By a resolution of the Annual General Meeting on May 7, 2014 under Item 8 of the Agenda, the Management Board is currently authorized, upon the approval of the Supervisory Board, to issue by May 6, 2019, convertible bonds, bonds with warrants and convertible participation rights, once or several times up to a nominal value of EUR 10,000,000,000, with or without definite maturity, and be equipped with conversion or option rights and/or conversion obligations for shares in the Company in a proportionate share of the share capital of up to EUR 230.000.000. Under certain circumstances, the Management Board shall be authorized to exclude subscription rights, upon the approval of the Supervisory Board.
To date, the Management Board has made no use of this authorization. By issuing a convertible bond in the nominal amount of EUR 500,000,000 in 2011, which entitles and obligates its holders to up to 7,031,360 shares in the company (subject to possible adjustments in accordance with the terms and conditions), partial use was made of an authorisation to issue convertible bonds by the Annual General Meeting of May 5, 2010. To be able to continue issuing bonds in the future, the administration proposes to the Annual General Meeting a new authorization. The authorization shall also include other, subordinated financial instruments, which are issued to create own fund items in accordance with the requirements under insurance supervisory law (referred to below as "Solvency II Instruments"). The authorization generally includes the following instruments:
- convertible bonds, bonds with warrants and convertible participation rights (in each case including such instruments issued as Solvency II Instruments; also referred to jointly below as "convertible bonds and bonds with warrants");
- participation rights without conversion or option rights and/or conversion obligations, which are issued as Solvency II Instruments; and also
- subordinated financial instruments without conversion or option rights and/or conversion obligations, which are issued as Solvency II Instruments, insofar as the issuing thereof requires, due to profit-based interest, the loss participation arrangement or for any other reason, the approval of the Annual General Meeting pursuant to § 221 AktG (these instruments are referred to below as “financial instruments” and jointly referred to below, together with the convertible bonds and bonds with warrants and the participation rights without conversion or option rights and/or conversion obligations, as "bonds").
The current authorization to issue bonds shall be cancelled. The existing Conditional Capital 2010/2014 is to be amended to such an extent that, in addition to securing the holders of the convertible bond issued in 2011, it is available for servicing the conversion or option rights and/or conversion obligations of holders of bonds, which are issued on the basis of the authorization to issue convertible bonds and bonds with warrants to be resolved under Agenda Item 7.
Setting the maximum issue volume allowed by the authorization at EUR 15,000,000,000 seems to be appropriate in light of the inclusion of Solvency II Instruments without conversion or option rights and/or conversion obligations and the five year term of the authorization. The authorization provides for granting and/or imposing on holders of bonds conversion or option rights and/or conversion obligations to shares of the company with a proportionate amount of share capital of up to EUR 230,000,000 (equivalent to approx. 19.7% of the current share capital). The number of shares required to settle the obligations arising from the exercise of option or conversion rights and/or conversion obligations of a bond with a specific issue volume depends on the market price of Allianz shares at the time the bond is issued or the time period immediately preceding the conversion.
The sum total of (i) shares which are to be issued to service conversion rights or conversion options and/or conversion obligations under convertible bonds and bonds with warrants – excluding shares to be issued due to conversion obligations in connection with Solvency II Instruments -, which in accordance with this authorization had been issued and (ii) shares issued during the term of this authorization from the Authorized Capital 2018/I, shall not exceed a proportionate amount of the share capital of EUR 467,968,000 (equivalent to 40% of the current share capital).
Adequate capital resources
Adequate capital resources are an important prerequisite for the Company’s development. By issuing convertible bonds and bonds with warrants, the Company can obtain low-interest capital. The issue of convertible participation rights allows the interest rates to be based, for example, on the Company’s current dividend. The Company benefits from the conversion or option premium. The option of conversion obligations triggering a conversion based on the market price of the Allianz share in a period before or at the time of conversion gives the Company security for the transformation of convertible bonds to equity.
