject to obtaining the Commissioner's approval or to Dikla holding a capital surplus at the rates prescribed in the capital note. If Dikla does not make an early repayment of the capital note, in respect of the period commencing on the early repayment date and ending on the original repayment date, supplementary interest shall be paid at a rate of 50% of the original interest margin ("the increased interest").
If the principal is suspended (as noted, for a maximum period of 3 years from the original repayment date), supplementary interest shall be paid to the bank for the period of the delay at a rate of 50% of the increased interest margin.
2. 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. 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.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-51 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
On February 10, 2011, the Company and Harel Finance signed an agreement whereby from the balance of the loans that Harel Investments had extended to Harel Finance, which at that date were NIS 54 million, an amount of NIS 36 million will be converted to a capital note. Accordingly, Harel Finance issued a capital note to Harel Investments in the aforesaid amount, with no repayment date, no interest or linkage.
Note 9 - Significant events during the reporting period
1. A senior officer who resigned from Harel Insurance
On February 3, 2011 the Company's board of directors confirmed Mr. Weinshel's retirement conditions including loan that had been given to Mr. Emil Weinshel, in the sum of NIS 2,759 thousand, would be repaid by the Company, including the grossing up. In addition, he would receive nine times his current monthly salary (without any social benefits), in return for an undertaking for confidentiality and to refrain from competition for a period of 18 months. Options granted to Mr. Weinshel expired following the end of his served.
2. Distribution of Dividend
On March 23, 2011, the Company's Board of Directors decided to distribute a cash dividend of NIS 64 million. The Board of Directors' decision was made after taking into account the Company's financial results for the Reporting Period. The directors were presented with the Company's distributable surpluses at December 31, 2010, which amount to NIS 3.5 billion. The Board of Directors reviewed the Company's compliance with the profit test and the solvency tests that, in Section 203(a) of the Companies Law, and subsequently confirmed that the Company was in compliance with the distribution tests.
The dividend was paid on April 28, 2011.
3. Replacement of the company that provides interest quotes
Regarding the replacement of the company that provides interest quotes and the change of the model used to determine the value of the fair value of non-marketable debt assets, see Note 2(B) .
4. On March 22, 2011, the Board of Directors of Dikla decided to distribute a cash dividend of NIS 50 million, on the green track. The Board of Directors made its decision after taking into account the Company's financial results for 2010, which showed that Dikla had a distributable surplus of NIS 84 million at December 31, 2010. Likewise, the Company's plan to manage its shareholders' equity was presented, taking note of the new Capital Regulations and the Commissioner's draft circular on the subject of the management of an insurer's equity. The Board of Directors specified a capital target for the Company at 5% above the minimum equity required by law. Dikla will be in compliance with this target after distribution of the dividend.
5. Allotment of share options to employees
On March 15, 2011, after first obtaining approval from the Company's Compensation Committee, the Company's Board of Directors approved an allotment of 47,047 stock options to 11 recipients. The exercise price of the options was determined according to the closing price of the Company's shares on the TASE, immediately prior to the Board of Directors decision, that is NIS 191.6 per share.
The fair value of the stock options allocated in the allotment is estimated at NIS 2.8 million, taking into account the possibility that some recipients may terminate their employment at an earlier date (excluding the Group's senior executives). The economic value of each option offered to the recipients, taking into account leaving rates and the probability that some options may be exercised at an earlier date, where the Board of Directors set the exercise price at NIS 191.6 per option linked to the CPI, is NIS 60 at the date of granting the stock options, March 15, 2011. The value of these options will be charged as an expense to the Company's financial statements over the anticipated vestment period of the options, beginning the year 2011.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-52 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 9 - Significant events during the reporting period (contd.)
The fair value of the option warrants granted as aforementioned is estimated by applying a binomial model to the costing of the options. The following parameters are used in applying the model:
Expected fluctuations in the price of the share 33.5% Risk-free interest rate 1.3%
The expected fluctuations are determined on the basis of the historical fluctuations in the share price. The duration of life of the options is calculated using the binomial model, based on accepted exercise multiples and the Company's past experience regarding employees who leave the Company's employment.
The risk-free interest rate is determined based on linked shekel government bonds, where the remainder of the period equals the anticipated duration of life of the options.
8. License to engage in life assurance – Dikla Insurance Company
In March 2011 Dikla's insurer's license was extended to include life assurance – pure risk only. Likewise, Dikla received approval for two insurance plans in the life assurance (risk) branch.
7. Conditions of employment for the CEO of Harel Insurance and joint CEO of Harel Investments
Pursuant to the specified in Note 41 above, on March 23, 2011, the Company's Board of Directors approved a revision to the terms of employment of Mr. Michel Siboni. Accordingly, Mr. Siboni's current monthly salary will be NIS 170,000, linked to the CPI (instead of NIS 150,000 linked to the CPI, as approved on November 30, 2009), effective from January 1, 2011.
As a result of his appointment as joint CEO of the Group, Mr. Siboni's status and the considerable knowledge he will accumulate when serving in this position will privilege him to much information about the Company and its subsidiaries. The Board of Directors takes a serious view of the fact that Mr. Siboni will be in possession of such information and that should he terminate his position he must refrain from competing against the Company's key businesses, particularly in the health insurance sector in which the Group is Israel's most prominent insurance company. The Board of Directors therefore approved payment of NIS 5 million, linked to the CPI, to Mr. Siboni in return for his commitment to refrain from competition should the employment relationship terminate. This non- competition clause will be in force for a period of 7 years (instead of 5 years as defined previously), during which time, he will be prohibited from serving as CEO of an insurance company in Israel or serving as a health insurance consultant.
8. Terms of employment for the joint CEO of Harel Investments
Pursuant to the specified in Note 41 above, on March 23, 2011, the Company's Board of Directors approved a revision to the terms of employment of Mr. Alkabetz. Pursuant to the revised conditions, Mr. Alkabetz' current wage, which is paid against a tax invoice and for which he is therefore not entitled to any social benefits, will be NIS 300,000 a month, linked to the CPI (instead of NIS 208,000 linked to the CPI, as approved in July 2010).
As a result of his appointment as joint CEO of the Group, Mr. Alkabetz' status and the considerable knowledge he will accumulate when serving in this position will privilege him to much information about the Company and its subsidiaries. The Board of Directors takes a serious view of the fact that Mr. Alkabetz will be in possession of such information and that should he terminate his position he must refrain from competing against the Company's key businesses. The Board of Directors therefore approved payment of NIS 2 million, linked to the CPI, to Mr. Alkabetz in return for his commitment to refrain from competition should the employment relationship terminate. This non-competition clause will be in force for a period of 6 years, during which time, he will be prohibited from serving as CEO of an insurance or finance group in Israel or serving as an insurance and finance consultant.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-53 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 9 - Significant events during the reporting period (contd.)
9. Compensation for a delay in withdrawing money or for a delay in transferring money between provident funds or investment tracks
On March 15, 2011, the Commissioner published a circular concerning compensation for a delay in withdrawing money or for a delay in transferring money between provident funds or investment tracks. The circular prescribes the provisions for calculating the compensation.
The financial institutions must implement the provisions with respect to the rules determined in the circular. The compensation shall be paid for applications that were received between June 1, 2008 and December 31, 2008 not through an operating bank, and with respect to complaints that members filed with the management company before March 15, 2011 regarding a delay in implementing their request. The unpaid money must be refunded pursuant to the aforementioned provisions in accordance with the dates specified in the circular.
The Group's management companies are studying the instructions contained in the ruling and reviewing its repercussions. The Company is of the opinion that implementation of the instructions in the ruling may have financial and operational repercussions for the Group's management companies. At this stage, the Company is unable to estimate the aforesaid repercussions.
Note 10 - Events after the date of the financial statements
1. Allotment of share options to employees On April 28, 2011, the board of directors of the Company decided to publish an outline for a securities offering to employees in accordance with the Securities Regulations (outline details of securities offering to employees) 5770 - 2000 and the Securities Regulations (private offering of securities in a registered company) 5770 - 2000. The outline plan is based on the outline plan published by the Company on June 4, 2009. The outline plan is for an allocation of up to 200,000 option notes for the exercise of up to 200,000 shares par value NIS 1 each of the Company. Pursuant to the outline plan as detailed above, on May 26, 2011, after first obtaining approval from the Company's Compensation Committee, the Company's Board of Directors approved an allotment of 161,924 stock options to 13 recipients. The exercise price of the options was determined according to the closing price of the Company's shares on the TASE, immediately prior to the Board of Directors decision, that is NIS 172.5 per share . Total value of the options will that will be credited as an expense to the Company's financial statements is estimated at NIS 9.6 million, taking into account the possibility that some recipients may terminate their employment at an earlier date (excluding the Group's senior executives). The economic value of each option offered to the recipients, taking into account leaving rates and the probability of exercising of the option at an earlier date, where the Board of Directors set the exercise price at NIS 172.5 per option linked to the CPI, is NIS 59 at the date of granting the stock options, March 26, 2011. The value of these options will be credited as an expense to the Company's financial statements over the anticipated vestment period of the options, from the beginning of the year 2011. The fair value of the option warrants granted as aforementioned is estimated by applying a binomial model to the costing of the options. The following parameters are used in applying the model:
Expected fluctuations in the price of the share 33% Risk-free interest rate 1.8%
The expected fluctuations are determined on the basis of the historical fluctuations in the share price. The duration of life of the options is calculated using the binomial model, based on accepted exercise multiples and the Company's past experience regarding employees who leave the Company's employment.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-54 Harel Insurance Investments & Financial Services Ltd. Notes to the condensed interim consolidated financial statements
Note 10 - Events after the date of the financial statements (contd.) The risk-free interest rate is determined based on linked shekel government bonds, where the remainder of the period equals the anticipated duration of life of the options. 2. Directives of the Supervisor of Banks concerning loans with variable interest On April 27, 2011, the Supervisor of Banks published a draft instruction concerning housing loans with variable interest that will apply to loans that receive approval in principle from May 5, 2011 onwards. The instruction restricts the part of the loan (mortgage) with variable interest to one third of the total amount of the housing loan that the bank gives a borrower. The restriction applies to new mortgages (housing loans) on all variable interest tracks, where the interest rate may change during a period of less than five years. This instruction is in addition to previous instructions published by the Supervisor of Banks during 2010, as described in detail in the Report on the Corporation's Business for 2010, in an effort to depress the residential real-estate market. These instructions led to extreme caution by the mortgage banks when issuing highly financed mortgages and to a decline in the demand for highly financed mortgages. Consequently, the demand for highly-financed mortgage insurance dropped, resulting in a decline in the Company's revenues from premiums from the second half of 2010. In addition to the foregoing, after the balance-sheet date, there was a further decline in demand for highly financed mortgages referred to EMI. This in turn will lead to a decline in EMI's revenues from premiums over the coming months. 3. Distribution of dividends On May 26, 2011, the Company's Board of Directors decided to distribute a dividend of NIS 42.4 The decision of the board of directors was reached after the financial results of the Company for the Reporting Period was presented before it and was taken under consideration. The board of directors was presented with surpluses that were suitable for distribution by the Company as of March 31, 2011, at the sum of approx. NIS 3.2 billion. The board of directors examined the Company's net profit criteria and the solvency criteria as prescribed in Section 203 (A) to the Companies Law and following this examination it approved the compliance of the Company with the criteria for distribution.
