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Stability of Insurance Companies

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					Stability of
Insurance Companies
                                                                               Stability of Insurance Companies



        Contents
1. Regulation of the Activity of Insurance Companies ........................................................................ 3
2. Analysis of the Business Outcomes of the Insurance Companies ............................... 12
3. Analysis of the Business Outcomes in Life Insurance ........................................................................ 31


List of Tables
Table B-1            Amounts of Life-Indexed Bonds Redeemed in Early Redemption Auction,
                     1997-2003.................................................................................................. 10
Table B-2            Main Financial Data of Insurance Companies (On Basis of Consolidated
                     Balance Sheets) ......................................................................................... 12
Table B-3            Comparison between Revenue from Management Fees of the Two Large
                     Insurance Companies and the Two Large Banks, 2003 ............................ 16
Table B-4            Rate of Yield on Accounting Equity, 1999-2003....................................... 17
Table B-5            Makeup of Recognized Equity and Reserve for Special Risks in Life
                     Insurance for Life Insurance Companies, 2003 ........................................ 19
Table B-6            Development of Equity in Active Insurance Companies (Non-Consolidated
                     Balance Sheets), 1999-2003 ...................................................................... 21
Table B-7            Share of Deferred Acquisition Costs Out of Recognized Equity (Insurance
                     Groups), 2001-2003 .................................................................................. 25
Table B-8            Share of Expenses in Life Insurance Capitalized to Deferred Acquisition
                     Costs Out of Total Expenses for Commissions, General and Administrative
                     Expenses in Life Insurance (Insurance Groups), 2003 ............................. 25
Table B-9            Aggregate Profit Before Tax from Life Insurance and Non-Life Insurance
                     Business by Insurance Companies (Non-Consolidated Balance Sheet Data),
                     1999-2003.................................................................................................. 27
Table B-10           Aggregate Profit Before Tax from Life Insurance and Non-Life Insurance
                     Business (Non-Consolidated Balance Sheet Data), 1999-2003 ................ 29
Table B-11           Profit from Life Insurance Business (Non-Consolidated Balance Sheet
                     Data), Rates of Change, Market Share, 2001-2003................................... 31
Table B-12           Life Insurance Premiums by Companies .................................................. 34
Table B-13           Distribution of Premiums in 2002-2003 between Insurance Policies Sold
                                                                                                                                      Annual Report 2003




                     Until 1990 and Insurance Policies Sold from 1991................................... 37
Table B-14           Distribution of Life Insurance Reserves between Participating Portfolio and
                     Assured-Yield Portfolio............................................................................. 38




                                                                                                                               ±
Table B-15   Market Share of Insurance Companies – Life Insurance Reserves –
             Participating Portfolio Versus Assured-Yield Portfolio............................. 39
Table B-16   Ratio of Surrendered Policies to Total Average Reserve – Industry-wide 41
Table B-17   Revenue from Management Fees in Life Insurance in Participating Portfolio
             by Companies, and Percentage of Management Fees Revenue from Profit in
             Life Insurance Business ............................................................................ 44
Table B-18   Ratio of Profit from Life Insurance Business to Total Life Insurance
             Reserves, by Insurance Groups ................................................................. 45
Table B-19   Ratio of Commissions to Premiums in Life Insurance ............................. 47
Table B-20   Ratio of General and Administrative Expenses to Total Life Insurance
             Reserves - Companies ............................................................................... 49


List of Chatrs
Chart B-1    Yield on Equity in Banks and Insurance Companies, 2001-2003 ............. 14
Chart B-2    Makeup of Profit Before Tax – Life Insurance Business Versus Non-Life
             Insurance Business .................................................................................... 28
Chart B-3    Ratio of Profit from Life Insurance and Non-Life Insurance Business to
             Gross Premiums, 2001-2003 ..................................................................... 29
Chart B-4    Market Share of Premiums Reported in 2003 – 2003 Underwriting Year
             Versus Previous Underwriting Years ......................................................... 36
Chart B-5    Ratio of Management Fees from Life Insurance Policies in Participating
             Portfolio to Total Profit from Life Insurance Business ............................. 43
Chart B-6    Market Share – General and Administrative Expenses Versus Life Insurance
             Reserves ....................................................................................................................50
                                                         Stability of Insurance Companies



1.     Regulation of the Activity of Insurance Companies

1.1 Introduction
In 2003, the activities of the Insurance Companies Stability Department centered on
elaborating the rules relating to the strengthening of the capital base, personal liability,
reporting, improving transparency and adopting rules of due disclosure. Rules were also
introduced regulating ongoing activities in the insurance industry and the relations between
the different bodies involved in this field.
Over the course of the year, the Commissioner published circulars requiring insurance
companies to set policy for exposure to reinsurers; to report to the Commissioner on
insurance against exposure for each separate reinsurers (including reporting on potential
exposure to a reinsurers on account of a catastrophe); and to regulate the conditions for
agreements between the insurer and the insurance agent. Insurance companies were also
required to establish rules regarding the appointment of a general insurance actuary. The
Commissioner’s circular established rules regarding the scope of actuary estimation that the
actuary should undertake, and regarding the declaration containing his professional opinion
regarding the evaluation of the insurer’s liabilities on account of the non-life insurance lines
he has evaluated. Another circular required the adoption of an action plan for coping with
crises and emergencies. In addition, over the course of the year a draft was published for the
amendment of the Insurance Business Supervision Regulations (Minimum Equity Required
of an Insurer), 5758-1998, relating to the equity requirement on account of all the deferred
acquisition costs in life insurance, and establishing minimum equity for the residential
credit portfolio. A draft was also published for the amendment of the Insurance Business
Supervision Regulations (Forms of Investment of Capital and Interest of an Insurer and
Management of Its Liabilities), 5761-2001, relating to the regulation of the attribution of
various deferred acquisition cost, the introduction of provisions for the granting of loans to
agents, and the adoption of rules of due disclosure applying to banking corporations relating
to the provision of residential loans by the insurer. These drafts were consolidated into the
form of regulation after the end of the year.
As part of the struggle against money laundering, steps were taken over the year to
inculcate the importance of this subject among relevant elements in the industry, through
the implementation of comprehensive audits, the publication of guidelines and explanations,
                                                                                                   Annual Report 2003




and the implementation of seminars and training sessions.




                                                                                           ≥
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     1.2 Capital Regulations
                     Deferred Acquisition Costs (DAC)
                     As part of the comprehensive reform undertaken by the Commissioner of Insurance in the life
                     insurance line, it was decided to increase the minimum capital requirements for an insurer on
                     account of deferred acquisition costs in life insurance, and to apply capital requirements on
                     account of deferred acquisition costs in health insurance.
                     As a general rule, a capital requirement is usually established due to the presence of intangible
                     assets in the balance sheets of the insurance company. Deferred acquisition costs in life
                     insurance are an intangible asset presented in an amount not exceeding the current value
                     of the revenue expected to accrue to the company from the life insurance policies. Among
                     other factors, this capital requirement is also intended to finance the acquisition costs of new
                     policies from the insurer’s equity – in contrast to the partial financing that was customary
                     in the past, from the sums of savings of the insured in participating life insurance plans.
                     The insurance companies customarily pay insurance agents who distribute the life insurance
                     companies very high acquisitions commissions at the time of issue of the policy, and much
                     lower commissions in subsequent years, as long as the policy remains valid. Accordingly,
                     the balance sheets of the insurance companies showed high deferred acquisition costs at a
                     high proportion of the insurer’s equity. Moreover, the fact that the insurance agents received
                     high commissions at the time of issuing the policies and subsequently lower commissions
                     throughout the life of the policy is liable to encourage a policy of twisting among the agents –
                     while this indeed yields higher remuneration for the agents, it does not necessarily constitute
                     an advantage to the insured, and indeed is liable to cause them damage. The establishment
                     of a full capital requirements against all deferred acquisition costs may enhance the level
                     of rationalization in the industry, since it led the insurance companies to establish “flat
                     commissions,” i.e. commissions at a similar rate throughout the life of the policy. This
                     development will reduce the incentive for agents to twist policies, and it may reasonably be
                     expected that the duration of life insurance policies will increase.

                     1.3 Capital Requirements for Companies in the Mortgage-Secured
                     Residential Credit Insurance Line and in the Mutual Life Insurance
                     Line
                     As part of the amendment of the capital regulations, capital requirements were established
                     for the first time with regard to insurers in the mortgage-secured residential credit insurance
                     line insuring mortgage-secured loans portfolios (as distinct from the insurance of a single




                       ¥     Annual Report 2003
                                                         Stability of Insurance Companies


mortgage-secured loan, for which capital requirements were established several years ago).
The amendment also established a minimum capital requirement for insurers active in mutual
life insurance.


1.4 Report Details Regulations
Transition to Nominal Financial Reporting
In July 2001, the Institute for Accounting Standards published Accounting Standard No.
12 relating to the discontinuation of the adjustment of financial statements. In December
2002, Accounting Standard No. 17 was published, in accordance with the application of
the provisions of Standard 12 is deferred through the end of 2003. Standard No. 12 was
published in light of the changing inflationary situation in Israel, manifested in the fall of
inflation to single-figure values. The standard established that the need to present financial
statements adjusted to the CPI would be abolished, and that accounting reporting would be
solely in nominal figures, as is customary internationally.
In light of the above, it was decided to adapt the reporting instructions for insurance companies
in line with the above-mentioned Accounting Standard No. 12, applying a nominal reporting
base as from January 1, 2004.


Transition to the Revaluation of Non-Negotiable Assets according to Fair Value
As part of the policy of the Commissioner of Insurance to introduce the presentation of
assets and liabilities according to fair value (market value), a policy that is consonant with
international policy as manifested in international accounting rules, it was decided, in the
first phase, to amend the manner of revaluation of non-negotiable assets in participating
portfolios. These assets will be revalued in accordance with fair value, calculated by means
of a model as instructed by the Commissioner of Insurance and based on the cash flow
capitalization method. The Commissioner will select a company supplying interest quotes,
and this company will establish the interest rates for cash flow capitalizations. It should
be noted that these assets are currently capitalized in accordance with the “adjusted cost”
method, and this change is being introduced alongside the similar change in the revaluation
rules for the provident funds and pension funds.
                                                                                                    Annual Report 2003




                                                                                            µ
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     1.5 The Contract between the Insurer and the Insurance Agent
                     The Insurance Business Supervision Law – 1981 (henceforth the Supervision Law) mandates
                     the existence of a written contract between the insurer and the insurance agent, a contract
                     which stipulates that the agent must keep the premiums that he has collected from the insured
                     in a separate account until he transfers them to the insurer, and that their transfer to the
                     insurer will be performed not later than on the 15th of the month subsequent to the month of
                     premium collection.
                     A review of public complaints and audits by the office of the Commissioner of Insurance
                     revealed that there are shortcomings in the implementation of the above-mentioned
                     regulations.
                     In February 2003, the Commissioner published a circular relating to the regulation of the
                     contract; however, the application of this circular was delayed following an appeal by the
                     Association of Insurance Brokers & Agents in Israel relating to the Commissioner’s authority
                     to establish rules and regulations on this matter. In November of the same year, the Supreme
                     Court rejected this petition.
                     At the beginning of August 2004, the Commissioner of Insurance published a detailed circular
                     with updated and final instructions regarding the framework for the contract between the
                     insurer and the insurance agent; this circular will become effective as of January 2005.
                     The provisions in the updated circular emphasize the abovementioned obligation requiring
                     an insurance agent to open separate bank accounts for the deposit of insurance fees received
                     from insureds pending the date of transfer to the insurers. These accounts will be trustee
                     accounts for the insurers, and the insurance agent will not be able to offset any amount due
                     to him as part of his regular accounting with the insurer, such as fees for commissions or the
                     processing of claims.
                     The circular prohibited the insurance agent from providing insureds with credit and payment
                     arrangements different from those provided by the insurer, and established that control and
                     audit systems will be applied to the trustee accounts, enabling both insureds and insurers to
                     monitor the movement of insurance fees from the insured to the insurer.
                     The original directive circular was updated, expanding the range of options available to
                     insurance agents regarding the transfer of insurance fees to insurers and ensuring the transfer
                     of insurance fees in full to the insurer.




