Harel Insurance (TASE: HARL)

Please refer important disclosures at the end of the report. This report is intended for institutional/experienced investors only as per the First Schedule of the Israeli Securities Law (1968) Terence Klingman Senior Analyst 972-3-753 6940 terencek@xnes.co.il 1 JULY 2009 Harel Insurance (TASE: HARL) Insurance Buy ( ) Update Target Price: NIS 228 More profitable than peers in core long-term savings and health franchises Stock Data Bloomberg HARL.IT Reuters HARL.TA Price (NIS) 160.00 Shares O/S (m) 20.6 Market cap (NISm) 3,290.8 Free float 28.0% 12 mo. range (NIS) L75.05 H172.40 12 mo. volume (NISm) 5.9 EV disclosure indicates that HARL is more profitable than its peers both with respect to existing in-force business (VIF/ Life & health reserves totals 15% compared with 11%/ 12% at MGDL / CLIS) and with respect to new business (we calculate 2008 new business margin of 5.2% vs. 3.2%/2.6% at MGDL / CLIS). Pension EV is also encouraging boosted by acquisition of Gilad fund in 2008, which adds substantial scale to the pension business. Higher than average exposure to investment guarantees. Higher inflation coupled with more subdued capital markets will probably force the company to reserve against these policies in 2H09 after making profits in 1H09. Non-covered businesses are less attractive. The P+C business is highly competitive leaving little room for error. HARL s provident and mutual funds face significant challenges from competing products and strong competitors and HARL has struggled to keep AUM from declining. We therefore apply conservative valuations to non-covered businesses. Upgrade to a BUY. Given its profitability profile HARL looks cheap both with respect to CLIS and MGDL. We upgrade to buy with a NIS 228 target price based on an average of sum of the parts (EV+ separate valuations for non-covered business) and sustainable 15% RoE model. HARL vs. TA25 Relative Strength 120% 100% 80% 60% 40% 20% 0% 00/01/1900 23/09/2008 29/12/2008 25/03/2009 28/06/2009 TA 25 Index HARL IT Equity Summary Earning Estimates Year-end Dec (NIS,m) 2006A 2007A 2008A 2009E 2010E PBT : Long term savings 280,549-228,817 224,704 283,558 PBT: Health 194,767 151,314 197,685 211,968 PBT: P+C 152,462 60,282 149,057 148,308 PBT: Financial Services 44,388-152,931-10,757 2,769 Unallocated and other 95,443-185,721-83,639-77,501 Profit Before Tax 730,875 767,609-355,873 477,050 569,102 Minorities -19,464-19,927-14,602-14,602-19,469 Taxation -286,927-283,557 91,133-166,968-199,186 Net income (exc. x- items) 424,484 464,125-279,342 295,481 350,447 Key Valuation Ratios Year-end Dec 2006A 2007A 2008A 2009E 2010E EPS (excl x- items) 20.02 21.89-13.15 14.27 16.93 P/E (x) (adj) 7.99 7.31-11.21 9.45 ROE-(exl. x- items) 18.59% 16.55% -10.48% 11.07% 11.57% P/B (x) 1.35 1.12 1.37 1.12 1.06 P/EV - 0.86 0.85 - - DPS 5.96 6.42 4.72 0.00 8.46 Dividend Yield 3.7% 4.0% 3.0% 0.0% 5.3% 1 Harel Insurance Investments Excellence Nessuah Securities Equity Research

