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The Phoenix Holdings Ltd.

Board of Directors Report

Please note that this report is a translation that was made for convenience purposes. Please note that the Hebrew version constitutes the binding version, and in any event of discrepancy, the Hebrew version shall prevail.

Table of contents

1. THE GROUP'S STRUCTURE, OPERATING SEGMENTS AND DEVELOPMENTS ................................... 1

2. DESCRIPTION OF THE BUSINESS ENVIRONMENT ............................................................................ 7

3. DEVELOPMENTS IN THE MACRO-ECONOMIC ENVIRONMENT ...................................................... 11

4. BUSINESS STRATEGY OF THE PHOENIX .......................................................................................... 11

5. THE BOARD OF DIRECTORS’ EXPLANATIONS ON THE STATE OF THE CORPORATION’S ............... 14

6. DISCLOSURE ON EXPOSURE AND MANAGEMENT OF MARKET RISKS .......................................... 33

7. CORPORATE GOVERNANCE ASPECTS ............................................................................................. 37

8. DISCLOSURE REQUIREMENTS RELATING TO THE COMPANY'S FINANCIAL REPORTING .............. 39



1-1

Board of Directors’ Report on the State of the Company's Affairs as of

December 31, 2019

The Directors’ Report of Phoenix Holdings Ltd. (hereinafter, “Phoenix Holdings” or “the Company”)

as of December 31, 2019, outlines the principal changes in the Company’s operations in the period

January through December 2019 (hereinafter, “the Reporting Period”).

The Report was prepared in accordance with the Securities Regulations (Periodic and Immediate

Reports), 1970. As concerns the insurance, pension, and provident fund operations of the Company

and its investees ("the Group"), the Report was prepared pursuant to the Supervision of Insurance

Business Regulations (Reporting Details), 1998, and in accordance with the circulars issued by the

Commissioner of the Capital Market, Insurance and Savings ("the Supervisor" or "the

Commissioner"). The Directors’ Report is an integral part of the Periodic Report, and the Periodic

Report is to be read in its entirety as a single unit. For detail of the explanations regarding changes

between the financial results for 2018 and the financial results for 2017 – see the Board of Directors’

Report on the State of the Company’s Affairs as of December 31, 2018, as published in the

Company’s Periodic Report for 2018.

1. The Group's Structure, Operating Segments, and Developments

1.1 The Group's Structure

1.1.1 As of the date of the report, the controlling shareholder of the Company is Belenus Lux

S.a.r.l. (hereinafter – “Belenus”), which is held by Centerbridge Partners Ltd. and Gallatin

Point Capital LLC (hereinafter, “the Buyers”). As of the date of the report, Belenus held

about 32.5% of the Company's issued and paid-up share capital. For additional details

regarding the transfer of the control of the Company – see Section 1.2 below.

1.1.2 The consolidated financial statements include the statements of Company-controlled

investees. In determining whether control exists, the effect of potential voting rights,

exercisable on the statement of financial position date, is taken into account. For additional

information concerning the Group's holding structure and stakes in its various investees,

see Section 1.2 to the Report on the Company's business as of December 31, 2019 ("the

Report on the Company's Business"). Company names in the Board of Directors' Report as

of December 31, 2019 match the definitions in the Report on the Company's Business.

1.2 Sale of Control of the Company and Sale of Shares by the Controlling Shareholder

Further to the Company's Immediate Reports dated February 19, 2019 (Ref.

No. 2019-01-015876) and February 27, 2019 (Ref. No. 2019-01-017676), on May 23, 2019

(Ref. No. 2019-01-043719), the Delek Group announced that on November 4, 2019, the

conditions were fulfilled, including receipt of the control permits over the Company from the

Commissioner of the Capital Market, Insurance and Savings in the Ministry of Finance, for

completion of the transaction for sale of the control nucleus in the Company (about 32.5%

of the Company’s share capital) to companies controlled by the Buyers for a total amount

of about NIS 1.57 billion, and the transaction was completed. For additional information –

see the Company’s Immediate Report dated November 4, 2019 (Ref No. 2019-01-107566).



1. The Group's Structure, Operating Segments, and Developments (cont’d)

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1.3 For information regarding the Company’s Operating Segments – see Section 1.4 to the

Report on the Company's Business.

1.4 Mehadrin Ltd.

Further to the Company’s report dated May 5, 2019 (Ref No. 2019-01-0389769), on

September 18. 2019, the Company distributed all the shares it held in Mehadrin as a

dividend in kind to the Company’s shareholders. For additional information, including the

directors’ reasoning for the distribution – see the Immediate Report dated August 15, 2019

(Ref. No. 2019-01-070854) and Note 7(4) to the financial statements.

1.5 Pension and provident fund activities

1.5.1 On June 30, 2019, the merger of The Phoenix Pension Ltd. with and into Excellence

Provident and Advanced Education Ltd. was completed, which changed its name to The

Phoenix Excellence Pension and Provident Ltd. (hereinafter – “The Phoenix Excellence”).

After the merger, the pension funds managed by The Phoenix Pension Ltd. were

transferred to management by The Phoenix Excellence and, thus, The Phoenix Excellence

manages all the provident and pension funds of the Phoenix Group. For additional details –

see Section 2.1.1.3.3 of the Report on the Company’s Business and Note 7(4) to the

Financial Statements.

1.5.2 On December 30, 2019, it was decided by the Board of Directors of The Phoenix Insurance

to issue The Phoenix Excellence by means of distribution of a dividend in-kind to the

Company. The distribution is subject to receipt of approvals in accordance with the law,

including approval of the Tax Authorities and Capital Market, Insurance and Savings

Authority. As of the date Publication of the report, the distribution was approved by Capital

Market, Insurance and Savings Authority but approval has not yet been received by Tax

Authorities. For additional details, including the reasoning of the Board of Directors for the

distribution – see the Company’s Immediate Report dated December 31, 2019 (Ref. No.

2019-01-126166).

1.6 The Phoenix Agencies

On April 18, 2019, the Board of Directors of The Phoenix Insurance approved the

distribution of shares of The Phoenix Insurance Agencies 1989 Ltd. (hereinafter – “The

Phoenix Agencies”) as a dividend in-kind to the Company. For additional details – see the

Immediate Report of The Phoenix Capital Raising dated April 18, 2019 (Ref. No. 2019-01-

036039).

1.7 AD 120

In the first quarter of 2019, transfer of all of the Company’s holdings in AD 120 to The

Phoenix Insurance was completed, this being a part of the completion of strengthening the

capital of The Phoenix Insurance and increase of the surplus capital for purposes of

Solvency II. As a result of the transfer, the accounting shareholders’ equity of The Phoenix

Insurance increased by about NIS 634 million.




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1.8 Acquisition of land in the “1000 Complex” in Rishon Lezion for self-use

In December 2019, The Phoenix Insurance submitted a bid in a tender of the City of Rishon

Lezion for the acquisition of a lot zoned for business and commercial uses in the City of

Rishon Lezion and for the performance of construction work (hereinafter – “the Tender”).

The bid of The Phoenix was the winning bid in the Tender. The Tender relates to an area

measuring about 60 dunams located in the “1000 Complex” in Rishon Lezion, where the

construction rights in the Tender pursuant to the present Urban Planning Scheme amount

to a total of about 355 square meters. In accordance with the terms of the Tender, the

winner undertook to construct about half of the building area within a period of about eight

years from the signing date of the agreement with the City of Rishon Lezion, where an

obligation for self-use exists for an area measuring about 50 thousand square meters.

For additional information – see Section 1.3.11 to the Report on the Company's Business

and the Immediate Report dated December 17, 2019 (Ref. No. 2019-01-121702).

1.9 Officers

The Company’s Board of Directors

As a result of change of the control over the Company, most of the directors were replaced

– both in the Company and in The Phoenix Insurance. In addition, Mr. Benjamin Gabay

was appointed as the Acting Chairman of the Board of Directors of The Phoenix Insurance

and temporary Chairman of the Board of Directors of The company.

The Company’s CEO

In April 2019, Mr. Eyal Lapidot concluded his position as the Company’s CEO and the CEO

of The Phoenix Insurance, and in his place, Mr. Eyal Ben Simon was appointed.

For additional details regarding changes in the Company’s officers – see Section 4.6.2 to

the Report on the Company's Business.

1.10 Officers liability insurance

On March 30, 2020, the General Meeting approved an update of the Company’s

remuneration policy in accordance with the provisions of Section 267A of the Companies

Law whereby the officers and other main position holders will be entitled to be included in

the officers’ liability insurance arrangement. The coverage ceiling (the policy’s liability limit)

may not exceed US$220 million plus reasonable legal expenses in accordance with

Section 66 of the Insurance Contract Law per event and in total for the insurance period

and with an annual premium not in excess of US$2 million with self-participation (a

deductible) of up to US$1 million. For details – see Note 41(B) to the financial statements.




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1.11 Issuance of options to employees and officers

On April 30, 2019, the Company’s Board of Directors approved granting of up to 556,000

options to employees and officers (“the Options”) exercisable for up to 556,000 of the

Company’s ordinary shares of NIS 1.00 par value each, subject to adjustments, for no cash

consideration.

On October 31, 2019, the Company’s Board of Directors approved the issuance of an

additional 200,000 options to officers of the Company and of The Phoenix Insurance

exercisable for up to 200,000 of the Company’s ordinary shares of NIS 1.00 par value

each, subject to adjustments, for no cash consideration.

The said issuances were made pursuant to the outline in accordance with the Securities

Regulations (Outline Details of an Offer of Securities to Employees), 2000, and the

Securities Regulations (Private Offer of Securities in a Registered Company), 2000 (“the

Private Offer Regulations”), which was published on December 27, 2018 (Ref. Nos. 2018

01 119905). For additional details – see the Immediate Reports dated May 1, 2019 (Ref.

No. 2019 01 037938),.May 6, 2019 (Ref. No. 2019 01 039360) and October 31, 2019 (Ref.

No. 2019 01 107011).

1.12 Collective labor agreements–see Section 4.6 to the Report on the Company's Business.

1.13 Issuance of securities

Sale of debt

The Phoenix Holdings

1.13.1 On May 12, 2019, the Company issued NIS 300 million NIS 1 par value each registered

bonds (Series 4), which were issued pursuant to a shelf offer prospectus of the Company

dated May 7, 2019 (Ref. No. 2019 01 039576). For additional details – see the Company’s

Immediate Report dated May 12, 2019 (Ref. No. 2019 01 040101).

1.13.2 On February 20, 2020, Company issued NIS 220 million NIS 1 par value each registered

bonds (Series 5), which were issued pursuant to a shelf offer prospectus of the Company

dated February 20, 2020 (Ref. No. 2020-01-014890). For additional details – see the

Company’s Immediate Report dated February 23, 2020 (Ref. No. 2019-01-015433). The

proceeds from the issuance are expected to be used by the Company for purposes of

strengthening the “Tier 1 capital” of The Phoenix Insurance in the Solvency II regime.

