„This translation is furnished for information purposes only. The original German text is binding in all respects“

A. Preliminary remarks

To all undertakings authorised to conduct primary insurance business that are subject to the provisions for small insurance undertakings (sections 212 to 217 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz - VAG), as well as German Pensionskassen and Pensionsfonds.

The Guidance Notes in Part B of the present Circular represent the administrative practice of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) governing the investment of the guarantee assets of primary insurance undertakings to which the provisions for small insurance undertakings (sections 212 to 217 of the VAG) apply, as well as German Pensionskassen (hereinafter referred to as insurance undertakings). Part C of the present Circular describes the extent to which the guidance notes in Part B also applies to German Pensionsfonds.

B. Guidance Notes on the Investment of the Guarantee Assets of Primary Insurance Undertakings which are subject to the Provisions for Small Insurance Undertakings (sections 212 to 217 of the VAG) Apply, as well as of German Pensionskassen

B.1. General

The Regulation on the Investment of Guarantee Assets of Pensionskassen, Funeral Expenses Funds and Small Insurance Undertakings (Anlageverordnung - AnlV), issued on the basis of section 217 sentence 1 no. 6 of the VAG in conjunction with section 219 (1) of the VAG and section 235 (1) sentence 1 no. 10 of the VAG, specifies the qualitative and quantitative requirements for the guarantee assets.

Section 1 (2) of the AnlV lists the general investment rules for the investment of the guarantee assets. For small insurance undertakings and death benefit funds, section 215 (1) of the VAG is relevant. For Pensionskassen, the provisions of section 124 (1) of the VAG must be observed. The qualitative and quantitative requirements of the AnlV supplementing section 124 (1) of the AnlV maintain the previous regulations on the investment of the guarantee assets for Pensionskassen, so that the legal situation does not change as a result. The additional requirements should be seen against the background that the procedures for determining the solvency of Pensionskassen do not correspond to those for life insurance undertakings subject to the supervisory regime Solvency II. In the case of Pensionskassen, BaFin considers the investment rule of quality within the meaning of section 124 (1) no. 2 of the VAG to be fulfilled in general if the provisions of the AnlV and the more detailed requirements of section 1 (5) of the AnlV with regard to the provisions of the AnlV, which are defined in the present Circular, are complied with.

In accordance with section 1 (3) of the AnlV, the obligation to ensure qualified investment management, appropriate internal investment rules and control procedures as well as a strategic and tactical investment policy is of primary importance. This means that the exercise of investment options is driven by investment and risk management, and by the undertaking’s risk-bearing capacity.

The objective of insurance undertakings’ entire investment activity remains to ensure that their obligations under insurance contracts can be met on a sustainable basis by managing the nature, scope and quality of the funds. However, the investment process places increasingly higher demands on insurance undertakings. Reasons for this include the considerably greater variety and complexity of investment products, the lower risk-free returns and the high volatility of investments.

The insurance undertakings are responsible for examining compliance with the investment rules and the eligibility of the investments for the guarantee assets. For this purpose, appropriate personnel and technical requirements must be in place. This also applies when external third parties are additionally consulted to assess the investments. If there are uncertainties with regard to the eligibility of an investment for the guarantee assets, an investment must not to be made.

BaFin will continue to be guided by the administrative principles applied in many years of practice and announced in the Official Bulletins VerBAV and GB BAV of the former Federal Insurance Supervisory Office (Bundesaufsichtsamt für das Versicherungswesen – BAV) unless these have been superseded by the new provisions of the present Circular. However, not all individual cases and possible structures of investment products can be conclusively regulated. In such cases, the regulatory provisions of the present Circular must to be applied in accordance with its regulatory intention.

All information given in the present Circular relates solely to the guarantee assets. The only exception applies to investments by a Pensionskasse in a sponsoring company (section 4 (6) of the AnlV).

B.2. Investment management

B.2.1 General

a) The investment process and the maintenance of the investment portfolio so as to cover the technical liabilities are part of the insurance business. To safeguard the interests of the policyholders and to ensure that the obligations under the insurance contracts can be met on a sustainable basis, insurance undertakings must manage their investments with the necessary expertise and care in such a way as to reflect their liabilities and their entire risk/return profile. Risk management is particularly important in this respect.

Depending on the nature of the insurance business conducted, the nature of an undertaking’s obligations may vary significantly in terms of their maturity and the predictability of the amount and timing of insurance benefits. Consequently, the need to maintain a high level of liquidity within the investment portfolio may also vary considerably. Equally, different accounting principles and the tax treatment of the different types of insurance business and investments may influence investment decisions.

