Migdal Insurance Capital: Which Part of the Debt Really Counts as Capital
Migdal's solvency headline looks more comfortable with transitional relief, but capital quality is decided elsewhere: which debt truly absorbs losses, in which layer it is recognized, and where the regulatory cap starts to bite. This follow-up breaks down the gap between the existing Tier 2 stack and the proposed AT1 layer.
The main article argued that Migdal's market window reopened, but clean capital is still not fully closed. This follow-up isolates the question that the headline ratio blurs: when Migdal Insurance Capital issues debt, which part of that debt really counts as capital for Migdal Insurance, and which part is still just financing that buys time.
That matters because the comfortable number and the decisive number are not the same number. The June 30, 2025 solvency report showed 124%, or 127% after capital actions, with transitional measures. Without transitional measures, the same ratio was only 98%, or 101% after capital actions. The voluntary estimate for December 31, 2025 also looks comfortable only in the upper layer: 135% to 138% with transitional measures, but just 110% to 113% without them, still below the 115% distribution gate.
That leads to four quick conclusions:
- Transitional relief is still doing heavy lifting. As of June 30, 2025, the full transition deduction was about NIS 6.2 billion, while the reduced balance still standing behind the reported ratio was about NIS 3.8 billion.
- Tier 2 is recognized capital, but not free capital. Series 7 through 18 are recognized as Tier 2 only subject to the maximum-allowable Tier 2 share and under terms that allow payment deferral.
- Additional Tier 1 is a different animal. The draft trust deed for proposed Series 19 allows coupon cancellation, principal deferral, and full or partial principal write-down.
- The rating gap already tells the story. Midroog rates Migdal's Tier 2 instruments at A1.il(hyb), while the proposed AT1 layer is rated A2.il(hyb).
This is the core of the piece. As long as the gap between the two bars stays this large, part of the reported stability still comes from a regulatory bridge that runs off through 2032, not only from capital that absorbs losses at the same depth.
What Actually Counts As Capital
Note 5 in the annual report gives the formal answer. The solvency ratio is calculated as economic own funds divided by the solvency capital requirement, and economic own funds include debt instruments with loss-absorption features, including AT1, Tier 2, hybrid secondary capital, and hybrid tertiary capital. In other words, debt can count as capital. But it does not count automatically, and it does not count with the same quality.
The clean way to read it is to separate three different layers:
| Layer | What sits inside it | What it contributes | Where the limit is |
|---|---|---|---|
| Transitional measures | Insurance-liability deduction, with a full value of about NIS 6.2 billion and a reduced balance of about NIS 3.8 billion as of June 30, 2025 | Lifts the reported solvency ratio | Runs off linearly through the end of 2032 |
| Existing Tier 2 | Series 7 through 18, including the 2025 Series 15 to 18 issuance and the Series 6 exchange into Series 13 and 14 | Adds recognized capital to Migdal Insurance | Recognition is subject to the maximum-allowable Tier 2 share |
| Proposed AT1 | Proposed Series 19, up to NIS 500 million par value | Adds a deeper capital layer | Subject to supervisor approval and an explicit 20% cap |
That is also the answer to the headline question. Not all of Migdal Insurance Capital's debt counts as capital in the same way. Part of the picture is a regulatory transition layer, part is Tier 2 that counts only within a capped regulatory envelope, and only the proposed AT1 move is meant to add a layer that behaves more like capital than like normal debt.
Tier 2: Debt That Gets Capital Credit, But Not Without Conditions
Note 5 repeats the same qualifier several times: the bond series are recognized as Tier 2 subject to the maximum-allowable Tier 2 share. That already matters. Legally these are subordinated debt instruments. Regulators can recognize them as capital. Analytically, however, you cannot read the full nominal amount as if every shekel were permanent, freely usable capital.
The 2025 transactions make that clear:
| Instrument | Layer | Size | First call date | Final maturity | Why it matters |
|---|---|---|---|---|---|
| Series 15 and 16 | Tier 2 | NIS 559.6 million par value | September 30, 2030 | December 31, 2039 and December 31, 2040 | Recognized capital, but market economics are anchored to the first call window |
| Series 17 and 18 | Tier 2 | NIS 534.4 million par value | December 31, 2030 | June 30, 2042 and June 30, 2043 | Cheaper and longer-dated debt, still in the same layer |
| Proposed Series 19 | AT1 | Up to NIS 500 million par value | June 30, 2037 | June 30, 2076 | A deeper layer, but with much harsher investor terms |
This chart shows why Tier 2 is not permanent capital in the same way AT1 is meant to be. Tier 2 gets capital credit, but its economics are still organized around an early call window, around replacement tests, and around the issuer's ability to refinance at a sensible cost. It buys time. It does not fully settle the capital-quality question on its own.
The documents explain why. For Series 15 through 18, early redemption is allowed only if the company issues a capital instrument of equal or better quality, or gets prior approval from the supervisor, and generally only if post-redemption own funds stay above SCR. So the market reads Tier 2 through the first call date, while the regulator reads it through the replacement test. That is a meaningful difference.