The Phoenix Capital Raising

1.13.3 On April 15, 2019, The Phoenix Capital Raising (2009) Ltd., a subsidiary of The Phoenix

Insurance (hereinafter – “The Phoenix Capital Raising”) issued NIS 100 million NIS 1 par

value bonds (Series J) to classified investors included with the investors detailed in the First

Addendum to the Securities Law, 1968, by means of an expansion of the bonds series

(Series J). The bonds were recognized as a Tier 2 debt instrument of The Phoenix

Insurance Company in accordance with the approval of the Supervisor of the Capital

Market, Insurance and Savings dated October 28, 2018. For additional details – see the

Immediate Reports of The Phoenix Capital Raising dated April 7, 2019 (Ref. No. 2019 01

031671) and April 10, 2019 (Ref. No. 2019 01 032577).

1.13.4 On July 23, 2019, The Phoenix Capital Raising issued NIS 300 million NIS 1 par value

each registered bonds (Series K), which were issued pursuant to a shelf offer prospectus of

The Phoenix Capital Raising dated July 21, 2019. The bonds (Series K) were recognized

by the Supervisor of the Capital Market, Insurance and Savings in the Ministry of Finance

as a Layer 2 debt instrument of The Phoenix Insurance. For additional details – see the

Immediate Reports dated July 21, 2019 (Ref. No. 2019-01-063018) and July 23, 2019 (Ref.

No. 2019-01-063444).




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1.13.5 On December 22, 2019, The Phoenix Capital Raising issued NIS 500 million NIS 1 par

value each registered bonds (Series K), which were issued, by means of expansion of the

series, pursuant to a shelf offer prospectus of The Phoenix Capital Raising dated

December 19, 2019. The additional bonds (Series K) were recognized by the Supervisor of

the Capital Market, Insurance and Savings in the Ministry of Finance as a Tier 2 debt

instrument of The Phoenix Insurance. For additional details – see the Immediate Reports

dated December 19, 2019 (Ref. No. 2019-01-122467) and December 22, 2019 (Ref. No.

2019-01-122893).

Publication of prospectuses

1.13.6 On August 15, 2019, the Company published a shelf prospectus pursuant to which it will be

able to issue various securities, such as ordinary shares of NIS 1 par value each

(hereinafter in this Section – “the Company’s Shares”), preferred shares, nonconvertible

bonds (including by means of expansion of the Company’s existing bonds series, as they

will be from time to time), bonds convertible into the Company’s Shares (including by

means of expansion of existing series of bonds convertible into the Company’s Shares, as

they will be from time to time), options exercisable for the Company’s Shares, options

exercisable for bonds, options exercisable for bonds convertible into the Company’s

Shares, marketable securities, and every security that in accordance with the law may be

issued by force of the shelf prospectus on the relevant date. For additional details – see the

Company’s Immediate Report dated August 15, 2019 (Ref. No. 2019 01 070590).

1.13.7 On August 15, 2019, The Phoenix Capital Raising published a shelf prospectus pursuant to

which it will be able to issue various types securities in accordance with the provisions of

law – nonconvertible liability certificates (including by means of expansion of an existing

series of liability certificates of The Phoenix Capital Raising as they will be from time to

time) and options exercisable for liability certificates of The Phoenix Capital Raising. The

issuance proceeds in respect of the securities, as stated, will be deposited in The Phoenix

Insurance for its use based on its discretion and on its responsibility. For additional details

– see the Company’s Immediate Report dated August 15, 2019 (Ref. No. 2019 01 070584).

1.14 Rating – for details regarding rating reports of the Company and The Phoenix Insurance –

see Section 4.12.4 to the Report on the Company's Business.

1.15 Commencing from January 1, 2019, The Phoenix Insurance provides collective long term

care services for Maccabee Health Services (hereinafter – “Maccabee”), including

operating services for parties insured under long term care insurance in Maccabee Magen

– Cooperative Society for Reciprocal Insurance against Illnesses Ltd. For additional details

– see Section 2.3.5(C) to the Report on the Company's Business.

1.16 For details regarding cash dividend distributions made by the Company in April 2019 – see

Note 15(G) to the financial statements.

1.17 For details regarding amendment of purchase options in Agam Ledayarim Holdings Ltd. –

see Section 2.5.8 to the Report on the Company's Business and Note 7(4) to the financial

statements.




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1.18 Preparations for application of IFRS 17 – in May 2017 International Financial Accounting

Standard IFRS 17 was published, which provides accounting principles for recognition,

measurement, presentation, and disclosure of insurance contracts covered by the

Standard. The commencement date is from the report for the first quarter of 2023. For

additional details – see Note 2(31) to the financial statements.

1.19 Interest

1.19.1 On August 8, 2019, the Supreme Court, in Civil Appeal 3751/17, The Israeli Database for

Vehicle Insurance (the Pool) v. Paloni (anonymous defendant) accepted the

recommendations of the Inter-Ministerial Committee for Examination of the Issue of the

Capitalization Rate in Compensation for Damages and the Consequences Thereof and

provided that the capitalization interest rate will be 3% (hereinafter – “the Court Decision”).

In addition, it was provided in the Court Decision that until the future amendment of the

legislation, it will be possible to change the capitalization interest rate determined, in

accordance with an examination mechanism that will be executed once every two years,

the examination will be performed with reference to the usual rate of return on an

investment in AA rated corporate bonds for a period of 25 years. To the extent there is a

variance of more than one percent in a certain direction, the interest rate will be updated,

except in unusual circumstances. On the basis of the ruling in the Court Decision, a change

in the capitalization rate to a rate of 3% has a positive impact on the Company’s financial

results, in light of the fact that the Company will be able to release reserves that were

calculated on the basis of a lower capitalization interest rate. For additional details – see

Section 4.1.7.1.10 to the Report on the Company's Business and Note 40 to the financial

statements.

1.19.2 The year of the report and particularly the second half thereof was characterized by a

continued decline in the interest rate curve. This trend has a significant impact on the

assets and liabilities of The Phoenix Insurance, as well as on its payment capacity. After

the balance sheet date and until the date of publication of the financial statements the

interest rate curve increased, For additional details see section 2.1.6 below and Note 43 to

the financial statements. A decline in the interest rate curve also impacts the mix of

products sold by the Company. For example, in the area of long term care insurance, in the

year of the report, the Company significantly cut back its activities with respect to the scope

of the products it sells in this area.

1.20 After the balance sheet date, the Coronavirus began to spread. The virus first erupted in

China several months ago and is causing illness and deaths around the world, triggering

actions in various countries including Israel to cope with the spread of the virus and its

outcomes. As at the approval date of the financial statements (“the Reference Date”), the

spread of the Coronavirus (“the Event”) has a material impact on the Group’s operations

and results. The spread of the Coronavirus led to a series of restrictions that include the

temporary closure of many businesses, restrictions on movement, entry of citizens from

various countries, congregations in workplaces, and the suspension of attendance in the

education system. These restrictions have caused a contraction in the Israeli economy and

around the world, accompanied by sharp declines in the financial markets and a decline in

economic activity. The Group is subject to a risk of falling prices in the financial markets

and a recession, and to insurance risks stemming from a pandemic. Elongating the Corona

virus crisis and deepening it in Israel can even bring about to materially harm the group's

business if the crisis worsens to the recession. For information on the exposure to risk

factors, also see Note 1(c) to the financial statements.




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2. Description of the Business Environment

2.1 Implementation of Solvency II directives that apply to The Phoenix Insurance

Company

2.1.1 Directives in the matter of implementation of the Solvency II Directive Solvency II is a regulation that settles insurance companies’ capital requirements and risk management processes. The report of the economic solvency ratio as of December 31, 2019, was reported in December 2019 (Ref. no. 2019-01-126082).

2.1.2 In May 2018, Insurance Circular 2018-1-5 - Amendment to the Consolidated Circular

Concerning Reports to the Supervisor - Solvency came into effect. Under this circular,

the Insurance Company must calculate its solvency position according to the Solvency

circular, at least as at the date of its annual report and as of the date of its second-quarter

report. In the event of a material change, the Insurance Company will also be required to

calculate its solvency position as at the date of the quarterly financial statement near the

time of such change.

2.1.3 On March 19, 2020, a draft circular was published to amend the Solvency Circular

(“Amended Solvency Circular). The purpose of the amendment was to adjust the

economic solvency regime in Israel to the Directive and its updates, including the option of

selecting an adaptation period in which the insurance reserve will increase gradually for

specific homogeneous classes of insurance reserves in the economic balance sheet,

beginning from December 31, 2019, to December 31, 2032. The said adaptation period

requires advance approval of the Supervisor and said adaptation period will replace the

solvency adaptation period up to 2024. The amendment should significantly increase the

Phoenix Insurance solvency ratio.

2.1.4 Provisions for the disclosure and reporting related to economic solvency ratio included in

the Circular - Structure of Required Disclosure on Economic Solvency Regime based

on Solvency-II in the Periodic Report and the Website of Insurance Companies, to

which the following provisions and clarifications were added (“the Disclosure Circular”).

The Disclosure Circular determined that, among other things, beginning from data for

December 31, 2019, an economic solvency ratio report in respect of December 31, and

June 30 data for each year will be included in the periodic report following the calculation

period, where the economic solvency ratio report in respect of data for December 31 each

year will be audited by the Company’s auditing accountant. On March 19, 2020, a circular

was published by the Regulator for the implementation of Solvency 2 directives in

European Union format, in which the publication date of the economic solvency ratio report

for December 31, 2019, data will be on August 31, 2020.

The Circular also includes provisions related to the structure of the economic solvency ratio

report, its approval by the proper company organs, its audit by the company’s auditing

accountant, and the disclosure requirement that apply to it.



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2. Description of the Business Environment (cont’d)

2.1.5 Capital requirements under the Economic Solvency Policy Implementation provisions

(NIS thousands):

Solvency ratio – The Phoenix Insurance

As of June 30

(*) The audit was conducted pursuant to International Standard on Assurance Engagement (ISAE) 3400 – “The Examination of Prospective Financial Information.” This standard is relevant to audits of solvency calculations and does not constitute part of the auditing standards that apply to financial statements.

(**) In December 2018, the Board of Directors of The Phoenix determined an economic solvency ratio based on Solvency II (the "Capital Target"). The Capital Target determined is 110% of the required capital (which reflects an initial "safety cushion" of 10% above SCR capital requirements), which will increase linearly until reaching 115% at the end of the period (that is, 2024). It is noted that the determination of the aforementioned target does not guarantee that The Phoenix Insurance will meet it at any time.