4. The Company is the owner of Interasco Societe Anonyme General Insurance Company S.A.G.I (Interasco), an insurance company operating in Greece in the health and non-life insurance sectors. The Company's management believes that since the financial exposure to the Greek capital market is insignificant, the crisis in Greece will not essential affect the Group's performance. 5. As specified in Note 5(B) of the Periodic Report, 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. As the conditions of the tender are not known, at this stage it is impossible to estimate the anticipated impact of the outcome of the tender on Dikla's financial results.
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 2-55
HAREL INSURANCE INVESTMENTS & FINANCIAL SERVICES LTD
APPENDIXES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix A - Harel Insurance Company Ltd., details of assets for yield-dependent contracts and other financial investments a. Assets for yield-dependent contracts The following are details of assets held against insurance contracts and investment contracts presented at fair value through the statement of income: March 31 December 31 2011 2010 2010 (Unaudited) (Unaudited) (audited) NIS NIS NIS thousands thousands thousands
Real estate for investment 695,412 591,599 675,313
Financial investments - - - Negotiable debt assets 6,968,713 6,462,571 6,719,816 Non-negotiable debt assets 3,346,085 3,246,791 3,268,908 Shares 3,575,121 3,253,964 3,731,791 Other financial assets 3,088,167 2,083,988 2,869,062
Total financial investments 16,978,086 15,047,314 16,589,577 Cash and cash equivalents 845,371 352,149 642,138 Handled as loans and receivables including bank deposits - - - Non-negotiable debt assets 270,512 283,986 272,439 Other financial assets 328,830 304,631 309,705
Total assets for yield dependent contracts* 19,118,211 16,579,679 18,489,172
Payables 1,825 4,423 2,226 Financial liabilities** 30,777 37,125 39,052
Financial liabilities - yield dependent contracts 32,602 41,548 41,278
* Assets held contra to liabilities for yield dependent insurance contracts are presented pursuant to the directives of Circular 2-9-2009 at adjusted cost. The fair value of these assets as at March 31, 2011, is NIS 274,714 thousand (as at March 31, 2010 and as at December 31, 2010, NIS 290,682 thousand and NIS 289,588 thousand respectively). ** Mainly derivatives and future contracts.
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix A - Harel Insurance Company Ltd., details of assets for yield-dependent contracts and other financial investments (contd.) b. other financial investments
at March 31, 2011(Unaudited) Reported at fair value, through profit and loss, Other debt designated upon initial Available Held to assets recognition for sale maturity Total NIS NIS NIS NIS thousands thousands thousands thousands NIS thousands
Negotiable debt assets 978,292 4,243,077 204,361* - 5,425,730 Non negotiable debt assets - - - 7,977,927 7,977,927 Shares - 533,089 - - 533,089 Other 475,848 929,790 - - 1,405,638
Total 1,454,140 5,705,956 204,361 7,977,927 15,342,384
at March 31, 2010 (Unaudited) Reported at fair value, through profit and loss, designated upon Available for Held to Other debt initial recognition sale maturity assets Total NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands
Negotiable debt assets 692,142 3,662,958 196,900* - 4,552,000 Non negotiable debt assets - - - 7,490,757 7,490,757 Shares - 420,856 - - 420,856 Other 437,989 1,066,025 - - 1,504,014
Total 1,130,131 5,149,839 196,900 7,490,757 13,967,627
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix A - Harel Insurance Company Ltd., details of assets for yield-dependent contracts and other financial investments (contd.) b. other financial investments (contd.)
at December 31, 2010 (audited) Reported at fair value, through profit and loss, designated upon initial Available for Held to Other debt recognition sale maturity assets Total NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands
Negotiable debt assets 821,842 4,249,334 203,393* - 5,274,569 Non negotiable debt assets - - - 7,855,205 7,855,205 Shares - 548,413 - - 548,413 Other 458,899 1,157,143 - - 1,616,042
Total 1,280,741 5,954,890 203,393 7,855,205 15,294,229
* The assets held for redemption are presented at adjusted cost. The fair value of these assets is NIS 205,824 thousands, as at March 31, 2011. (as at March 31, 2010 and as at December 31, 2010, NIS 197,328 thousand and NIS 204,377 thousand respectively).
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix A - Harel Insurance Company Ltd., details of assets for yield-dependent contracts and other financial investments (contd.) b. Details of other financial investments (contd.) 1. Negotiable debt assets
book value Amortized Cost December March 31 31 March 31 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (audited) (Unaudited) (Unaudited) (audited) NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands NIS thousands
Government bonds 2,118,470 2,166,936 2,052,899 2,130,778 2,077,109 1,810,200
Other debt assets
Debt assets non-convertible 3,283,431 2,355,694 3,195,712 3,191,624 2,218,050 3,053,778
Debt assets convertible 23,829 29,370 25,957 22,104 26,981 24,547
Total tradable debt asset 5,425,730 4,552,000 5,274,568 5,344,506 4,322,140 4,888,525
Impairment balances 8,419 25,199 8,610 - - -
* Convertible bonds presented at cost and not at amortized cost. ** Amortized cost - cost less principal payments plus (less) accumulated amortization by the effective interest method on any difference between cost and the repayment amount less any reduction due to impairment in value recorded to the statement of income.
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix A - Harel Insurance Company Ltd., details of assets for yield-dependent contracts and other financial investments (contd.) b. Details of other financial investments (contd.) 2. Non negotiable debt assets
Book Value Fair Value
December December March 31 31 March 31 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (audited) (Unaudited) (Unaudited) (audited) NIS NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands Thousands
Government bonds Designated bonds 3,773,549 3,580,879 3,732,999 4,499,775 4,346,435 4,599,824 Other bonds 17,878 19,071 17,927 18,944 21,074 19,313
Total government bonds 3,791,427 3,599,950 3,750,926 4,518,719 4,367,509 4,619,137 other debt assets ------Non-convertible other debt assets 4,186,500 3,890,807 4,104,279 4,423,651 4,273,611 4,384,345 convertible other debt assets ------Total non tradable debt asset 7,977,927 7,490,757 7,855,205 8,942,370 8,641,120 9,003,482
Impairment balances 19,239 18,671 19,333 - 0 0
3. Shares
book value Amortized Cost March 31 December 31 March 31 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (audited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands
Tradable shares 437,210 331,766 450,929 294,775 186,355 293,474
Non Tradable shares 95,879 89,090 97,484 83,217 84,725 83,316
Total shares 533,089 420,856 548,413 377,992 271,080 376,790
Impairment balances 103,489 111,646 105,226 - - - 2-61
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix A - Harel Insurance Company Ltd., details of assets for yield-dependent contracts and other financial investments (contd.) b. Details of other financial investments (contd.) 4. Other financial investments
book value Amortized Cost March 31 December 31 March 31 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands
Tradable financial investments 819,597 1,088,018 1,075,693 747,451 1,037,613 1,024,738 Non Tradable financial investments 586,042 415,996 540,349 478,217 344,986 428,353 Total other financial investments 1,405,639 1,504,014 1,616,042 1,225,668 1,382,599 1,453,091 Permanent impairment aggregate credited to profit and loss 74,258 77,998 77,628 - - - Derivatives presented in financial obligations 12,295 4,263 9,127 - - - The other financial investments include mainly investments in exchange traded notes, notes participating in trust funds, investment funds, financial derivatives, forward contracts, options and structured products.
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix B - Dikla Insurance Company Ltd., details of assets for yield-dependent contracts and other financial assets a. Assets for yield dependent contracts The following are details of assets held against insurance contracts and investment contracts presented at fair value through the statement of income:
March 31 December 31 2011 2010 2010 (Unaudited) (Unaudited) (audited) NIS NIS NIS thousands thousands thousands
Real estate for investment 37,706 29,077 36,014
Financial investments Negotiable debt assets 699,859 653,473 690,636 Non-negotiable debt assets 241,823 231,535 231,625 Shares 178,483 159,794 184,606 Other financial assets 176,538 142,452 173,482
Total financial investments 1,296,703 1,187,254 1,280,349
Cash and cash equivalents 141,971 69,346 104,691 Other financial assets 36,500 254,278 35,970
Total Assets for yield dependent contracts 1,512,880 1,539,955 1,457,024 * Designated and measured mainly as loans and receivables. The fair value of these assets as at March 31, 2011 is NIS 252,272 thousand (as at March 31, 2010 and December 31, 2010 - NIS 245,244 thousand and NIS 244,082 thousand respectively).
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix B - Dikla Insurance Company Ltd., details of assets for yield-dependent contracts and other financial assets (contd.) b. Details of other financial investments
at March 31, 2011(Unaudited) Reported at fair value, through profit and loss, designated upon initial Available Other debt recognition for sale assets Total NIS NIS NIS NIS thousands thousands thousands thousands
Negotiable debt assets 1,203 432,086 - 433,289 Non negotiable debt assets - - 91,573 91,573 Shares - 26,704 - 26,704 Other 26,728 49,446 - 76,174 Total 27,931 508,236 91,573 627,740
at March 31, 2010 (Unaudited) Reported at fair value, through profit and loss, designated upon initial Available Other debt recognition for sale assets Total NIS NIS NIS NIS thousands thousands thousands thousands
Negotiable debt assets 1,418 410,278 - 411,696 Non negotiable debt assets - - 80,589 80,589 Shares - 20,042 - 20,042 Other 25,133 48,715 - 73,848 Total 26,551 479,035 80,589 586,175
at December 31, 2010 (audited) Reported at fair value, through profit and loss, designated upon initial Available Other debt recognition for sale assets Total NIS NIS NIS NIS thousands thousands thousands thousands
Negotiable debt assets 1,339 360,021 - 361,360 Non negotiable debt assets - - 88,995 88,995 Shares - 26,663 - 26,663 Other 27,183 55,781 - 82,964 Total 28,522 442,465 88,995 559,982
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix B - Dikla Insurance Company Ltd., details of assets for yield-dependent contracts and other financial assets (contd.) b. Details of other financial investments (contd.) 1. Negotiable debt assets
book value Amortized Cost March 31 December 31 March 31 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (audited) (Unaudited) (Unaudited) (audited) NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands
Government bonds 208,388 269,758 168,987 207,105 261,250 164,252 Other debt assets Debt assets non- 223,698 140,520 191,034 218,182 132,805 184,495 convertible Debt assets convertible 1,203 1,418 1,339 1,154 1,331 1,298 Total tradable debt 433,289 411,696 361,360 426,441 395,386 350,045 asset
Total tradable debt asset 1,301 2,398 1,323 - - -
* Convertible bonds presented at cost and not at amortized cost. ** Amortized cost - cost less principal payments plus (less) accumulated amortization by the effective interest method on any difference between cost and the repayment amount less any reduction due to impairment in value recorded to the statement of income.