Own fund items recognized under insurance supervisory law hold particular importance for insurance companies. The European own fund requirements for insurance companies and re-insurers in accordance with Directive 2009/138 EC of November 25, 2009 (referred to below as "Solvency II Directive") demand adequate capital resources. The delegated Ordinance (EU) 2015/35 of October 10, 2014 for amending the Solvency II Directive contains detailed requirements for recognizing subordinated bonds issued to create own fund items for covering capital requirements under insurance supervisory law. Solvency II Instruments issued to strengthen Tier 1 own funds must provide for, in case of a crisis, a convertible obligation, a write-down or a comparable loss participation. In the case of Solvency II Instruments with convertible obligations, the instrument is converted if in case of a crisis certain own fund quotas are not complied with. The supervisory law purpose of the mandatory conversion is the participation of investors in disadvantageous developments that triggered the mandatory obligation (non compliance with own fund quotas). Usually this should not result in a benefit for the investors: Either this is – in case of a variable conversion price – excluded through the fixing of a minimum conversion price or – in case of a bond with a fixed rate conversion – at least unlikely. An economic disadvantage from the mandatory obligation for the Company and therefore for shareholders is rather unlikely.
The company assumes that usually Solvency II Instruments with mandatory conversion can only be successfully issued, when the chance of the occurance of a mandatory conversion event is viewed as rather unlikely by investors. The conversion, write-down or comparable loss participation effectively leads to a qualitative own fund increase from a regulatory perspective, which also benefits the shareholders, especially in case of a crisis, in order to avert other more stringent measures.
Solvency II Instruments are part of the company's capital resources, even ahead of a conversion, write-down or other loss participation that may be stipulated in the terms and conditions as they can create (regulatory) own funds. It is in the company's interest to have the scope of action required to be able to issue such instruments for effective capital management and to fulfil own fund requirements under insurance supervisory law. Shareholders will generally be given subscription rights when bonds requiring the approval of the shareholders meeting in accordance with § 221 AktG are issued.
Specifics regarding subscription rights when issuing convertible bonds and bonds with warrants
The Management Board shall, however, upon an issue of convertible bonds and bonds with warrants against cash contributions, be authorized in corresponding application of § 186 (3), sentence 4 AktG to exclude these subscription rights, upon approval of the Supervisory Board, if the issue price of the bonds is not substantially lower than their market value. This can be a suitable way to take advantage of favourable stock market conditions and to place bonds quickly and flexibly at attractive conditions on the market. Achieving the most beneficial outcome possible from an issue especially in volatile markets depends on the ability to respond at short notice. Terms that correspond as much as possible to market conditions can generally be secured only if the Company is not tied for too long. In the case of issues with subscription rights, a considerable discount is generally required due to the long offer period. Although § 186 (2) AktG allows the subscription price to be published (and, as such, the terms and conditions of bonds carrying conversion or option rights) up to the third day before the end of the subscription period, there still exists, due to the volatility of the equity markets, a market risk over several days leading to discounts when determining the terms and conditions of the bond and, hence, resulting in terms that are not close to market conditions. Furthermore, an alternative placement with third parties is more difficult or entails additional effort, given the uncertainty surrounding the subscription behaviour. Finally, the Company cannot react to changes in market conditions at short notice when granting subscription rights, given the duration of the subscription period. This applies in particular to Solvency II Instruments, if these are to be issued at short notice to satisfy own fund requirements under insurance supervisory law. Especially in these cases, the company needs to be able to issue quickly and with flexibility.
Shareholders’ interests are protected by the bonds being issued on terms that are not substantially lower than the market value. The market value must be determined using recognised finance-mathematical methods. When determining the price, the Management Board will take into consideration the prevailing conditions on the capital markets and keep the discount on the market value as low as possible. This would result in the computed value of the subscription rights being close to zero, thereby ensuring that the shareholders will not suffer any material economic disadvantages from the exclusion of subscription rights.
