By a resolution of the Annual General Meeting on May 9, 2018 under Agenda Item 7, the Management Board is currently authorized, upon the approval of the Supervisory Board, to issue by May 8, 2023, bearer or registered convertible bonds, bonds with warrants, convertible participation rights, participation rights and subordinated financial instruments without conversion or option rights or conversion obligations, with or without definite maturity once or several times up to a nominal value of EUR 15,000,000,000. Under certain circumstances, the Management Board shall be authorized to exclude subscription rights, upon the approval of the Supervisory Board.
This authorization was utilized by the Management Board through the issue of undated subordinated financial instruments without conversion or option rights or conversion obligations, in order to create own fund items in accordance with insurance regulatory requirements, namely with a nominal amount of EUR 1,250,000,000 and USD 1,250,000,000 on November 17, 2020 as well as with a nominal amount of EUR 1,250,000,000 and USD 1,250,000,000 on September 7, 2021. The authorization was not otherwise utilized to date. It was, in particular, not utilized for the issue of convertible bonds and bonds with warrants. Allianz SE does not currently have any financial instruments outstanding that provide conversion or option rights or conversion obligations.
To ensure that the Company can continue to issue financial instruments, a new authorization should be approved and the existing authorization shall be cancelled, insofar as it has not been utilized. The new authorization entirely encompasses the following instruments:
- convertible bonds, bonds with warrants and convertible participation rights with or without definite maturity, in each case including subordinated bonds (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 in order to create own fund items in accordance with insurance regulatory requirements (also referred to below as “participation rights”); as well as
- subordinated bonds without conversion or option rights and/or conversion obligations, with or without definite maturity, which are issued in order to create own fund items in accordance with insurance regulatory requirements, 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 “hybrid instruments” and also jointly referred to below, together with the convertible bonds and bonds with warrants and the participation rights as “financial instruments”).
Maintaining the maximum issue volume allowed by the authorization at EUR 15,000,000,000 seems to be appropriate in light of the inclusion of participation rights und hybrid instruments without conversion or option rights and/or conversion obligations and the term of the authorization of five years. The authorization provides for granting and/or imposing on holders of convertible bonds and bonds with warrants, conversion or option rights and/or conversion obligations to shares of the company with a proportionate amount of share capital of up to EUR 116.992.000 - at the time of the authorization, this corresponds to 10% of the share capital of EUR 1,169,920,000. 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.
New conditional capital shall be created for servicing conversion rights or option rights or conversion obligations of holders of bonds which were issued on the basis of the authorization to be adopted by the resolution under Agenda Item 10, to issue convertible bonds and bonds with warrants (Conditional Capital 2022). The Conditional Capital 2010/2018 of Allianz SE (§ 2 (5) of the Statutes of Allianz SE) amounting to EUR 250,000,000, which was earmarked, among other things, for servicing the conversion rights or conversion obligations under a EUR 500,000,000 convertible bond issued in 2011 and repurchased in 2021, has not been utilized until now. The Conditional Capital 2010/2018 that is not utilized to date shall be cancelled upon this new Conditional Capital 2022 coming into effect.
Apart from the authorizations designated for cancellation under Agenda Items 8, 9 and 10, Allianz SE currently has no other comparable authorizations to increase the share capital.
The sum total of (i) shares which are to be issued to service conversion rights or conversion options and/or conversion obligations under financial instruments which had been issued in accordance with this authorization and (ii) shares issued during the term of this authorization from the Authorized Capital 2022/I, shall not exceed a proportionate amount of the share capital of EUR 467,968,000 - at the time of the authorization, this corresponds to 40% of the share capital of EUR 1,169,920,000.
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 bonds and bonds with warrants in the form 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 at a conversion price, which is based on the price of the Allianz share on the stock markets 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 (as amended from time to time) (referred to below as "Solvency II Directive") demand adequate capital resources. The delegated Regulation (EU) 2015/35 of October 10, 2014 (as mended from time to time) 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. Participation rights and hybrid instruments issued to strengthen Tier 1 own funds, which do not grant or impose any conversion or option rights or conversion obligations, provide for a write-down or other loss participation in the event of a crisis. From a regulatory perspective, the write-down or other loss participation constitutes a qualitative strengthening of own funds, which, especially in the event of a crisis, is also in the interest of the shareholders in order to avoid other more drastically incisive measures.
Participation rights and hybrid instruments are part of the Company's capital resources, even ahead of a 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.
Specifics regarding subscription rights when issuing convertible bonds and bonds with warrants for a contribution in cash
Shareholders will generally be given subscription rights when bonds requiring the approval of the General Meeting in accordance with § 221 AktG are issued. 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 favorable 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 financial 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 behavior. Finally, the Company cannot react to changes in market conditions at short notice when granting subscription rights, given the duration of the subscription period.
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 recognized 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 of the bonds 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 terms and conditions of the convertible bonds and bonds with warrants, 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.
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. This ensures a limitation of the overall extent of the exclusion of subscription rights.
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 in corresponding application of § 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 in corresponding application of § 186 (3), sentence 4 AktG. These provisions serve the interests of shareholders by minimizing the dilution of their investment as much as possible.
Special features of the subscription right when issuing participation rights and hybrid instruments without conversion or option rights and/or conversion obligations for contributions in cash
Insofar as participation rights or hybrid instruments without conversion or option rights and/or conversion obligations are issued against cash contribution, 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 hybrid 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 recognized finance-mathematical methods. This may be achieved by carrying out the so-called bookbuilding procedure described above thereby avoiding a notable dilution.
The issuing of such participation rights and hybrid 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 hybrid instruments do not constitute any entitlement to a share in the value increase of the company.
However, 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 participation rights or hybrid instruments. This applies in particular if these participation rights or hybrid 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 inter alia “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 hybrid instruments without conversion or option rights and/or conversion obligations 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 as well as the relevant denomination of the financial instruments 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 favor 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, if this is provided for by the terms and conditions of the bonds in question. 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. This can be economically advantageous for the Company.
Exclusion of the subscription right on issuing financial instruments against contributions in kind
Financial instruments 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 financial instruments as calculated using recognized finance-mathematical methods. This makes it possible to use financial instruments 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. The possibility of offering financial instruments as consideration thereby creates a competitive advantage in relation to potential acquisition targets and increases the Company’s 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 optimizing the financing structure. It also creates the possibility to repurchase existing bonds in exchange for the issue of new financial instruments, for example in order to facilitate an exchange of existing bonds, if this is advisable in view of changing insurance regulatory requirements or economically expedient for other reasons. The Management Board will carefully examine each case on its merit to decide whether to make use of the authorization to issue financial instruments against contributions in kind with 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 financial instruments in the form of convertible bonds and bonds with warrants, which had been issued in accordance with this authorization subject to the exclusion of the subscription rights and (ii) shares issued during the term of this authorization from the Authorized Capital 2022/I subject to the exclusion of the subscription right, may not exceed a proportionate amount of the share capital of EUR 116,992,000 - at the time of the authorization, this corresponds to 10% of the current share capital of EUR 1,169,920,000.
Overall, these restrictions ensure a limitation on the exclusion of subscription rights, and thus limit the possible dilution for the shareholders excluded from subscription rights through the use of these authorizations.
The Management Board will report on the extent to which it has made use of the authorization to issue financial instruments at the respective next General Meeting.
Creation of Conditional Capital 2022
The creation of the Conditional Capital 2022 is needed to meet the obligations arising from the conversion or option rights and/or conversion obligations granted or imposed under financial instruments in the form of convertible bonds and bonds with warrants. 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.