As of December 31

2019 2018

Unaudited and unreviewed

Audited(*)

NIS thousands NIS thousands

Excluding the effects of directives on the adaptation period and share-based scenario: Shareholders equity for SCR 9,074,639 9,139,354 Equity for SCR 8,279,129 7,042,367

Reserves (Deficit) 795,510 2,096,987

Solvency ratio (%) 110% 130%

Total material capital events in the period between the balance sheet date and the reporting date that affected the Company’s solvency ratio Issue of additional Tier-1 capital 300,000 300,000 Issue of Tier-2 capital 601,459 –

Redemption of Tier-2 capital bonds (Series B) (444,519) –

Total material capital events in the period between the balance sheet date and the reporting date that affected the Company’s solvency ratio 456,940 300,000

Reserves (excluding the effects of directives concerning the adaptation period and share-based scenario) 1,252,450 2,396,987

Solvency ratio (excluding the effects of directives concerning the adaptation period and share-based scenario) 115% 134%

Directors’ Capital Target(**) 111% 111%

Capital reserve (including capital events that occurred up to December 31, 2019, the first publication date) with respect to the Capital Target 916,618 1,642,448

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As of December 31, 2018, the ratio, including a dividend of NIS 250 million and a

distribution of The Phoenix Agencies shares as a dividend in-kind to the Company in the

amount of approximately NIS 371 million. For information on the distributions, see Note 7

and Note 15 to the financial statements.

As at June 30, 2019, the ratio includes the effects of the Circular published in November

2019 “Amendment to the Provisions of the Standard Circular in the Matter of Measuring

Liabilities – Update to the Demographic Assumptions in Life Insurance and Update to the

Model of Mortality Improvements for Insurance Companies and Pension Funds” and a

position paper on this topic.

On December 30, 2019, the Board of Directors of The Phoenix Insurance approved the

distribution of shares of The Phoenix Excellence Pension and Provident, which constitute

approximately 100% of the issued and paid-in share capital of The Phoenix Excellence as a

dividend in kind to the Company. The distribution described above is subject to the required

statutory approvals including the approval of the tax authorities and the Capital Market,

Insurance, and Savings Authority. As of the date Publication of the report, the distribution

was approved by Capital Market, Insurance and Savings Authority but approval has not yet

been received by Tax Authorities. For additional information, see the Company’s immediate

report dated December 31, 2019 (Ref. No. 2019-01-126166).

On February 20, 2020, the Company issued NIS 220 million in registered CPI-linked bonds

(Series 5), of NIS 1 par value each, and received proceeds in the amount of NIS 220,000

thousand. The proceeds of the issue will be used by the Company to inject Tier-1capital

into The Phoenix Insurance. On March 9, 2020, the Supervisor of the Capital Market,

Insurance, and Savings Commissions issued approved to include additional Tier-1 capital

in the calculation of the shareholders’ equity of The Phoenix Insurance. This capital will be

included in the calculation of the economic solvency ratio of The Phoenix Insurance as of

December 31, 2019. For information on the see, see Note 26 to the financial statements.

2.1.6 In the second half of 2019, a material drop occurred along the risk-free linked shekel interest curve. This increase is expected to have an adverse effect on the Company’s economic solvency rates.

The following table summarizes the positive/negative risk-free linked interest ("SPOT") 1rates:

Range/Years 19/03/2020 31/12/2019 31/12/2018

Short 1-3 0.18%-1.68% (1.01%)-(0.77%) (0.49%)-(0.32%)

Medium 4-10 0.62%-0.83% (0.90%)-(0.47%) (0.11%)-0.83%

Medium-long 11-15 0.62%-0.68% (0.38%)-0.00% 0.94%-1.26%

Long 16-25 0.70%-0.90% 0.09%-0.75% 1.32%-1.77%

1 Source: Mirvah Hogen.

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The Company performed an estimate of the effect of the decline in the linked shekel

interest curve on the results as at June 30, 2019; A decline of 50 base points along the

linked shekel interest curve would lead to a decline of approximately 9% in the economic

solvency ratio, as stated above.

This result is no more than an estimate, based on the data as at June 30, 2019, and

constitutes an indication that is designed to illustrate the effect of a decline in interest on

the solvency, and we cannot infer the result had the Company calculated this estimate on

the publication date of the report. Furthermore, this estimate was calculated on the basis of

a concurrent fall of 50 base points across the curve, and therefore a change in the interest

curve will not necessarily have a linear effect on the Company’s solvency on the above

date.

These figures on the surplus solvency, which take into account the capital activities

described above, do not include the effects of the Business operations of The

Phoenix Insurance after June 30, 2019, changes in the composition and size of the

insurance investments and liabilities, exogenous effects such as changes in the risk-

free interest curve, as described above, and regulatory changes that affect the

business environment. According to the Supervisor’s guidelines, the Company is required

to meet 100% of the SCR on December 31, 2024. For additional information on

implementing Solvency II provisions, see the solvency report, which appears on the

Company’s website.

Determining the optimal estimate is based, inter alia, on forecasts, assessments, and

estimates of future events, the realization of which is not certain or in the Company’s

control, and should be considered forward-looking information as this term is defined in

Section 32A to the Securities Law 5728-1968.

Actual results may differ from that described in the estimate in this Report, if these

forecasts, assessments, sensitivity tests, and estimates, either in entirety or in part, fail to

materialize or materialize otherwise than anticipated, inter alia with respect to actuarial

assumptions (including mortality rates, morbidity rates, recovery rates, cancellations,

expenses, payout of pension benefits, and underwriting profit rate), assumptions regarding

future management action, capital market returns, future revenue, and damage in

catastrophic scenarios.

According to the Supervisor’s guidelines, the Company is expected to publish its solvency

rate results as of December 31, 2019, by August 31, 2020.

For events that happened after the balance sheet date, regarding the CORONA virus, see

section 1.20 above and Note 1(c) to the financial statements.




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2.2 Indices in which the Company’s shares are traded

As at the date of the report, the Company’s shares are traded on a number of indices,

mainly Tel Aviv 35, Tel Aviv 125, Tel Aviv Financial Index, Tel Aviv Insurance Plus Index,

Tel Aviv Ma’ala Corporate Responsibility Index and Tel Aviv All Shares Index. The

Company’s bonds are included in the Tel Bond Extra Linked Index, Tel Bond Linked Index,

and Tel Bond Ma’agar.

2.3 Arrangements in effect – see Section 4.1.1 of the Report on the Company's Business

3. Developments in the macroeconomic environment – see Section 4.1.6 of the Report on the Company's Business

4. Business strategy of The Phoenix

The Group’s business strategy and targets constitute “forward-looking” information, within the meaning thereof in Section 32A of the Securities Law, and are based on the data and information in the Group’s possession as at the date of the report, and its plans as a practical result of the said data, the situation existing in the market and the Group’s position. The Group’s business strategy and targets could change from time to time. In addition, the realization of the Group’s strategy and targets is not certain and is not solely under the Group’s control. The Group’s business strategy and targets may not ultimately be realized due to, among other things, changes in the Group’s targets and orders of priority and new needs of the Group, developments in the market, other business opportunities, etc.

Set forth below is a detail of the targets and strategy of The Phoenix:

4.1 Targets and strategy in the area of long term savings

The Group takes a comprehensive view of the long term savings area as being one activity

sector having a number of alternative and supplemental channels. As part of this view, the

Group operates the long term savings area, which combines therein the Group’s activities

in life insurance, pension, and provident fund products. That stated is with the goal of taking

full advantage of the synergy existing between the various different products, to create one

address for all the Company’s distribution channels and customers in the area of pension

savings and insurance, and to provide a response to the needs of the customers for

integrated products.

The Group’s targets also include strengthening and preserving its status as a leading

player in the long term savings area, while placing emphasis on maintaining and improving

the insurance portfolio, service excellence and increased operating and distribution

capabilities, as well as earning nice yields for the members (policyholders) while tailoring

the level of risk.



1-12

4. Business strategy and targets (cont’d)

The Company strives to increase its market share in new sales of life and pension

insurance while stressing the individual and savings products by means of development of

new products, expanding the distribution base and deepening the marketing efforts with

respect to existing products, while directing greater efforts to products yielding good profits.

In light of the increasing demand for the pension products, the Company has placed

emphasis on increasing its pension portfolio and expanding its sales also to independent

contractors. The Group also strives to maintain and expand its customer base and market

share in the area of life insurance, pension, and provident funds (regarding provident funds

– while stressing the advanced education funds), against the background of the regulatory

changes that have taken place, along with other possible changes, which could trigger an

increase in competition in the area. Efforts are also made to avoid redemptions and

cancellations through strengthening the Customer Maintenance Unit and development of

products that will encourage customers to choose to continue managing their money in the

Group.

The Company also attempts to improve its connection base with its customers and

establish a long term commitment, by placing their financial needs as the focus of their

activities and providing financial solutions for these customers even after their retirement.

The Company directs efforts to improve its computer systems in the area of long term

savings and strengthening its control systems – this being in order to improve the service

and information provided to the customer, as well as to support the maintenance of the

portfolio and the sales capability.

The Company also examines the structure of its purchase and operating costs, while

streamlining and adapting the inputs to the changing markets and aligning the model for the

commissions paid to the agents with the legislative prescriptions.

4.2 Targets and strategy in the area of health insurance

The Group sees the health insurance area as a significant growth engine since in its

estimation there are unserviced sectors in this area and the demand for insurance

coverage therein is gradually rising. The Group has set a goal to position itself in the health

insurance area as a leading company, among other things, from the standpoint of

innovation and service, and to increase its activities and profits, while placing emphasis on

the individual products in the insurance sector. In the health insurance area, the Group

endeavors to achieve the said goal, among other things, by means of offering innovative

accompanying insurance or service plans, appropriate pricing for the insurance plans, the

synergy between the various different activity areas within the health sector, analysis of

underwriting information and improvement of underwriting results, improvement of

insurance profits, intelligent use of reinsurance for purposes of transferring risks, expansion

of the marketing activities, diversification, and strengthening of the various distribution

channels and etc.

4.3 Targets and strategy in the area of P&C insurance

The Company acts to increase the market share in the P&C insurance area, while carefully

scrutinizing the quality of the portfolio and its profitability and through use of supervision

and control tools to improve and strengthen the underwriting systems, as well as by means

of continually examining new technologies that are able to improve the performance in the

area.



1-13

4. Business strategy and targets (cont’d)

4.4 Targets and strategy in the area of financial services

Excellence conforms and bases itself as an investment house that focuses solely on the

management of assets for the short and medium terms, and on the provision of financial

services – this being in the midst of a competitive situation wherein there is the constant

and continual erosion of the management fees in these areas.