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix B - Dikla Insurance Company Ltd., details of assets for yield-dependent contracts and other financial assets (contd.) b. Details of other financial investments – contd. 2. Non negotiable debt assets
book value Amortized Cost March 31 December 31 March 31 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (audited) (Unaudited) (Unaudited) (audited) NIS NIS NIS NIS Thousands Thousands NIS Thousands Thousands Thousands NIS Thousands
Other debt assets Debt assets non- convertible 91,573 80,589 88,995 93,465 83,799 92,031 Total non tradable debt asset 91,573 80,589 88,995 93,465 83,799 92,031 Permanent impairment aggregate credited to profit and loss 348 316 353 - - -
3. Shares
book value Amortized Cost March 31 December 31 March 31 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (audited) (Unaudited) (Unaudited) (audited) NIS NIS NIS NIS NIS Thousands Thousands Thousands Thousands Thousands NIS Thousands
Tradable shares 22,713 16,344 22,600 15,605 8,803 14,907 Non Tradable shares 3,992 3,698 4,063 3,501 3,600 3,502 Total shares 26,705 20,042 26,663 19,106 12,403 18,409 Permanent impairment aggregate credited to profit and loss 5,602 6,326 5,696 - - -
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix B - Dikla Insurance Company Ltd., details of assets for yield-dependent contracts and other financial assets (contd.) b. Details of other financial investments – contd. 4. Other financial investments
book value Amortized Cost December December March 31 31 March 31 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (audited) (Unaudited) (Unaudited) (audited) NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands Tradable financial investments 44,157 50,786 53,458 38,548 46,115 48,293 Non Tradable financial investments 32,017 23,062 29,507 27,419 21,597 25,965 Total other financial investments 76,174 73,848 82,965 65,967 67,712 74,258 Permanent impairment aggregate credited to profit and loss 4,426 4,809 4,585 - - - Other financial investments include mainly investments in exchange traded notes, participation in mutual funds certificates, investment funds, financial derivatives, forward contracts, options and structured products.
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix C - E.M.I Mortgage Insurance Company Ltd. - Details of other financial investments
at March 31, 2011(Unaudited) Reported at fair value, through profit and loss, designated upon initial Available Other debt recognition for sale assets Total NIS NIS NIS NIS thousands thousands thousands thousands
Negotiable debt assets - 629,246 - 629,246 Non negotiable debt assets - - 59,458 59,458 Shares - 31,611 - 31,611 Other 7,733 32,232 - 39,965 Total 7,733 693,089 59,458 752,547
at March 31, 2010 (Unaudited) Reported at fair value, through profit and loss, designated upon initial Available Other debt recognition for sale assets Total NIS NIS NIS NIS thousands thousands thousands thousands
Negotiable debt assets - 675,615 - 675,615 Non negotiable debt assets - - 26,274 26,274 Shares - - - - Other - - - - Total - 675,615 26,274 701,889
at December 31, 2010 (Audited) Reported at fair value, through profit and loss, designated upon initial Available Other debt recognition for sale assets Total NIS NIS NIS NIS thousands thousands thousands thousands
Negotiable debt assets - 634,099 - 634,099 Non negotiable debt assets - - 48,848 48,848 Shares - 34,513 - 34,513 Other 4,912 32,602 - 37,514 Total 4,912 701,214 48,848 750,062
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendix C - E.M.I Mortgage Insurance Company Ltd. - Details of other financial investments 1. Negotiable debt assets
book value Amortized Cost December March 31 31 March 31 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands NIS thousands
Government bonds 371,554 520,982 387,409 362,487 494,028 370,776
Other debt instruments other debt instruments, non convertible 257,691 154,633 246,690 250,644 143,112 238,785
Total marketable debt 629,245 675,615 634,099 613,131 637,140 609,561 Permanent impairment aggregate credited to profit and loss 4,307 4,384 4,390 - - -
* Amortized cost - cost less payments of principal plus (less) accumulated amortization by the effective interest method of any difference between the cost of repayment less any amortization due to an impairment in value recorded to the statement of income.
2. Non negotiable debt assets book value Amortized Cost December March 31 31 March 31 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited) (Audited) NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands
Other debt assets Non-convertible other debt assets 59,458 26,274 48,848 58,994 28,011 50,274 Total non tradable debt asset 59,458 26,274 48,848 58,994 28,011 50,274
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd. Appendixes to the condensed interim consolidated financial statements
Appendices to the condensed interim and consolidated financial statements
Appendix C -E.M.I Mortgage Insurance Company Ltd. - Details of other financial investments (contd.)
3. Shares
book value cost December December March 31 31 March 31 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (audited) (Unaudited) (Unaudited) (audited) NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands
Tradable shares 31,611 - 34,513 29,177 - 31,139
Total shares 31,611 - 34,513 29,177 - 31,139 Permanent impairment aggregate credited to profit and loss 2,263 - 2,349 - - -
4. Other financial investments
book value Cost March 31 December 31 March 31 December 31 2011 2010 2010 2011 2010 2010 (Unaudited) (Unaudited) (audited) (Unaudited) (Unaudited) (audited) NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands Tradable financial investments 29,232 - 29,244 28,529 - 29,302 Non Tradable financial investments 10,733 - 8,269 9,654 - 5,241 Total other financial investments 39,965 - 37,513 38,183 - 34,543 Derivatives presented in financial obligations 138
Other financial investments include mainly investments in exchange traded notes, participation in mutual funds certificates, investment funds, financial derivatives, forward contracts, options and structured products.
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd
Harel Insurance Investments and Financial Services Ltd.
Financial data from the interim consolidated statements relating to the Company itself As at March 31, 2011
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd
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, 2011 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 567,958thousand as at March 31, 2011, and the Company’s share in their profits is NIS 1,946 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 26, 2011
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements on the financial position as at
March 31 December 31' 2011 2010 2010 (Unaudited) (Unaudited) (Audited) NIS NIS NIS thousands thousands thousands Assets Intangible assets 576 1,127 713 Fixed assets 2,085 1,628 2,286 Loans to investee companies 3,530,815 3,436,382 3,470,200 Real estate for investment 37,632 339,273 153,625 Current tax assets 17,370 16,910 17,370 Other receivables 22,076 32,188 14,580 Other financial investments Marketable debt assets 51,270 1,561 151,875 Non marketable debt assets 3,400 3,053 3,315 Shares - 760 61 Others 327,594 28,595 120,202 Total financial investments and others 382,264 33,969 275,453 Cash and cash equivalents 116,665 44,065 99,929 Total Assets 4,109,483 3,905,542 4,034,156
Capital Share capital and premium on shares 307,203 305,974 306,691 Treasury stock (137,789) (94,155) (138,625) Capital reserves 200,179 243,700* 229,126 Retained earnings 3,003,363 3,227,674 * 3,181,178 Total capital 3,597,267 3,458,882 3,578,370 Liabilities Liabilities for deferred taxes 6,265 5,058 4,995 Liabilities for benefits to employees 3,528 2,663 4,211 Other payables 103,350 23,768 39,282 Liabilities for current taxes 1,823 4,053 10,062 Financial liabilities 397,250 411,118 397,236 Total liabilities 512,216 446,660 455,786 Total liabilities and capital 4,109,483 3,905,542 4,034,156
Y. Hamburger B. Hamburger R. Agassi Chairman of the Board of Member of the Deputy Chief Executive Directors Board of Directors, CEO Officer and Chief Financial Officer Date of Approval of the Financial Statements: May 26, 2011. * Regarding reclassification see Note 1(d).