If the Management Board carries out what is known as a book-building process, it can also set terms in line with the general market environment and thereby largely avoid dilution. In book-building, investors are invited to submit bids on the basis of provisional bond terms and conditions, specifying what they consider to be a fair market interest rate and/or other economic components. When the book-building period ends, the investors’ bids are evaluated in order to determine the terms that still remain unresolved at that point in time, such as interest rate, according to supply and demand. This ensures that the issue price of the bond issue is in line with conditions prevailing in the market. By conducting a book-building process, the Management Board can ensure that shares are not economically diluted by the exclusion of subscription rights.
Moreover, shareholders can maintain their share of the share capital of the Company through purchases on virtually the same terms and conditions via the stock exchange. This ensures reasonable protection of their economic interests. This authorization to exclude subscription rights pursuant to § 186 (3), sentence 4 AktG, shall only apply, however, to bonds carrying rights to receive shares corresponding to a proportionate amount of the share capital not exceeding 10% in the aggregate, neither on the date on which this authorization takes effect nor on the date of exercise of this authorization.
The sale of treasury shares shall be counted towards this limitation, if the sale occurs during the term of this authorization to the exclusion of subscription rights pursuant to § 186 (3), sentence 4 AktG. In addition, shares issued during the term of this authorization from authorized capital shall be counted towards this limitation, provided that subscription rights are excluded pursuant to § 186 (3), sentence 4 AktG. These provisions serve the interests of shareholders by minimising the dilution of their investment as much as possible.
Issuing participation rights and financial instruments without conversion or option rights and/or conversion obligations
Insofar as participation rights or financial instruments without conversion or option rights and/or conversion obligations are issued as Solvency II Instruments in return for cash, the Management Board is also authorized, with the approval of the Supervisory Board, to generally exclude the subscription rights of the shareholders, if these participation rights or financial instruments do not constitute voting rights or other membership rights in Allianz SE. It must be ensured in this case that the issue price does not significantly fall below the theoretical market value determined according to recognised finance-mathematical methods. This may also be achieved by carrying out the so-called bookbuilding procedure described above thereby avoiding a notable dilution.
The issuing of such participation rights and financial instruments without conversion or option rights and/or conversion obligations does not alter the share ownership structure or the voting rights. The acquirers do not see participation in the company as a priority, especially since such participation rights and financial instruments do not constitute any entitlement to a share in the value increase of the company.
On the other hand, such instruments provide for a loss participation and/or other features of an arrangement resembling equity capital. This risk is reflected by an increased interest payment, which can lead to a reduction in the dividend capacity. However, there are also considerable financial drawbacks, which a company can suffer if the subscription right cannot be excluded when increasing own funds through the issuing of such Solvency II Instruments. This applies in particular if these Solvency II Instruments are to be issued at short notice to fulfil own fund requirements under insurance supervisory law. Especially in these cases, the company needs to be able to respond quickly and with flexibility.
Moreover, § 186 (3), sentence 4 AktG stipulates that the subscription right can be excluded "if the capital increase against cash contributions does not exceed ten percent of the share capital and the issue amount does not significantly fall below the stock exchange price". Even if the provision of § 186 (3), sentence 4 AktG on the easier subscription right exclusion on issues of participation rights and financial instruments without conversion or option rights and/or conversion obligations, which are issued as Solvency II Instruments, does not fit directly, it can nonetheless be concluded that the market requirements can justify an exclusion of the subscription right if the shareholders do not suffer any, or any notable disadvantage through the kind of pricing, which ensures that the economic value of a subscription right is close to zero. Since the proposed authorization ensures that the issue price does not significantly fall below the theoretical market value determined according to finance-mathematical methods, the impact on the shareholders' interests is zero or at least kept to a minimum.
Exclusion of the subscription right for fractional amounts
Moreover, the Management Board shall be authorized, upon the approval of the Supervisory Board, to exclude subscription rights with respect to fractional amounts. Such fractional amounts can be the result of the amount of the relevant issuing volume and the need to fix a practicable exchange ratio. In such cases, excluding subscription rights simplifies the execution of the capital increase.