                       ∂     Annual Report 2003
                                                        Stability of Insurance Companies



1.6 Actuary Assessment in Non-Life Insurance
In 2003, a circular was published updating the provisions relating to the implementation of
actuary assessment in pending claims in non-life insurance lines.
The new directives included an updated list of insurance lines in which actuary assessment is
to be undertaken, and updated requirements for reporting by the company to the Commissioner
of Insurance relating to the appointment of a new actuary. These requirements include
extensive details regarding the education, experience and capabilities of the actuary.
In accordance with the new provisions, insurance companies are required, for the first time,
to submit a detailed annual actuary report to the Commissioner in non-life insurance, in
which the actuary reports on the manner of implementation of the assessment of pending
claims, and attaches an analysis of the development of pending claims over the past year.
Moreover, the companies are required to attach to their financial statement the actuary’s
declaration, including key details relating to the actuary assessment as implemented. The
companies are required to file the statements beginning with the data for 2003.
The circular further established that, as of 2006, insurance companies will begin to allocate
sums on account of indirect expenses for the settlement of claims and for shortfalls in
premiums.
The inclusion of the actuary’s declaration in the financial statements of insurance companies
as published for the public is of particular importance. The increased transparency required
in accordance with the new provisions with regard to the non-life insurance reserves helps
those using the statements (including insureds and investors) to evaluate the financial state of
the company and the outcomes of its operations, and constitutes a further step in strengthening
the indirect supervision of the companies.


1.7 Financial Statements of the Residual Insurance Arrangement
Regulation 4(B) of the Motor Vehicle Insurance Regulations (Residual Insurance
Arrangement and Mechanism for Setting the Tariff), 5761-2001, establishes that the director
of the residual insurance arrangement will prepare and forward to the relevant authority
financial statements reflecting the financial operations of the residual insurance arrangement
(the “Pool”), prepared in accordance with accounting and reporting rules, and on the dates
applying to an insurer in the motor vehicle insurance line, mutatis mutandis.
In 2003, a circular was published directing the Pool to submit financial statements in
                                                                                                  Annual Report 2003




accordance with the Insurance Business Supervision Regulations (Accounting Details),
5758-1998 (hereinafter “the Regulations”), to which it is to attach all the reporting forms




                                                                                          ∑
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     to the Commission that an insurer is required to submit in the motor vehicle insurance line,
                     with the exception of data not relevant to the activities of the Pool, and with the addition of
                     details or explanations relevant to the Pool’s special operations.
                     The additions relate mainly to the detailing of the number of insured vehicles, the percentage
                     of participation of each company in the Pool, and a distinction between the “Pool Motorcycles”
                     figures and those for other types of vehicles insured in the Pool.


                     1.8 Management of Exposure to Reinsurers
                     Over the course of the year, a Commissioner's circular was published with the goal of
                     improving the management of the exposure of insurance companies to reinsurers. The
                     circular imposes three principal obligations on the insurance companies, as follows:
                     A. To set policy and procedures for the management of the exposure to reinsurers – an
                         obligation is imposed on the board of directors to establish policy relating to exposure
                        to reinsurers and the preparations of the insurer to manage and control such exposure.
                        The board of directors will supervise implementation of the policy as established and
                        will attend to exceptional cases. The executive is obliged to manage operations with
                        reinsurers within the limits of the general framework as established by the board of
                        directors. The executive will establish work procedures and will report to the board of
                        directors, among other aspects, on the operations with reinsurers, the general exposure
                        of the insurer to each separate reinsurer, in all lines, the manner of compliance with the
                        policy set by the board of directors and the organizational and automated preparations
                        for ensuring proper management of operations.
                     B. To prepare a report on exposure, including earthquakes – insurers are required to prepare
                        a quarterly report relating to their overall actual exposure to each separate reinsurer for
                        earthquake insurance (in non-life insurance). The report will be submitted to the board
                        prior to the approval of the financial statements, and will be reported to the Commissioner
                        at his request.
                     C. To report to the Commissioner – insurers are required to report to the Commissioner of
                        Insurance once a year on the balance of their exposure to each separate reinsurer and on
                        the arrears of reinsurers by the level of arrears.


                     1.9 Money Laundering
                     In 2003, the campaign against money laundering focused on three areas: enforcement,
                     regulation and inculcation. Over the course of the year, comprehensive audits were




                       ∏     Annual Report 2003
                                                       Stability of Insurance Companies


implemented in four companies in order to examine their preparedness for the struggle
against money laundering and in order to examine their compliance with the obligations
established in law. Following the findings of the audit in one company, and due to the defects
found in its preparedness and in its compliance with its legal obligations, the Commissioner
of Insurance filed a request to impose a financial sanction against the company, after the
representatives of the company have made their claims before the Insurance Companies
Sanctions Committee. Since this was a first offense, it was decided to warn the company
about its state of preparedness.
In 2003, a seminar was held for the compliance officers in the insurance companies under
the auspices of the Office of the Commissioner of Insurance, in cooperation with the
Authority for the Prohibition of Money Laundering in the Ministry of Justice. In addition,
the Commissioner published explanatory comments on the Prohibition of Money Laundering
Order, the translated procedure of the International Organization of Commissioners
regarding preparations by insurance companies for the struggle against money laundering,
and information sheets relating to the role of the insurance agent in the struggle against
money laundering.
A circular was also published requiring a report to be submitted to the Authority for the
Prohibition of Money Laundering regarding any action connected to a country that is not
cooperating in the struggle against money laundering.

1.10 Emergency Deployment
In 2003, the Commissioner published a circular requiring insurance companies to prepare to
cope with crises and emergencies, particularly in the operational and technological spheres.
The circular imposes obligations on the board of directors and executive, as follows:
The board of directors will set policy regarding the continued business operations of the
insurance company in various crises and emergencies (Business Continuity Planning –
BCP), including the definition of critical business actions that must be taken even in crises
and emergencies.
The executive of the insurance company will determine the concrete arrangements for
implementing the policy as set by the board of directors. Among other aspects, the executive
is responsible for appointing a management team of relevant officials that will be charged
with preparing contingency plans for coping with crises and emergencies. The executive will
                                                                                                Annual Report 2003




also appoint a “back-up executive” which, if necessary, will replace it in times of crisis.




                                                                                        π
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     1.11 Life Indexed (LI) Bonds
                     LI-type insurance plans are CPI-indexed assured yield life insurance programs; such programs
                     were issued by the insurance companies during the period 1962 – 1990. According to agreements
                     signed in the past between the government and the life insurance companies, the state undertook
                     to issue bonds against the greater part of the insurance funds accruing from these insurance
                     transactions (hereinafter earmarked bonds), provided that there were active policies from these
                     programs. The insurance companies, for their part, were required to invest in the said bonds for
                     the duration of the life of the policies. The interest stated in the earmarked bonds was based on
                     the assured yield for the insureds – yield that was reduced over the years.
                     As of December 2003, the stock of bonds held by the insurance companies at the Bank of
                     Israel totals some NIS 29.6 billion, of which approximately NIS 4.1 billion is at interest of
                     6.2%, about NIS 20.8 billion at interest of 5.2%, and some NIS 4.7 billion at interest of 4%.
                     In 1997, after the insurance companies expressed their desire to redeem some of the earmarked
                     bonds in order to invest the moneys in channels offering higher interest rates, the Division
                     began to prepare auctions for the early surrender of the earmarked bonds.
                     In 2003, one tender was held for the early surrender of earmarked bonds. In this tender, bonds
                     totaling NIS 70 million were redeemed. The closing interest in the tender was identical to
                     minimum interest, at 5.2%. The redemption of this auction was in addition to the NIS 4.3
                     billion (in current values) redeemed to date.
                     Table B-1 below shows the amounts of LI-type bonds redeemed in the auction for early redemption:


                                                    Table B-1
                        Amounts of Life-Indexed Bonds Redeemed in Early Redemption Auction,
                                                    1997-2003
                                                             (NIS millions, current prices)


                            Year                  Redeemed amount                         Cumulative Redeemed Amount
                            1997                             45                                               45
                            1998                            649                                              694
                            1999                            700                                             1,394
                            2000                           2,175                                            3,569
                            2001                            500                                             4,069
                            2002                            170                                             4,239
                            2003                             70                                             4,309

                     Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division




                       ±∞      Annual Report 2003
                                                        Stability of Insurance Companies


The deceleration in the process of redemption is due to two main reasons:
1. Falling interest rates in the economy – early redemption is worthwhile for the insurance
   company as long as it can secure a higher alternative yield on the money.
2. Maximum limit on surrender in order to maintain the insurers’ stability – as part of the
   regulation of prior surrender, the Commissioner of Insurance determined a maximum
   proportion of earmarked bonds available for surrender in the funds. This limit ensures
   that, at any given time, the insurance companies will hold earmarked bonds in amounts
   equivalent to not less than 50% of the reserves for investment in each fund. In some funds,
   some insurance companies have already reached the maximum limit for surrender.




                                                                                                 Annual Report 2003




                                                                                        ±±
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     2.       Analysis of the Business Outcomes
                              of the Insurance Companies

                                                        Table B-2
                          Main Financial Data of Insurance Companies (On Basis of Consolidated
                                                      Balance Sheets)
                                                NIS thousands, December 31, 2003 prices, percent

                                                                                                         Rate of change between the years
                                     Item                      2001           2002           2003       2001-2002   2002-2003   2001-2003
                                                                            Profitability
                           Net profit (after tax)             1,359,550      944,952        2,546,839      -30%       169.5%       87.3%
                         Profit from life insurance
                                                             1,804,205      1,107,314      2,102,740      -39%        89.9%       16.5%
                           business (before tax)
                       Profit from non-life insurance
                                                              824,497       1,029,371      2,196,665      25%        113.7%       166.6%
                           business (before tax)
                                                             Insurance premiums and claims
                          Premiums in life insurance        14,843,471     14,128,570   13,827,363        -5%         -2.1%       -6.8%
                      Premiums in non-life insurance 15,600,372            17,212,556   17,458,986        10%         1.4%        11.9%
                     Total payments to insured parties
                                                       6,725,841            6,783,662      7,448,563       1%         9.8%        10.7%
                             in life insurance
                          Claims paid and provision for
                                                              11,869,210   10,791,179   12,558,705        -9%         16%           6%
                     outstanding claims in non-life insurance
                                                                        Investment profits
                     Investment profits in life insurance     4,549,790      (430,576)      10,936,636    -109%       2,640%        140%
                       Investment profits in non-life
                                                             1,866,214      (24,582)       2,869,375     -101%       11,087%       54%
                                insurance
                                                                        Balance sheet data
                                Total balance              126,650,453 130,169,707 147,635,477             3%         13.4%       16.6%
                       Total reserves of participating
                                                            38,242,148     40,772,837   52,379,242         7%         28%          37%
                         portfolio in life insurance
                       Total reserves of assured-yield
                                                            43,464,306     43,600,748   44,178,278         0%          1%           2%
                       portfolio in old life insurance
                                                                      Equity and dividend
                              Accounting equity              5,381,742      6,131,690      7,776,390      14%         26.9%       44.5%
                            Distributed dividend*             781,018       299,218         918,492       -62%       207.0%       17.6%
                              Yield on equity**                26%            16%            34%

                     Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division

                     * Taken from statements on a non-consolidated basis.
                     ** Calculated by dividing profit by average equity.