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements of income
For the three months ended for the year ended December March 31, 2011 31' 2011 2010 2010 (Unaudited) (Unaudited) (Audited) NIS NIS NIS thousands thousands thousands
Profits from investments, net, and financing revenues 2,275 3,350 13,671 Revenues from management fees 18,031 16,396 63,039
Total revenues 20,306 19,746 76,710
General and administrative expenses 8,567 7,069 35,925 Other expenses 8 - 76 Financing expenses 4,860 4,202 17,210
Total expenses 13,435 11,271 53,211 Company's shares in profits (losses) of investee companies 104,758 175,090 511,550
Income (loss) before taxes on income 111,629 183,565 535,049
Taxes on income 1,996 2,207 5,224
Income (loss) after taxes on income 109,633 181,358 529,825
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 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' (Unaudited) (Audited) 2011 2010 2010 NIS NIS NIS thousands thousands thousands
Income (loss) for the year 109,633 181,358 529,825
Other comprehensive income (loss): Net changes in fair value of financial assets classified as available for sales 2,408 (424) (970) sale transferred to the statement of incomeNet changes in fair value of financial assets classified as available for sales 121 - 622
Loss from impairment in value of financial assets available for sale transferred to the statement of income - 26 - Taxes on income relating to components of other comprehensive income (loss) (389) 292 280 Foreign currency translation differences for foreign operations 1,600 (192) (3,160) The Grop share in the comprehensive income (loss) of investee companies (34,548) 51,952 29,052
Other comprehensive income (loss) for the year (30,808) 51,654 25,824
Total income (loss) for the year Attributed to the company's owners 78,825 233,012 555,649
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments and Financial Services Ltd. Financial data from the condensed interim financial statements of changes in capital
Capital Capital reserve for Translation reserve for financing reserve Capital Transactions revaluation Share assets from reserve for with non- of Balance of capital and available for overseas share based Treasury controlling investment retained premium sale operations payments stock interests real estate earnings Total NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS thousands NIS 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 Reissuing 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
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments and Financial Services Ltd. Financial data from the condensed interim financial statements of changes in capital (cont'd)
Translation Capital Capital Capital reserve reserve reserve for Transactions reserve for Balance Share for financing from share with non- revaluation of of capital and assets available overseas based Treasury controlling investment retained premium for sale operations payments stock interests real estate earnings Total NIS NIS NIS NIS NIS NIS NIS thousands NIS thousands thousands thousands thousands thousands NIS thousands thousands thousands Balance as at December 31, 2009 140,196 229,645 - (3,741) 4,329 (90,231) 4,248 2,822,005 3,106,451 Comprehensive income for year ------Profit for year ------181,358 181,358 Total other comprehensive income (loss) - 56,104 - (4,450) - - - - 51,654 Total comprehensive income for year - 56,104 - (4,450) - - - - 51,654 Transactions with owners credited directly to equity Share based payment - - - - 3,225 - - - 3,225 Acquisition of rights do not grant control 165,700 - (45,660) - 179 - - 120,040 Purchase of treasury stock 78 ------257 Reissuing of treasury stock - - - - (4,103) - - (4,103) Balance as at march 31, 2011 305,974 285,749 (45,660) (8,191) 7,554 (94,155) 4,248 3,003,363 3,458,882
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd
Harel Insurance Investments and Financial Services Ltd. Capital Capital reserve for Translatio Capital Transactio reserve for financing n reserve reserve for ns with revaluatio Financial data from the condensed Share assets from share non- n of Balance of interim financial statements of capital and available overseas based Treasury controlling investment retained changes in capital (cont'd) premium for sale operations payments stock interests real estate earnings Total NIS NIS NIS NIS NIS NIS NIS NIS NIS thousands thousands thousands thousands thousands thousands thousands thousands thousands
Balance as at December 31, 2009 140,196 229,645 - (3,741) 4,329 (90,231) 4,248 2,822,005 3,106,451 Comprehensive income for year Profit for year ------529,825 529,825 Total other comprehensive income (loss) - 34,190 - (10,499) - - 2,133 - 25,824 Total comprehensive income for year - 34,190 - (10,499) - - 2,133 529,825 555,649
Transactions with owners credited directly to equity Share based payment - - - - 14,481 - - - 14,481 Dividends paid ------(170,652) (170,652) Purchase of treasury stock 165,700 - (45,660 ) - - - - 120,040 Reissuing of treasury stock 795 - - - 12,140 - - 12,935 Acquisition of minority interests* - - - - - (60,534) - - (60,534)
Balance as at December 31, 2010 306,691 263,835 (45,660) (14,240) 18,810 (138,625) 6,381 3,181,178 3,578,370
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments and Financial Services Ltd. Financial data from the interim consolidated statements of cash flows
for the year ended For the three months ended December March 31 31'
(Unaudited) (Unaudited) (Audited)
2011 2010 2010 NIS NIS NIS Appendix Thousands Thousands Thousands Cash flows from operating activities Before taxes on income A (9,816) 6,621 44,736 Income tax (paid) refund (1,220) (1,123) (5,494) Net cash provided by operating activities (11,036) 5,498 39,242 Cash flows from investing activities Investment in investee companies (36,000) (10,314) (60,728) Investment in fixed assets - (1) (1,586) Investment in intangible assets 100 - 600 Acquisition of real estate for investment (18) (69) (181) Proceeds from realizing fixed assets - (19) (479) Dividends from investee companies 55,000 - 350,360 Net Financial investments (103,807) (1,270) (234,268) Loans to investee companies (24,897) (122,029) (171,215) Repayment of loans given to investee companies 137,394 123,301 339,833 Net cash provided by (used for) investing activities 27,772 (10,401) 222,336 Cash flows from financing activities Dividends paid - - (170,652) Purchase of treasury stock - - (35,965) Repayment of loans to banks and others - - (4,000) Net cash provided by (used for) financing activities - - (210,617) Increase (decrease) in cash and cash equivalents, net 16,736 (4,903) 50,961 Cash and cash equivalents at beginning of year 99,929 48,968 48,968 Cash and cash equivalents at end of year 116,665 44,065 99,929
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments and Financial Services Ltd. Financial data from the consolidated statements of cash flows
for the year For the three months ended ended March 31 December 31' (Unaudited) (Unaudited) (Audited) 2011 2010 2010 NIS NIS NIS Thousands Thousands Thousands
Appendix A – Cash flows from operating activities before taxes on income 109,633 181,358 529,825
Items which are not connected with cash flows Company's shares in revenues of investee companies handled by the straight-line method (104,758) (175,090) (511,550) Net profits from financing activities (504) 1,081 (7,090) Change in fair value of real estate for investment 8,682 1,728 5,421 Financing expenses, net 1,996 2,207 5,224 Taxes on income 264 258 1,019 Depreciation and amortization (8) - 92 Share-based payment 433 360 1,438
Changes in other balance sheet items Other receivables (12,661) (5,345) 11,693 Other payables (4,076) 390 505 Changes n items of current taxes (8,134) (303) 6,634 Liabilities for benefits to employees, net (683) (23) 1,525
Total adjustments required to present cash flows from operating activities (119,449) (174,737) (485,089)
Total cash flows from operating activities before taxes on income (9,816) 6,621 44,736
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 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 March 31, 2011. b. Definitions The Company - Harel Insurance Investments and Financial Services Ltd. Investee companies - Subsidiaries, subsidiaries by proportional consolidation and companies in which the Company's investment in them is included, directly or indirectly, in the financial statements by the equity method. Date of report - Date of the statement of financial condition. c. Method of preparing the financial data The separate financial data was prepared in accordance with the accounting principles detailed in Note 1 to the separate yearly financial statements of the Company. D. Reclassified During the Reporting Period, the Company included a reclassification of a capital fund in respect of a revaluation of investment real estate that was moved from the surpluses to a separate fund in the report on changes in equity. The changes in classification had no effect on the Company's equity or profit.
Note 2 - Relation, commitments and significant transactions with investee companies 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.
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements
Note 3- Significant events during the period of report
1. A senior officer who resigned from Harel Insurance
On February 3, 2011 the Company's board of directors confirmed Mr. Weinshel's retirement conditions including loan that had been given to Mr. Emil Weinshel, in the sum of NIS 2,759 thousand, would be repaid by the Company, including the grossing up. In addition, he would receive nine times his current monthly salary (without any social benefits), in return for an undertaking for confidentiality and to refrain from competition for a period of 18 months. Options granted to Mr. Weinshel expired following the end of his served.
2. Distribution of Dividend
On March 23, 2011, the Company's Board of Directors decided to distribute a cash dividend of NIS 64 million. The Board of Directors' decision was made after taking into account the Company's financial results for the Reporting Period. The directors were presented with the Company's distributable surpluses at December 31, 2010, which amount to NIS 3.5 billion. The Board of Directors reviewed the Company's compliance with the profit test and the solvency tests that, in Section 203(a) of the Companies Law, and subsequently confirmed that the Company was in compliance with the distribution tests.
The dividend was paid on April 28, 2011.
3. Distribution of Dividend in Dikla
On March 22, 2011, the Board of Directors of Dikla decided to distribute a cash dividend of NIS 50 million, on the green track. The Board of Directors made its decision after taking into account the Company's financial results for 2010, which showed that Dikla had a distributable surplus of NIS 84 million at December 31, 2010. Likewise, the Company's plan to manage its shareholders' equity was presented, taking note of the new Capital Regulations and the Commissioner's draft circular on the subject of the management of an insurer's equity. The Board of Directors specified a capital target for the Company at 5% above the minimum equity required by law. Dikla will be in compliance with this target after distribution of the dividend.
4. Allotment of share options to employees
On March 15, 2011, after first obtaining approval from the Company's Compensation Committee, the Company's Board of Directors approved an allotment of 47,047 stock options to 11 recipients. The exercise price of the options was determined according to the closing price of the Company's shares on the TASE, immediately prior to the Board of Directors decision, that is NIS 191.6 per share.
The fair value of the stock options allocated in the allotment is estimated at NIS 2.8 million, taking into account the possibility that some recipients may terminate their employment at an earlier date (excluding the Group's senior executives). The economic value of each option offered to the recipients, taking into account leaving rates and the probability that some options may be exercised at an earlier date, where the Board of Directors set the exercise price at NIS 191.6 per option linked to the CPI, is NIS 60 at the date of granting the stock options, March 15, 2011. The value of these options will be charged as an expense to the Company's
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements
Note 3- Significant events during the period of report (cont'd)
financial statements over the anticipated vestment period of the options, beginning the year 2011.
The fair value of the option warrants granted as aforementioned is estimated by applying a binomial model to the costing of the options. The following parameters are used in applying the model:
Expected fluctuations in the price of the share 33.5% Risk-free interest rate 1.3%
The expected fluctuations are determined on the basis of the historical fluctuations in the share price. The duration of life of the options is calculated using the binomial model, based on accepted exercise multiples and the Company's past experience regarding employees who leave the Company's employment.
The risk-free interest rate is determined based on linked shekel government bonds, where the remainder of the period equals the anticipated duration of life of the options.
5. Conditions of employment for the CEO of Harel Insurance and joint CEO of Harel Investments
Pursuant to the specified in Note 41 to the periodic report, on March 23, 2011, the Company's Board of Directors approved a revision to the terms of employment of Mr. Michel Siboni. Accordingly, Mr. Siboni's current monthly salary will be NIS 170,000, linked to the CPI (instead of NIS 150,000 linked to the CPI, as approved on November 30, 2009), effective from January 1, 2011.
As a result of his appointment as joint CEO of the Group, Mr. Siboni's status and the considerable knowledge he will accumulate when serving in this position will privilege him to much information about the Company and its subsidiaries. The Board of Directors takes a serious view of the fact that Mr. Siboni will be in possession of such information and that should he terminate his position he must refrain from competing against the Company's key businesses, particularly in the health insurance sector in which the Group is Israel's most prominent insurance company. The Board of Directors therefore approved payment of NIS 5 million, linked to the CPI, to Mr. Siboni in return for his commitment to refrain from competition should the employment relationship terminate. This non- competition clause will be in force for a period of 7 years (instead of 5 years as defined previously), during which time, he will be prohibited from serving as CEO of an insurance company in Israel or serving as a health insurance consultant.
6. Terms of employment for the joint CEO of Harel Investments
Pursuant to the specified in Note 41 to the periodic report, on March 23, 2011, the Company's Board of Directors approved a revision to the terms of employment of Mr. Alkabetz. Pursuant to the revised conditions, Mr. Alkabetz' current wage, which is paid against a tax invoice and for which he is therefore not entitled to any social benefits, will be NIS 300,000 a month, linked to the CPI (instead of NIS 208,000 linked to the CPI, as approved in July 2010).
As a result of his appointment as joint CEO of the Group, Mr. Alkabetz' status and the considerable knowledge he will accumulate when serving in this position will privilege him to much information about the Company and its subsidiaries. The Board of Directors takes a
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments and Financial Services Ltd. Notes to the consolidated statements
Note 3- Significant events during the period of report (cont'd)
serious view of the fact that Mr. Alkabetz will be in possession of such information and that should he terminate his position he must refrain from competing against the Company's key businesses. The Board of Directors therefore approved payment of NIS 2 million, linked to the CPI, to Mr. Alkabetz in return for his commitment to refrain from competition should the employment relationship terminate. This non-competition clause will be in force for a period of 6 years, during which time, he will be prohibited from serving as CEO of an insurance or finance group in Israel or serving as an insurance and finance consultant.