The Excellence Group operates as a single mutual funds management company, which

manages both the existing mutual funds and the basket funds created as a result of the

transition from the basket certificates to the mutual fund's regime – this being while taking

advantage of the synergy between the activities, which is intended to give rise to growth in

this business line. For additional details – see Section 2.4.2 to the Report on the

Company's Business.

The Company is facing a number of business challenges regarding positioning and

establishment in the short and medium-term area, and at the same time administrative

challenges – with respect to the adaptation of the investment house structure to the said

areas of activity, and strengthening the management set up, the employees and the

organizational culture. In its main existing areas of activity, Excellence will need to

strengthen, improve and upgrade its performances with reference to the management of

the mutual funds, continue its growth trend in connection with its activities as a stock

exchange member company and leverage its ability into additional activity sectors.

Excellence will continue to establish high service standards for its customers and to

strengthen the relationships and service with both its customers and the distribution

systems while placing emphasis on regulatory, supervision, control and monitoring matters.

During the reporting period, the Company began operations in private equity funds and

non-negotiable debt funds. This activity will continue to grow and develop in the years to

come.

4.5 Targets and strategy in the area of the agencies

The Phoenix Agencies aspires to expand its activities in the area of the agencies and

improve its profitability by increasing the scope of its operations either through mergers and

acquisitions and collaborations with other entities or by improving its ongoing operations,

among other things by increasing the efficiency of agencies’ procedures and adopting

technological solutions.



1-14

5. The Board of Directors’ explanations on the state of the corporation’s business

5.1 General

The Group’s operations are affected by Constantly changing regulations and changes and regulatory reforms that are executed in a step-wise manner over time. The Group operates in a complex, changing reality in which it must prepare for such regulatory changes. In addition, as the controlling shareholder of institutional entities, the Group must cope with proposed changes in the minimum capital requirements that apply to the operations of institutional entities, which also impose restrictions on dividend distributions in the institutional entities, among other effects. The Group’s operations and results are influenced by the capital markets to a considerable extent, including, among other factors, the low-interest environment that has implications for its insurance liabilities and on the returns in the Group’s financial asset portfolios, and consequently also on the management fees and the financial margins from investments.

5.2 Key data from the Group’s consolidated financial statements

2 Managed assets on March 26, 2020 : Managed assets on December 31, 2019:

Gross earned premiums and benefit contributions:

Total managed assets in provident funds, pension funds, mutual funds, and customers’ investment portfolios are not included in the Company’s consolidated financial statements. Proceeds in respect of investment contracts are not included under premiums but are charged directly to liabilities in respect of insurance contracts and investment contracts. For additional information on premiums in the various sectors, see Notes 3, 19, 20, and 27 to the financial statements.

2 In view of the spread of the Corona virus after the balance sheet date, which triggered declines in the financial markets and a rise in redemptions, the balance of managed assets is presented as at March 26, 2020. For information on the Coronavirus, see Section 1.20 above and Note 1(c) to the financial statements.



1-15


(cont’d)

5.3 Description of the development of the Group’s financial position:

Following are summary data from the consolidated balance sheets (in NIS millions):

31/12/2019 31/12/2018

Fixed Assets 770 579

Investments in associates 718 761

Reinsurance assets 2,348 2,037

Financial investments for performance-based contracts 64,305 48,862

Other financial investments 24,809 22,738

Total assets 110,064 91,123

Total shareholders' equity 6,491 6,426

Liabilities for insurance contracts and investment contracts: 94,665 76,988

Of which:

Liabilities for non-performance-based insurance contracts and investment contracts 23,574 21,480

Liabilities for performance-based insurance contracts and investment contracts 71,091 55,508

Financial liabilities 5,757 4,956

Total liabilities 103,573 84,697

Total shareholders' equity and liabilities 110,064 91,123

Assets Total assets as of December 31, 2019, amounted to approximately NIS 110,064 million,

compared to a total of approximately NIS 91,123 million on December 31, 2018, reflecting

an increase of approximately 20.8%. Investments in associates as of December 31, 2019,

totaled approximately NIS 718 million, compared to approximately NIS 761 million in the

previous year, reflecting a decline of approximately 5.7%. The decline stems mainly from

the distribution of Mehadrin shares as a dividend in kind to the Company’s shareholders.

For additional information, see Section 1.4 above.

Reinsurance assets as of December 31, 2019, totaled approximately NIS 2,348 million,

compared to NIS 2,037 million as of December 31, 2018, reflecting an increase of

approximately 15.3%. The increase stems mainly from an increase in the Company’s

operations and expansion of reinsurance agreements in the P&C insurance area.

Total financial investments for yield-dependent contracts as at December 31, 2019,

amounted to NIS 64,305 million, compared to approximately NIS 48,862 million as of

December 31, 2018, reflecting an increased rate of approximately 31.6%, which was mainly

influenced by capital market returns and the continued growth in net accruals in the asset

portfolio. For information on events after the reporting period due to the Coronavirus, see

Section 1.20 above and Note 1(c) to the financial statements.

Total other financial investments as at December 31, 2019, amounted to approximately NIS

24,809 million, compared to approximately NIS 22,738 million as at December 31, 2018, an

increase of approximately 9.1%, which was mainly influenced by capital market returns and

the continued growth in net accruals in the asset portfolio.

For information on events after the reporting period due to the Coronavirus, see Section

1.20 above and Note 1(c) to the financial statements.

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(cont’d)

Liabilities

Liabilities in respect of insurance contracts and investment contracts that do not yield

dependent totaled approximately NIS 23, 574 million as of December 31, 2019, compared

to approximately NIS 21,480 million as of December 31, 2018, an increase of

approximately 9.7%. This increase was influenced largely by an increase in net accruals in

the asset portfolio and an increase in the scope of the Company’s operations.

Liabilities in respect of yield-dependent insurance contracts and investment contracts

totaled approximately NIS 71,091 million as of December 31, 2019, compared to

approximately NIS 55,508 million as of December 31, 2018, an increase of approximately

28.1%. This increase was influenced largely by capital market returns, continued growth in

net accruals in the asset portfolio, and effects of changes in the interest curve and the

illiquidity premium.

Financial liabilities as of December 31, 2019, totaled NIS 5,757 million, compared to

approximately NIS 4,956 million, an increase of approximately 16.2%. This increase stems

mainly from an expansion of The Phoenix Insurance’s capital base and the Company’s

capital raising in 2019. For additional information, see Note 26 to the financial statements.




1-17

(cont’d)

5.4 Description of the development of the Group’s income for the period and

comprehensive income:

Following is a summary of the results of the Company’s operations for each of the years and for the fourth quarter (in NIS millions):

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Premiums earned, gross 11,325 10,104 9,691 2,794 2,690

Premiums earned in retention 9,923 8,926 8,801 2,440 2,375

Investment income, net, and financing income 9,110 1,069 4,880 3,311 (2,132)

Management fees 1,487 827 1,099 468 83

Revenue from commissions 542 483 409 138 128

Total revenue 21,291 11,507 15,450 6,413 515

Payments and changes in liabilities for insurance contracts and investment contracts, gross 18,745 8,431 12,218 6,074 (196)

Commissions, marketing expenses, and other acquisition costs 1,918 1,753 1,581 502 460

G& A expenses 1,281 1,211 1,177 291 318

Finance expenses 143 180 153 31 45

Total expenses 21,149 10,629 14,481 6,614 444

Share in the profits of equity-accounted investees 97 71 62 50 44

Profit (loss) for the period 192 697 720 (83) 106

Profit (loss) for the period attributable to the Company’s shareholders 155 679 710 (97) 97

Shareholders' return on equity for the period (based on profit for the period) 2.4% 11.3% 13.5% (5.9%) 6.3%

Other comprehensive income (loss), net of taxest 393 (140) 159 66 (149)

Comprehensive income (loss) for the period 584 557 879 (19) (44)

Comprehensive income (loss) for the period attributable to owners of the Company 547 539 869 (32) (52)

Shareholders' return on equity for the period (based on comprehensive income for the period) 8.6% 9.0% 16.5% (2.0%) (3.3%)

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1-18

(cont’d)

A considerable share of the Group’s asset portfolio is invested in the capital market.

Therefore, returns in various investment vehicles in the capital market have a material

impact both on the returns achieved for the Group’s customers and on the Group’s

earnings. Investment income and losses reflect the behavior of capital markets in Israel and

abroad, and the behavior of the CPI and the exchange rates of the shekel against the major

currencies, whose cumulative effect on the financial margin is the main reason for

fluctuations in the reported results.

The change in the results in the reporting year compared to the results in the previous year

were influenced by capital market returns, which were significantly higher than in the

corresponding period of the previous year, and by an increase in variable management

fees, which partially offset the effects of the change in the risk-free interest rate and the

illiquidity premium between these periods as a result of a drop in the interest curve and in in

the illiquidity premium.

For events happened after the balance sheet date, regarding the spread of corona virus

and the decline in financial markets in Israel and around the world, which resulted in a

decline in the value of the Phoenix Insurance assets portfolio and based on an initial

estimate made by Phoenix Insurance from the beginning of the year to the date of approval

of the financial statements, Phoenix Insurance is not expected to collect variable

management fees in the future by approximately NIS 562 million before the tax effect, In

addition, Phoenix Insurance's tradable Nostro assets decreased by approximately NIS 635

million after the tax effect. A decline in the value of non-marketable assets is also expected,

which at this stage is not possible to gauge its scope. For additional information see

Section Note 1(c) to the financial statements.

Investment income, including other comprehensive income (before tax) in 2019 totaled

approximately NIS 9,714 million, compared to NIS 851 million in 2018.

Revenue from management fees totaled approximately NIS 1,487 million in 2019,

compared to approximately 827 million in 2018. The growth in management fees in 2019

compared to 2018 stems from the collection of variable management fees in the amount of

approximately NIS 478 million, after the deficit in variable management fees in the amount

of approximately NIS 62 million as at December 31, 2018, was covered in full in the first

quarter of 2019, after the Company did not collect variable management fees in 2018 as a

result of the negative returns in the portfolio of profit-sharing policies that were sold until

2004.

Revenues from management fees totaled approximately NIS 468 million in the fourth

quarter of the year, compared to approximately NIS 83 million in the corresponding quarter

of the previous year. The growth in management fees stems mainly from the aforesaid

collection of variable management fees compared to the corresponding fourth quarter of

the previous year, in which no variable management fees were collected. Also, see Section

5.5.1 below.