                       ±≤      Annual Report 2003
                                                           Stability of Insurance Companies


A review of the principal financial data for the insurance companies in 2003, compared to the
previous two years, reflects several key points:
1. Yield on capital of the insurance companies totaled 33% in 2003, a significant change as
    compared to 2002 and 2001. At the same time, the accounting equity of the companies grew
    by 45% between 2001 and 2003, totaling NIS 7.7 billion. The increase in equity, which was
    not accompanied by a similar increase in the scope of operations of the insurance companies,
    reflects the improved stability of the companies and improved capital adequacy.
2. Aggregate after-tax profit from insurance businesses (NIS 2.55 billion) rose by 164%
    compared to aggregate profit for 2001. This change was due mainly to a sharp increase
    in profitability in the non-life insurance lines (pre-tax profits of NIS 2.2 billion, an
    increase of 166% compared to 2001), as opposed to the moderate rise in the profitability
    of life insurance lines (NIS 2.1 billion before tax, an increase of 16.5% compared to
    2001). The reasons for this may be diverse, particularly the recession in the economy,
   which increased the proportion of people not employed and was accompanied by the
   cancellation of life insurance policies and by a reduction in the scope of sales of new
   insurance policies. It may be that public tastes have also changed, leading to a substantial
   increase in deposits in the new pension funds over the past two years.
4. A key component in the financial outcomes of the insurance companies is revenue from
   investment. Investment profits influence both the profit in non-life insurance businesses and
   the profit in life-insurance businesses (through the management fee from the participating
   portfolio, where profits are calculated as a proportion of the total assets with the addition of a
   proportion of the profits from investments, and through the financial margin in assured yield
   life insurance policies between the yield rate stated on the earmarked bonds received by the
   insurance company from the state and the lower yield rate assured by the insurance companies
   to their insured in the program). In 2002, the insurance companies absorbed substantial losses
   amounting to some NIS 450 million in their investment portfolios. The vast majority (95%)
   of these losses were absorbed in the life insurance portfolio. In 2003, this trend was reversed
   sharply, and the companies enjoyed high revenue on their investments. The life insurance
   investment portfolio secured profit of almost NIS 11 billion, and the nostro investments in non-
   life insurance yielded profit totaling NIS 2.9 billion. It is important to note that a substantial
   portion of the profits from investments in life insurance were credited in favor of the insureds’
   savings, particularly in the participating portfolio. The substantial growth in total assets in
                                                                                                       Annual Report 2003




   the balance sheets of the insurance companies in 2003 is attributed mainly to profits from
   investments, since, as detailed above, there was an increase in the companies’ payments to
   insureds alongside relative stability in total revenue from premiums and insurance fees.




                                                                                              ±≥
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     2.1 Yield and Return (Excluding Avner and Karnit)

                                                         Chart B-1
                                Yield on Equity in Banks and Insurance Companies, 2001-2003
                                                                         (percent)

                            ≥µÆ∞•
                                                                                                            ≥≥Æ∞•

                            ≥∞Æ∞•


                            ≤µÆ∞•           ≤¥Æ∞•

                            ≤∞Æ∞•


                            ±µÆ∞•
                                                                            ±≤Æ∞•
                                                                                                                        π•
                            ±∞Æ∞•
                                                       ∂•
                             µÆ∞•                                                       ≥•

                             ∞Æ∞•
                                                ≤∞∞±                             ≤∞∞≤                            ≤∞∞≥

                                                                       Insurance companies   Banks




                     Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division


                     For many years, the insurance industry has been characterized by particularly high levels
                     of yield on capital, accompanied by a very high level of fluctuation in recent years. This
                     fluctuation is due mainly to the high level of variance in yield secured on the investments
                     of the insurance companies – yield that influences both the profit in life insurance (through
                     the management fees of participating portfolios) and the nostro portfolio of the insurer
                     (particularly in non-life insurance).


                     In comparison, yield on capital in the banking corporations was 8.5% in 2003 and 2.8% in
                     2002. The substantial difference between yield on capital in insurance companies and yield
                     on capital in banking corporations may be explained through the use of several variables,
                     including the fact that the capital of all the financial intermediaries is determined by means of
                     technical rules, and not in accordance with calculations based on the individual risk of each




                       ±¥      Annual Report 2003
                                                           Stability of Insurance Companies


corporation. For this reason, the capital in insurance companies may be smaller to a certain
extent. A further argument raised in this context is that whereas the banks undertake all the
risks inherent in their operations, the insurance companies sell part of this risk to reinsurers
(as detailed below), so that the scope of capital required relative to the scope of their activities
and the inherent risks may be smaller. A further explanation may be found in the fact that the
capital requirements due to operations in life insurance are limited, and relate solely to the
deferred acquisition costs in life insurance, as detailed below. Moreover, the balance sheets
of the insurance companies show reserves for special risks in life insurance in the proportion
of up to 0.2% of the amount at risk. Accordingly, part of the cushion absorbing losses in
insurance companies is not a component of equity, and, accordingly, there may be distortion
when comparing equity yield in insurance companies to equity yield in the banks.
In order to examine the equity yield of insurance companies and banks, we compared revenue
relative to capital from the management of financial assets for two insurance companies and
two banks. Banking corporations are not, of course, required to provide equity on account of
operations in the management of the public’s financial assets in provident funds and study
funds, as is the case with the operations of the insurance companies in the participating life
insurance portfolio. For the purpose of our example, we shall compare the scope of assets
managed by the two largest insurance companies (Migdal and Clal) in life insurance reserves
in the participating portfolio and the revenue relative to equity derived from these managed
assets with the scope of assets managed by the two largest banks (Bank Hapoalim and Bank
Leumi) in provident funds and mutual funds, and the scope of revenue relative to equity
derived from the managed assets.




                                                                                                       Annual Report 2003




                                                                                              ±µ
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                                                   Table B-3
                         Comparison between Revenue from Management Fees of the Two Large
                                 Insurance Companies and the Two Large Banks, 2003
                                                               NIS billions, current prices

                                                                                   Bank         Bank                            Clal
                                                                                                               Migdal
                                                                                   Leumi       Hapoalim                      Insurance

                                              Equity                               14.21         14.26           1.53            1.46

                       Assets of provident funds and mutual funds                   66.9          84.1             -               -

                      Assets of participating life insurance portfolio                -             -            14.6             9.2

                              Revenue from management fees                         0.405         0.633          0.354            0.244

                        Revenue from management fees, with tax
                              deducted (45.3% tax rate)                            0.222         0.346          0.193            0.133

                      Revenue with tax deducted divided by equity                  1.6%           2.4%         12.6%             9.1%

                       Share of revenue from 1% management fees
                         with tax deducted in relation to equity                   2.5%           3.2%          5.2%             3.5%

                               Share of management fees out
                                    of managed assets                              0.61%         0.75%          2.4%             2.7%

                     Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division



                     As Table B-3 shows, revenue relative to equity for each of the two main insurance companies
                     from the management of the participating portfolio alone in 2003 was higher than the average
                     yield for capital of the banks in the same year (8.5%). It is true that revenue relative to equity
                     in Migdal and Clal Insurance in 2003 (11.6% and 9.1% respectively) is exceptional due to the
                     high level of yields on investments in 2003; however, the revenue of the insurance companies
                     from management fees, in the proportion of 1%, is also greater than 4.5%. In addition to this
                     calculation, we would note that the assets of the participating portfolio constitute 56% of the
                     scope of reserves in life insurance, and the companies have additional revenue accruing from
                     the management of assets in the assured yield portfolio, albeit on a smaller scale.




                       ±∂      Annual Report 2003
                                                                     Stability of Insurance Companies



                                        Table B-4
                       Rate of Yield on Accounting Equity, 1999-2003
                                                     Percent


                                             Annual yield, percentage points
                                                                                                    Average
        Company                                                                                   annual yield
                                 1999         2000          2001         2002         2003          2003-1999
           Harel                 54%          52%           79%           25%         67%              54%
         Menorah                 90%          39%           43%           27%         53%              49%
            Dikla                38%          36%           38%           41%         59%              42%
           Ayalon                65%          41%           35%           22%         39%              40%
          Migdal                 34%          31%           35%           13%         33%              29%
         IDI Direct              21%          14%           56%           17%         34%              28%
            Clal                 34%          19%           22%           13%         30%              23%
           Eliahu                53%          25%           24%          -33%         62%              21%
         Hamagen                 20%          18%           25%            8%         32%              20%
          Phoenix                31%          22%            8%           16%         25%              20%
        Sahar-Zion               37%          20%           27%           19%           -              20%
           Aryeh                 28%          17%           10%            3%         21%              15%
        New BSSCH                  -            -             -           20%          8%              15%
          Hadar                   9%          24%           12%            5%         18%              13%
      Israel Land
 Development Company
                                  19%           9%           9%           5%          15%              11%
         IFTRIC                   26%          19%          -3%            2%          7%              10%
           Shirbit                 0%           9%           4%            1%         12%               5%
        Clal Credit                4%           1%           4%            1%         16%               5%
            Inbal                  5%           5%           4%            2%          5%               4%
          Shomera                  5%           2%           3%            1%          8%               4%
           Ishpuz                  9%           4%           8%           -3%           -               3%
  Agricultural Insurance           0%           0%           5%            0%          3%               2%
 Natural Disasters Fund            1%           0%           5%           -5%          4%               1%
         EMI-Ezer                -50%         -55%         -19%          -47%         12%             -36%
            AIG                 -103%         -53%           5%           28%         51%              -15%
   Overall industry              31%          23%           24%          12%          33%              24%
   weighted average
                                                                                                                   Annual Report 2003




Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division
* Note: Merged into Harel insurance company in 2003.




                                                                                                              ±∑
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     Several variables may explain the variance in yield for capital between the insurance
                     companies. The first, of course, are better business outcomes following revenue profit
                     and higher underwriting profits accruing from insurance operations. However, additional
                     explanations seem likely, including the existing level of equity compared to required equity.
                     Both the companies enjoying the highest yield (Menorah and Harel) have equity that is only
                     a few percentage points above that required, whereas other companies have much greater
                     surplus equity, in proportions of up to 38%. Moreover, the composition of capital recognized
                     for the purposes of supervision may influence yield on equity. Some of the companies raised
                     secondary capital on a larger scale, relative to their primary capital (Menorah – 23%), while
                     other companies recruited secondary capital on a much more restricted scale; indeed, some
                     companies do not have any secondary capital. Naturally, the smaller the equity and the more
                     it is replaced by secondary capital, the greater the potential for an increase in yield for
                     capital, since the company’s profitability is effectively unchanged on the issue of secondary
                     capital (the only change is higher financing costs, offset by tax benefits).


                     The increase in total recognized equity of the insurance companies over the past five years
                     is due to a series of amendments to the regulations, leading to an increase in the equity
                     requirements imposed on the companies.
                     The increase in the scope of premiums for non-life insurance, and the increase in pending
                     claims, following the gradual decline in the part of the Avner corporation in compulsory
                     vehicle insurance (to 0%) in 2003, also led to changes in the equity requirement for insurance
                     companies in the non-life insurance.1
                     In addition, the increase since 1999 in the balance of deferred acquisition costs in life
                     insurance also created additional demand for equity, explaining the increase in the scope of
                     recognized equity.
                     It is important to note that the figures for reserves for special risks in life insurance are
                     presented before the influence of tax. Accordingly, if the reserves were released into the
                     profit and loss statement, the net impact of the reserves would be to increase the companies’
                     equity by 55% of the amount of the reserves, i.e. by an additional NIS 670 million.




                     1. The equity requirement in non-life insurance is a function of the insurance fees and pending claims in the
                     self-residual. A detailed explanation of the equity requirement is provided below.




                      ±∏      Annual Report 2003
                                                                         Stability of Insurance Companies



                                Table B-5
 Makeup of Recognized Equity and Reserve for Special Risks in Life Insurance
                   for Life Insurance Companies, 2003
                                 NIS thousands, December 31, 2003 prices


                  Recogni-    Recogni-                                                          Share of       Reserve
                                         Recognized                             Equity
                    zed      zed second-                       Required                      surplus/ deficit for special
  Company                                  equity                              surplus/
                  primary ary capital                           equity                       out of required risks in life
                                           (1+2)                                deficit
                 capital (1)     (2)                                                             equity       insurance
    Clal        1,456,011        200,000       1,656,011 1,246,572             409,439           33%          198,352
  Migdal        1,527,828         71,155       1,598,983 1,161,005             437,978           38%          419,549
 Phoenix        1,026,322        209,510       1,235,832 942,820               293,012           31%          110,000
   Harel         742,046         100,196        842,242   758,239               84,003           11%          204,273
 Menorah         529,374         122,649        652,023   547,130              104,893           19%           77,758
  Hadar          444,051             -          444,051   368,142               75,909           21%           40,000
  Eliahu         314,133             -          314,133   211,075              103,058           49%           46,112
  Ayalon         203,785          37,111        240,896   204,495               36,401           18%           10,873
  Aryeh          239,724             -          239,724   248,978               -9,254           -4%           43,585
Hamagen          220,478             -          220,478   204,910               15,568            8%           41,567
  ILDC           146,362          57,869        204,231   220,571              -16,340           -7%           11,400
IDI Direct       172,157             -          172,157   150,801               21,356           14%           12,374
    AIG          124,476             -          124,476    77,388               47,088           61%            2,557
Agricultural
                  106,607            -          106,607         72,553          34,054           47%               -
 Insurance
   Dikla          63,230           6,370         69,600         69,518            82            0.1%               -
EMI-Ezer          27,174          10,835         65,470         55,126          10,344          19%                -
  Shirbit         62,870             -           62,870         48,605          14,265          29%                -
 Shomera          55,762             -           55,762         48,395           7,367          15%                -
   Inbal          53,432             -           53,432         48,167           5,265          11%                -
    New
                  48,134             -           48,134         43,953           4,181           10%               -
 BSSCH
    Clal
  Credit          30,126             -           30,126         24,213           5,913           24%               -
Insurance
 IFTRIC           15,062             -           15,062         12,042           3,020           25%               -
 Natural
 Disasters         6,848             -            6,848          6,009            839            14%               -
   Fund
   Total        7,615,992        815,695       8,459,148 6,770,707 1,688,441                    25%          1,218,400
                                                                                                                              Annual Report 2003




Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division
* Note: List does not include the Avner corporation, which is in run-off and is exempt from presenting equity requirements.