EV disclosure indicates that HARL is more profitable than its peers The profitability of both in-force (existing) and new business at HARL appears to be superior to that of its peers, a fact we attribute to 3 factors: a strong health insurance franchise, more individual as opposed to group retirement policies in the life business mix and a large number of collective (pure risk) group cover policies. VIF/ Life & health reserves totals 14.99% at HARL compared with 10.62% and 11.98% at MGDL and CLIS respectively (refer Table 1). This is a substantial difference, which can be partly explained by HARL s business mix that is more heavily oriented than its competitors to premiumdriven as opposed to reserve-driven business. Nevertheless, even after making allowance for this we feel that HARL still demonstrates more robust profitability than the competition. Israeli insurers do not provide direct disclosure of new business margins but if we divide VNB by 10x annualized new premiums+ 1x single premiums we calculate a new business margin for HARL of 5.77% compared with 2.55% and 3.21% for CLIS and MGDL respectively, which reinforces our conclusion drawn above (refer Table 2). VNB as a percentage of EV is also larger at HARL (5%) than at MGDL (3%) or CLIS (2.5%), so profitability is also accompanied by growth. Table 1: EV comparatives- life and health (NIS m) 2008 Harel (incl. Dikla) Migdal Clal ANW 880 1,366 1,054 VIF 3,062 5,380 4,256 EV 3,942 6,746 5,310 Health and life reserves 20,434 50,652 35,523 VIF/ Health and reserves 14.99% 10.62% 11.98% VNB/ EV 5.77% 3.21% 2.55% Source: ENS Research & Company Data Higher than average exposure to investment guarantees. By surrendering a portion of the designated government bonds held against the guaranteed real return policies issued prior to 1990 HARL is more exposed than MGDL and CLIS where designated bonds are ~80% of pre-1990 policies compared to ~60% at HARL. HARL s exposure to pre-1990 policies is ~NIS 3.3bn (net of designated bonds). HARL also has a guaranteed real return policy for early-retirement employees of Bezeq, Israel largest telco which presently total NIS 1.1bn. Higher inflation coupled with more subdued capital markets will probably force HARL to claw back some of the profits made in 1H09 during 2H09. This exposure introduces more volatility into the long term savings results than at other insurers (although absolute level of exposure to investment guarantees is not excessive totaling 23% of total life reserves). However, HARL s strong underwriting profits from the health franchise and other profit generators enable it to manage this volatility comfortably. 2 Harel Insurance Investments Excellence Nessuah Securities Equity Research

Given the relatively higher level of exposure to guaranteed products, HARLs strong EV performance relative to other competitors is noteworthy and reflects the strengths we outlined above. Table 2: New business profitability-life and health 2008 Harel (incl. Dikla) Migdal Clal VNB 227 217 135 Annulized new premium 373 668 588 VNB/Annualised new premium 61% 32% 23% One time premiums 633 404 171 VNB/(Annualized new premium*10+ one time premiums) 5.22% 3.06% 2.24 % 2007 Harel (incl. Dikla) Migdal Clal VNB 180 194 169 Annualised new premium 337 617 537 VNB/Annualised new premium 53% 31% 31% One time premiums 317 320 82 VNB/(Annualized new premium*10+ one time premiums) 4.88% 2.99% 3.10 % Source: ENS Research & Company Data Pension EV is also encouraging HARL s pension EV was boosted by acquisition of Gilad fund in 2008, which adds substantial scale to the pension business. HARL now manages close to NIS 6bn in pension assets, which is smaller than the big three players MGDL, CLIS and MMHD (Menorah-Mivtahim). However, the VIF as a % of pension funds under administration is higher at HARL than at the MGDL and CLIS but lower than at MMHD, although this is partly explained by the fact that both CLIS and MGDL also run some old pension funds (pre-1995) of NIS 3.9bn and NIS 1bn respectively where profitability is lower. Table 3: EV comparatives-pension Pension 2008 Harel (HARL) Migdal (MGDL) Clal (CLIS) Menorah (MMHD) ANW 20 69 27 227 VIF 510 1,017 938 1,946 EV 530 1,086 964 2,173 Pension funds Under administration 5,741 14,157 11,663 19,883 VNB 59 83 93 149 VIF/ Pension funds under administration 8.9% 7.2% 8.0% 9.8% VNB/EV 11.6% 8.2% 9.9% 7.7% Source: ENS Research & Company Data 3 Harel Insurance Investments Excellence Nessuah Securities Equity Research