Exclusion of the subscription right in favour of the holders of convertible bonds and bonds with warrants already issued
Furthermore, the Management Board shall be given the authority to exclude, upon the approval of the Supervisory Board, the subscription rights of the shareholders in order to grant the holders of convertible bonds and bonds with warrants issued by the company or Group companies, a subscription right to such an extent as such holders would be entitled to after having exercised their conversion or option rights or after any conversion obligations have been fulfilled. Thereby the holders of issued convertible bonds and bonds with warrants are treated as if they were shareholders. Instead of lowering the option or conversion price, this offers the possibility of being able to grant a subscription right as dilution protection. Providing bonds with such a dilution protection is standard market practice. In order to be able to grant holders of previously issued bonds subscription rights as dilution protection, the subscription right of the shareholders to the new bond used for this purpose must be excluded.
Exclusion of the subscription right on issuing bonds against contributions in kind
Bonds can also be issued against contributions in kind if this is in the interest of the Company. In such case, the Management Board shall be authorized to exclude the subscription rights of the shareholders with the approval of the Supervisory Board provided that the value of the contribution in kind is appropriate in relation to the theoretical market value of the bonds as calculated using recognised finance-mathematical methods. This makes it possible to use bonds in individual cases as acquisition currency, for example as part of company mergers or when (also indirectly) acquiring companies, parts of companies, interests in companies, or other assets, or entitlements to the acquisition of assets or claims against the company or its Group companies. In negotiations, there may well be situations in which consideration is to be provided in a form other than cash. This option will increase the Company’s competitive position with respect to potential acquisition targets and increase its flexibility to take advantage of opportunities with respect to the acquisition of companies, interests in companies, or other assets, while maintaining its liquidity levels. This can also be advantageous when optimising the financing structure. The Management Board will carefully examine each case on its merit to decide whether to make use of the authorization to issue bonds carrying conversion or option rights and/or conversion obligations against contributions in kind to the exclusion of subscription rights. It will only do so if such an action is in the interest of the Company and, thus, of its shareholders.
Limitation of the exclusion of subscription rights
The sum total of (i) shares which are to be issued under convertible bonds and bonds with warrants – excluding shares to be issued to service conversion obligations under Solvency II Instruments - , which in accordance with this authorization had been issued subject to the exclusion of the subscription rights and (ii) shares issued to service conversion rights or conversion obligations under the EUR 500,000,000 convertible bond issued in 2011, shall, taking into account shares issued during the term of this authorization from the Authorized Capital 2018/I subject to the exclusion of the subscription right, not exceed a proportionate amount of the share capital of EUR 16,992,000 (equivalent to 10% of the current share capital).
Shares which are to be issued in connection with convertible obligations under Solvency II Instruments, which had been issued subject to the exclusion of subscription rights, shall not be accounted for when calculating the aforementioned sum. However the sum total of shares to be issued in connection with convertible obligations under Solvency II Instruments, which had been issued subject to the exclusion of subscription rights, shall not exceed a proportionate amount of the share capital of EUR 116,992,000 (equivalent to 10% of the current share capital).
These restrictions ensure a combined upper limit on the exclusion of subscription rights, and limit the possible dilution for the shareholders excluded from subscription rights. Due to Solvency II Instruments being recognized as own fund items under insurance supervisory law, it is in the company's interests to be able to issue such instruments to a considerable extent. To retain the company's scope of action, it appears justifiable not to consider the Solvency II Instruments with conversion obligations when calculating the sum of exclusions of subscription rights and only consider Solvency II Instruments in a separate limitation without adding shares, which have to be delivered under other bonds or which are issued from the Authorized Capital 2018/I.
The Management Board will report on the extent to which it has made use of the authorization to issue bonds at the respective next General Meeting.
Amendment to Conditional Capital 2010/2014
The proposed amendment of the Conditional Capital 2010/2014 is needed to meet the obligations arising from the conversion or option rights and/or conversion obligations under respective bonds. Other forms of fulfilment can also be used for the conversion or option rights/conversion obligations instead, for example the delivery of treasury shares or shares from authorized capital.