                                                                                                                       ±π
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     A review of Table B-6 shows that the equity of the companies increased by 75% over the last
                     five years. Special mention should be made of Harel, Menorah, AIG and IDI Direct, whose
                     equity increase substantially over the past five years, reflecting the rapid development of
                     these companies, particularly in terms of their activities in the non-life insurance industry.
                     The major insurance groups Migdal, Clal and Phoenix also showed growth rates in double
                     figures in percentage terms. These are very high growth rates relative to other companies in
                     the capital market, such as the banking institutions.


                     Notes:
                     1. We should emphasize that, in some cases, surplus capital, relative to the established
                        requirements, is held (in whole or in part) in accordance with the requirements of the
                        Commissioner of Insurance as part of the provisions defined for each company in the
                        control permit the owners of control received from the Commissioner of Insurance.
                     2. Aryeh has higher equity than the figure stated in the table, including primarily surpluses;
                        however, only part of this is recognized for the purpose of inspection, since most of
                        the equity is surpluses rather than share capital. After the report date, the company
                        issued bonus stocks from its surplus in order to meet the inspection requirements. Other
                        insurance companies, such as Ayalon, Hamagen and others, also have higher actual equity
                        comprising surpluses not recognized by the inspection, but which could be recognized as
                        existing equity in accordance with the requirements of the supervision after conversion
                        to bonus stocks.


                     The data reflect the capital structure of the various insurance companies, showing which
                     companies chose to recruit money from external sources through secondary capital and
                     which rely on equity.
                     Recognized secondary capital in insurance companies averages 10% of total recognized
                     capital, compared to 46% in the banking corporations (in 2002). It should be noted here,
                     however, that since the beginning of 2004 we have seen extensive capital recruitment in
                     several insurance companies (and in the holding companies of insurance companies) through
                     secondary capital, due to the change in the capital regulations, in which context the minimum
                     equity required of most of the companies is expected to increase, and due to an examination
                     of possibilities to expand the companies’ activities in the pension field, and the competition
                     to acquire the managing companies of the new pension funds available for sale.




                      ≤∞     Annual Report 2003
                                                                      Stability of Insurance Companies



                               Table B-6
 Development of Equity in Active Insurance Companies2 (Non-Consolidated
                        Balance Sheets), 1999-2003
                                NIS thousands, December 31, 2003 prices

   Company name              1999                 2000             2001            2002                2003
      Migdal              1,129,688            1,147,019        1,177,164       1,282,120           1,527,828
            Clal           940,219             1,094,983        1,249,645       1,323,319           1,456,011
         Phoenix           544,927              611,436          670,329         804,100            1,026,322
 Harel (formerly Shiloah)  133,037              112,131          255,131         293,937             742,046
         Menorah           151,605              167,007          337,297         373,304             529,374
          Hadar            364,032              403,165          459,635         501,155             444,051
          Aryeh            176,974              210,800          280,977         288,706             356,280
          Eliahu           151,249              192,936          206,899         171,991             314,133
        Hamagen            179,703              156,253          199,809         216,490             280,890
          Ayalon            91,457               99,334          130,653         152,281             203,785
       IDI Direct*          19,630              -18,535          139,354         160,167             172,157
          ILDC              90,523               98,966          119,031         125,328             146,362
            AIG             35,156               39,643           51,265          67,754             124,476
 Agricultural Insurance     75,663               85,007           97,082         103,988             106,607
         BSSCH             106,053              105,721          106,417          94,222              94,325
           Dikla            41,223               59,084           64,483          69,144              93,651
          Shirbit              -                 55,372           57,830          58,241              62,870
         Shomera            33,776               49,739           57,001          55,152              55,762
           Inbal            44,837               47,523           49,653          50,751              53,432
      New BSSCH                -                    -             22,457          47,053              48,134
     Clal Insurance         24,436               24,619           25,498          25,703              30,126
           Ezer             32,139               30,668           29,820          24,127              27,174
 Natural Disasters Fund      6,540                6,554            6,922           6,590               6,848
          Avner            250,026              227,595          317,362         582,658             985,093
     Sahar-Zion**          122,337              127,904          235,947         285,463                 -
          Total           4,745,230            5,134,924        6,347,661       7,163,744            8,887,737
Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division
* For the IDI Direct insurance company in 1999 and 2000, the data of the Direct Insurance company are shown.
 ** Merged into Harel insurance company in 2003.
                                                                                                                    Annual Report 2003




2. The Avner corporation stopped selling new compulsory vehicle insurance policies in 2002, and is in run-off
processes. Moreover, the list includes the Sahar-Zion insurance company whose activity was substantively in
the non-life insurance field and was merged into the Harel insurance company at the beginning of 2003. Other
companies that were active in the past and were not active in 2003 are not listed in the table.




                                                                                                               ≤±
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     The minimum required equity for an insurance company was established in the Inspection
                     of Insurance Businesses Regulations (Minimum Required Equity for an Insurer), 5758-1998
                     (hereinafter the Equity Regulations). Minimum equity provides a safety cushion ensuring
                     that the insurer will be able to meet its liabilities to insured at any time, even if, at any given
                     time, it absorbs losses in the course of its operations.
                     In accordance with the provisions of the Equity Regulations, an insurer is entitled to hold
                     secondary capital up to a ceiling of 50% of primary capital. Primary capital includes share
                     capital, funds and surpluses (however, if share capital is not greater than NIS 250 million,
                     at least 50% of the primary capital must be share capital and premiums paid on the issue of
                     stocks), whereas secondary capital is foreign capital, including deferred liabilities deeds and
                     capital certificates issued for a period greater than two years.
                     Maintaining the stability of insurance companies is of the utmost importance, both as
                     part of the overall financial system in the country (the collapse of one of the components
                     of which may impair public confidence in the financial system as a whole) and as bodies
                     insuring the public’s financial savings and maintaining the value of its various assets
                     in the event of damage or loss. The equity is the company’s safety cushion vis-à-vis
                     its insureds, and is intended to maintain the company’s repayment capabilities and its
                     capacity to make payments to the insureds even if the insurance reserves it calculated
                     prove inadequate.
                     The broader the insurance operations of the insurance company, and the greater the sums it
                     invests in acquiring new life insurance policies, the greater the demand for equity. There is
                     currently no equity requirement on account of life insurance operations, but the companies
                     maintain money in reserves against special dangers, in the amount of 0.2% of the amount in
                     risk in life insurance.


                     Since the beginning of 2004, the minimum equity requirement for insurance companies has
                     been calculated as the sum total of all the following:
                     1. The highest of the following three amounts:
                         A. The amount of primary capital – this amount totals NIS 42 million for an insurer
                             in the life insurance line, NIS 48 million for an insurer in the non-life line and NIS
                             72 million for an insurer engaged in both life and non-life insurance (figures are at
                             December 2003 values and are CPI indexed).
                         B. The total of the following three amounts:
                             1. 10% of the non-life insurance fees for the past year, up to a limit of insurance
                                  fees in the amount of NIS 66 million.




                      ≤≤     Annual Report 2003
                                                                    Stability of Insurance Companies


       2. 5% of non-life insurance fees for the past year in excess of total insurance fees
           of NIS 66 million.
       3. 7.5% of insurance fees in self-residual in non-life insurance over the past year.
   C. The total of the following two amounts:
       1. 20% of the balance of pending non-life insurance claims in self-residual, up to a
           ceiling of claims of NIS 360 million.
       2. 12% of the balance of pending non-life insurance claims in excess of a total of
           NIS 360 million.
2. Total required equity in the three columns of the following table:


                                                              Life insurance policies issued through
                               Life insurance                 December 31, 2003
                                and sickness/
                               hospitalization    Deferred acquisition Deferred acquisition
                             policies issued from costs recorded for      costs recorded
                              January 1, 2004      deposits through     for deposits from
                                                  December 31, 2004      January 1, 2005
 Capital requirement          An amount equal to     An amount equal to
                               the full acquisition 30% of the acquisition
                              costs as recorded in   costs as recorded in
                             the insurer’s financial the insurer’s financial
                                    statement             statement

                                                         55% of the discrepancy
                                                         between the acquisition
                                                           costs as recorded in
                                                          the insurer’s financial
                                                            statements and the
                                                             acquisition costs
                                                            recognized for the
                                                         purpose of income tax3


3. Amount of unrecognized assets – this group of assets includes a long list of assets,
   including: Assets held contrary to the investment regulations, deferred costs (excluding
   in life and non-life insurance), bad debts not credited to costs, and so on.
4. The amount required on account of assured yield insurance programs – this amount is
                                                                                                                     Annual Report 2003




3. Deferred acquisition costs in life insurance are depreciated in the insurers’ financial statements for a period
of at least 15 years. In addition, when eliminating or removing a policy, the acquisition costs on account of that
policy are immediately depreciated. By contrast, acquisition costs for income tax purposes are depreciated over
a period of four years.




                                                                                                           ≤≥
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                        calculated as a percent of the value of the assets available against assured yield policies.
                        The greater the risk of the asset, the greater the equity required on account thereof. The
                        minimum amount in accordance with this section is 2% of the balance of assets in the
                        assured yield programs.
                     5. Additional capital on account of holdings in controlled insurance companies or
                        companies for the management of pension funds – the required addition is at the level
                        of the proportion of the insurance company’s holdings in the share capital of the held
                        company, multiplied by the equity required of the held capital, with the addition of the
                        balance of the original discrepancy relating to the acquisition of the held company.


                     2.2 Deferred Acquisition Costs as a Proportion of Existing Equity
                     Deferred acquisition costs in life insurance in 2003 totaled NIS 4.70 billion, compared to
                     NIS 4.44 billion in 2002.
                     From a review of the data, differing development trends may be seen in the insurance
                     companies. Some companies recorded a fall in total deferred acquisition costs for the last
                     year (Migdal and ILDC), while others recorded a significant rise (Phoenix recorded an
                     increase of over 20%, as did IDI Direct, although this company’s costs are low).
                     In all the companies, however, (with the exception of IDI Direct) there was a fall in the
                     balance of deferred acquisition costs relative to equity. In some companies, this was due to a
                     fall in the balance of deferred acquisition costs themselves, whereas in other cases the reason
                     lies in the business outcomes for 2003, which led to high profitability, and hence to a more
                     rapid increase in equity than in deferred acquisition costs. This trend is positive in terms
                     of the stability of the company, since a high rate of nullification of policies in an insurance
                     company (accompanied by the elimination of part of the deferred acquisition costs) may
                     have a lesser influence on the capital adequacy and stability of the company.
                     Our assessment is that this downward trend may continue in the future, for the following
                     reasons:
                     1. Rising demand for capital due to the holding of the balance of deferred acquisition costs
                          as detailed above.
                     2. Changes in the policy of the insurance companies relating to the payment of commissions
                          to agents.