1-19

(cont’d)

The results in the reporting period and in the fourth quarter were significantly affected by a

decrease in the interest curve and the illiquidity premium in the local economy, which led to

an increase of approximately NIS 1,185 million and approximately NIS 360 million in

insurance liabilities before tax, respectively, in addition to the effects of the changes in the

Demographic Assumptions Circular, noted above, in the amount of approximately NIS 85

million in the reporting period. In addition, the effect of changes in actuarial assumptions in

the life insurance and health segment led to an increase in insurance liabilities of

approximately NIS 568 before tax and approximately NIS 594 million before tax, in the

reporting period and the fourth quarter, respectively. This effect was partially offset by a

revision to the Company’s estimates in the compulsory motor and liability sectors following

a Supreme Court ruling, according to which the interest rate to be used to capitalize

annuities will be 3% and consequently, the provisions in these sectors declined by

approximately NIS 155 million before tax in the reporting period.

The total effect is an increase in insurance liabilities in the amount of approximately NIS

1,683 million before tax, and approximately NIS 954 million before tax in the reporting

period and in the fourth quarter, respectively.

In 2018, the results were affected by an increase in the interest curve and by the effects of

changes in actuarial assumptions. The effect of the increase in interest rates and in the

illiquidity premium on the decline in insurance liabilities and the effect of changes in

actuarial assumptions was a decrease in income in the amount of approximately NIS 52

million before tax. For additional information, see Note 40 to the financial statements.

In 2019, the ratio of commissions, marketing expenses, and other acquisition costs to gross

earned premiums was approximately 16.9%, compared to 17.4% in 2018. In the fourth

quarter of 2019, the ratio of commissions, marketing expenses, and other acquisition costs

to gross earned premiums was approximately 18% compared to 17.1% in the

corresponding quarter of the previous year.

The ratio of general and administrative expenses to gross premiums earned was

approximately 11.3% in the reporting year, compared to approximately 12% in 2018. In the

fourth quarter of 2019, the ratio of general and administrative expenses to gross premiums

earned was approximately 10.4%, compared to approximately 11.8% in the corresponding

quarter of the previous year.

In 2019, comprehensive income not attributable to reporting segments (excluding the

Company’s share in the net results of investees not attributable to reporting segments) was

approximately NIS 377 million, compared to losses of approximately NIS 107 million in

2018. Income in the fourth quarter of 2019 amounted to approximately NIS 107 million,

compared to losses of approximately NIS 105 million in the corresponding period of the

previous year. This change stems mainly from capital market returns, which were

significantly lower than those earned in the previous year.

Following is a description of the developments in the Group’s operating results, by

operating segment.




1-20

(cont’d)

5.5 Developments in the life insurance and long-term savings (LTS) segment

5.5.1 Life insurance line of business

Following are the key data from the financial results of the life insurance segment, included

in the Company’s financial statements (in NIS millions):

Life Insurance

In NIS millions

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Premiums earned, gross 5,209 5,082 5,059 1,244 1,399

Management fees 889 378 669 320 (36)

Total comprehensive income (loss) before taxes on income (327) 219 182 (126) (135)

For information concerning the financial results of the life insurance segment, see Note 3 to

the financial statements.

The profitability of investments has a material effect on the profitability of this segment,

which is characterized by long-term accrual of significant reserves. Investment income is

affected by capital market fluctuations, as well as changes in interest rates and the rate of

change in the Israeli CPI, which affect the yields on the tradable financial asset portfolios

held against insurance and outstanding claims reserves. It is noted that a significant part of

the investment income is charged to investment profit-sharing policies and does not directly

influence the Company’s results. For information concerning investment income attributed

to policyholders after management fees, see also the information concerning the weighted

returns on profit-sharing policies, as detailed below.

Results for the reporting year were materially affected by a decrease in the interest curve

and the illiquidity premium, which led to an increase in insurance liabilities, and conversely

from the high capital market returns that generated greater investment income and variable

management fees compared to the corresponding period of the previous year.

In the reporting period, management fees totaled approximately NIS 889 million, compared

to approximately NIS 378 million in the corresponding period of the previous year. The

major share of the increase in the reporting period stems from variable management fees in

the reporting period, which totaled approximately NIS 478 million, compared to the

corresponding period of the previous year in which no variable management fees were

charged. The increase in variable management fees in the reporting period in comparison

to the previous year stems from higher real returns earned by the Company in this period

compared to the previous year, after full coverage in the first quarter of 2019 of the deficit in

variable management fees as at December 2018, in the amount of approximately NIS 62

million. In the fourth quarter, variable management fees totaled approximately NIS 217

million, compared to a deficit of approximately NIS 130 million due to the decline in return in

the corresponding period of the previous year.

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1-21

(cont’d)

For events happened after the balance sheet date, regarding the spread of corona virus

and the decline in financial markets in Israel and around the world, which resulted in a

decline in the value of the Phoenix Insurance assets portfolio and based on an initial

estimate made by Phoenix Insurance from the beginning of the year to the date of approval

of the financial statements, Phoenix Insurance is not expected to collect variable

management fees in the future by approximately NIS 562 million before the tax effect, In

addition, Phoenix Insurance's tradable Nostro assets decreased by approximately NIS 635

million after the tax effect. A decline in the value of non-marketable assets is also expected,

which at this stage is not possible to gauge its scope. For additional information see

Section Note 1(c) to the financial statements.

The effect of the change in the interest curve and the illiquidity premium led to an increase

in insurance liabilities in the reporting period in the amount of approximately NIS 942 million

compared to a decline in insurance liabilities in the amount of approximately NIS 91 million

in the corresponding period of the previous year. The effect of the change in the interest

curve and the illiquidity premium led to an increase in insurance liabilities in the fourth

quarter of approximately NIS 395 million, compared to a decrease in insurance liabilities of

approximately NIS 4 million in the corresponding period of the previous year.

The effect of the change in the Demographic Assumptions Circular noted above, led to an

increase in insurance liabilities, mainly affecting the annuity reserve already on June 30,

2019, in the amount of approximately NIS 85 million. In addition, the changes in other

assumptions used in the calculation of life insurance reserves led to an increase of

approximately NIS 59 million in insurance liabilities, and to approximately NIS 54 million in

the fourth quarter, compared to an increase in insurance liabilities in the amount of

approximately NIS 11 million in the corresponding period of the previous year and a decline

in insurance liabilities in the amount of approximately NIS 28 million in the corresponding

quarter of the previous year. For additional information see Note 40 to the financial

statements. For information on the sensitivity of the insurance liabilities to changes in

interest rates, see Note 40(3)(2) to the annual financial statements.

Note 19 to the financial statements analyzes the Group’s life insurance operations by-

products containing a savings component according to underwriting years, and products

not including a savings component. A distinction is made between individual policies and

group policies. The Note also presents the financial margin, including management fees.

Comprehensive loss from policies issued up to 1990 that include a savings component

(mainly guaranteed-yield policies backed by Hetz bonds) totaled approximately NIS 325

million in the reporting year, compared to comprehensive income before tax in the amount

of approximately NIS 252 in 2018. Results were mainly affected by changes in special

provisions, made due to changes in the risk-free interest curve for a supplementary reserve

for annuities and for LAT reserves in the amount of approximately NIS 556 million, a

decline in reserves in 2019, compared to a decline of NIS 28 million in reserves in 2018.




1-22

(cont’d)

Comprehensive loss from policies issued up to 2003 (mainly profit-sharing policies)

amounted to approximately NIS 33 million in the reporting period, compared to a

comprehensive loss before tax of approximately NIS 12 million in the corresponding period

of the previous year. The bulk of this loss in 2019 was due to special provisions recognized

in the amount of approximately NIS 386 million due to the declining risk-free interest curve

in respect of the supplementary reserve for pension benefits, compared to approximately

NIS 64 million in respect of the corresponding period of the previous year. The loss in the

reporting period was largely set off as a result of the higher returns earned, as a result of

which variable management fees were collected.

Savings policies from the 2004 underwriting year onward posted losses of approximately

NIS 130 million in 2019 and 2018. This loss does not represent the profitability of these

products in the long term. The reason is that the bulk of the profits seen from these

products is attributable to fixed management fees that are a function of the size of the

reserves portfolio, and at this point in the policies' lifetime, these fees are relatively low. As

of December 31, 2019, these reserves total approximately NIS 35 billion.

Profit from individual risk policies amounted to approximately NIS 128 million in the

reporting period, compared to approximately NIS 104 million in 2018. Profits from group

risk policies amounted to approximately NIS 5 million in 2019, similar to the figure for 2018.

In June 2018, the Capital Market Authority asked The Phoenix Insurance to re-approve the

rates for its life insurance plans, according to guidelines set by the Authority. In February

2019, rates were approved for individual risk 1 and mortgage risk policies. For additional

information, see Section 2.1.1.1.3 to the Description of the Company’s Business.

Note 19 presents the segmentation of reserves on two levels: segmentation by financial

exposure (guaranteed yield or investment profit sharing), and by insurance exposure

(Company liability at the end of the insurance period - withdrawal as a lump sum or as an

annuity). For information concerning the Company’s financial and insurance exposures,

see also Note 40 to the financial statements.

Redemptions accounted for 2.6% of the average (annualized) reserve for insurance

contracts in the reporting period, compared to 2.3% and 1.7% in 2018 and 2017,

respectively. It is noted that the general state of the economy, employment rates,

availability of substitute products such as the various pension and provident fund products,

salary levels, and market competition all affect this rate.




1-23

(cont’d)

Weighted returns on profit-sharing policies

Following are details concerning estimated net investment earnings attributed to profit-sharing

policyholders and management fees calculated according to the Supervisor of Insurance's

guidelines, based on insurance reserve balances and returns:

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Investment gains 6,788 (343) 3,068 2,480 (2,296) (losses) attributed to policyholders after management fees

Management fees 893 382 673 321 (34)

Management fees in the period are after full coverage, already in the first quarter of 2019, of the deficit in variable management fees as of December 31, 2018, in the amount of approximately NIS 62 million.

Nominal returns on profit-sharing policies for policies issued from 1992 to 2003 were as follows:

Policies issued up to 2004 (J Fund)

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Nominal returns before 13.95% 0.23% 9.48% 4.79% (4.26%) payment of management fees

Nominal returns after 11.52% (0.37%) 7.52% 3.92% (3.96%) payment of management fees

Real returns before 13.61% (0.95%) 9.15% 5.00% (4.35%) payment of management fees

Real returns after 11.18% (1.55%) 7.20% 4.12% (4.06%) payment of management fees Fluctuations in these returns are a function of capital market returns in Israel and abroad, changes in the CPI, and changes in the NIS exchange rates against the major currencies.

Nominal returns on profit-sharing policies for policies issued from 2004 onward were as follows:

Policies issued since 2004

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Nominal returns before 13.48% (0.37%) 8.89% 4.48% (4.57%) payment of management fees

Nominal returns after 12.34% (1.41%) 7.71% 4.25% (4.81%) payment of management fees

Real returns before 13.14% (1.55%) 8.56% 4.69% (4.66%) payment of management fees

Real returns after 12.00% (2.58%) 7.39% 4.45% (4.91%) payment of management fees

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1-24

(cont’d)

For information concerning investment income, the financial margin including management

fees, returns and management fee rates in profit-sharing policies, see Note 19B to the

financial statements. For information on events after the reporting period due to the

Coronavirus, see Section 1.20 above and Note 1(c) to the financial statements.

