On 25 February 2015, the German Federal Cabinet adopted a regulation to amend the Insurance Ordinance ("AnlV-E") and the Pension Fund Capital Ordinance. We informed about the initial draft published on 23 May 2014 in our client information of 27 May 2014. The regulation will enter into force on the day after its promulgation in the Federal Law Gazette (Bundesgesetzblatt).
The final version contains some of the hoped for improvements compared to the problematic draft of May 2014. The new regulation includes necessary adjustments due to the replacement of the German Investment Act (Investmentgesetz) by the German Capital Investment Code (Kapitalanlagegesetzbuch, "KAGB"), but in general is oriented to a large extent on the status quo of the current Insurance Ordinance and the administrative practice of the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, "BaFin"). In addition, it also contains pleasant amendments regarding investments in loan funds and in loans in general.
As before, the new regulation also explicitly grants BaFin the power to supplement and interpret the rules of the Insurance Ordinance by way of administrative practice (for instance in the form of a new capital investment circular). It is currently however not foreseeable when such a new capital investment circular will be published.
For certain insurance companies the Insurance Ordinance applies only until the end of 2015, as then Solvency II will come into force (this applies in particular to insurance companies whose annual gross written premium income exceeds EUR 5 mio or whose gross technical provisions calculated under Solvency II exceed EUR 25 mio). For all other insurance companies, pension schemes, pension funds and also indirectly for professional pension schemes, the Insurance Ordinance will remain important.
In the following we summarize some of the relevant provisions of the new Insurance Ordinance:
- Investments in Private Equity ("PE")
funds may in the future be allocated to the PE-quota, if
- the EEA fund manager is in possession of an AIFM authorisation or is registered as a "sub-threshold" manager. Funds which are managed by non-EEA managers are eligible if the manager has its seat in an OECD state and is in possession of a comparable authorisation or registration; and
- the PE-fund invests in equity, quasi-equity instruments or other forms of corporate financing. Funds which invest in loans but follow a PE-investment strategy will therefore be eligible to qualify, under continuance of the current administrative practice, for the PE-quota.
- There will be no look-through approach with regard to PE-fund of funds; it is hence generally sufficient if the requirements are fulfilled at the level of the fund of funds.
- Investments in real estate funds can be allocated to the real estate quota, if the fund qualifies as a so called "special fund" (i.e. only professional and semi-professional investors may subscribe by virtue of its statutes) and if the fund invests in assets which are permissible for German real estate funds. If the fund is a retail fund, it needs to be structured as a closed-ended fund. It is possible that BaFin will introduce further restrictions (e.g. limitation of leverage), particularly in the latter case.
- Special funds remain eligible, possibly subject to further yet to be specified restrictions by BaFin (similar to the current administrative practice).
- A new asset class will be introduced for alternative investment funds, under which all funds can be allocated which are seated in the EEA and are managed by a fully authorised EEA-manager. These funds are even eligible if they are invested up to 100% in loans. These loans must however at least have a Speculative-Grade-Rating.
- The final version of the AnlV-E also foresees the possibility to directly invest in High-Yield-Corporate Loans.
The provisions in detail:
I. Private Equity funds (Section 2 para. 1 no. 13 lit. b) AnlV-E)
It will remain possible to invest up to 15% of the restricted assets into this asset class.
The following further requirements also need to be taken into consideration:
1. Requirements regarding the fund manager
PE-funds are eligible for the investment of restricted assets and fall under the PE-quota under Section 2 para. 1 no. 13 lit. b) AnlV-E, if the respective fund manager with seat in an EEA member state is at least in possession of an AIFM registration (this also entails fund managers registered as EuVECA or EuSEF managers). Fund managers with seat in a full-membership OECD state must be subject to public supervision with a view to protecting investors and must be in possession of a comparable registration.
For fund managers with seat in a full-membership OECD state, the assessment whether or not comparability exists needs to be conducted by the insurance companies on their own responsibility prior to acquiring interests or shares.
2. Fund of funds
PE-target funds do not need to meet the requirements of Section 2 para. 1 no. 13 lit. b) AnlV-E. A look-through approach (as was foreseen in the draft of May 2014) will not apply.