Note 4 - Events after the date of the financial statements
1. Allotment of share options to employees
On April 28, 2011, the board of directors of the Company decided to publish an outline for a securities offering to employees in accordance with the Securities Regulations (outline details of securities offering to employees) 5770 - 2000 and the Securities Regulations (private offering of securities in a registered company) 5770 - 2000. The outline plan is based on the outline plan published by the Company on June 4, 2009. The outline plan is for an allocation of up to 200,000 option notes for the exercise of up to 200,000 shares par value NIS 1 each of the Company.
Pursuant to the outline plan as detailed above, on May 26, 2011, after first obtaining approval from the Company's Compensation Committee, the Company's Board of Directors approved an allotment of 161,924 stock options to 13 recipients. The exercise price of the options was determined according to the closing price of the Company's shares on the TASE, immediately prior to the Board of Directors decision, that is NIS 172.5 per share .
Total value of the options will that will be credited as an expense to the Company's financial statements is estimated at NIS 9.6 million, taking into account the possibility that some recipients may terminate their employment at an earlier date (excluding the Group's senior executives). The economic value of each option offered to the recipients, taking into account leaving rates and the probability of exercising of the option at an earlier date, where the Board of Directors set the exercise price at NIS 172.5 per option linked to the CPI, is NIS 59 at the date of granting the stock options, March 26, 2011. The value of these options will be credited as an expense to the Company's financial statements over the anticipated vestment period of the options, from the beginning of the year 2011.
The fair value of the option warrants granted as aforementioned is estimated by applying a binomial model to the costing of the options. The following parameters are used in applying the model:
Expected fluctuations in the price of the share 33% Risk-free interest rate 1.8%
The expected fluctuations are determined on the basis of the historical fluctuations in the share price. The duration of life of the options is calculated using the binomial model, based on accepted exercise multiples and the Company's past experience regarding employees who leave the Company's employment.
2. Distribution of Dividend
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Note 4 - Events after the date of the financial statements (contd.)
On May 26, 2011, the Company's Board of Directors decided to distribute a dividend of NIS 42.4 The decision of the board of directors was reached after the financial results of the Company for the Reporting Period was presented before it and was taken under consideration. The board of directors was presented with surpluses that were suitable for distribution by the Company as of March 31, 2011, at the sum of approx. NIS 3.2 billion. The board of directors examined the Company's net profit criteria and the solvency criteria as prescribed in Section 203 (A) to the Companies Law and following this examination it approved the compliance of the Company with the criteria for distribution.
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Harel Insurance Investments & Financial Services Ltd.
Chapter 4
Report concerning the effectiveness of internal control over financial reporting and disclosure
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd
Quarterly report concerning the effectiveness of the internal control over financial reporting and disclosure as per Article 38c (a) Under the oversight of the Board of Directors of Harel Insurance Investments and Financial Services Ltd. ("the Corporation"), management is responsible for defining and maintaining due internal control over the Corporation's financial reporting and disclosure. In this instance, management consists of: (a) Joint CEOs: Mr. Michel Siboni, who also serves as CEO of Harel Insurance Ltd. and chairs the boards of directors of the Group's subsidiaries that are financial institutions. Mr. Shimon Alkabetz, who also chairs the board of directors of Harel Finance Holdings Ltd., chairs the board of directors of Pia Mutual Funds Ltd. and holds other positions in the Group's companies. (b) Mr. Ronen Agassi – the Company's CFO, deputy CEO and head of the finance and resources division of Harel Insurance Company Ltd. (c) Mr. Sami Babkov – CEO of Harel Finance Holdings and CEO of Harel Pia Mutual Funds Ltd. (d) Mr. Avi Keller, CEO of Dikla Insurance Company Ltd. (e) Mr. Dan Bar-On, deputy CEO of Harel Insurance Company Ltd., Chief Actuary and risk manager for Harel Insurance Company Ltd. (f) Mr. Hanan Fridman, legal advisor to the Corporation and the Group's companies, deputy CEO of Harel Insurance Company Ltd. (g) Mr. Amir Hessel, VP of the Corporation and manager of the Group's investments, deputy CEO and manager of the investment division of Harel Insurance Company Ltd. Internal control over financial reporting and disclosure includes the Corporation's existing controls and procedures that were planned by the general manager and the most senior financial officer or are monitored by them or by the person who actually performs these duties, under the oversight of the Corporation's board of directors. The purpose of the controls and procedures is to provide a reasonable measure of assurance certainty regarding the reliability of financial reporting and the preparation of the financial statements pursuant to the provisions of the law, and to ensure that the information that the Corporation is required to disclose in its published reports in accordance with the provisions of the law, is collected, processed, summarized and reported on the dates and in the format prescribed by law. Among other things, the internal control consists of controls and procedures designed to ensure that the information that the corporation is required to disclose, as noted, is accumulated and transferred to the Corporation's management, including to the CEO and most senior financial officer, or to the person who actually performs these duties, in an effort to ensure that decisions aremade at the appropriate time, with respect to the disclosure requirement. Due to its inherent limitations, internal control over financial reporting and disclosure may not provide absolute assurance regarding the prevention or detection of misstatements. Harel Insurance Company Ltd. and Dikla Insurance Company Ltd., subsidiaries of the
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Corporation, are financial institutions governed by the instructions of the Superintendent of the Capital Market, Insurance and Savings Division at the Ministry of Finance, regarding the assessment of the effectiveness of the internal control over financial reporting. With respect to internal control in the aforementioned subsidiaries, the corporation implements the following instructions: Financial institutions Circular 2010-9-7 from November 2010 – "Internal control over financial reporting – attestations, statements, and disclosures"; Financial institutions Circular 2010-9-6 from November 2010 – "Management's responsibility for the internal control over financial reporting – Amendment" (amendment to Financial institutions Circular 2009-9-10); Financial institutions Circular 2009-9-10, from June 2009 – "Management's responsibility for the internal control over financial reporting"; In the 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, 2010 (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 over financial reporting, with respect to the internal control by financial institutions at December 31, 2010, 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 2011 ("the Reports"). (2) Based on my knowledge, the Reports contain no misstatement of a material fact nor do they omit any statement of a material fact necessary to ensure that the statements that they contain, in light of the circumstances under which such statements were included, shall not be misleading with respect to the period covered in the Reports; (3) Based on my knowledge, the financial statements and other financial information contained in the Reports reasonably reflect, in all material respects, the financial situation, results of operations, and cash flows of the Corporation at the dates and periods covered in the Report. (4) I disclosed to the Corporation's external auditor, the board of directors and the audit committee of the Corporation's board of directors, based on my most recent evaluations of the internal control over financial reporting: (a) Any significant deficiencies and material weakenesses in the determination or application of the internal control over financial reporting and disclosure that may reasonably have an adverse effect on the Corporation's ability to collect, process, summarise or report financial information in a manner that may cast doubt on the credibility of the financial reporting and preparation of the financial reports pursuant to the provisions of the law; and - (b) any fraud, whether material or immaterial, that involves the general manager (CEO) or any person directly accountable to him or other employees who have a significant role in the Company's internal control over financial reporting and disclosure; (5) I, myself or together with others in the Corporation: (a) Defined controls and procedures, or ensured that controls and procedures are in place under my supervision, to ensure that material information pertaining to the Corporation, including its subsidiaries as defined in the Securities (Preparation of Annual Financial Reports) Regulations, 5753-1993, has been brought to my attention is brought to my attention by others in the Corporation, specifically during the period in which the Reports are prepared; and - (b) I defined controls and procedures, or ensured that controls and procedures under my supervision are in place, to ensure with reasonable certainty that the financial reports are credible and that the financial reports are prepared in accordance with the provisions of the law, including in accordance with generally accepted accounting standards; (c) I evaluated the effectiveness of the internal control over financial reporting and disclosure, and in this report I have presented the conclusions of the board of directors and management regarding the effectiveness of the internal control at the reporting date. The aforesaid shall not derogate from my responsibility or from the responsibility of any other person, under any law.
May 26, 2011 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 for first quarter of 2011 ("the Reports"). (2) Based on my knowledge, the Reports contain no misstatement of a material fact nor do they omit any statement of a material fact necessary to ensure that the statements that they contain, in light of the circumstances under which such statements were included, shall not be misleading with respect to the period covered in the Reports; (3) Based on my knowledge, the financial statements and other financial information contained in the Reports reasonably reflect, in all material respects, the financial situation, results of operations, and cash flows of the Corporation at the dates and periods covered in the Report. (4) I disclosed to the Corporation's external auditor, the board of directors and the audit committee of the Corporation's board of directors, based on my most recent evaluations of the internal control over financial reporting: (a) Any significant deficiencies and material weakenesses in the determination or application of the internal control over financial reporting and disclosure that may reasonably have an adverse effect on the Corporation's ability to collect, process, summarise or report financial information in a manner that may cast doubt on the credibility of the financial reporting and preparation of the financial reports pursuant to the provisions of the law; and - (b) any fraud, whether material or immaterial, that involves the general manager (CEO) or any person directly accountable to him or other employees who have a significant role in the Company's internal control over financial reporting and disclosure; (5) I, myself or together with others in the Corporation: (a) Defined controls and procedures, or ensured that controls and procedures are in place under my supervision, to ensure that material information pertaining to the Corporation, including its subsidiaries as defined in the Securities (Preparation of Annual Financial Reports) Regulations, 5753-1993, has been brought to my attention is brought to my attention by others in the Corporation, specifically during the period in which the Reports are prepared; and - (b) I defined controls and procedures, or ensured that controls and procedures under my supervision are in place, to ensure with reasonable certainty that the financial reports are credible and that the financial reports are prepared in accordance with the provisions of the law, including in accordance with generally accepted accounting standards; (c) I assessed the effectiveness of the internal control over financial reporting and disclosure, and in this report I have presented the conclusions of the board of directors and management regarding the effectiveness of the internal control at the reporting date. The aforesaid shall not derogate from my responsibility or from the responsibility of any other person, under any law.
