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. 1 -2 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd 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. 1 -2 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Board of Directors' Report 1 -2 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Financial Board of Directors'' Report Services Ltd Three-months period ended March 31, 2011 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 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Board of Directors'' Report Financial Services Ltd Three-months period ended March 31, 2011 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. 1 - 2 WorldReginfo - 4886058c-6408-4f8e-afaf-b843c74867dd Harel Insurance Investments & Board of Directors'' Report Financial Services Ltd Three-months period ended March 31, 2011 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