Non-covered businesses are less attractive Property and casualty insurance The P+C business is highly competitive leaving little room for error. Overall our impression is that in recent years given the severe competition in most P+C lines underwriting profits have evaporated to be replaced by combined ratios in excess of 100%, leaving P+C profitability at the mercy of investment performance. It is not clear to us that going forward the non-life industry as a whole can earn in excess of its cost of capital, unless there is substantial industry consolidation. We prefer MGDL s approach-unique among the big insurers- which has kept the exposure to non-life at a much lower levels of the overall business mix Provident funds and mutual funds HARL acquired good quality provident fund and mutual fund assets from LUMI as part of the Bachar reforms, but has struggled to prevent the erosion of AUM. Provident and mutual funds are under pressure both from competing products and strong competitors. Provident funds are gradually being eroded from competition from pension funds which offer better benefits at lower levels of fees. No insurer has voluntarily disclosed the EV on provident funds. Mutual funds face strong competition from a very active ETF industry, and HARL is not a significant force in the ETF market. In general, independent investment houses have had a better track record in managing both mutual funds and provident funds than the insurers in-house financial arms and HARL is no exception to this trend. HARL s investment performance is generally midtable while the independent investment houses generally manage to be well represented among the top-performing funds. In addition, the independent investment houses have implemented very successful marketing strategies combining a direct approach to the end-client with aggressive targeting of investment advisors at the banks. Upgrade to a BUY. Given its profitability profile HARL looks cheap both with respect to CLIS and MGDL. We upgrade to buy with a NIS 228 target price based on an average of a sum- of- the -parts (EV+ separate valuation for P+C and mutual fund business) and a sustainable RoE model (which assumes 15% RoE through cycle). In principle, the relative lack of pre-retirement and post- retirement investment guarantees compared to certain European insurers, should make investors feel more comfortable that VIF will be less affected by market dislocations. The added element of performance related fees (15% of real returns) with respect to the 1990-2003 life pools also means that the VIF with respect to these portfolios is perhaps understated as the realized investment returns are likely to produce substantially more management fees than assumed by projecting future returns at the risk-free rate. 4 Harel Insurance Investments Excellence Nessuah Securities Equity Research

Table 4: Valuation NIS '000 Upside EV 2008 -Insurance company level (Harel Insurance+65% of Dikla) 4,117 21% Add: additional capital at holding company level 729 Less: G/W & intangibles related to non-covered businesses (1,005) Adjusted tangible EV -holding company-2008 3,841 13% Mutual fund business (25% impairment from cost, 2.9% of AUM) 431 Provident fund business (15% impairment from cost) 480 P+C- 5x PE on NIS 78m post-tax through cycle profits 390 Debt with respect to non-covered businesses (155) Non-covered businesses 1,302 Sum of the parts valuation 5,142 52% Indicated fair value per share NIS using sum-of-the parts 250.02 52% Indicated fair value per share NIS using RoE model (15%) 205.88 25% Average of above models 227.95 38% 5 Harel Insurance Investments Excellence Nessuah Securities Equity Research

Please refer important disclosures at the end of the report. This report is intended for institutional/experienced investors only as per the First Schedule of the Israeli Securities Law (1968) HARL Projected P+L (ILS 000) Long Term Savings 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 Health MV- Liability MV- Property Other- Property Other- Liability Total P+C Fin. services Other Inter segment Earned premium 2,922,811 1,769,973 553,737 816,032 596,699 703,757 2,670,225 0 0 0 7,363,009 Reinsurance 108,574 123,348 6,250 5,238 397,650 482,858 891,996 0 0 0 1,123,918 Earned premium- net 2,814,237 1,646,625 547,487 810,795 199,049 220,899 1,778,229 0 0 0 6,239,091 Investment income 4,080,843 31,567 143,015 29,215 10,204 32,865 215,298 14,722 50,000-24,997 4,367,432 Management fees 402,051 0 120,312 2,908 0 525,271 Commissions 21,303 60,102 0 472 65,544 57,684 123,700 23,994 49,475-26,359 252,214 Other financial services 0 0 0 0 0 Other income 15 428 100 363 364 1,255 16 38,020 0 39,306 Total revenues 7,318,433 1,738,309 690,929 840,581 275,159 311,812 2,118,482 159,044 140,403-51,356 11,423,315 Claims paid+ change in reserves 6,479,862 0 0 0 0 6,479,862 Re-insurers share -76,116 0 0 0 0-76,116 Net change 6,403,746 1,136,171 546,849 612,618 83,419 181,083 1,423,969 0 0 0 8,963,886 Commissions and selling expenses 408,262 291,252 60,033 172,764 161,002 123,988 517,787 0 4,825-26,359 1,195,767 General and admin and G/W write off 274,582 106,118 5,925 6,258 5,913 5,890 23,986 148,000 112,743 0 665,429 Finance expenses 20,537 7,083 1,366 279 2,005 34 3,683 19,649 107,298-24,997 133,253 Total expenses 7,107,128 1,540,624 614,173 791,919 252,339 310,994 1,969,425 167,649 224,866-51,356 10,958,335 Asociate income 13,398 0-2,152 824 0 12,070 Profit before tax 224,704 197,685 76,757 48,662 22,821 818 149,057-10,757-83,639 0 477,050 Tax 166,968 Profit after tax 310,083 Outside shareholders 14,602 295,481 EPS 14.27 No. of shares 20,705 Total 0 0 0 6 Harel Insurance Investments Excellence Nessuah Securities Equity Research