May 26, 2011 Michel Siboni Joint CEO
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WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Services Ltd
Certification I, Ronen Agassi, hereby attest that: (1) I have reviewed the Periodic Report of Harel Insurance Investments and Financial Services Ltd. ("the Corporation") for 2010 ("the Reports"). (2) Based on my knowledge, the Reports contain no misstatement of a material fact nor do they omit any statement of a material fact necessary to ensure that the statements that they contain, in light of the circumstances under which such statements were included, shall not be misleading with respect to the period covered in the Reports; (3) Based on my knowledge, the financial statements and other financial information contained in the Reports reasonably reflect, in all material respects, the financial situation, results of operations, and cash flows of the Corporation at the dates and periods covered in the Report. (4) I disclosed to the Corporation's external auditor, the board of directors and the audit committee of the Corporation's board of directors, based on my most recent evaluation of the internal control over financial reporting: (a) Any significant deficiencies and material weakenesses in the determination or application of the internal control over financial reporting and disclosure that may reasonably have an adverse effect on the Corporation's ability to collect, process, summarise or report financial information in a manner that may cast doubt on the credibility of the financial reporting and preparation of the financial reports pursuant to the provisions of the law; and - (b) any fraud, whether material or immaterial, that involves the general manager (CEO) or any person directly accountable to him or other employees who have a significant role in the Company's internal control over financial reporting and disclosure; (5) I, myself or together with others in the Corporation: (a) Defined controls and procedures, or ensured that controls and procedures are in place under my supervision, to ensure that material information pertaining to the Corporation, including its subsidiaries as defined in the Securities (Preparation of Annual Financial Reports) Regulations, 5753-1993, has been brought to my attention, is brought to my attention by others in the Corporation, specifically during the period in which the Reports are prepared; and - (b) I defined controls and procedures, or ensured that controls and procedures under my supervision are in place, to ensure with reasonable certainty that the financial reports are credible and that the financial reports are prepared in accordance with the provisions of the law, including in accordance with generally accepted accounting standards; (c) I evaluated the effectiveness of the internal control over financial reporting and disclosure, and in this report I have presented the conclusions of the board of directors and management regarding the effectiveness of the internal control at the reporting date. The aforesaid shall not derogate from my responsibility or from the responsibility of any other person, under any law.
May 26, 2011 ______Ronen Agassi CFO
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Report Regarding Embedded Value Of Harel Insurance Company Ltd. (Including Pension Fund Management Companies)
as at 31.12.2010
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd
Report Regarding Embedded Value Of Harel Insurance Company Ltd. as at 31.12.2010
Table of contents
1.1 Background and extent of disclosure 3 1.2 Clarification regarding forward looking information 3 1.3 Major chapters in document 3 1.4 Definitions 3 1.5 Comments, clarifications and exceptions 5 1.5.1 General 5 1.5.2 Reforms and legislation 5 1.5.3 Risk handling 6 1.5.4 Revaluation of asset assessment at fair value 7 1.5.5 Pension fund governmental subsidization arrangements 7 1.5.6 Embedded value not designed to represent financial value or market value of the company or its holding company 7
2 Embedded value calculation methodology 2.1 General 8 2.2 Handling risks 8 2.3 Financial assumptions 8 2.3.1 Yields, capitalization interest and inflation 8 2.3.2 Taxation 9 2.4 Demographic and operational assumptions 9 2.4.1 Demographic assumptions 9 2.4.2 Future management and general expenses 9 2.5 Calculation method 2.5.1 Adjusted Equity (ANW) 10 2.5.2 Present value of future profits (PVFP) 10 2.5.3 Cost of capital (CoC) 10 2.5.4 Value of new business (VNB) 10 2.6 Handling options and financial pledges 11 2.7 Analysis of the EV change and the profit on an EV basis 11 2.8 Sensitivity tests 15 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 2010 18 3.3 Correspondence between adjusted equity and equity in financial reports 19 3.4 Analysis of the changes in EV and Profit 20 3.5 Adjustments between Changes in Equity and Net Profit 21 3.6 Sensitivity analysis in respect of included businesses 21 3.7 Analysis of the changes in EV – Pensions 22
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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 2010.
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.
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).
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 Worth (ANW) be consistent with the in force portfolio value (see paragraph 251).
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 (VIF) cost.
Embedded Comprised of a combination of the in force portfolio value 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 included in calculation of in force portfolio businesses 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
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have only been valued until the next renewal date of these policies.
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:
* Financial factors (e.g. – capitalization interest, yields) * Demographic factors (e.g. – changes in mortality and morbidity) * Legislation and legislative arrangements on relevant matters * Taxation * 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, including the following reforms:
* Product reform – provident fund regulations Amendment Number 3 * Mobilization reform – amendment of regulations regarding mobilization of pension saving money among different pension savings channels and between pension savings channels themselves. * Entry of banks into pension consultation activities.
The embedded value calculations relate to the aforementioned reforms in the following manners:
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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 entry of banks according to experience since the legislation was enacted and assumptions related to the future impact according to management estimations.
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 the basis of studies and analyses which rely on the company experience and the experience of the pension fund management companies 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 calculation of 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 able to distribute the uncertainty by possessing a diverse and distributed investment portfolio and on the assumption
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that the uncertainty can be distributed as aforementioned. In actual fact, it is possible that part of the demographic and operational risks will be impossible to be distributed. 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 – these risks have not been weighted in the embedded value.
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 3.6. 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.
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 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.
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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 2010 were:
Interest Interest Interest End of Rate End of Rate End of Rate 2011 -0.14% 2021 2.36% 2031 2.97% 2012 0.19% 2022 2.46% 2032 3.01% 2013 0.55% 2023 2.55% 2033 3.03% 2014 0.90% 2024 2.63% 2034 3.06% 2015 1.22% 2025 2.70% 2035 3.08% 2016 1.49% 2026 2.76% 2036 3.11% 2017 1.73% 2027 2.81% 2037 3.13% 2018 1.93% 2028 2.86% 2038 3.15% 2019 2.09% 2029 2.90% 2039 3.16% 2020 2.24% 2030 2.94% 2040 3.18%
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 2015 2018+ Tax 34.48% 33.62% 32.47% 31.60% 30.74% 29.00% 29.00% 29.00% rate
(*) Profit tax rate included above is 16.0% for 2011-2012 and 15.5% 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.
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.
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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 2010. 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 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.
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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 2010. New coverage issued in 2010 as an addition to policies which were issued before 2010. Group policies which were renewed in 2010. One-time premiums on existing policies which do not emanate from a wage increase. New members of the pension funds during 2010.
It should be clarified that the present value of future profits (PVFP) includes the value of profits from the end of 2010 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:
2.7.1. Adjustments to embedded value as at 31 December 2009 – this paragraph includes corrections in respect of the opening data, including changes in the calculation methodology and a decrease in ANW of 12 million NIS related to a reorganization of the pension management companies.
2.7.2. 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:
2.7.2.1. Life insurance and health insurance: In ANW, there is an increase mainly related to an update of morbidity assumptions. In VIF, there was an increase following an update of morbidity
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assumptions, offset by a reduction in VIF related to an update of assumptions relating to long-term expenses.
2.7.2.2. Pension: mainly relates to an increase in VIF following an update of the assumptions regarding long-term expenses and lapses.
2.7.3. 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:
2.7.3.1. 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.
2.7.3.2. 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.
2.7.3.3. Profit anticipated to transfer from the in force portfolio value to the adjusted equity during 2010 – during 2010 the anticipated profit for the year 2010 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.
2.7.4. The influence of the deviations from the operational and demographic assumptions during 2010 – naturally, during this period the actual experience regarding the rate of claims, cancellations, expenses, etc. were different than the assumptions made at the beginning of the year 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 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.
2.7.5. Profit from new businesses – the embedded value does not include the value which is anticipated to be added from new businesses which will
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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.
2.7.6. 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 2010, there were no expenses which were not included in the embedded value.
2.7.7. Profit from special items – there were no special items for 2010.
2.7.8. Influence of inflation during 2010 – this paragraph includes the influence of inflation during 2010 (2.3%) 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.
2.7.9. Profit resulting from deviation from the economic assumptions during 2010 and changes in the economic assumptions – this paragraph includes two components:
2.7.9.1. Influence on the portfolio value from changes occurring in the economic assumptions which are based on the market interests. Such assumptions include the capitalization interest and anticipated yields.
2.7.9.2. 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:
2.7.9.2.1. In the adjusted capital – due to the influence on the profit, mainly from yields which were different from those
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anticipated on the company assets which are placed vis-à-vis the capital and against the insurance reserves in respect of the included businesses.
2.7.9.2.2. 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.
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).
2.7.10. Capital movements – this paragraph presents the change in the embedded value emanating from capital movements, including payment of dividends during the year.
2.7.11. 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 are financing expenses in a sum of NIS 66 million.
The summary of the changes in paragraphs 2-11 constitutes the ‘sum of the profit on an embedded value basis’.
2.8. Sensitivity tests
The sensitivity tests presented in paragraph 3.5 hereunder have adopted the following approaches:
2.8.1. Unless stated otherwise, the sensitivity relates to all included businesses.
2.8.2. The sensitivity tests relate to each assumption separately without measuring accumulating or offsetting influences or derivative changes on other factors, etc.
2.8.3. The sensitivity in respect of the value of new businesses relates to changes from the end of 2010 onwards, not to the period from the time of sale until the end of 2010.
2.8.4. Mortality before retirement age – mortality rate sensitivity tests (including death by accident) not including mortality of insureds who are
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receiving retirement pensions or monthly restitution for loss of ability or nursing.
2.8.5. Mortality among retirement pension recipients – sensitivity test of mortality rate among retirement pension recipients only, not including mortality among other pension recipients.
2.8.6. 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.
2.8.7. Interest – sensitivity test results include:
2.8.7.1. 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).
2.8.7.2. Impact of changes in interest rate on value of assets bearing Shekel or linked interest, placed vis-à-vis the included businesses.
2.8.8. Increase in the required capital – influence on the increase in capital due to a 10% increase in the required capital.