                      ≤¥     Annual Report 2003
                                                                     Stability of Insurance Companies



                                   Table B-7
           Share of Deferred Acquisition Costs Out of Recognized Equity
                          (Insurance Groups), 2001-2003
                          Percent, NIS thousands, December 31, 2003 prices

                 Deferred acquisition costs as                Total deferred acquisition     Rate of
                     percentage of equity                        costs in life insurance     change
                  2001      2002       2003                   2001         2002       2003  2002-2003
 Menorah         131%       124%       105%                 591,796 623,628 687,600          10.3%
   Harel          92%        99%        91%                 591,212 711,708 764,133           7.4%
  Migdal          88%        97%        77%                1,104,785 1,277,412 1,236,568 -3.2%
   ILDC          120%        99%        76%                 200,241 183,254 155,820 -15.0%
  Phoenix         70%        66%        66%                 611,341 673,794 816,918          21.2%
    Clal          64%        63%        54%                 799,322 839,304 891,769           6.3%
  Ayalon          41%        36%        30%                  62,001      68,095      72,129   5.9%
 IDI Direct        7%        11%        15%                  11,135      17,180      25,854  50.5%
   Eliahu         17%        23%        13%                  34,399      39,547      40,820   3.2%
    AIG            8%        12%         9%                   6,374      10,866      11,500   5.8%
   Total          77%       78%        67%                 4,012,606 4,444,788 4,703,111      5.8%
Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division



                                 Table B-8
   Share of Expenses in Life Insurance Capitalized to Deferred Acquisition
  Costs Out of Total Expenses for Commissions, General and Administrative
            Expenses in Life Insurance (Insurance Groups), 2003
                                                     Percent

                           Rate of    Rate of capitalized                   Total rate of capitalized expenses
                         capitalized     general and
                        commissions administrative expenses
       ILDC                74.6%            40.5%                                         62.7%
     Menorah               74.1%            32.5%                                         61.1%
    IDI Direct              0.0%            60.7%                                         60.7%
      Ayalon               81.1%            23.5%                                         56.4%
  Phoenix Group            66.4%            29.5%                                         54.6%
      Eliahu               72.0%            33.9%                                         53.3%
      Harel                60.1%            27.8%                                         47.9%
   Clal Group              53.0%            31.5%                                         46.2%
  Migdal Group             53.2%            19.3%                                         41.9%
                           26.7%            26.5%
                                                                                                                 Annual Report 2003




       AIG                                                                                 26.5%
  Industry total           60.3%           28.0%                                           49.3%
Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division




                                                                                                            ≤µ
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     As the above table shows, the rate of costs recognition of which was deferred and which
                     were recorded as deferred acquisition costs varies from one company to another. The higher
                     the proportion of capitalization of costs, the greater short-term profitability; in the long term,
                     however, deferred costs will be released into the profit and loss statement, reducing profits
                     relative to similar companies that chose to capitalize smaller amounts in the present and
                     present higher profitability rates in the future.


                     2.3 Profitability by Insurance Lines
                     In 2003, the portion of non-life insurance in profitability in the insurance market as a whole
                     continued to grow. Profitability in life insurance fell to 49% of total profitability in the line,
                     compared to 52% of total pre-tax profit in 2002 and 69% in 2001.




                      ≤∂     Annual Report 2003
                                                                     Stability of Insurance Companies



                                Table B-9
Aggregate Profit Before Tax from Life Insurance and Non-Life Insurance Business
 by Insurance Companies (Non-Consolidated Balance Sheet Data), 1999-2003
                            NIS thousands, December 31, 2003 prices, percent

                                                                                             Profit component from
               Profit from life insurance    Profit from non-life    Profit component from
                                                                                                non-life insurance
                       business             insurance business     life insurance business
                                                                                                     business
 Company           2002         2003         2002         2003        2002         2003         2002          2003
     Clal        198,356      298,555      125,387      282,556      61.3%        51.4%        38.7%         48.6%
   Aryeh          34,263       34,101       -7,017       59,833     125.8%        36.3%       -25.8%         63.7%
Clal Credit          -            -          2,519        6,099       0.0%         0.0%       100.0%         100.0%
Clal Group       232,619      332,656      120,889      348,488     65.8%         48.8%       34.2%          51.2%
  Migdal         299,250      666,383        8,432       70,723      97.3%        90.4%         2.7%          9.6%
 Hamagen          18,781       70,943       19,696       56,378      48.8%        55.7%        51.2%         44.3%
  Migdal         318,031      737,326       28,128      127,101     91.9%         85.3%       8.1%          14.7%
   Group
  Phoenix        160,895      270,040       52,265      60,533      75.5%         81.7%       24.5%         18.3%
   Hadar          74,719      106,390       14,329      37,653      83.9%         73.9%       16.1%         26.1%
  Phoenix        235,614      376,430       66,594      98,186      78.0%         79.3%       22.0%         20.7%
   Group
    Harel           -         349,132         -         226,685        -          60.6%          -          39.4%
  Shiloah        114,723         -         38,993           -       74.6%            -         25.4%           -
Sahar-Zion       14,767          -         112,994          -       11.6%            -         88.4%           -
   Ishpuz           -            -           156            -        0.0%            -        100.0%           -
    Dikla           -            -         53,871        75,145      0.0%         0.0%        100.0%        100.0%
   Harel         129,490      349,132      206,014      301,830     38.6%         53.6%       61.4%         46.4%
   Group
    ILDC         14,159       15,028        9,301       36,655      60.4%         29.1%       39.6%         70.9%
     New            -            -          15,516       7,780       0.0%         0.0%        100.0%        100.0%
  BSSCH
   ILDC          14,159       15,028        24,817      44,435      36.3%         25.3%       63.7%         74.7%
   Group
     AIG            451        -2,644       17,920       26,354       2.5%       -11.2%       97.5%         111.2%
 EMI-Ezer            -            -         -11,481       1,912       0.0%         0.0%      100.0%         100.0%
AIG Group           451        -2,644        6,439       28,266       6.5%       -10.3%      93.5%          110.3%
 Menorah         128,257      254,647       88,299      116,476      59.2%        68.6%      40.8%          31.4%
  Ayalon          19,260       21,052       54,498       92,093      26.1%        18.6%      73.9%          81.4%
  Eliahu          44,653       32,045      -105,115     212,647     -73.9%        13.1%      173.9%         86.9%
 Shomera             -            -          1,093        4,268       0.0%        0.0%       100.0%         100.0%
  Shirbit            -            -          4,862       14,712       0.0%        0.0%       100.0%         100.0%
IDI Direct         3,772        5,981       58,450       81,981       6.1%        6.8%       93.9%          93.2%
 IFTRIC              -            -          2,073        1,311       0.0%        0.0%       100.0%         100.0%
Agricultural        -            -            20         9,651       0.0%         0.0%       100.0%         100.0%
 Insurance
   Avner            -            -          473,193     713,528      0.0%         0.0%       100.0%         100.0%
                                                                                                                      Annual Report 2003




    Inbal           -            -            598         623        0.0%         0.0%       100.0%         100.0%
    Total       1,126,306    2,121,653     1,030,852   2,195,596    52.2%         49.1%      47.8%          50.9%
Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division




                                                                                                               ≤∑
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     Note: The table data are based on non-consolidated financial statements of the insurance
                     companies, and not on the data appearing in the consolidated statements. However, the
                     difference between the summary on the basis of consolidated statements and the summary
                     on the basis of non-consolidated statements is not significant.

                                                     Chart B-2
                          Makeup of Profit Before Tax – Life Insurance Business Versus Non-Life
                                                  Insurance Business
                                                                           Percent


                            ±∞∞•


                                            ≥∑•              ≥∂•                 ≥±•                   ¥∏•         µ±•
                             ∑µ•




                             µ∞•



                                            ∂≥•              ∂¥•                 ∂π•                   µ≤•         ¥π•
                             ≤µ•




                              ∞•
                                         ±πππ              ≤∞∞∞                 ≤∞∞±                 ≤∞∞≤        ≤∞∞≥

                                                               Life insurance          Non-life insurance




                     Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division




                       ≤∏      Annual Report 2003
                                                                             Stability of Insurance Companies



                                Table B-10
    Aggregate Profit Before Tax from Life Insurance and Non-Life Insurance
        Business (Non-Consolidated Balance Sheet Data), 1999-2003
                                 NIS thousands, December 31, 2003 prices

                Year                                Life insurance                           Non-life insurance
                1999                                    1,596,563                                     937,850
                2000                                    1,448,640                                     457,458
                2001                                    1,824,760                                     826,418
                2002                                    1,126,306                                     1,030,852
                2003                                    2,121,653                                     2,195,596
Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division




                                  Chart B-3
     Ratio of Profit from Life Insurance and Non-Life Insurance Business to
                         Gross Premiums, 2001-2003
                                                          Percent
                                                                                                        ±µÆ≥•
     ±∂Æ∞•
                                  ±≤Æ¥•

     ±≤Æ∞•
                                                                      ∏Æ∞•                  ∏Æ∂•


      ∏Æ∞•
                         µ•
                                                          ¥Æ≤•

      ¥Æ∞•



      ∞Æ∞•
                         ≤∞∞±                                ≤∞∞≤                              ≤∞∞≥

                    Ratio of profit from non-life insurance buisness to gross premiums without Avner and Karmit
                    Ratio of profit from non-life insurance buisness to gross premiums
                                                                                                                       Annual Report 2003




Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division




                                                                                                                  ≤π
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     This year, too, sharp fluctuations were seen in profit rates from insurance businesses relative
                     to insurance fees in the industry. In life insurance, this rate increased from 8% last year to
                     15.3% this year (12.4% in 2001). In non-life insurance, too, (excluding Avner and Karnit),
                     the trend once again changed, and the profit rates from gross insurance fees rose to 8.6%,
                     compared 4.2% in 2002.




                      ≥∞     Annual Report 2003
                                                                      Stability of Insurance Companies



3.       Analysis of the Business Outcomes in Life Insurance

3.1 Profit Sources


                                Table B-11
 Profit from Life Insurance Business (Non-Consolidated Balance Sheet Data),
                  Rates of Change, Market Share, 2001-2003
                          NIS thousands, December 31, 2003 prices, percent

                                                                                                         Market
                                Profit from life insurance business            Rate of change
        Company                                                                                          share
                                  2001          2002           2003       2001-2003 2002-2003              2003
         Migdal                636,199        299,250        666,383         4.7%         122.7%          31.4%
       Hamagen                  79,262         18,781         70,943        -10.5%        277.7%           3.3%
     Migdal Group              715,461        318,031        737,326         3.1%         131.8%          34.8%
     Harel (formerly
        Shiloah)
                               209,849        114,723        349,132         66.4%        204.3%          16.5%
      Sahar-Zion                65,317         14,767            0    -100.0%             -100.0%          0.0%
      Harel Group              275,166        129,490        349,132    26.9%              169.6%         16.5%
          Clal                 305,022        198,356        298,555    -2.1%               50.5%         14.1%
         Aryeh                  36,721         34,263         34,101    -7.1%               -0.5%          1.6%
      Clal Group               341,743        232,619        332,656    -2.7%               43.0%         15.7%
        Phoenix                162,473        160,895        270,040    66.2%               67.8%         12.7%
         Hadar                  63,171         74,719        106,390    68.4%               42.4%          5.0%
     Phoenix Group             225,644        235,614        376,430    66.8%               59.8%         17.7%
        Menorah                183,142        128,257        254,647    39.0%               98.5%         12.0%
          Eliahu                46,583         44,653         32,045   -31.2%              -28.2%          1.5%
          Ayalon                21,805         19,260         21,052    -3.5%                9.3%          1.0%
          ILDC                  17,482         14,159         15,028   -14.0%                6.1%          0.7%
     Direct Insurance            1,257          3,772          5,981   375.8%               58.6%          0.3%
           AIG                  -3,523           451          -2,644    25.0%             -686.3%          -0.1%
           Total              1,824,760      1,126,306      2,121,653 16.3%                88.4%          100.0%
Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division
Note: The table data are based on non-consolidated financial statements of the insurance companies, and not on the data
appearing in the consolidated statements. However, the difference between the summary on the basis of consolidated
statements and the summary on the basis of non-consolidated statements is not significant.
                                                                                                                         Annual Report 2003




                                                                                                               ≥±
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     Revenue sources in the life insurance line are as follows:
                     1. The interest margin accruing from the assured yield life insurance portfolio -against the
                        insurance reserves for insurance policies issued from the early 1960s through 1990, the
                        insurance companies are entitled to acquire earmarked government bonds. The bonds
                        are CPI-indexed and assure a yield of 6.2% (funds A and B, which were open for new
                        insureds during the period 1962-1976), 5.2% (funds CF and F, which were open for new
                        insureds during the period 1976-1988) or 4% (funds G and H, which were open for new
                        insureds during the period 1988-1989). The assured yield for insureds in these policies
                        is approximately one percent lower than the yield of the earmarked bonds. Accordingly,
                        the insurance companies enjoy a fixed profit of approximately one percent of the assured
                        yield insurance reserves.
                     2. Management fees from the participating portfolio – on account of participating insurance
                        programs opened during the period 1990 – 2003, the insurance companies are entitled
                        to collect annual management fees in the rate of 0.6% of total assets, with the addition
                        of 15% of the investment profits. In new programs opened from 2004, participation in
                        profits from investments will no longer be permitted. The basic management fee rate
                        will be one percent of total assets.
                     3. In addition to the fees noted in paras. 1 and 2, the insurance companies collect additional
                        commissions from the premiums. The maximum rate of the commission component on
                        account of policies issued through June 2001 is 28% of total premiums (including the risk
                        component); from June 2001, the maximum rate is 20% (including the risk component).
                        It should be noted that in new insurance programs issued from January 2004, the risk
                        and expenses components were separated, and the maximum commissions rate from the
                        premiums (excluding the risk component) fell to 11% (fixed rate), or, alternatively, a
                        staggered rate beginning at 13% and falling gradually over several years, in such manner
                        that the average management fee rate shall not exceed 11%. Additional commissions
                        applied in the past, such as the policy factor and the sub-annuals factor, were reduced
                        or abolished, and, in any case, were included as part of the management fees that the
                        insurance companies are entitled to collect.
                     4. Insurance profit from the risk component and the loss of earning capacity – if the
                        incremental premium paid on account of the risk component and loss of earning capacity
                        exceeds the cost of covering claims on account of death or loss of earning capacity, the
                        companies enjoy additional profit.
                     5. Profit from surrender values – the withdrawal of money by an insured prior to the end
                        of the insurance period is subject to a fine. The insured receives his money at surrender




                      ≥≤     Annual Report 2003
                                                        Stability of Insurance Companies


   values lower than the value of the money at the date of withdrawal. The level of the fine
   depends on the type of insurance program (executive or private, preferential or mixed),
   the seniority accumulated by the insured in the program, and the circumstances of the
   early withdrawal (leaving the place of employment, dismissal, etc.)
6. In addition to the above-mentioned sources, in calculating insurance tariffs there is an
   additional profit component loaded on the various expenses of the insurer.