Please refer important disclosures at the end of the report. This report is intended for institutional/experienced investors only as per the First Schedule of the Israeli Securities Law (1968) Ratings Key 1. Buy: Expected to outperform the relevant broader market index over the next 12-18 months. 2. Neutral: Expected to perform in-line with the relevant broader market index over the next 6-12 months. 3. Sell: Expected to underperform the relevant broader market index over the next 6-12 months. Disclaimer and Disclosures Analyst Information Name License Type License Number Address Terence Klingman Investment marketing 9002 7 Jabotinsky Street Ramat Gan 52520 Israel Education B.Com (1993), B.Com (Hons) (1994) with distinction, University of the Witwatersrand, South Africa Experience Terence Klingman completed articles in accountancy at Kessel Feinstein in South Africa. He thereafter served in a number of senior positions in the banking field at both Investec, in South Africa and Israel and HSBC, Israel.. Licensed broker: Excellence Nessuah Brokerage Services Ltd. 7 Jabotinsky Street Ramat Gan 52520 Israel Conflict of interest - Analyst At date of preparation of this report, the analyst is not aware of any conflict of interest with respect to the company that is covered in this report. Information regarding analysis Valuation methodology Using our earnings forecasts and historical data as a base, we have used applied sustainable RoE model to determine a target price for the covered companies. We also used a sum of the parts methodology which incorporates Embedded Value disclosures and estimates. Risks 1. Regulation: Insurers are subject to regulation by, inter- alia, the Insurance Supervisor, the Antritrust Authority and the Israel Securities authority. Changes in regulation can significantly impact the business environment in which insurers operate 2. Israeli Economy: Insurers are directly exposed to the Israeli economy and any adverse developments in the domestic economic environment can have a direct impact on insurers. 3. Discount rate: Changes in the long term government bond rates have a direct impact on the discount rate used in our models for valuing insurers and calculating the value of in force business. 4. Inflation risk: Certain policies issued by the insurers carry real-yield investment guarantees and changes in inflation are not entirely hedged by non-tradable designated government bonds. In addition insurers may issue inflation-linked debt whose value and the financing charges related thereto are sensitive to changes in the inflation rate. 7 Harel Insurance Investments Excellence Nessuah Securities Equity Research

5. Actuarial assumptions: Insurers reserves are based on a variety of actuarial assumptions such as longevity, mortality and loss ratios. Changes in actuarial assumptions may therefore lead to significant adjustments in insurance reserves. Share Information (NIS)-HARL 30,000 25,000 20,000 15,000 10,000 XNES target price HARL IT Equity 5,000 10/02/2008 10/03/2008 10/04/2008 10/05/2008 10/06/2008 10/07/2008 10/08/2008 10/09/2008 10/10/2008 10/11/2008 10/12/2008 10/01/2009 10/02/2009 10/03/2009 10/04/2009 10/05/2009 10/06/2009 Recommendation history Change Rating Target price NIS 01/07/2009 Upgrade Buy 231.00 18/09/2008 Downgrade Neutral 25/05/2008 Buy 252.00 13/01/2008 Buy 303.00 Analyst Certification I, Terence Klingman, certify that views expressed in this report accurately reflect my personal views about the subject securities and issuer. I also certify that I have not and will not receive any compensation for providing specific recommendations or views expressed in this report. 8 Harel Insurance Investments Excellence Nessuah Securities Equity Research