5.5.2 Provident fund line of business

The Group manages provident and study funds through The Phoenix Excellence Pension

and Provident Ltd., a wholly owned subsidiary of The Phoenix Insurance, which manages

benefit and severance pay funds, study funds, a central compensation fund, a yield-

guaranteed provident fund, an investment provident fund, a child long-term investment

provident fund for savings, a personally managed benefit provident fund, and a personally

managed study fund, or additional information on the merger of the companies that

manage the provident funds, study funds, and pension funds, and the decision of the Board

of Directors of The Phoenix Insurance on the issue of The Phoenix Excellence Pension and

Provident Ltd by distributing a dividend in kind to the Company in the reporting period, see

Section 1.5 to the Report. For the highlights from the results of provident fund operations,

see Note 3 to the financial statements.

Revenue from management fees in 2019 totaled approximately NIS 205 million, compared

to approximately NIS 189 million in 2018. Revenue from management fees increased in the

reporting period mainly as a result of the increase in assets under management, alongside

a decrease in the management fee rate as a result of increasing competition in this sector.

Comprehensive income before taxes in 2019 and 2018 amounted to approximately NIS 40

million and approximately NIS 26 million, respectively. The increase in income stemmed

mainly from capital market returns, which affected margins in guaranteed-yield provident

funds, and on the other hand was partially offset by an increase in general and

administrative expenses, due to changes in operating and investment management

agreements with The Phoenix Insurance and The Phoenix Investments.

Following are developments in benefit contributions and total assets-under-management in

2017-2019:




1-25

(cont’d)

3Based on Ministry of Finance data, aggregate contribution benefits in the provident fund

sector in the reporting period totaled approximately NIS 45,460 million, compared to a total

of approximately NIS 40,357 million in the corresponding period of the previous year,

reflecting an increase of approximately 12.6%.

According to the Ministry of Finance data, as of December 31, 2019, aggregate assets

under management in the provident fund sector amounted to a total of approximately NIS

534 billion, compared to approximately NIS 461 billion on December 31, 2018, an increase

of approximately 15.8%.

5.5.3 Pension funds line of business

The Group manages pension funds through The Phoenix Excellence Pension and

Provident Ltd., a wholly owned subsidiary of The Phoenix Insurance. For additional

information on the merger of the companies that manage the provident funds, study funds,

and pension funds, and on the decision of the Board of Directors of The Phoenix Insurance

on the issue of The Phoenix Excellence Pension and Provide Ltd by distributing a dividend

in kind to the Company in the reporting period, see Section 1.5 to the Report. For the

highlights from the results of provident fund operations, see Note 3 to the financial

statements.

Revenue from management fees in 2019 totaled approximately NIS 165 million, compared

to approximately NIS 163 million in 2018. The increase in management fees stemmed from

growth in operations and assets under management, which was offset by lower

management fee rates. General and administrative expenses in the reporting period totaled

approximately NIS 79 million, compared to approximately NIS 59 million in the previous

year. The increase in general and administrative expenses stems mainly from the revision

to the Group’s expense allocation model and is related to investment management costs of

The Phoenix Investments.

Income before tax totaled approximately NIS 11 million, compared to a total of

approximately NIS 28 million in 2018.

Developments in benefits contributions and assets-under-management in 2017-2019:

3 Based on Gemel -Net .




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(cont’d)

4Based on Ministry of Finance data, aggregate benefits contributions in the new

comprehensive pension fund market totaled approximately NIS 43,182 million in the

reporting period, compared to approximately NIS 39,099 million in the corresponding period

of the previous year, an increase of approximately 10.4%.

3 According to the Ministry of Finance data, as of December 31, 2019, aggregate assets

under management in the new comprehensive pension fund market amounted to a total of

approximately NIS 404 billion, compared to approximately NIS 329 billion on December 31,

2018, an increase of approximately 22.8%.

4 Based on Pensiya -Net.




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(cont’d)

5.6 Health insurance segment

Following are key data from the financial results of the health insurance segment, as included in the Company’s financial statements (in NIS millions):

Health Insurance segment

In NIS millions

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Premiums earned, gross 3,257 2,231 2,042 835 574

Total comprehensive income (loss) before taxes on income (311) 79 125 (284) (30)

For highlights from the results of health insurance operations, see Note 3 to the financial

statements.

Beginning from January 1, 2019, the financial results include group long-term care (LTC)

insurance services on behalf of Maccabi. For additional information, see Section 1.15 above.

Profitability on investments materially affects the profitability of this segment, which has

specific products (such as LTC) that are characterized by long-term accrual of significant

reserves. Gains on investments are affected by capital market fluctuations, as well as by

changes in interest rates and the rate of change in the Israeli CPI, which affect the yields on

the tradable financial asset portfolios held against insurance and outstanding claims

reserves.

Results for the reporting year were materially affected by a decrease in the interest curve and the illiquidity premium, which led to an increase in insurance liabilities, and conversely from the high capital market returns that increased investment income and variable management fees compared to the corresponding period of the previous year. Results for the reporting year compared to the previous year were materially affected by a decrease in the risk-free interest curve, which increased the LAT reserve in the healthcare (LTC) segment by approximately NIS 261 million, compared to a decline in LAT reserves of approximately NIS 96 million in 2018 and in the fourth quarter of 2018. Results were also adversely affected by the revision to actuarial assumptions, which increased insurance liabilities by approximately NIS 481 million and NIS 512 million in the reporting period and the fourth quarter, respectively, compared to an increase in the reserves of approximately NIS 137 million and approximately NIS 114 million in the reporting period and the fourth quarter of the previous year, respectively. On the other hand, the results in the reporting period were favorably affected by investment income compared to the corresponding period of the previous year.

In view of the guaranteed return in LTC insurance plans, and the complexity of the related

reinsurance in this sector, the Company had suspended the sale of individual LTC policies at

this time.

For additional information, see Sections 5.1.7 and 5.1.10 in Note 40 to the financial

statements.

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(cont’d)

5.7 P&C insurance segment

P&C insurance segment

In NIS millions

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Gross premiums 2,815 2,822 2,726 599 645

Total comprehensive income before taxes on 681 269 435 157 73 income

The decline in gross premiums in the reporting period, compared to the corresponding

period of the previous year stems from a decline in premiums in the motor property sector,

which offset the increase in gross premiums in the remaining P&C insurance segments.

Comprehensive income from P&C insurance operations in the reporting period amounted to

approximately NIS 681 million, compared to comprehensive income of approximately NIS

269 million in the corresponding period of the previous year.

Results in the reporting period were materially affected by a decline in P&C insurance

liabilities in compulsory and liability sectors, already in the second quarter, in the amount of

approximately NIS 155 million before tax and approximately NIS 102 million after-tax,

following a Supreme Court ruling on the discount rate to be used in calculating

compensation to injury claims, to be 3%, which is higher than the rate the Company used to

calculate its reserves. For additional information, see Section 1.19 above. The increase in

comprehensive income, controlling for said provision, stems mainly from a significant

increase in investment income and an improvement in underwriting results in homeowners

and business segments.

In the reporting period, the risk-free interest curve showed a decrease as a result of which

the Company recorded a loss of approximately NIS 17 million (before tax), compared to an

increase in interest and recording of income of approximately NIS 16 million (before tax) in

the corresponding period of the previous year. For information, see Note 40 to the financial

statements.

The following are explanations on the financial results of the various P&C insurance

segments. The results of each segment are presented in detail in Note 3 to the Company’s

financial statements.

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(cont’d)

5.7.1 Compulsory motor insurance line of business

Compulsory motor insurance line of business

In NIS millions

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Gross premiums 571 565 527 120 121

Total comprehensive income before taxes on income 320 74 212 63 33

In 2019, gross premiums increased by 1.1%. This increase stems from a rise in the number

of policies issued by the Company, which was accompanied by a decline in average

premiums.

Comprehensive income in the reporting period and in the fourth quarter increased by

approximately NIS 246 million and approximately NIS 30 million, respectively, compared to

the corresponding period of the previous year, mainly due to a significant increase in

investment income and a decline in insurance liabilities in the amount of approximately NIS

105 million in the reporting period, following the implementation of a court ruling on the

discounting regulations. See Note 40 to the financial statements.

5.7.2 Motor property insurance line of business

Motor property insurance line of business

In NIS millions

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Gross premiums 1,056 1,109 1,054 232 245


loss ratio (gross) 66.9% 60.5% 64.3%

loss ratio (retained) 66.9% 60.5% 64.3%

combined ratio (gross) 96.0% 89.9% 93.0%

combined ratio (retained) 96.0% 89.9% 93.0%

Premiums fell in the reporting period and in the fourth quarter compared to the

corresponding period of the previous year, mainly as a result of the decline in average

premiums alongside an increase in the number of policies issued by the Company.

The decline in comprehensive income in the reporting period and in the fourth quarter

stems mainly from a decline in average premiums, as noted above, and an increase in

claims and acquisition costs, alongside a significant increase in investment income.

Dummy TextDummy TextDummy TextDummy TextDummy TextDummy Text




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(cont’d)

5.7.3 Other property (without motor) insurance lines of business

Other property (without motor) insurance lines of business

In NIS millions

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Gross premiums 758 719 741 150 177


loss ratio (gross) 32.9% 51.2% 43.7%

loss ratio (retained) 26.0% 33.1% 37.0%

combined ratio (gross) 60.9% 79.1% 72.5%

combined ratio (retained) 62.1% 66.8% 72.8%

The increase in gross premiums in the reporting period stems mainly from a change in the

renewal dates of a large policy in the property loss segment, in which the duration of the

insurance coverage exceeds one year. The increase in comprehensive income before tax

in the reporting period stems from a significant increase in investment income and an

improvement in underwriting results in homeowners and business insurance.

5.7.4 Liability and other insurance lines of business

Liability and other insurance lines of business

In NIS millions

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Gross premiums 430 429 404 97 102

Total comprehensive income (loss) before 140 (16) 18 55 6 taxes on income

The increase in comprehensive income in the reporting period and the fourth quarter,

compared to the corresponding period of the previous year stems mainly from a significant

increase in investment income and a decline in insurance liabilities in the reporting period

of approximately NIS 50 million, following the implementation of a court ruling on the

discount regulations. See Note 40 to the financial statements.





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(cont’d)

5.8 Financial Services Segment

Operations in this segment are carried out through Excellence.