Alongside revenue, the insurance company bears payments of claims to the insureds on
account of death or loss of earning capacity, or pays savings accumulated in accordance with
the provisions of the policy.
The insurance companies also have operating costs. The central cost in managing the life
insurance system is the payment of commissions to insurance agents for the marketing of
policies, maintenance of the insureds portfolio, and processing of the collection of premiums.
To date, the major portion of commissions was paid to agents during the year of underwriting
of the policy and during the following year.
General and administrative expenses are used mainly for the operation of the insurer’s life
insurance division, and for management of the insurer’s life insurance investment portfolio.
The scope of these costs fluctuates less than the amounts of commissions, which are derived
directly from the scope of sales, and includes salary costs and automation expenses.
Profits in the life insurance line totaled NIS 2,121 million, and increase of 71% over 2002,
despite a decrease of 2.1% in the scope of premiums collected by the companies. The main
reason for the increased profit is the high yields recorded in 2003 on investments in the
capital market, which led to an increase in the management fees collected by the insurance
companies of NIS 830 million – an increase of 334% over 2002.


                                                                                                 Annual Report 2003




                                                                                        ≥≥
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     3.2 Premiums


                                                              Table B-12
                                                 Life Insurance Premiums by Companies
                                               NIS thousands, December 31, 2003 prices, percent

                                                                                             Rate of change in              Market
                                                         Premiums
                        Company                                                                 premium                     share
                                             2001            2002            2003         2001-2003 2002-2003                    2003

                          Migdal          4,197,284       3,999,126       3,824,815          -8.9%           -4.4%           27.5%
                         Hamagen           777,228         687,323         652,380          -16.1%           -5.1%               4.7%
                      Migdal Group        4,974,512       4,686,449       4,477,195         -10.0%           -4.5%           32.2%
                            Clal          3,091,789       2,979,747       2,889,062          -6.6%           -3.0%           20.8%
                            Aryeh          364,039         383,283         375,726           3.2%            -2.0%               2.7%
                        Clal Group        3,455,828       3,363,030       3,264,788          -5.5%           -2.9%           23.5%
                          Phoenix         1,358,211       1,286,142       1,305,270          -3.9%            1.5%               9.4%
                            Hadar         1,029,316        966,978         970,855           -5.7%            0.4%               7.0%
                      Phoenix Group       2,387,527       2,253,120       2,276,125          -4.7%           1.0%            16.4%
                            Harel         2,009,541       1,903,395       1,888,399          -6.0%           -0.8%           13.6%
                         Menorah          1,407,016       1,294,688       1,307,921          -7.0%           1.0%            9.4%
                            ILDC           290,457         295,447         277,177           -4.6%           -6.2%           2.0%
                          Ayalon           176,357         187,583         197,307          11.9%            5.2%            1.4%
                          Eliahu           191,592         172,838         147,785          -22.9%          -14.5%           1.1%
                        IDI Direct          20,544          36,858          48,025         133.8%            30.3%           0.3%
                            AIG             5,771            9,419          13,097         126.9%            39.0%               0.1%

                            Total        14,919,145 14,202,827 13,897,819                    -6.8%           -2.1%           100.0%


                     Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division



                     Before analyzing the changes and developments, it should be emphasized that an increase in
                     the scope of premiums does not necessarily improve profitability. The premium received from
                     the insured includes three principal components: risk – to cover the risk of death; savings
                     – accumulated by the insured for the retirement period; and the component of management




                       ≥¥      Annual Report 2003
                                                        Stability of Insurance Companies


fees on the premium. The method of allocation of the premium between these different
companies varies from company to company and from one insurance program to another.
In the long term, the greater the seniority of the policy, the lower the costs of the insurance
company (particularly commissions to agents). Income from management fees for savings
grow according to the increase in the savings balance.
A review of premiums in the life insurance line reflects a continued downward trend in the
scope of premiums collected by the insurance companies. Total gross premiums in the life
insurance line in 2003 were NIS 13.9 billion, compared to NIS 14.2 billion in 2002 and NIS
14.9 billion in 2001. This is a cumulative decrease of 7% since 2001, returning premiums to
their level in the year 2000.
As may be seen, with the exception of Ayalon, IDI Direct and AIG, all remaining companies
recorded a decrease in the scope of premiums relative to previous years. The five major
companies have recorded a decrease of 5-10% in the scope of premiums over the past two
years. Eliahu recorded a much sharper decrease, in excess of 20%. The direct insurance
companies – IDI Direct and AIG – recorded very high increases, as would be expected for
new companies in the industry. Whereas the efforts of the veteran companies focus on life
insurance programs with a savings component, the direct insurance companies concentrate
on life insurance based solely on risk, without a savings component (such as life insurance
for housing loans).
Chart B-4 shows the changes in the market share of the insurance companies on account of
premiums received for policies from the year of underwriting 2003 compared to premiums
received for policies from previous underwriting years (the old portfolio).
As the chart shows, the market share of the Migdal group, Menorah and ILDC in sales of new
life insurance policies in 2003 was smaller than in previous years. Conversely, growth trends
may be noted in the Clal group, which rose by 6.6% compared to the previous underwriting
years, and in the Harel and Phoenix groups, which rose by 2% and 3% respectively compared
to the premiums reported for previous underwriting years.
                                                                                                  Annual Report 2003




                                                                                         ≥µ
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                                                     Chart B-4
                         Market Share of Premiums Reported in 2003 – 2003 Underwriting Year
                                          Versus Previous Underwriting Years
                                                                             Percent
                            ≥∞Æ∞•




                            ≤µÆ∞•




                            ≤∞Æ∞•




                            ±µÆ∞•




                            ±∞Æ∞•




                            µÆ∞•




                            ∞Æ∞•
                                    Clal   Migdal Harel Phoenix Hadar Menorah Aryeh Hamagen Eliahu Ayalon ILCD               Direct    AIG
                                                                                                                           Insurance

                                                 Premium for 2003 under writing year   Premium for previous under writing years




                     Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division



                     The presentation of total premiums in the life insurance line reflects historical activities over
                     many years, whereas the figures presented in Chart B-4 detail the distribution of premiums
                     on the basis of new sales in 2003, reflecting the activities of the insurance companies in the
                     last year only. The figures reflect growth in the market share of the Clal group, Harel group,
                     Phoenix group and Eliahu, alongside a reduction in the market share of the Migdal group
                     and of Menorah and ILDC. It should be emphasized, however, that these figures relate only
                     to one specific reporting year.
                     In Table B-13, a distinction is made between the scope of premiums paid for assured yield
                     insurance programs open for new insureds until 1990 and the scope of premiums paid for




                       ≥∂      Annual Report 2003
                                                                     Stability of Insurance Companies


insurance programs opened from 1990. Most premiums for underwriting year 1990 on are
on account of participating life insurance programs, with smaller proportions on account of
pure risk and loss of earning capacity. As may be seen, most of the premiums were received
on account of insurance programs opened from 1990 (87%), and only a minority (13%, or
some NIS 1.8 billion) on account of old assured yield programs. The low deposits for assured
yield programs and the fact that the assets bear an average yield of 5%, i.e. approximately two
billion shekels, reflect the fact that the rate of surrenders from assured yield programs totaled
almost four billion shekels, i.e. almost twice the level of surrenders. Since the deposit amounts
are not growing, due to the fact that these programs are closed to new insureds, and since the
age of the insureds is rising, surrenders can be expected to rise. Accordingly, we expect that
the downward trend in the assets of these reserves will increase over the coming years.


                                Table B-13
   Distribution of Premiums in 2002-20034 between Insurance Policies Sold
               Until 1990 and Insurance Policies Sold from 1991
                                                     Percent

                                  2002 reporting year                            2003 reporting year
                          Premiums for         Premiums for              Premiums for         Premiums for
                            1991-2002        underwriting years            1991-2003        underwriting years
                        underwriting years       until 1990            underwriting years       until 1990
      Migdal                  84%                   16%                      85%                   15%
     Hamagen                  90%                   10%                      91%                    9%
   Migdal Group               85%                   15%                      86%                   14%
        Clal                  83%                   17%                      85%                   15%
       Aryeh                  88%                   12%                      90%                   10%
    Clal Group                84%                   16%                      86%                   14%
      Phoenix                 85%                   15%                      85%                   15%
       Hadar                  94%                    6%                      94%                    6%
  Phoenix Group               89%                   11%                      89%                   11%
       Harel                  85%                   15%                      87%                   13%
     Menorah                  85%                   15%                      87%                   13%
       ILDC                   91%                    9%                      92%                    8%
       Ayalon                 96%                    4%                      95%                    5%
  Direct Insurance            100%                   0%                      100%                   0%
        AIG                   100%                   0%                      100%                   0%
        Total                85.5%                 14.5%                     87%                  13%
Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division
                                                                                                                 Annual Report 2003




4. The table does not include data on the Eliahu company in the above period, in light of the company’s
contention that it is unable to carry out the abovementioned calculation.




                                                                                                            ≥∑
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     3.3 Life Insurance Reserves
                     2003 saw significant improvement in the scope of the participating insurance portfolio. Life
                     insurance reserves in the participating portfolio, which were equal in size to the reserves
                     in the assured yield portfolio in 2002, continued to rise, accounting for 56% of total life
                     insurance reserves by the end of 2003. These changes are consonant with the fact that
                     the issue of assured yield insurance policies was discontinued in 1990, as detailed above.
                     In 2003, the insurance companies secured particularly high yield on investments in the
                     participating portfolio, compared to the fixed yield of the assured yield portfolio (most of
                     which is invested in earmarked bonds with fixed interest rates of 4% to 6.2%). Accordingly,
                     the increased share of participating reserves at the expense of assured yield reserves was
                     also due to the discrepancy in the yield secured in 2003, and not only to the higher figures
                     for new deposits.
                     An analysis of the changes in the market share in terms of the size of the reserve reflects
                     the reverse trend to that found from the analysis of changes in market share on account of
                     premiums. Despite their reduced share in terms of premiums, the Migdal and Clal groups
                     recorded a cumulative increase of 1.1% in reserves for the participating portfolio and 0.5%
                     in the reserves of the assured yield portfolio.