Disclosure Excellence Nessuah Brokerage Services Ltd (the 'Company') Conflicts of interest 1. This report was published on in response to/ ahead of a quarterly/annual results announcement 2. At the time of publishing this report, or in the 30 days previous to this report, the company or companies associated with it, held in its Nostro or managed accounts, significant holdings in the shares of the company analysed, or companies associated with it. Disclaimer The analysis included in this report is for informational purposes only and is offered for the knowledge of investment advisors solely as background information that may be used as one of a number of tools that are available to help such persons formulate recommendations to their clients, with whom they have signed consulting agreements, as required under the law. This report and/or the information contained herein and/or the analysis provided herein should not be considered as an offer and/or advice to purchase and/or sell and/or hold the securities and/or the financial assets described herein or any other securities and/or financial assets. This document is presented solely for the use of professional and experienced investors as defined in the First Schedule of the Israel Securities Law (1968), who make their investment decisions without relying on this document, or on any documentation related to it. Companies within the Excellence Nessuah Group, its directors, managers and workers, take no responsibility for any direct or circumstantial loss that may arise from use of this document or any documents related to it. The analysis presented herein was performed on the basis of information that was published and/or that was made available to the entire public, including information that was collected and prepared by the Company and information that originates from other sources that the Company assumes to be reliable, although no independent investigation as to the credibility of such was made by the Company. This report does not constitute a written proof and/or approval as to the credibility of such information. The information presented in this report does not claim to include all the information that an investor would require, and does not claim to constitute a complete analysis of all of the facts and details that appear in the report, and the opinions presented herein may change without prior notice. Accordingly, this report does not constitute in any way a substitute for investment advising that would take into consideration the figures and special needs of each person. Anyone who relies upon the information presented in this report does so at he's own risk and the Company, companies controlled by the Company and their shareholders, managers and employees, shall not bear any liability whatsoever for any damage and/or loss that may be caused as a result of using this report, and shall not guarantee or bear any responsibility whatsoever for the reliability of the information presented in this report. It should be noted that the Excellence Nessuah Brokerage (the Company) Services Ltd is part of the Excellence Group, which is part of the Delek Group. Excellences Group businesses include, inter alia, the management of investment portfolios, securities trade, stock market transactions, and investment banking. Furthermore, companies controlled by the Company and it's shareholders, or other related parties hold or may hold, from time to time, either directly or indirectly, securities or financial instruments that are the subject of this report, either before they are published, at the time they are published or after they are published. In addition, by virtue of the fact that the Company, companies held by the Company, the Company s shareholders, or other related parties are entities that serve as underwriters or in the area of investment advising, portfolio management, or investment marketing, such entities may act as underwriters for the securities of the Company that is the subject of this report, and may be related to the Company by virtue of commercial ties. In addition, the Company serves as a market maker with regard to the securities of various companies, pursuant to the approval granted by the Tel Aviv Securities Exchange Ltd., and may use at any date as market maker with regard to the securities of the Company that is the subject of this report. All rights contained in this report are the property of the Company. This report is designated for the recipient whose name appears above, and any transfer of portions of this report or publication of any kind, without the advanced, expressed, written approval of the Company, and without including this provision in the text of the report in a prominent place, is strictly prohibited, unless noted otherwise 9 Harel Insurance Investments Excellence Nessuah Securities Equity Research

Excellence Nessuah Brokerage Services Contact Page CEO, Excellence Nessuah Securities Ron Sireni Telephone ++ 972 3 753 2020 rons@xnes.co.il Research Department Head of Research Terence Klingman Telephone ++972 3 753 6940 Mobile ++972 54 900 1047 terencek@xnes.co.il Analyst Gilad Alper Telephone ++972 3 753 2035 Mobile ++972 54 245 0342 gilad.alper@xnes.co.il Analyst Gil Dattner Telephone ++ 972 3 753 2038 Mobile ++ 972 54 900 1004 gilda@xnes.co.il Chief Macro Economist Shlomo Maoz Telephone ++ 972 3 753 2068 Mobile ++ 972 50 727 6772 shlomom@xnes.co.il Sales & Trading Department International Sales Dan Farhi Telephone ++ 972 3 753 2058 Mobile ++ 972 54 521 1353 danf@xnes.co.il International Sales Sarah Jane Ross Telephone ++ 972 3 753 6540 Mobile ++972 54 800 2155 sarahr@xnes.co.il Chief Trader Roy Laufer Telephone ++ 972 3 753 2047 Mobile ++ 972 54 355 051 royl@xnes.co.il Head Trader, International Desk Daniel Rapoport Telephone ++ 972 3 753 2072 Mobile ++ 972 54 770 630 daniel.rapoport@xnes.co.il Trader Ido Amarilio Telephone ++ 972 3 753 6628 Mobile ++ 972 54 245 0346 ido.amarilio@xnes.co.il 10 Harel Insurance Investments Excellence Nessuah Securities Equity Research

Trader Oren Ossad Telephone ++ 972 3 753 2075 Mobile ++ 972 54 521 1369 oren.ossad@xnes.co.il Fixed income Trader David Rashelbach Telephone ++ 972 3 753 8596 Mobile ++ 972 54 245 0351 david.rashelbach@xnes.co.il Trader Eliran Stuckelman Telephone ++ 972 3 753 6804 Mobile ++ 972 54 485 2508 elirans@xnes.co.il 11 Harel Insurance Investments Excellence Nessuah Securities Equity Research