Migdal Insurance: Does The Additional Tier 1 Raise Really Solve The Capital Bottleneck

What This Follow Up Is Isolating

The main article already made the broader point: Migdal Insurance's earnings recovery has not yet translated into clean capital flexibility. This continuation does not revisit the operating franchise, CSM quality, or investment income. It isolates one narrower question: does the planned Additional Tier 1 issuance actually solve the bottleneck, or does it mostly buy time.

The short answer is that it addresses a different threshold. An Additional Tier 1 instrument is meant to add recognized capital and move the insurer further away from regulatory stress points. But the constraint that matters to ordinary shareholders is not the instrument's loss absorption trigger. It is the dividend gate. The filings are explicit here: on January 29, 2025, Migdal Insurance's board set the dividend threshold at a 115% economic solvency ratio without transitional relief. Then, on March 24, 2026, as part of the preparation for the first issuance of this kind, Migdal Insurance published a voluntary estimate that put the December 31, 2025 solvency ratio at 110% to 113% without transitional relief. In other words, the company is still below the distribution threshold at the starting point.

That distinction matters. The debt market can feel comfortable well before the equity market gets genuine upstream capacity. Midroog looks at the probability of reaching deferral or write down territory and assigns the planned series an A2.il(hyb) rating with a positive outlook. Equity holders have to ask a different question: can the company get above 115% without transitional relief, and can it stay there after an actual distribution. Those are not the same line.

Where The Real Line Sits

The local documents create a clear hierarchy of thresholds, and only one of them is the capital bottleneck for shareholders.

The point of the chart is not just that solvency improved. It is where the improvement sits. With transitional relief, the picture has looked acceptable for a while: 131% at year end 2024, 127% after the June 2025 update, and 135% to 138% in the voluntary estimate for December 31, 2025. Without transitional relief, the picture is much tighter: 103% at year end 2024, 101% after the post date capital actions included in the June 2025 disclosure, and only 110% to 113% in the year end estimate. That is why regulatory relief and recognized capital are not the same thing as distributable surplus.

This also explains why the issuance makes sense for debt holders while still leaving the equity question unresolved. At roughly 110% to 113% without transitional relief, the company is still far away from the 75% loss absorption trigger. But it is also still below the 115% dividend threshold. That is exactly what this hybrid instrument is designed to do: reduce the probability that capital turns into an immediate stress event, not automatically reopen the distribution channel.

What The Raise Does Change

This is not a cosmetic move. On March 24, 2026, the boards of Migdal Insurance Capital Raising and Migdal Insurance approved, in principle, the first public issuance of a subordinated instrument intended to qualify as Additional Tier 1. The draft trust deed makes clear that the issuing entity is Migdal Insurance Capital Raising, a wholly owned subsidiary, and Midroog adds that the proceeds will be deposited in full at Migdal Insurance and recognized as Additional Tier 1, subject to the 20% cap on that layer.

So this is not just balance sheet theater at a holdco layer. The stated intention is to inject recognized capital into the insurer itself. From a capital structure perspective, that is real.

The instrument terms also show that this is not a temporary bridge that management can quickly take out after one cleaner year. The coupon is fixed until June 30, 2037, then resets every five years, and the first optional redemption date is June 30, 2037, unless there is an adverse regulatory classification change. On top of that, early redemption requires prior supervisory approval and, as a rule, is expected to be replaced by an equivalent Tier 1 or Additional Tier 1 instrument. This is meant to be a durable capital layer, not a short term patch.

Midroog adds one useful outside signal. In its view, given the company's current and expected economic solvency, the uncertainty around reaching deferral conditions or a trigger event is low, which is why it did not notch the planned AT1 instrument down further than the normal hybrid framework already implies. That matters. But it is a debt market signal, not proof that the shareholder bottleneck is gone.

Why It Still Does Not Solve The Bottleneck

The first problem is arithmetic, and the documents are still incomplete on that point. The company speaks about an issuance of up to NIS 500 million par value, but the local evidence set does not yet include final issuance results, a final coupon, or the final amount that will be recognized as capital after pricing and allocation. So the filings do not let us claim that the move already pushes the company above 115% without transitional relief. They let us say the move is relevant. They do not let us say it is proven.

The second problem is the distribution test itself. Even if the issuance lifts the no-transition ratio above 115%, that still does not equal freely distributable capital. Under the board policy and the supervisor's letter, the insurer has to remain above the relevant threshold after the distribution. So a raise that only nudges the ratio slightly above the line may produce a positive headline while leaving very little real dividend capacity. That is why the right question is not whether the issuance improves the ratio. The right question is whether it leaves real excess capital after any upstream action to shareholders. The documents do not answer that yet.

The third problem is that this is a true loss absorbing instrument. The trust deed sets out several stress cases. If there are no distributable profits, if equity falls below SCR, if Migdal's board sees a near term risk to SCR or to higher ranking liabilities, or if the supervisor orders it, coupon payments can be canceled. Those canceled coupons do not accrue and do not come back later.

The terms are harsher in a deeper stress scenario. If, based on the latest published financial statements, the solvency ratio falls below 75% and no capital completion was made, the company can write the principal down, fully or partially. Again, there is no mechanism that restores the missed coupons. And if the principal is later restored, that can happen only if Migdal's recognized capital again exceeds SCR, only with prior supervisory approval, only out of distributable profits generated after the capital moved back above SCR, and only for up to ten years from the write down date. This is not ordinary debt. It is a shock absorber.

There is one more non obvious point in the deed. It separates the funding subsidiary from the insurer. Section 15.1 says the issuing subsidiary itself is not subject to dividend or share buyback restrictions. But section 7.8 says that if coupons are canceled or principal payments are deferred, Migdal Insurance itself cannot make distributions, cannot repay capital notes or shareholder loans, and cannot make certain controlling shareholder related payments. In other words, when the instrument is truly needed, it does not open the upstream channel. It locks it tighter.

That leads to the practical conclusion. Additional Tier 1 can reduce the probability that capital becomes an immediate problem, and it can move Migdal Insurance closer to the dividend line. But it does not replace organic common capital formation, and it does not by itself turn a 110% to 113% no-transition ratio into clearly distributable surplus. To say the bottleneck is solved, we still need to see a no-transition ratio that sits above 115% with room to spare.

What Needs To Happen Next

Three checkpoints will decide whether this is a short bridge or a real solution.

The first is the full December 31, 2025 solvency report, which the company says is expected to be published together with Migdal Insurance's March 31, 2026 financial statements. The company itself stresses that the current estimate is voluntary, not audited, not reviewed, and built under a narrower control process than the full regulatory report.

The second is the actual issuance outcome: how much will be raised, how much will be recognized as Additional Tier 1 in practice, and whether the 20% cap on that layer starts to matter.

The third, and most important for shareholders, is where the no-transition ratio settles after the issuance, and just as important, how much of that ratio remains after any future distribution. Only then will we know whether this is genuine excess capital or just a thicker buffer that buys more time.

Conclusion

This raise is not fake. It is meant to inject recognized capital into the insurer, widen the safety margin versus regulatory stress levels, and build a deeper shock absorbing layer. In that sense, it is a real capital move.

But based on the local filings alone, it still does not prove that the capital bottleneck has been solved. The company's own estimate published ahead of the issuance puts the no-transition solvency ratio at 110% to 113%, below the 115% dividend threshold. So the cleaner reading is improved capital cushioning, and maybe a bridge toward a solution, not proof that the upstream capital blockage is already gone.