                                                     Table B-14
                      Distribution of Life Insurance Reserves between Participating Portfolio and
                                                 Assured-Yield Portfolio
                                               NIS thousands, December 31, 2003 prices, percent

                             Year                           Participating                               Assured-Yield
                                                                     Share of total                                  Share of total
                                                  Reserve                                        Reserve
                                                                     reserves in life                                reserves in life
                                                  amount                                         amount
                                                                       insurance                                       insurance

                             2002               41,420,794                  50.2%              41,093,253                 49.8%

                             2003               53,131,753                  56.3%              41,224,592                 43.7%

                     Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division




                       ≥∏      Annual Report 2003
                                                                     Stability of Insurance Companies



                                  Table B-15
        Market Share of Insurance Companies – Life Insurance Reserves –
              Participating Portfolio Versus Assured-Yield Portfolio
                            NIS thousands, December 31, 2003 prices, percent

                                          2002                                            2003
    Company
                       Participating             Assured-yield          Participating            Assured-yield
                   Market     Reserve      Market       Reserve     Market      Reserve     Market      Reserve
                   share      amount       share        amount      share       amount      share       amount
     Migdal         28.6% 11,850,052 33.4%             13,708,258    29.1%     15,487,069    33.6%     13,859,836
    Hamagen         6.7%      2,759,489     3.2%       1,320,914     6.7%      3,568,761     3.2%       1,327,114
 Migdal Group       35.3% 14,609,541 36.6%             15,029,172    35.9%     19,055,830    36.8%     15,186,950
       Clal         20.0%     8,286,934 20.9%          8,604,666     20.4%     10,813,390    21.1%      8,682,249
     Aryeh          2.2%       908,522      2.2%        906,807      2.2%      1,161,193     2.3%           960,294
   Clal Group       22.2%     9,195,456 23.1%          9,511,473     22.5%     11,974,583    23.4%      9,642,543
      Harel         0.0%          -         0.0%           -         12.7%     6,748,636     13.3%      5,485,547
     Shiloah        10.0%     4,126,616     9.9%       4,088,229                    -                          -
   Sahar-Zion       2.9%      1,188,175     3.8%       1,558,256                    -                          -
  Harel Group       12.8%     5,314,791 13.7%          5,646,485     12.7%     6,748,636     13.3%      5,485,547
     Phoenix        9.1%      3,760,654 12.4%          5,084,737     9.0%      4,784,558     12.4%      5,110,949
     Hadar          7.5%      3,099,831     2.6%       1,087,852     7.3%      3,874,766     2.6%       1,066,135
 Phoenix Group 16.6%          6,860,485    15.0%       6,172,589     16.3%     8,659,324     15.0%      6,177,084
    Menorah         9.5%      3,924,533     8.7%       3,560,998     9.3%      4,915,460     8.7%       3,570,999
      ILDC          1.7%       689,017      1.2%        490,349      1.5%       775,602      1.2%           491,570
     Eliahu         0.8%       335,727      1.1%        472,337      0.7%       373,944      1.1%           458,992
     Ayalon         1.1%       470,849      0.5%        203,398      1.1%       591,061      0.5%           208,140
   IDI Direct       0.0%       20,341       0.0%          604        0.1%        37,313      0.0%            2,767
      AIG           0.0%          -         0.0%         5,848                      -                          -
      Total         100% 41,420,794 100%               41,093,253    100%      53,131,753    100%      41,224,592
Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division
                                                                                                                        Annual Report 2003




                                                                                                                   ≥π
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     The blend of the composition of life insurance reserves also influences the profitability rates
                     of the different companies. Whereas investments in the assured yield portfolio yield an
                     interest margin of approximately one percent, management fees in the participating portfolio
                     on account of policies issued through December 31, 2002 total 0.6% of total assets, with
                     the addition of 15% of the investment profits. Based on an assumed long-term yield of 4%,
                     annual management fees are expected to be approximately 1.2%. In years when higher yields
                     are secured, as was the case last year, management fees rise substantially. Management fees
                     on account of the assets in the participating portfolio for policies issued from January 1, 2004
                     totaled one percent. In other words, until the beginning of 2004, the management fees for
                     the participating portfolio were higher than the interest margin in the assured yield portfolio
                     (as were the investment management costs). This situation has now changed, however, and
                     in new policies the management fees are equal to the interest margin. Accordingly, in the
                     long term a reduction can be expected in the rate of revenues from the management of
                     assets, compared to the revenues secured by the companies last year, commensurate with the
                     decreasing share of the old participating portfolio and the rising share of the new portfolio.


                     3.4 Life Insurance Surrenders
                     The surrender of moneys in life insurance prior to the end of the period has two ramifications
                     with contradictory influences on profitability. On the one hand, the moneys are redeemed
                     at surrender values that include a fine for the insured and profit for the company. On the
                     other hand, the company is obliged to delete the deferred acquisition costs recorded against
                     that policy, and to recognize the cost immediately in its profit and loss statement, since no
                     further future income is expected from the said policy. The pricing of a substantial portion of
                     the policies in the market is based on the assumption that they will remain valid for several
                     years, since during the early years the company “loses” on the policy, and only begins to
                     secure a profit later, as the management fees on account of assets rise (due to the rising value
                     of the portfolio) while commissions to agents fall.
                     Table B-16 below shows the scopes of surrenders of life insurance policies during the period
                     2001-2003. For the line as a whole, it may be seen that the rate of surrenders from life
                     insurance reserves, which fell in 2002, rose again in 2003 by 0.2%, reaching a total of 5.6%
                     of the average life insurance reserves.
                     An examination of the surrender rates from life insurance reserves for each company
                     shows that ILDC leads in terms of the scope of surrenders of life insurance policies, with a
                     cancellation rate of almost 8%, followed by Eliahu, Menorah, Ayalon and Harel.




                      ¥∞     Annual Report 2003
                                                                     Stability of Insurance Companies


By contrast, the surrender rate in insurance companies such as Phoenix and Migdal fell
consistently to less than 5%. This figure reflects the capacity of the insurance company
to maintain its portfolio and to ensure the quality of the insurance agents who undertake
its marketing work. It is important to note, however, that in absolute terms deposits grew
in most companies by comparison to the previous year (with the exception of Eliahu and
ILDC), totaling NIS 4.9 billion, representing a growth rate of 11% by comparison to 2002.
Accordingly, it may be deduced that the fall in surrender rates could be due to the rapid
increase in life insurance reserves in general, and in the participating portfolio in particular.


                                Table B-16
    Ratio of Surrendered Policies to Total Average Reserve – Industry-wide
                          NIS thousands, December 31, 2003 prices, percent

                                 Surrender amounts                    Ratio of surrendered policies to
   Company                        in life insurance                           average reserve
                         2001            2002           2003          2001         2002              2003
      ILDC             85,754          97,394          94,397         7.9%        8.6%               7.9%
     Eliahu            56,825          69,793          64,956         6.6%        8.0%               7.5%
       Harel           608,115         584,248        713,104         5.9%        5.4%               6.9%
     Menorah           445,460         457,002        520,858         6.5%        6.3%               6.7%
      Ayalon           34,680          37,135          46,501         6.3%        6.0%               6.5%
      Hadar            280,473         293,708        295,403         7.0%         6.9%              6.3%
     Phoenix           458,213         433,878        446,124         5.4%         4.9%              4.7%
 Phoenix Group         738,686         727,586        741,527         5.9%        5.5%               5.2%
      Aryeh            94,442          94,507          113,158        5.7%         5.3%              5.7%
       Clal            892,977         886,418       1,010,085        5.8%         5.4%              5.6%
   Clal Group          987,419         980,925       1,123,243        5.8%        5.4%               5.6%
    Hamagen            195,151         204,864        221,497         5.8%         5.6%              5.4%
      Migdal         1,329,034       1,245,764 1,353,296              5.5%         4.9%              4.9%
  Migdal Group       1,524,185       1,450,628 1,574,793              5.6%        5.0%               5.0%
      Total          4,481,124        4,404,711 4,879,379             5.9%        5.4%               5.6%
                                                                                                                 Annual Report 2003




Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division




                                                                                                            ¥±
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     3.5 Management Fees and Profit from Life Insurance Business
                     An analysis of the sources of profit from the life insurance business of the companies reflects
                     the consistent trend of changes in the composition of insurance reserves in the life insurance
                     line in the insurance companies.
                     The part of the management fees collected by the insurance companies on account of their
                     part in management and in profits accumulated in the participating portfolio has continued to
                     rise over the years, as the scope of reserves in the participating portfolio has risen. The peak
                     in the capital market in 2003 secured high management fees for the insurance companies
                     on account of profits in the participating portfolio, which accounted for 51% of total profit
                     in the life insurance business. As may be seen, in previous years, when the capital market
                     suffered from recession and falling rates, management fees from the participating portfolio
                     were approximately one-fifth of total revenue sources in the companies’ life insurance line.
                     It is important to note that management fees in 2003 constitute a form of “capital gain”
                     rather than current revenue gain, since most of the profit was received from the mechanism
                     that entitles the insurance companies to participate in 15% of the profits of investments in
                     the participating portfolio. Most of the profit was due to the sharp price increases in the
                     bonds market, and from the increased rates in the indices of the various stocks on TASE,
                     which were unusually high. The sharp price rises in the bonds market led to a sharp fall in
                     the yield to maturity of the bonds, and will thus influence the scope of management fees in
                     coming years. On the other hand, the fixed component in management fees (0.6%) will not
                     be influenced by capital profits, and its financial impact is expected to increase alongside the
                     increase in the reserves.




                      ¥≤     Annual Report 2003
                                                                     Stability of Insurance Companies



                                   Chart B-5
     Ratio of Management Fees from Life Insurance Policies in Participating
              Portfolio to Total Profit from Life Insurance Business
                                                     Percent


                ∂∞•
                                                                                  µ∞Æπ•




                ¥µ•



                                   ≤∏Ʊ•

                ≥∞•
                                                           ≤∞Ʊ•




                ±µ•




                 ∞•
                                ≤∞∞±                   ≤∞∞≤                   ≤∞∞≥




Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division




                                                                                                                 Annual Report 2003




                                                                                                            ¥≥
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                                                  Table B-17
                     Revenue from Management Fees in Life Insurance in Participating Portfolio by
                     Companies, and Percentage of Management Fees Revenue from Profit in Life
                                               Insurance Business
                                               NIS thousands, December 31, 2003 prices, percent

                                                       2001                            2002                            2003
                        Company           Management          % of        Management           % of        Management             %
                                             fees             profit          fees              profit          fees             of profit

                          Migdal            160,099           25.2%          63,853           21.3%          294,795          44.2%
                         Hamagen             33,312           42.0%          13,486           71.8%           59,688          84.1%
                       Migdal Group         193,411           27.0%          77,339           24.3%          354,483          48.1%
                             Clal            98,885           32.4%          47,193           23.8%          219,890          73.7%
                            Aryeh            9,632            26.2%           5,105           14.9%           24,096          70.7%
                        Clal Group          108,517           31.8%          52,298           22.5%          243,986          73.3%
                          Phoenix            38,022           23.4%          21,916           13.6%          103,212          38.2%
                            Hadar            39,652           62.8%          17,915           24.0%           75,285          70.8%
                      Phoenix Group          77,674           34.4%          39,831           16.9%          178,497          47.4%
                            Harel            67,900           24.7%          28,821           22.3%          143,321          41.1%
                         Menorah             49,815           27.2%          21,033           16.4%          133,328          52.4%
                            Ayalon           4,674            21.4%           2,212           11.5%            8,792          41.8%
                            ILDC             7,301            41.8%           3,166           22.4%           12,050          80.2%
                            Eliahu           4,201            9.0%            1,834           4.1%             6,007          18.7%
                         IDI Direct            52             4.1%             217            5.8%              429            7.2%
                             AIG                0             0.0%               0            0.0%               0             0.0%

                            Total           513,545           28.1%          226,751          20.1%         1,080,893          50.9%


                     Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division
                     Note: The table data are based on non-consolidated financial statements of the insurance companies, and not on the data
                     appearing in the consolidated statements. However, the difference between the summary on the basis of consolidated
                     statements and the summary on the basis of non-consolidated statements is not significant.




                       ¥¥      Annual Report 2003
                                                                     Stability of Insurance Companies



3.6 Profit Ratio from Life Insurance Business from the Life
Insurance Reserves
This index reflects the yield on assets from the life insurance operations of the companies.
The higher this ratio, the higher the profitability created by the portfolio, reflecting higher
revenues, lower costs or a combination of both. Caution should be exercised in using these
figures, however, since the higher the share of premiums in programs including savings, the
higher the expected reserve. Conversely, in a portfolio comprised of premiums for insurance
against risk or loss of earning capacity, the reserve can be expected to be much lower, and in
a portfolio where the premiums are for pure risk with a varying premium, there is no need
to present any reserve. Thus the composition of the portfolio influences the composition of
the reserves, and hence companies that sell pure risk on an extensive scale can reasonably be
expected to have higher yield for assets, subject to the underwriting costs. In most companies,
yield for assets rose in 2003, though there are a number of companies in which it fell.