The explanatory comments of the AnlV-E however refer to specific insurance supervisory provisions, which in particular address a possible circumvention in connection with investing in PE-funds through a fund of funds (for instance, requirements could be introduced with respect to risk diversification).
3. Equity, quasi-equity instruments and other forms of corporate financing
In accordance with the current administrative insurance supervisory practice of BaFin, funds which invest in loans and follow an investment strategy similar to that of a PE fund may be allocated to the equity quota. This shall be the case if the activity is not only restricted to monitoring the loans, but rather each granting of a loan is assessed and monitored on an individual basis.
For this, the eligible assets for a PE-fund were broadened to also include "other instruments of corporate financing". These can be acquired in addition to the assets falling under Section 261 para. 1 no. 4 KAGB (interests in non-listed companies) and "other quasi-equity instruments".
To what extent additional requirements currently stipulated by BaFin (restrictions on leverage, free transferability, etc.) will need to be abided by remains to be seen. We expect that, in accordance with BaFin's current administrative practice, the requirements of free transferability and of a trustee inhibition notice (Treuhändersperrvermerk) will remain to be applicable.
II. Real Estate funds (Section 2 para. 1 no. 14 lit. c) AnlV-E)
The final version has expanded the eligible real estate funds to now also include closed-ended Special-AIF. Open- as well as closed-ended real estate Special-AIF and closed-ended real estate retail-AIF can now be allocated under Section 2 para. 1 no. 14 lit. c) AnlV-E, provided that they are managed by a manager possessing an authorisation under Section 20 KAGB or with seat in an EEA-member state and in possession of a comparable authorisation. In case of a fund of funds structure, the real estate target funds must also meet the above criteria. The real estate quota of 25% of the restricted assets will remain applicable for real estate funds.
In addition, free transferability must be provided for (as is applicable to PE funds).
III. Open-ended Special-AIF with non-variable investment conditions (Section 2 para. 1 no. 16 AnlV-E)
Open-ended Special-AIF with non-variable investment conditions pursuant to Section 284 KAGB will remain eligible, in accordance with the current administrative practice, pursuant to Section 2 para. 1 no. 16 AnlV-E, provided they do not already fall under Section 2 para. 1 no. 14 lit. c) AnlV-E (open-ended real estate Special-AIF). The limitation, which was included in the draft of May 2014, to Special-AIF with a UCITS-strategy has been omitted. It remains to be seen if BaFin will uphold its practice in applying the stricter insurance supervisory requirements with regard to an investment in an open-ended Special-AIF (for example not more than 30% of the asset value may be invested in non-securitized loan obligations).
IV. Alternative Special-AIF (Section 2 para. 1 no. 17 AnlV-E)
As already foreseen in the draft of May 2014, a new asset class will be introduced in the AnlV-E. Alternative Special-investment funds, which do not fall under one of the aforementioned asset categories, may be acquired under the new quota for alternative strategies (max. 7.5% of the restricted assets). Precondition is that the funds are German or EU-investment funds and are managed by a fully authorised German or EEA-manager.
V. Investment in loans
Investments in loans to undertakings with seat in an EEA- or OECD member state, who are not in possession of an Investment-Grade-Rating (so called High-Yield-Corporate Loans), are permissible provided sufficient collateral exists. These undertakings must however at least be in possession of a Speculative-Grade-Rating. This expansion of the possibility to invest in corporate loans is in particular intended to ease the granting of loans to infrastructure companies. The investment in High-Yield-Corporate Loans may not exceed 5% of the restricted assets.
VI. Transitional provisions (Section 6 AnlV-E)
Like the draft of May 2014, the final version also foresees a grandfathering for investments in PE-funds which have been made prior to the AnlV-E taking effect. Due to the pleasant changes in the final version, the significance of this grandfathering provision is slightly diminished.
The transitional provision for investments in open Special-AIF has been omitted due to it becoming redundant, as the final version – opposed to the draft of May 2014 – in essence adheres to the status quo.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.