Following are key data from the financial results of the financial services segment, as

included in the Company’s financial statements in the reporting year (NIS millions):

Financial Services Segment

In NIS millions

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Total revenue 405 258 299 100 76

Total expenses 249 204 209 65 59


Total income before taxes on income and comprehensive income 167 60 95 38 18

Income from financial services in the reporting period and the corresponding period of the

previous year includes income from ETFs, after Amendment no. 28 (ETFs) came into force

in October 2018, compared to 2017, in which the income is from ETNs.

The bulk of the increase in income from financial services stems from the increase in

management fees in ETFs compared to the previous years, in which these operations

generated nonrecurring losses.

Furthermore, the increase in income stems from a company consolidated for the first time

in the first quarter of 2019 and nonrecurring income from gains on the reevaluation of an

investment in the investee that was consolidated for the first time in the first quarter of 2019

due to an increase in control, in the amount of approximately NIS 29 million. For

information on the first-time consolidation of the investee, see Note 7 to the financial

statements.

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(cont’d)

5.9 Insurance agencies segment

Key data from the financial results of the insurance agencies segment, as included in the

Company’s financial statements in the reporting year (NIS millions):

Insurance agencies segment

In NIS millions

1-12/2019 1-12/2018 1-12/2017 10-12/2019 10-12/2018

Total revenue 407 365 366 107 109

Total expenses 247 247 244 63 69


Total income before taxes on income and comprehensive income 171 125 128 46 41

The revenue and total income before tax from the insurance agencies segment increased

in the reporting period and in the fourth quarter compared to the corresponding period last

year, mainly as a result of the increase in the sales activity of the agencies.

5.10 Other segments and operations not attributed to operating segments

In 2019, comprehensive income not attributable to reporting segments (excluding the

Company’s share in the net results of investees, which is not attributable to reporting

segments) totaled approximately NIS 377 million compared to losses of approximately NIS

107 million in 2018. Earnings in the fourth quarter totaled approximately NIS 107 million,

compared to losses of approximately NIS 105 million in the corresponding period of the

previous year. This change stems mainly from capital market returns, which were

significantly lower than returns in the previous year.

5.11 Analysis of developments of cash flows

The consolidated cash flows used in ongoing operations in the reporting year totaled NIS

567 million. Consolidated cash flows used in investing operations in the reporting year

totaled NIS 507 million and included, among others, NIS 258 million that were mainly used

in software development and acquisition, NIS 100 million used in the acquisition of PP&E,

and NIS 138 million used in investments in associates.

The consolidated cash flows from financing operations in the reporting year totaled NIS 331

million, and included, among others, NIS 1,211 million from Issue of debentures, NIS 250

million used to distribute a dividend to the Company’s shareholders, and NIS 562 million

used to discharge financial liabilities. The Group’s cash and cash equivalents balances

increased from NIS 6,954 million at the beginning of the reporting year to NIS 7,344 million

at the end of the reporting year.

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6. Disclosure on exposure and management of market risks

The Group’s risk management activities are designed to support and protect the Group

against unexpected losses, which are liable to prevent the Group from achieving its

business objectives. The existing risk management system is based on fundamental

principles of risk management and control, which include, inter alia, proper involvement and

understanding of risk management by the Board of Directors, providing tools for evaluating

and measuring risk, and arranging for means of supervision and control of those risks. The

following section presents exposure to market risks. Position data and sensitivity tests do

not include the insurance company, which accounts for most of the activity in the

consolidated company (for a description of the corporation’s risks and risk management

policies and control thereof, see Note 40 to the financial statements).

Definitions in this chapter:

1. “The Group” - The Phoenix Holdings, including its consolidated companies, with the

exception of The Phoenix Insurance.

2. “Nostro Assets” - financial assets held by the Group.

3. "Nostro Liabilities" - the Group's financial liabilities.

The Group's market risk management officer is Mr. Amit Netanel. The risk management officer received the full cooperation of the Company’s management and Board of Directors in all matters necessary for the fulfillment of his duties.

Following is the risk-free (“spot”) linked interest curve



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6. Disclosure on exposure and management of market risks (cont’d)

The following tables summarize the results of sensitivity tests for Nostro Assets (as defined above) on comprehensive income before tax, as of December 31, 2019. Results are presented in NIS millions, and do not include the insurance company:

Risk factor – CPI-lined interest rate

Profit (Loss) from changes in Profit (Loss) from changes in the

the risk factor risk factor

Absolute Absolute Type of 10% 5% Fair 5% 10%

increase decrease instrument increase increase value decrease decrease

of 2% of 2%

Government (5.9) (0.2) (0.1) 108.9 0.1 0.2 6.5

bonds

Corporate (0.7) (0.1) (0.1) 44.9 0.1 0.1 0.7

bonds

Capital note to the insurance (30.1) (0.8) (0.4) 248.7 0.4 0.8 35.9

company

Total assets (36.7) (1.2) (0.6) 402.5 0.6 1.2 43.1

The Phoenix 20.0 0.8 0.4 (465.0) (0.4) (0.8) (21.7)

bonds*

Total liabilities 20.0 0.8 0.4 (465.0) (0.4) (0.8) (21.7)

Total (16.7) (0.4) (0.2) (62.5) 0.2 0.4 21.4

(*) The value of The Phoenix’s bonds under the model is 1.63% lower than their market value (472), the reason being that the credit margin reflected in The Phoenix's debt is lower than the average margin for similarly rated debts.

Risk factor - NIS-based interest rate

Profit (Loss) from changes in the Profit (Loss) from changes in the

risk factor risk factor

Absolute Absolute Type of 10% 5% Fair 5% 10%

increase decrease instrument increase increase value decrease decrease

of 2% of 2%

Governmen(4.5) (0.1) (0.0) 84.7 0.0 0.1 5.0

t bonds

Corporate (0.9) (0.0) (0.0) 14.2 0.0 0.0 1.0

bonds

Total (5.4) (0.1) (0.1) 98.9 0.1 0.1 6.0

assets

The Phoenix 24.7 0.7 0.3 (566.3) (0.3) (0.7) (28.2) bonds*

Total 24.7 0.7 0.3 (566.3) (0.3) (0.7) (28.2)

liabilities

Total 19.3 0.6 0.3 (467.3) (0.3) (0.6) (22.1)

(*) The value of The Phoenix’s bonds under the model is 3.5% lower than their market value (586.8), the reason being that the credit margin reflected in The Phoenix's debt is lower than the average margin for similarly rated debts.

Dummy TextDummy TextDummy TextDummy TextDummy TextDummy TextDummy TextDummy Text



1-35


Risk factor - Foreign currency (underlying risk)*

Profit (Loss) from Profit (Loss) from changes in the risk changes in the risk

factor factor

10% 5% Fair 5% 10% Type of instrument

increase increase value decrease decrease

Corporate bonds 0.2 0.1 2.3 (0.1) (0.2)

Cash in foreign currency 0.6 0.3 6.1 (0.3) (0.6)

foreign shares (0.6) (0.3) (6.5) 0.3 0.6

Total assets 0.2 0.1 1.9 (0.1) (0.2)

Total 0.2 0.1 1.9 (0.1) (0.2)

(*) The maximum daily increases and decreases observed in the past 10 years across all relevant currencies were less than 10% in absolute value terms

Risk factor - shares in Israel (underlying risk)*

Profit (Loss) from Profit (Loss) from

changes in the risk factor changes in the risk factor

Type of 10% 5% 5% 10% Fair value

instrument increase increase decrease decrease

Israeli shares 3.4 1.7 34.4 (1.7) (3.4)

Total assets 3.4 1.7 34.4 (1.7) (3.4)

Total 3.4 1.7 34.4 (1.7) (3.4)

(*) The maximum daily increases and decreases observed in the past 10 years across all relevant share indices were less than 10% in absolute value terms.

Risk factor - foreign shares*

Profit (Loss) from Profit (Loss) from

changes in the risk factor changes in the risk factor

Type of 10% 5% 5% 10% Fair value

instrument increase increase decrease decrease

foreign shares (0.6) (0.3) (6.5) 0.3 0.6

Total assets (0.6) (0.3) (6.5) 0.3 0.6

Total (0.6) (0.3) (6.5) 0.3 0.6

(*) The maximum daily increases and decreases observed in the past 10 years across all relevant share indices were less than 10% in absolute value terms.




1-36


Assumptions underlying the calculations

Fair value: Fair value was calculated using the discounted cash flow model, using the

suitable interest rate for the cash flow period. The discount rate was calculated based on

the market interest rate for the cash flow period, plus the risk premium derived from the

note’s rating. Market interest rate data was taken from the database that feeds The

Phoenix’s risk management system, and risk premium data (credit spreads) were taken

from the fair spread.

Scenarios: Daily historical changes in the past ten years were tested for each of the

relevant risk factors (such as exchange rates and shares). The maximum and minimum

daily changes were calculated for each risk factor, excluding interest rate risk, for which the

calculation was based on a 2% absolute increase or decrease during one day. This

scenario was selected after a study of the interest curve database found that in the past 10

years, no absolute change exceeding 2% was observed in any single day. These changes

served as scenarios for potential changes in each of the risk factors. Scenario outcomes

were calculated at the single asset level, so as to avoid distorting results by grouping

different instruments together.



1-37

7. Corporate Governance Aspects

7.1 Disclosure on directors with accounting and financial expertise

For information concerning directors possessing financial accounting expertise, see the

corporate governance questionnaire attached to the Company’s reports.

7.2 Payments to senior officers

In general, contracts with the Company's senior officers comply with the Company's

remuneration policy and are based on individual agreements between each officer and the

Company. These agreements specify salaries, social benefits, ancillary payments,

severance terms, and post-employmentt non-competition clauses. All the terms of these

agreements are based on the responsibilities and complexities of the officer's position with

the Company.

For information concerning remuneration paid to the five highest-paid officers in the

Company or companies under its control, see Regulation 21 to the Periodic Report.

7.3 Disclosure on the percentage of independent directors

For information concerning the percentage of independent directors, see the corporate

governance questionnaire attached to the Company’s reports.

7.4 Disclosure on the financial statements’ approval process in the reporting entity

Pursuant to the Israel Securities Authority’s directive on disclosures required in the board of

directors' report concerning the financial statements' approval process in a reporting entity,

the corporate organs charged with overall control and supervision in the entity must be

identified, and disclosure must be made of the procedures implemented by the persons

charged with overall control and supervision in the company, prior to the financial

statements’ approval. The directive does not apply to insurance companies. The Group’s

institutional investors are subject to the Supervisor’s directives, and accordingly follow

Sections 302 and 404 to the Sarbanes-Oxley Act of 2002 (“SOX”), including examination of

workflows and internal controls in the institutional investor. The financial statements of the

said institutional entities include executive declarations concerning the adequacy of the

financial data presented in the financial statements and the existence and efficacy of

internal controls over these financial statements. For more information, see Section 5.4 to

the Report on the Company’s Business.