                                 Table B-18
 Ratio of Profit from Life Insurance Business to Total Life Insurance Reserves,
                             by Insurance Groups
                                                     Percent

                               2000                   2001                    2002                    2003
      Migdal                   2.1%                   2.5%                    1.2%                   2.3%
     Hamagen                   1.2%                   2.2%                    0.5%                   1.6%
   Migdal Group                2.0%                   2.5%                    1.1%                   2.2%
        Clal                   1.7%                   1.9%                    1.2%                   1.5%
       Aryeh                   2.2%                   2.1%                    1.9%                   1.6%
    Clal Group                 1.8%                   1.9%                    1.2%                   1.5%
      Phoenix                  1.8%                   1.9%                    1.8%                   2.7%
       Hadar                   1.8%                   1.5%                    1.7%                   2.1%
   Phoenix Group               1.8%                   1.7%                    1.8%                   2.5%
       Ayalon                  4.0%                   3.7%                    3.0%                   2.7%
     IDI Direct               -34.2%                  7.3%                   10.8%                  10.0%
       Eliahu                  3.5%                   5.3%                    5.2%                   3.7%
      Menorah                  2.1%                   2.6%                    1.7%                   3.1%
       Harel                   2.0%                   2.4%                    1.2%                   2.8%
       ILDC                    2.1%                   1.5%                    1.2%                   1.2%
        AIG                  -936.6%                -136.0%                  11.3%                  -35.9%
                                                                                                                  Annual Report 2003




      Average                  2.0%                   2.2%                    1.4%                   2.3%
Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division




                                                                                                             ¥µ
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     As can be seen, IDI Direct, which is active mainly in pure risk fields, shows a relatively high
                     rate of profit from its reserves. In life insurance programs covering risk only, the premium
                     paid by the insured includes only the cost of risk, with the addition of the company’s cost
                     component. The insurance reserves for risk alone are much lower than the reserves for
                     insurance plans including savings, since, in general, the savings component in the latter
                     programs is higher than the risk component. Accordingly, the reserves recorded by the
                     companies on account of operations in this line are low, given the absence of the savings
                     amounts that form the major part of the life insurance reserves for life insurance programs
                     including a savings component. Both IDI Direct and AIG are still in growth stages; however,
                     while the operations of IDI Direct in the line became profitable in 2002 and maintained this
                     position in 2003, AIG registered losses in 2003, after securing profitability in 2002.
                     As may be seen, Eliahu and Ayalon (despite a reduction in the case of Ayalon in 2003),
                     whose scope of operations in the life insurance line is relatively limited, show relatively high
                     profit ratios on reserve. Migdal, Clal and Phoenix show lower profit ratios.


                     3.7 Commission in the Life Insurance Line
                     An examination of Table B-19 shows that the level of commissions paid by the companies to
                     mediators active in the life insurance line has remained more or less stable during the period
                     2001-2003, accounting for just over 16% of the premium. It is expected that the reform at
                     the beginning of 2004 in life insurance programs and in the question of deferred acquisition
                     costs will lead to a change in the structure of commissions (“flat” commissions spread over
                     the policy period, rather than varying-rate commissions with higher start rates).
                     The top five companies in terms of the payment of the highest commissions include Hadar,
                     which reached first place in 2003 at 21.4%; Menorah, at 20.8% (maintaining the second
                     place for the third consecutive year); Aryeh and Harel, with commissions on premiums rates
                     of almost 19%.
                     The most notable phenomenon is the sharp fall in the level of commissions in the Migdal
                     group, compared to the modest increase in the Harel group and the sharper increase in the
                     Phoenix group. The market share in new sales of each company for 2003, as detailed above,
                     should be examined with reference to these figures.




                      ¥∂     Annual Report 2003
                                                                      Stability of Insurance Companies



                                     Table B-19
                   Ratio of Commissions to Premiums in Life Insurance
                             NIS thousands, December 31, 2003 prices, percent

                                                               Ratio of commission           Rate of change in
                          Commission fees paid                     to premium                commission fees
                                                                                             2001-
                       2001         2002          2003        2001      2002       2003                  2002-2003
                                                                                             2002
     Migdal          647,175       638,854      512,603      15.4% 16.0% 13.4%               -1.3%        -19.8%
    Hamagen           94,486       84,052        69,986      12.2% 12.2% 10.7%               -11.0%       -16.7%
  Migdal Group       741,661       722,906      582,589      14.9% 15.4% 13.0%               -2.5%        -19.4%
     Phoenix         193,966       186,861      232,282      14.3% 14.5% 17.8%               -3.7%        24.3%
      Hadar          170,105       160,218      207,715      16.5% 16.6% 21.4%               -5.8%        29.6%
 Phoenix Group 364,071             347,079      439,997      15.2% 15.4% 19.3%               -4.7%        26.8%
     Shiloah         234,561       220,305          -        15.7% 15.7%             -       -6.1%       -100.0%
   Sahar-Zion        111,642       110,914          -        21.5% 22.4%             -       -0.7%       -100.0%
      Harel              -             -        355,976         -          -      18.9%         -             -
   Harel Group       346,202       331,219      355,976      17.2% 17.4% 18.9%               -4.3%         7.5%
       Clal          480,028       462,732      438,929      15.5% 15.5% 15.2%               -3.6%         -5.1%
      Aryeh           65,880       66,824        71,310      18.1% 17.4% 19.0%                1.4%         6.7%
   Clal Group        545,908       529,556      510,239      15.8% 15.7% 15.6%               -3.0%        -3.6%
    Menorah          288,982       234,503      272,096      20.5% 18.1% 20.8% -18.9%                     16.0%
      Ayalon          36,816       29,112        29,815      20.9% 15.5% 15.1% -20.9%                      2.4%
      ILDC           102,301       72,362        43,993      35.2% 24.5% 15.9% -29.3%                     -39.2%
      Eliahu          20,136       15,417        14,740      10.5% 8.9% 10.0% -23.4%                      -4.4%
       AIG               -           240           180          -       2.5%      1.4%          -         -25.0%
    IDI Direct           -             -            -           -          -         -          -             -

      Total         2,766,632 2,580,480 2,740,966 16.8% 16.4% 17.6%                          -6.7%         6.2%

Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division
Note: The table data are based on non-consolidated financial statements of the insurance companies, and not on the data
appearing in the consolidated statements. However, the difference between the summary on the basis of consolidated
statements and the summary on the basis of non-consolidated statements is not significant.
                                                                                                                         Annual Report 2003




                                                                                                                  ¥∑
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                     In an effort to examine the impact of the commissions paid on the market share of the company,
                     we attempted to assess whether there is a correlation between the rate of commissions paid
                     on the premium and the market share of the company in premiums reported on account of
                     new sales for the underwriting year 2003. As can be seen, a higher rate of commissions does
                     not necessarily lead to a substantial increase in market share, and even in companies that
                     increased the scope of commissions, the market share of premiums is not higher than the
                     market share of commissions. Moreover, despite the fact that the two main companies do
                     not pay the highest commissions, they have maintained a large market share, including in
                     new sales.


                     3.8 General and Administrative Expenses as a Percentage of
                     Life Insurance Reserves
                     The routine management operations of the life insurance divisions and the management of
                     the assets portfolio incur routine costs throughout the life of the policy. Table B-20 details
                     the rate of general and administrative expenses as a percentage of life insurance reserves.
                     A review of the well-established companies shows that the rate of expenses of Ayalon and
                     ILDC is almost twice as high as that of Migdal, Clal, Menorah and Phoenix. Once again,
                     size seems to offer advantages, enabling the company to operate at lower expense levels as
                     a percentage of the total reserve.
                     An exception is Harel, whose expense ratio (1.72%) is higher than the average ratio for the
                     other four main companies (average 1.1%). However, an examination of the development
                     trends of this group shows that it is in the process of reducing its expenses, as reflected in the
                     merger of Shiloach and Sahar-Zion, which was completed at the beginning of 2003.




                      ¥∏     Annual Report 2003
                                                                      Stability of Insurance Companies



                                Table B-20
      Ratio of General and Administrative Expenses to Total Life Insurance
                            Reserves - Companies
                                                      Percent

                                                                                               Rate of change
                                                           Ratio of general and
                 General and administrative                                                    in general and
                                                       administrative expenses to life
                          expenses                                                             administrative
                                                            insurance reserves
                                                                                                  expenses
                 2001        2002         2003          2001         2002         2003      2001-2002 2002-2003
  Migdal       258,761      256,939      251,665       1.03%        0.99%        0.86%       -0.70%      -2.05%
 Hamagen        45,990      42,188       40,164        1.27%        1.13%        0.90%       -8.27%      -4.80%
  Migdal
           304,751   299,127   291,829   1.06%                      1.01%        0.86%        -1.85%       -2.44%
  Group
    Clal   166,552   167,906   198,362    1.03%                     1.00%        1.02%        0.81%        18.14%
   Aryeh    31,000   34,388    37,940     1.78%                     1.89%        1.79%        10.93%       10.33%
    Clal
           197,552   202,294   236,302   1.10%                      1.08%        1.09%        2.40%        16.81%
  Group
  Hadar     80,224   75,744    85,565     1.89%                     1.76%        1.68%        -5.58%       12.97%
 Phoenix 113,318     93,376    120,127    1.29%                     1.04%        1.20%       -17.60%       28.65%
 Phoenix
           193,542   169,120   205,692   1.49%                      1.27%        1.36%       -12.62%       21.62%
  Group
  Shiloah  145,363   145,014      -       1.80%                     1.75%           -         -0.24%      -100.00%
  Sahar-
            55,805   59,179       -       2.11%                     2.15%           -         6.05%       -100.00%
    Zion
   Harel       -         -     214,414       -                         -         1.72%           -            -
   Harel
           201,169   204,193   214,414   1.88%                      1.85%        1.72%        1.50%        5.01%
  Group
 Menorah 134,963     130,976   123,220   1.88%                      1.78%        1.49%        -2.95%       -5.92%
    AIG     9,612     9,896     9,981   371.09%                    248.52%      135.56%       2.95%         0.86%
     IDI
            12,312   15,197    20,408    71.87%                    43.32%       34.18%       23.43%        34.29%
   Direct
  Ayalon    19,356   19,381    22,258    3.27%                      2.98%        2.84%        0.13%        14.84%
   ILDC     24,965   24,968    23,785    2.21%                      2.18%        1.91%        0.01%        -4.74%
  Eliahu    13,730    11,976   14,257    1.57%                      1.39%        1.63%       -12.77%       19.05%
 Industry
          1,111,952 1,087,128 1,162,146 1.39%                       1.31%        1.23%        -2.23%       6.90%
    total
Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division
Note: The table data are based on non-consolidated financial statements of the insurance companies, and not on the data
                                                                                                                         Annual Report 2003




appearing in the consolidated statements. However, the difference between the summary on the basis of consolidated
statements and the summary on the basis of non-consolidated statements is not significant.




                                                                                                               ¥π
                     The Capital Market, Insurance and Saving Division
Annual Report 2003




                                                       Chart B-6
                       Market Share – General and Administrative Expenses Versus Life Insurance Reserves
                                                                                     Percent

                          ¥∞•

                          ≥µ•

                          ≥∞•

                          ≤µ•

                          ≤∞•

                          ±µ•

                          ±∞•

                            µ•

                            ∞•
                                  Migdal       Clal     Phoenix       Harel    Menorah         ILDC    Eliahu     Ayalon      Direct      AIG
                                                                                                                            Insurance

                                           Market share of life insurance reserves        Market share of general and administrative expenses




                     Source: Statements of the insurance companies processed by Capital Market, Insurance and Savings Division



                     An additional way to present advantages of size in the life insurance line is by means of Chart
                     B-6, which shows the relative share of the insurance companies in general and management
                     expenses in the life insurance line, compared to their relative share in insurance reserves.
                     According to this ratio, it can be seen that Migdal is the main beneficiary of advantages of size,
                     holding 36% of insurance reserves, compared to just 25% of total general and administrative
                     expenses. Clal also enjoys an advantage of size in the field, although on a more modest scale.
                     The direct companies – IDI Direct and AIG – represent the opposite end of the spectrum,
                     showing a market share of general and administrative expenses that is higher than the market
                     share of life insurance reserves.




                       µ∞        Annual Report 2003

				
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