2.9 Embedded value report review Annexed to this report is an external reviewer’s report who performed a review of the report regarding the embedded value as at 31.12.2010 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 31.12.2010 (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 2,008.2 22.4 (240.1) 1,790.5 (see paragraph 3.3 below) Present value of 3,712.9 972.5 0.0 4,685.3 future profits, less taxes (see paragraph 1.5.3) Less cost of (133.9) (1.9) 0.0 (135.8) required capital Embedded value 5,587.2 993.0 (240.1) 6,340.1
3.2. Value of new businesses for sales during 2010 (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 326.6 111.1 437.7 businesses before required capital cost Value of required (11.2) (0.4) (11.6) capital in respect of new businesses Total value of new 315.4 110.7 426.1 businesses
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3.3. Adjustment between adjusted equity and the equity in the financial reports
Table 3.3a – insurance businesses NIS millions Equity as at 31 December 2010 2,450.8 Reevaluation of overlapping assets of included businesses and displayed in 148.3 financial reports by cost of fair value, less taxes Less deferred acquisition costs (DAC) (861.1) Plus reserves for deferred tax on DAC 270.2 Adjusted equity in respect of long-term insurance included businesses 2,008.2
Table 3.3b – pension fund management companies NIS millions Equity as at 31 December 2010 79.3 Less deferred acquisition costs (DAC) (77.4) Plus reserves for deferred tax and future tax benefits on DAC 21.5 Less reputation in respect of purchased pension funds, appearing in the company’s (1.0) balance sheet of the pension fund management company Adjusted equity in respect of pension businesses 22.4
Table 3.3c – Harel Insurance Company: inclusion of pension fund management businesses
NIS millions Adjusted equity in respect of long-term insurance policies (life and health 2,008.2 insurance), from table 3.3a above Less deferred acquisition costs (balance sheet DAC) in respect of pension (77.4) Plus reserves for deferred tax and future tax benefits on DAC, Pension 21.5 Less the value of purchased pension fund management companies and reputation in (161.8) respect thereof included in the equity Adjusted equity of Harel Insurance, taking pension fund management businesses 1,790.5 into account
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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 – Harel Insurance
See Adjusted In force Embedded paragraph Equity Portfolio Value Value Embedded value as at 31.12.2009 (opening 1,709.9 3,441.4 5,151.2 balance)* Adjustment to embedded value in respect of the 2.7.1 0.0 (35.9) (35.9) opening balance Embedded value adjusted to the opening balance 1,709.9 3,405.5 5,115.3 Operational profit from the in-force portfolio to the
opening balance: § Changes in operational and demographic 2.7.2 6.7 (43.0) (36.3) assumptions § Anticipated profit on the in force portfolio 2.7.3 45.4 197.8 243.2 value § Inclusive profit predicted in 2010, 2.7.3 325.7 (325.7) 0.0 transferred from portfolio value to equity § Influence of deviations from the operational 101.6 25.8 127.4 and demographic assumptions during 2010, plus 2.7.4 other changes to the inforce portfolio Total 479.5 (145.1) 334.3 Profit from new businesses 2.7.5 (195.5) 510.9 315.4 Real operational profit on an embedded value 284.0 365.8 649.8 basis Development expenses not included in the embedded 2.7.6 0.0 0.0 0.0 value Profit from special items 2.7.7 0.0 0.0 0.0 Adjustment to the index in respect of the opening 2.7.8 25.2 82.5 107.7 balance Profit (loss) from deviations from the economic 173.8 (274.8) (101.0) assumptions during 2010 and amendments of the 2.7.9 economic assumptions Total real profit on an embedded value basis 483.0 173.5 656.5 Profit from pension businesses 16.1 0.0 16.1 Profit from non-included businesses 2.7.10 38.8 0.0 38.8 Total real profit on an embedded value basis - 537.8 173.5 711.3 including all business of the company Capital Movements (239.4) 0.0 (239.4) Embedded value as at 31.12.2010 2,008.2 3,579.0 5,587.2
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Table 3.4b - Pension fund management businesses See Adjusted In force Embedded paragraph Equity Portfolio Value Value Embedded value as at 31.12.2009 (opening 32.6 691.9 724.5 balance)* Adjustment to embedded value in respect of the 2.7.1 (12.2) (9.3) (21.5) opening balance Embedded value adjusted to the opening balance 20.4 682.6 703.0 Operational profit from the in-force portfolio to the 0.0 0.0 0.0 opening balance: § Changes in operational and demographic 2.7.2 0.0 80.4 80.4 assumptions § Anticipated profit on the in force portfolio value 2.7.3 0.5 18.0 18.6 § Inclusive profit predicted in 2010, 2.7.3 38.5 (38.5) 0.0 transferred from portfolio value to equity § Influence of deviations from the operational (1.6) 8.1 6.5 and demographic assumptions during 2010, plus 2.7.4 other changes to the inforce portfolio Total 37.4 68.1 105.4 Profit from new businesses 2.7.5 (36.4) 147.1 110.7 Real operational profit according to 1.0 215.1 216.1 embedded value Development expenses not included in the embedded 2.7.6 0.0 0.0 0.0 value Profit from special items 2.7.7 0.0 0.0 0.0 Adjustment to the index in respect of the opening 2.7.8 0.4 17.6 18.1 balance Profit (loss) from deviations from the economic 1.1 55.2 56.3 assumptions during 2010 and amendments of the 2.7.9 economic assumptions Total real profit on an embedded value basis 2.5 288.0 290.5
Capital Movements (0.5) 0.0 (0.5) Embedded value as at 31.12.2010 22.4 970.6 993.0
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Table 3.4c - Harel Insurance and Pension fund management businesses
See Adjusted In force Embedded paragraph Equity Portfolio Value Value Embedded value as at 31.12.2009 (opening 1,506.4 4,133.3 5,639.7 balance)* Adjustment to embedded value in respect of the 2.7.1 0.0 (45.2) (45.2) opening balance Embedded value adjusted to the opening balance 1,506.4 4,088.1 5,594.5 Operational profit from the in-force portfolio to the
opening balance: § Changes in operational and demographic 2.7.2 6.7 37.4 44.1 assumptions § Anticipated profit on the in force portfolio value 2.7.3 39.7 215.8 255.6 § Inclusive profit predicted in 2010, 2.7.3 364.2 (364.2) 0.0 transferred from portfolio value to equity § Influence of deviations from the operational 100.0 33.9 133.9 and demographic assumptions during 2010, plus 2.7.4 other changes to the inforce portfolio Total 510.6 (77.1) 433.6 Profit from new businesses 2.7.5 (231.9) 658.0 426.1 Real operational profit according to 278.8 580.9 859.7 embedded value Development expenses not included in the embedded 2.7.6 0.0 0.0 0.0 value Profit from special items 2.7.7 0.0 0.0 0.0 Adjustment to the index in respect of the opening 2.7.8 22.2 100.1 122.3 balance Profit (loss) from deviations from the economic 184.5 (219.5) (35.0) assumptions during 2010 and amendments of the 2.7.9 economic assumptions Total real profit on an embedded value basis 485.5 461.5 947.0 Profit from non-included businesses 38.8 0.0 38.8 Capital Movements (239.9) 0.0 (239.9) Total Change in EV 284.3 461.5 745.8 Embedded value as at 31.12.2010 1,790.7 4,549.6 6,340.3
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3.5 Adjustment between the changes in adjusted equity and the net profit of the company for 2010 (in NIS millions) a. Harel Insurance Net profit for 2010 452.3 Items attributed directly to equity 27.2 Total After-Tax Profit 479.5 Changes in DAC, before tax -37.2 Tax in respect of changes in DAC not included in the in force portfolio value 6.1 Changes in the difference of fair value, less tax 89.4 Total Profit Adjusted to EV Basis 537.8 Capital Movements -239.4 Total Change in Adjusted Equity 298.4 b. Pension management businesses Net profit for 2010 19.4 Items attributed directly to equity 0.0 Total After-Tax Profit 19.4 Changes in DAC, before tax -23.8 Tax in respect of changes in DAC not included in the in force portfolio value 7.0 Changes in the difference of fair value, less tax 0.0 Total Profit Adjusted to EV Basis 2.5 Capital Movements -12.7 Total Change in Adjusted Equity -10.2
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3.6 Sensitivity analysis for included businesses as at 31.12.2010 a. Insurance businesses Change in embedded value Change in value of new business NIS % NIS % millions millions Base result 5,587 100% 315 100% 0.5% reduction in risk-free interest 61 1.1% 13 4.2% 10% increase in administration and (172) (3.1%) (22) (7.0%) general expenses Relative 10% increase in cancellation (257) (4.6%) (49) (15.6%) rate (including redemptions and settlements) 10% increase in mortality rates among (57) (1.0%) (16) (5.2%) pre-retired insureds 10% increase in morbidity rates (360) (6.4%) (46) (14.6%) Relative 10% decrease in mortality (156) (2.8%) (4) (1.2%) rate among recipients of old-age pensions Relative 10% increase in risk-free (37) (0.7%) (12) (3.8%) interest 10% decrease in administration and 172 3.1% 22 7.0% general expenses Relative 10% decrease in cancellation 288 5.2% 57 18.0% rate (including redemptions and settlements) 10% decrease in mortality rates 53 0.9% 14 4.5% among pre-retired insureds 10% decrease in morbidity rates 363 6.5% 46 14.6% Relative 10% increase in mortality 140 2.5% 6 2.0% rate among recipients of old-age pensions b. Pension businesses Change in Change in value of new embedded value business NIS % NIS millions % millions Base result 993 100% 111 100% 0.5% reduction in risk-free interest 46 4.6% 8 7.0% 10% increase in administration and general expenses (31) (3.1%) (8) (6.9%) Relative 10% increase in cancellation rate (including (64) (6.5%) (13) (11.3%) redemptions and freezing) 1% decrease in wages rises (30) (3.0%) (8) (6.8%) Increase in governmental interest by 0.5% (42) (4.2%) (7) (6.5%) 10% decrease in administration and general expenses 31 3.1% 8 6.9% 10% decrease in cancellation rate (including redemptions 72 7.2% 14 12.8% and freezing) 1% increase in wages rises 32 3.2% 8 7.3%
______M. Siboni R. Agassi D. Barron CEO CFO Chief Actuary
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Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv 67067, Israel Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il
26 May 2011
To: The Board of Directors Harel Insurance Co. Ltd.
Dear Sir or Madam,
Re: Review of embedded value report dated 31.12.2010
A. In accordance with your request, we reviewed the information prepared by Harel Insurance Co. Ltd. (hereinafter the ‘company’) regarding its embedded value as at 31.12.2010, 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.
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C. On the basis of our review and relying on the information and data provided by the company, we note as follows:
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 6,340 million, value of new business of NIS 426 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 pension fund management businesses owned by the company, the publication of which is not obligatory according to the Commissioner’s instructions.
Yours faithfully,
Kost Forer Gabbay & Kasierer C.P.A. Certified Public Accountants
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Report Regarding Embedded Value Of Dikla Insurance Company Ltd.
as at 31.12.2010
WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd
Report Regarding Embedded Value Of Dikla Insurance Company Ltd. as at 31.12.2010
Table of contents
1 General 1.1 Background and extent of disclosure 3 1.2 Clarification regarding forward looking information 3 1.3 Major chapters in document 3 1.4 Definitions 4 1.5 Comments, clarifications and exceptions 5 2 Embedded Value Calculation Methodology 2.1 General 7 2.2 Handling risks 7 2.3 Financial assumptions 8 2.4 Demographic and operational assumptions 8 2.5 Calculation method 9 2.6 Handling options and financial pledges 10 2.7 Analysis of the EV Change and Profit 10 2.8 Sensitivity tests 13 2.9 Embedded value report review 13 3 Results 3.1 Embedded value on 31.12.2010 (in NIS millions) 14 3.2 Value of new business for sales in 2010 (in NIS millions) 14 3.3 Correspondence between adjusted equity and equity in financial reports 14 3.4 Analysis of the changes in EV and the profit on an EV basis (in NIS millions) 15 3.5 Adjustments between Changes in Equity and Net Profit 16 3.6 Sensitivity analysis in respect of included businesses 16 as at 31 December 2010
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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 health insurance) for the end of the previous year. In accordance with the circular, Dikla Insurance Co. Ltd. (“the company”) hereby publishes the embedded value of company long term insurance business as at 31 December 2010.