In examining the financial results, meetings are held and attended by the CEO, the CFO,

division heads and other relevant persons. These meetings discuss material issues

concerning financial reporting, including material transactions outside the ordinary course

of business, material valuations used in the financial statements, the plausibility of the data

and the implemented accounting policies.

The Company's Board of Directors is the corporate organ charged with overall supervision

and approval of its financial statements. The Company's Board of Directors has appointed

a committee for examining the financial statements (“the Financial Report Committee” or

“the Committee”), which submits its recommendations to the Board of Directors concerning

approval of the financial statements, prior to their approval by the Board of Directors. The

Committee is separate from the Audit Committee.



7. Corporate Governance Aspects (cont’d)

1-38

7.5 Company policies regarding philanthropy/social responsibility

As part of Israeli society, the Company adopts the concept of contributing to the

community, a concept which it both puts into practice and emphasizes to its employees. It

is important for The Phoenix to “give back” to the community in which it conducts its

business. In order to put this policy into action in the best possible way, the Company has

appointed a Community Relations Committee, which convenes periodically to review

requests for donations, sent to the Company by non-profit organizations and others.

The Company also chose to focus on a few key areas:

Assistance to the Institute for the Advancement of Education in Jaffa- The Institute

offers a hot lunch to school children, helps them with their homework, and provides

extracurricular arts, computers, and other classes. The food hand-out center provides

approximately 300 food packages each month to needy families. The Company’s

employees volunteer in several ways, including handing out food, collecting appliances,

and various donations. In addition, Company employees periodically collect food

products, clothes for adults and children, winter supplies, backpacks, etc.

Adoption of IDF "Armored battalion 77"- as part of the Soldier's Welfare Association's

"Adopt a Soldier" program. As part of its commitment, in addition to a donation of NIS

100,000 to the soldiers of the battalion, the Company maintains constant contact with the

soldiers, visits them in the field during training and during combat operations, and

organizes events for them and sends them gift packages.

Assistance to "Leket Israel" – a charity providing food supplies to families in need.

Company employees volunteer in the fields picking fruits and vegetables. All produce is

sent to charities handing out food to needy families.

Assistance to "Shiur Acher" – a charity working to empower school children and

promote public involvement in the education system. In the past 5 years, The Phoenix

employees have volunteered to teach extra-curricular classes in the Na'amat

Technological School in Holon.

Assistance to "Pitchon Lev" – a charity handing out food to needy families. Each

week, 10 Company employees volunteer to hand out food supplies.

Assistance to "Migdal Or institutions" – the charity provides education for thousands

of at-risk kids from infancy to adolescence, from all parts of Israeli society.

The donation was made to help with the daycare project, which is a unique model using

a boarding school format, for children aged 10 through 12, which combines boarding

school accommodations alongside a supportive and nurturing family.

The overall scope of the Company's monetary donations in the reporting year amounted to

NIS 1,189,060. Donations are made directly to the various organizations pursuant to

Management's decision.



1-39

7. Corporate Governance Aspects (cont’d)

7.6 Company policy concerning non-significant transactions

For information on the Company's policy concerning non-significant transactions, see Note

41 to the financial statements.

7.7 Internal auditor

For information on the internal auditor – see Chapter 5, Section 5.2 to the Description of the

Company’s Business.

7.8 Auditors

For information on the Company's Auditor, see Chapter 5, Section 5.3 to the Description of

the Company’s Business.

8. Disclosure requirements relating to the Company's financial reporting

8.1 Events after the date of the statement of financial position

For information concerning events after the balance sheet date, see Note 43 to the financial

statement.

8.2 Provisions concerning preparations for application of the Solvency II Directive

For details regarding the Group’s preparations for application of the Solvency II Directive,

see Section 2.1 of the Report of the Board of Directors and Note 7 to the financial

statements.

8.3 Report regarding critical accounting estimates

The Company does not make use of critical accounting estimates, the use of which and/or

a reasonable change therein could have a significant impact on the Group’s financial

position and/or the results of its operations. For additional details – see Note 2 to the

financial statements.



8. Disclosure requirements relating to the Company's financial reporting (cont’d)

1-40

8.4 Designated disclosure to the holders of the Company’s bonds

Series I Issue Date Bond Series 2 Bond Series 3 Bond Series 4

Rating company Midroog Midroog Midroog

Rating at the reporting As3 Aa3 Aa3 date

Par value upon issue NIS 620,050,496 NIS 272,191,000 NIS 300,000,000

Type of interest CPI-linked Unlinked Unlinked

Nominal interest rate 2.55% 2.22% Variable quarterly interest at the Bank of Israel rate plus a margin of 1.28%

Effective interest rate 3.95% Approximately the 1.7% upon issue nominal interest

Registered for trade on Yes Yes Yes the TASE

Principal payment dates 6 equal annual 5 equal annual 2 equal annual installments of 5% on installments of 16.66% installments of 12% on March 26 of each of the on July 31 of each of the July 31 of each of the years from 2014 to 2019 years from 2022 to 2026 years 2020 and 2021 inclusive, and 5 equal inclusive, and one and 4 equal annual installments of 14% on installment of 16.7% on installments of 19% on March 26 of each of the July 31, 2027. July 31 of each of the years from 2020 to years 2025 go 2028, 2024. inclusive.

Interest payment dates Semi-annual interest on Semi-annual interest on Quarterly interest on March 26 and 26 January 31, and on July January 31, April 30, September 31. July 31, and October

31.

Par value as at App. NIS 434 million App. NIS 272 million App. NIS 300 million December 31, 2019

Par value CPI-linked as App. NIS 444 million App. NIS 272 million App. NIS 300 million of December 31, 2019

Carrying amount of App. NIS 431 million App. NIS 270 million App. NIS 298 million outstanding bonds as of December 31, 2019

Carrying amount of App. NIS 3 million App. NIS 2.5 million App. NIS 0.8 million interest payable as at December 31, 2019

Market value as of App. NIS 473 million App. NIS 287 million App. NIS 304 million December 31, 2019 (*)

Material series The series is material as The series is material as The series is material as this term is defined in this term is defined in this term is defined in Regulation 10(b)13(a) of Regulation 10(b)13(a) of Regulation 10(b)13(a) of the Securities the Securities the Securities Regulations (Periodic Regulations (Periodic Regulations (Periodic and Immediate Reports) and Immediate Reports) and Immediate Reports) 5730-1970 5730-1970 5730-1970

(*) Market value includes accrued interest as at December 31, 2019.




1-41

Bond issuance after the balance sheet date

On February 20, 2020, the Company issued registered bonds (Series 5) with par value NIS

220 million par value linked to the CPI, at NIS 1 par value each, according to the

Company’s shelf offer report dated August 15, 2019 (Ref. No. 2019-01-070590). Proceeds

of the issue totaled NIS 220,000 thousand. The bonds (Series 5) will mature (principal) in

six unequal annual installments payable on May 1 of each of the years 2022 to 2024, on

May 1, 2028, and on May 1 of each of the years, 2029 to 2030, where the first installment is

payable on May 1, 2022, and the six and final installment is payable on May 1, 2030. Each

of the installments, from the first through the third installment, inclusive, represents 4% of

the principal, and the fourth installments represent 28% of the principal, while the fifth and

sixth installments represent 30% of the principal. The outstanding amount of the principal of

bonds (Series 5) bears a fixed annual interest of 0.44%. Bonds (Series 5) were rated ilAA-

with a stable outlook by Maalot. The proceeds of the issue will be used by The Phoenix

Holdings to inject Tier 2 capital into the subsidiary. On March 9, 2020, approval was

received from the Supervisor of the Capital Market, Insurance, and Savings Authority for

the inclusion of additional Tier-1 capital in the calculation of The Phoenix Insurance’s

shareholders equity.

Contractual restrictions and financial covenants

Under the Deed of Trust of the Company’s bonds (Series 2), the Company undertook not to

create a general floating charge on its assets as long as bonds (Series 2) have not been

repaid in full unless a said charge is also created in favor of bondholders (Series 2) at the

same time and at the same degree. Furthermore, with respect to bonds (Series 2), the

Company assumed restrictions on distributions of dividends and expansions of bonds

(Series 2), and the Company undertook to comply with the financial covenant that the

Company’s shareholders’ equity will not fall below NIS 1.3 billion for two consecutive

quarters, and that the Company’s total financial debt to total assets will not exceed 60%.

Furthermore, a mechanism for adjusting the rate of change in the interest rate due to

noncompliance with financial covenants was determined. The following mechanism was

also defined: In the event that the Company’s shareholders’ equity falls below NIS 1.5

billion over two consecutive quarters, the annual interest rate will increase at a rate

determined in paragraph 7.11A of the Deed of Trust. For additional information, see shelf

offer reported dated February 19, 2013.

In the Deed of Trust of the Company’s bonds (Series 3), the Company undertook not to

create a general floating lien on its assets as long as bonds (Series 3) are not repaid in full

unless the bondholders give their consent in advance and the Company creates a lien in

the same degree in favor of bondholders (Series 3). With respect to bonds (Series 3), the




quarters, and that the Company’s total financial debt to total assets will not exceed 50% for

two consecutive quarters. Furthermore, a mechanism for adjusting the rate of change in the

interest rate due to noncompliance with financial covenants was determined: In the event

that the Company’s shareholders’ equity falls below NIS 3 billion, the annual interest rate

will increase at a rate determined in paragraph 5.11A of the Deed of Trust. For additional

information, see shelf offer reported dated January 22, 2018.




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the same degree in favor of bondholders (Series4). With respect to bonds (Series 4), the







that the Company’s shareholders’ equity falls below NIS 3.5 billion, the annual interest rate

will increase at a rate determined in paragraph 5.10 of the Deed of Trust. For additional

information, see shelf offer reported dated May 7, 2019.




the same degree in favor of bondholders (Series4). With respect to bonds (Series 5), the







that the Company’s shareholders’ equity falls below NIS 3.5 billion, the annual interest rate

will increase at a rate determined in paragraph 5.9 of the Deed of Trust. For additional

information, see shelf offer reported dated February 20, 2020.

As at the balance sheet date, the Company complies with its financial covenants and the

mechanism for adjusting interest rates of the bonds series due to noncompliance with

financial covenants described above. On December 31, 2019, the net financial debt ratio is

approximately 11% and the Company’s shareholders’ equity as appears on its financial

statements (solo) as of December 31, 2019, was approximately NIS 6.65 billion, which is

higher than the shareholders’ equity required above.

For additional details – see Note 26 to the Company’s financial statements as of December

31, 2019.

The members of the Board of Directors thank the Company’s management,

employees and agents for their contribution to the Company.

Eyal Ben Simon

30 March 2020

Benjamin Gabbay

CEO Temporary Chairman of the Board

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