The stress mechanics are also different from ordinary debt. Under deferral circumstances, Migdal can postpone principal and interest on Tier 2 instruments. The delay lasts until the deferral conditions cease or up to three years from the original due date, whichever comes first, unless the supervisor allows earlier payment. While delayed amounts remain unpaid, restrictions also apply to distributions and certain payments tied to controlling shareholders. This is debt that gets capital recognition precisely because it already gives up part of the certainty that normal debt would provide.
There is another quiet but important point. If Migdal does not exercise the call by the specified dates, the Tier 2 series carry an additional coupon equal to 50% of the original risk spread. That is not an immediate problem. It is a reminder that both economically and regulatorily, Tier 2 is designed to be refinanced or replaced on time. It supports solvency, but it does not turn the capital stack into a permanent equity-like layer.
Additional Tier 1: This Is Where Debt Starts Behaving Like Capital
The draft trust deed for proposed Series 19 changes the rules. This is not just another long-dated Tier 2 bond. It is meant to be recognized as Additional Tier 1, subject to an explicit 20% cap and to supervisor approval.
The difference starts with time and ends with loss absorption. Final maturity is June 30, 2076. The first early-redemption date is June 30, 2037, and after that only every five years on an interest payment date. Even then, the deed says early redemption requires prior supervisor approval, and as a rule is meant to come together with replacement by Tier 1 or AT1 of equivalent quality. This is no longer a layer designed only to buy time. It is designed to stay in the structure.
The deeper difference is in how it absorbs losses. Under the AT1 draft, interest can be cancelled without constituting a breach. That can happen if Migdal has no distributable profits, if recognized own funds are below SCR, if the board sees a near-term risk to capital adequacy or to payment of more senior liabilities, or if the supervisor instructs non-payment.
In a real stress case, the mechanism goes much further. The deed states that upon a trigger event, principal must be written down in full or in part by the amount needed for the trigger event to cease. The trigger event itself is defined around three core cases: if own funds were below SCR in the financial report preceding the latest published report and no capital completion was made by the time the latest report was published, if the latest published solvency ratio is below 75% without capital completion, or if there is material doubt over Migdal's ability to continue as a going concern. This is no longer debt that merely postpones payment. This is debt that can disappear.
Even the restoration option says something important. If, after a write-down, recognized own funds later move back above SCR, the company may, at its discretion and subject to supervisor approval, restore all or part of the written-down principal. The key word is may. There is no automatic restoration promise here. It is a discretionary corporate decision inside a regulatory framework.
This is exactly why the rating gap matters more than any marketing language. Midroog rates Migdal's Tier 2 instruments A1.il(hyb), while the proposed Series 19 AT1 layer is rated A2.il(hyb). At the same time, Midroog also says that given current and expected solvency and what it sees as sufficient distance from the effective regulatory capital requirement, it does not apply an additional notch for the probability of deferral circumstances or a trigger event. That is an important nuance. The contract is harsher, but the rating agency is not reading it as an immediate distress instrument.
What The 135% Number Actually Means
The voluntary estimate for December 31, 2025 was published as part of the preparation for the possible Series 19 issuance. That matters for two separate reasons.
The first is reading discipline. The estimate is not audited and not reviewed, and the company itself stresses that the control work behind it is narrower than the full process that will support the mandatory March 31, 2026 solvency publication. So it cannot be read as fully locked in.
The second reason is more important. The same estimate gives 135% to 138% with transitional measures, but only 110% to 113% without them. In the same evidence set, the distribution gate remains 115% without transitional measures. That means that even after a clear reopening of market access, and even before the potential AT1 issuance, the clean capital reading still had not crossed the board's own distribution threshold.
There is another signal here. In January 2025, Migdal revised its capital policy so the target range moved down to 150% to 170%, from 155% to 175%, and the minimum target at the end of the transition period moved down to 135%, from 140%. That is a meaningful easing of the policy envelope. But the distribution threshold without transitional measures stayed at 115%. In other words, the board softened the management range a bit, but it did not soften the cleaner test.
That is why the AT1 move should not be read as just another debt layer that polishes the same story. It is an attempt to change the quality of the capital sitting underneath the ratio. If the reader wants the direct answer to which part of the debt really counts as capital, it is not “everything that trades”. It is only the part that fits the recognition limits of its regulatory layer and is willing to carry the loss-absorption mechanics that belong to that layer.
Bottom Line
The short answer is that not all of Migdal Insurance Capital's debt counts as capital with the same quality, and not even with the same stability. Tier 2 is very useful. It buys time, preserves market access, and supports the solvency ratio. But it does so inside recognition caps, around early call windows, under replacement tests, and with payment-deferral mechanics.
AT1 behaves differently. It is much longer, sits deeper in the stack, can cancel coupons, can write down principal, and can be recognized only up to an explicit 20% cap. That makes it better capital for Migdal and a harsher instrument for the investor. That is exactly the gap the headline solvency number tends to hide.
So 135% to 138% is not the end of the story. As long as the estimate without transitional measures remains 110% to 113%, and as long as Series 19 is still only at the in-principle stage, Migdal is still moving from an open market window toward cleaner capital. The debt that truly “counts as capital” is not the full nominal stack. It is only the slice that clears the regulatory filters and is willing to absorb losses when required.
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