GERMAN insurance group Allianz sold €500m (£451m) of so-called “coco” bonds to privately-owned Japanese insurer Nippon Life yesterday in the first use of such instruments in the sector.
The contingent convertible bonds Allianz created can convert to common equity in the insurer within ten years of being issued, in the event of certain conditions it did not specify.
Nippon Life, Japan’s largest life insurer by assets, may also opt to exchange the bonds for common Allianz stock within a decade from their issuance, the companies said. When fully converted to equity the notes will give Nippon about a 1.5 per cent stake in Allianz.
“With this transaction, we are among the first companies to participate in the growing market for contingent convertible notes,” Allianz chief executive Michael Diekmann said.
Nippon has invested in the bonds to diversify its revenues and boost its presence outside its slow-growing home market, while Allianz will benefit from a better solvency ratio without having to issue fresh equity.
The bonds are being issued by Allianz finance subsidiary Allianz Finance II, which is wholly owned by Munich-based Allianz.
Coco bonds are usually designed to be written off or converted to shares in a financial institution in the event of a major shock that would see its capital ratio falling beneath levels required by regulators.
The debt instruments have been issued by a number of large European banks including Credit Suisse and Barclays as they seek to boost their regulatory capital against future financial crises, but have not been deployed by insurance companies before.