This report has been made according to the rules and principles determined by the Commissioner for Insurance who adopted the rules and principles determined 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 1.5.2 below, as specified in said paragraph.
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).
Profit from special items – this paragraph includes effect on cost of capital from changes to capital requirements made during 2010.
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 251).
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. Short term health insurance business. b. Other company fields of operation. 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 the health insurance portfolio, valid on 31 December 2010, including future increases in premium in respect of these policies.
b. Group health 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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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 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 crystallized mainly on the basis of studies and analyses which rely on the company 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 actual long term experience.
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. 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. Different to the statements in the committee report, 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 embedded value expectancy for share owners being obtained. 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 able to distribute the uncertainty by possessing a diverse and distributed investment portfolio and on the assumption that the uncertainty can be distributed as aforementioned. In actual fact, it is possible that part of the demographic and operational risks will be impossible to be distributed. 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 embedded value has not been reduced in respect of these risks.
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 3.6. 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 does not constitute an estimate of this type, but rather serves as a tool for the readers of the report in order to assess the influence of the matters, at their discretion.
1.5.3 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.
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1.5.4 Embedded value is not intended to represent the company’s financial or market value
It should be emphasized that as aforementioned, the in force portfolio value does not include short term health insurance business and does not include other fields of operation of the company or the ability to generate future business (reputation).
Furthermore, embedded value does not take into account certain risks specified in paragraph 1.5.2 above.
Therefore, it is understood that in light of the above, embedded value does not represent the market value or the inclusive economic value of the company.
2. Embedded value calculation methodology 2.1 General Embedded value calculation principles are based on committee report rules and principles, apart from the matter of handling certain risks described above in paragraph 1.5.2, 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
o 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 are 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.
o 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
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assumptions’ and by capitalization 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 inflatio 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 2010 were:
Interest Interest Interest End of Rate End of Rate End of Rate 2011 -0.14% 2021 2.36% 2031 2.97% 2012 0.19% 2022 2.46% 2032 3.01% 2013 0.55% 2023 2.55% 2033 3.03% 2014 0.90% 2024 2.63% 2034 3.06% 2015 1.22% 2025 2.70% 2035 3.08% 2016 1.49% 2026 2.76% 2036 3.11% 2017 1.73% 2027 2.81% 2037 3.13% 2018 1.93% 2028 2.86% 2038 3.15% 2019 2.09% 2029 2.90% 2039 3.16% 2020 2.24% 2030 2.94% 2040 3.18%
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 2015 2018+ Tax 34.48% 33.62% 32.47% 31.60% 30.74% 29.00% 29.00% 29.00% rate
(*) Profit tax rate included above is 16.0% for 2011-2012 and 15.5% 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.
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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 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 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 2010. 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.
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 and other data in the possession of the company. 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.
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). The present value of profits was calculated using an actuarial model based on policy data, and other data, all in
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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 2010. . New coverage issued in 2010 as an addition to policies which were issued before 2010. . Group policies which were renewed in 2010.
It should be clarified that the present value of future profits (PVFP) includes the value of profits from the end of 2010 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:
2.7.1 Adjustments to embedded value as at 31 December 2009 – this paragraph includes corrections in respect of the opening data, including changes in the calculation methodology.
2.7.2 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 relate to a decrease in VIF following an update in the long-term expense assumption.
2.7.3 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:
2.7.3.1 The anticipated yield on the in force portfolio value, 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.
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2.7.3.2 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.
2.7.3.3 Profit anticipated to transfer from the in force portfolio value to the adjusted equity during 2010 – during 2010 the anticipated profit for the year 2010 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.
2.7.4 The influence of the deviations from the operational and demographic assumptions during 2010 – naturally, during this period the actual experience regarding the rate of claims, cancellations, expenses, etc. were different than the assumptions made at the beginning of the year 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 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.
2.7.5 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. 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, before the influence of inflation and unexpected economic factors, such as
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unanticipated changes in the market interest rates, the capital market and inflation.
2.7.6 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 2010, there were no expenses which were not included in the embedded value.
2.7.7 Profit from special items – during 2010, special profit items.
2.7.8 Influence of inflation during 2010 – this paragraph includes the influence of inflation during 2010 (2.3%) 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.
2.7.9 Profit resulting from deviation from the economic assumptions during 2010 and changes in the economic assumptions – this paragraph includes two components:
2.7.9.1 Influence on the portfolio value from changes occurring in the economic assumptions which are based on the market interests. Such assumptions include the capitalization interest and anticipated yields.
2.7.9.2 Influence from the deviations of the actual economic parameters during the year as opposed to the assumptions which served as the basis for calculation of the embedded value as at the end of the previous year. The influence is only 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.
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.
2.7.10 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
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profits/ losses of spheres of activity which are not included in the portfolio value.
2.7.11 Capital movements – this paragraph presents the change in the embedded value emanating from capital movements, including payment of dividends during the year.
The summary of the changes in paragraphs 2-11 constitutes the sum of the profit on an embedded value basis.
2.8 Sensitivity tests
The sensitivity tests presented in paragraph 3.6 hereunder have adopted the following approaches:
1. Unless stated otherwise, the sensitivity relates to all included businesses.
2. The sensitivity tests relate to each assumption separately without measuring accumulating or offsetting influences or derivative changes on other factors, etc.
3. The sensitivity in respect of the value of new businesses relates to changes from the end of 2010 onwards, not to the period from the time of sale until the end of 2010.
4. Mortality – mortality rate sensitivity tests.
5. Morbidity – sensitivity tests include all claims except for mortality included in section 4 above, including morbidity from severe diseases, nursing, surgery and hospitalization, etc. The test relates to frequency of claims and not period of payment of claims in respect of nursing.
6. Interest – sensitivity test results include:
6.1 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).
6.2 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 who performed a review of the report regarding the embedded value as at 31.12.2010 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 31.12.2010 (in NIS millions)
Included businesses in health insurance (including nursing) Adjusted equity (see paragraph 3.3 below) 295.8 Present value of future profits, less taxes 300.2 Less cost of required capital (15.7) Embedded value 580.3
3.2 Value of new businesses for sales during 2010 (in NIS millions)
VNB in respect of included businesses in health insurance (including nursing) Value of new businesses before required capital 91.4 cost Value of required capital in respect of new (2.8) businesses Total value of new businesses 88.6
3.3 Adjustment between adjusted equity and the equity in the financial reports
NIS millions Equity as at 31 December 2010 309.4 Reevaluation of overlapping assets of included businesses and displayed in 1.6 financial reports by cost of fair value, less taxes Less deferred acquisition costs (balance sheet DAC)* (20.4) Plus reserves for deferred tax on DAC 5.2 Adjusted equity in respect of included businesses 295.8
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3.4 Analysis of the change in embedded value and profits on an embedded value basis (in NIS millions)
See Adjusted In force Embedded paragraph Equity Portfolio Value Value Embedded value as at 31.12.2009 (opening 307.1 235.7 542.8 balance)* Adjustment to embedded value in respect of the 2.7.1 0.0 6.9 6.9 opening balance Embedded value adjusted to the opening balance 307.1 242.7 549.8 Operational profit from the in-force portfolio to the
opening balance: § Changes in operational and demographic 2.7.2 0.0 (15.5) (15.5) assumptions § Anticipated profit on the in force portfolio 2.7.3 8.2 2.2 10.4 value § Inclusive profit predicted in 2010, 2.7.3 34.9 (34.9) 0.0 transferred from portfolio value to equity § Influence of deviations from the operational 17.3 6.0 23.3 and demographic assumptions during 2010, plus 2.7.4 other changes to the inforce portfolio Total 60.4 (42.1) 18.2 Profit from new businesses 2.7.5 2.0 86.6 88.6 Real operational profit on an embedded value 62.4 44.5 106.9 basis Development expenses not included in the embedded 2.7.6 0.0 0.0 0.0 value Profit from special items 2.7.7 0.0 0.0 0.0 Adjustment to the index in respect of the opening 2.7.8 4.5 5.5 10.0 balance Profit (loss) from deviations from the economic 0.9 (8.2) (7.3) assumptions during 2010 and amendments of the 2.7.9 economic assumptions Total real profit on an embedded value basis 67.9 41.8 109.6 Profit from non-included businesses 2.7.10 19.4 0.0 19.4 Total real profit on an embedded value basis - 87.3 41.8 129.1 including all business of the company Capital Movements 2.7.11 (98.6) 0.0 (98.6) Embedded value as at 31.12.2010 295.8 284.5 580.3
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3.5 Adjustment between the changes in adjusted equity and the net profit of the company for 2010 (in NIS millions)
Net profit for 2010 87.1 Items attributed directly to equity 2.0 Total After-Tax Profit 89.0 Changes in DAC, before tax (3.9) Tax in respect of changes in DAC not included in the in force portfolio value 1.0 Changes in the difference of fair value, less tax 1.1 Total Profit Adjusted to EV Basis 87.3 Capital Movements (98.6) Total Change in Adjusted Equity (11.3)
3.6 Sensitivity analysis for included businesses as at 31.12.2010 Change in Change in value of new embedded value business NIS % NIS millions % millions Base result 580.3 100% 88.6 100% Deduction of 50 base points in risk-free interests 2.0 0.3% 3.0 3.4% 10% increase in administration and general expenses -7.4 (1.3%) -0.4 (0.5%) Relative 10% increase in cancellation rate -12.1 (2.1%) -4.1 (4.6%) 10% increase in mortality rates 2.5 0.4% 1.8 2.1% 10% increase in morbidity rates -29.6 (5.1%) -5.1 (5.8%) Increase of 50 base points in risk-free interests -2.7 (0.5%) -1.5 (1.7%) 10% decrease in administration and general expenses 7.4 1.3% 2.0 2.3% Relative 10% decrease in cancellation rate 13.1 2.3% 6.3 7.1% 10% decrease in mortality rates -2.8 (0.5%) -0.3 (0.3%) 10% decrease in morbidity rates 31.2 5.4% 7.2 8.1%
______A. Keller Y. Molkendof M. Yarmish CEO CFO Chief Actuary
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Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il
25 May 2011
To: The Board of Directors Dikla Insurance Co. Ltd.
Dear Sir or Madam,
Re: Review of embedded value report dated 31.12.2010
A. In accordance with your request, we reviewed the information prepared by Dikla Insurance Co. Ltd. (hereinafter the ‘company’) regarding its embedded value as at 31.12.2010, 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 health insurance policies (including nursing) (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 - 4886058c-6408-4f8e-afaf-b843c74867dd 1. The methodology and assumptions described in the embedded value report substantively comply with the Commissioner’s circular, subject to item D(2) 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 580 million, value of new business of NIS 89 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. Comments, clarifications and limitations relating to the treatment of risks described in paragraph 1.5.2 of the embedded value report.
Yours faithfully,
Kost Forer Gabbay & Kasierer C.P.A. Certified Public Accountants
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