Allianz sets up €500m contingent capital facility with Nippon Life

Contingent capital, which provides a source of capital under certain circumstances and triggers, is becoming a more popular way to provide a predictable source of financing at exactly the times that a company requires it. The other day we wrote about French reinsurer SCOR’s contingent capital facility being triggered due to their increasing Q1 natural catastrophe losses. Now Allianz have announced that they have set up a €500m contingent capital facility by issuing contingent convertible notes.

Allianz announced the placement of the €500m of 30 year convertible subordinated notes which are to be purchased by Nippon Life. The notes are valid for 10 years within which time they can be triggered under certain, unspecified circumstances and automatically convert into Allianz common stock.

“I am delighted that we were able to close this transaction with such an important and trusted partner,” said Michael Diekmann, chairman of the board of management of Allianz SE. “With this transaction, we are among the first companies to participate in the growing market for contingent convertible notes.”

It’s been reported (by the Financial Times) that this contingent capital facility is designed to provide Allianz with protection in the event that its solvency ratio drops and that the insurer is thinking ahead to and preparing for the Solvency II regulatory environment. That could potentially happen after a major natural catastrophe, large mortality event or after the fallout of a sovereign default, for example.

These types of instruments are likely to increase in usage and may prove to be a popular alternative to reinsurance or instruments like catastrophe bonds, particularly if contingent capital facilities can have long terms. They provide a very predictable source of reinsurance type cover which when linked to events or financial metrics (such as an index) can be thought of as extremely similar to a cat bond facility.