In view of the wide variety of insurance undertakings, the requirements described in the following must be complied with in a manner which is proportionate to the nature, scope and complexity of the risks underlying the insurance undertakings’ activities (principle of proportionality or proportionality principle in accordance with section 296 (1) of the VAG). Principles such as the responsibility of all members of the management board (in the following: the management board), the need for a forward-looking investment policy, the separation of certain functions and risk treatment and control apply to all insurance undertakings.

b) The insurance undertaking must have at its disposal an adequate investment portfolio with an appropriate nature, maturity and liquidity so that it can meet its obligations when they fall due even when market conditions change. For this reason, a detailed analysis of the risks associated with assets and liabilities and the relationship between the two sides of the balance sheet (asset/liability management) are a key condition for the design and implementation of an investment strategy (see B.2.4).

c) Each portfolio entails a range of investment-specific risks that might jeopardise cover for the technical liabilities. In addition, the use of derivative financial instruments for hedging purposes, for hedges of future purchases of securities and for generating increased returns (section 15 (1) sentence 2 of the VAG; for derivative financial instruments, see the current Circular on derivative financial instruments and structured products (Rundschreiben - Derivative Finanzinstrumente und strukturierte Produkte)) changes insurance undertaking’s risk position. The insurance undertaking must identify, assess, monitor, manage and control the specific risks of the investments and the derivative financial instruments and include them in its reporting. The following material risks in particular must be considered in the investment process: market risks, credit risks, concentration risks, liquidity risks and operational risks (for definitions, see section 7 of the VAG). These also include the legal risks inherent in the investment, in particular complex fund rules and foreign legal rules, as well as external risks that may result in particular from changes in legislation and court rulings.

d) The insurance undertaking must ensure that it is able at any given time to respond adequately to changes in economic and legal circumstances, in particular developments in the financial and real estate markets, catastrophic events involving major losses, or other exceptional market circumstances. This must be reflected in the composition of the investment portfolio, which must therefore at all times represent the outcome of a well-structured, disciplined and transparent investment process comprising the following components:

i) the definition of a strategic investment policy, i.e. the definition of a target portfolio by the management board, based on a detailed analysis and conservative assessment of the risks associated with assets and liabilities and the relationship between the two sides of the balance sheet, as well as the insurance undertaking’s risk-bearing capacity and risk appetite;

ii) the development of a tactical investment policy, i.e. the portfolio to be implemented;

iii) the implementation of the investment policy by a professional investment management function (front office) with appropriate personnel and technical resources to match the risks inherent in the individual investments on the basis of a precise investment mandate;

iv) ongoing control of the investment activity by the responsible member of the management board or by organisational units reporting to that member (investment risk management/investment controlling) by means of comprehensive, accurate and flexible systems to capture, measure and assess investment risks and their aggregation at various levels, e.g. for each individual investment type that is used, for the insurance undertaking and, if appropriate, at group level. The design of such systems may differ, but they must match the quality of the risks and the composition of the investments and must be suitable for capturing and measuring all material risks quickly, and they must be capable of being understood by all relevant employees at the various levels of the insurance undertaking, depending on their specific areas of responsibility;

v) securities management, including those areas that are responsible for the monitoring, settlement and control of transactions (back office);

vi) appropriate procedures for measuring and assessing investment performance;

vii) a full and timely exchange of information about the investment activity between the various levels and bodies of the insurance undertaking;

viii) internal procedures for reviewing the appropriateness of the investment policy and the procedures used;

ix) effective examination and monitoring procedures so as to identify weaknesses in the control of the investment activity or compliance with statutory, supervisory, or internal rules and to report these to the relevant bodies (internal audit).

The employees involved in investment activities must be instructed about the above-mentioned principles, depending on their areas of responsibility.

The management board must review the appropriateness of the strategic investment policy with regard to the insurance undertaking’s business and its entire risk acceptance level, as well as the requirements for the risk to be assumed and the required return, at least once a year.

The above-mentioned principles are addressed in greater detail in the following sections. It should be noted that less complex structures and procedures may be sufficient, depending on the nature and scope of the business and of the insurance undertaking’s product and investment policy.

B.2.2 Internal investment guidelines and procedures

The insurance undertaking is obliged to prepare internal investment rules that specify its investment policy in greater detail. At a minimum, the following points must be defined:

a) the investment objectives, taking into account the nature of the insurance business conducted and the structure of the undertaking;

b) the parameters used to measure investment performance (benchmark; total return);

c) the directly and indirectly permitted investments (according to the AnlV), taking into account the statutory provisions and supervisory requirements (investments that are not to be acquired directly and/or indirectly as a matter of principle must be explicitly excluded if necessary, e.g. investments in structured products, etc.). For alternative investments such as direct and indirect investments through which commodity risks are entered into, direct and indirect investments through which hedge fund risks are entered into, asset-backed securities, credit-linked notes and other investments linked to credit risks, investments in private equity, etc., special internal investment rules and procedures must be drawn up and integrated into the internal investment guidelines before the first acquisition;

d) the limits of the composition of the investment portfolio, taking into account economic regions, countries, markets, sectors and currencies;

e) the qualitative and quantitative conditions for acquiring investment products, e.g. only securities that are quoted on certain stock exchanges, minimum credit rating, the minimum size of issues in which the undertaking may invest, requirements regarding companies’ market capitalisation, price/earnings ratios and other criteria to be taken into consideration, such as risk limits within the general investment policy, maturity limits for fixed-income securities, permitted counterparties, etc.;

f) the criteria for using innovative investment products. The inherent risks must be carefully analysed. Before these instruments are acquired for the first time, it must be ensured that they are subject to the necessary controls. The principles for measuring new risks and for assessing innovative investment products must be defined in detail before such instruments are acquired for the first time (new-product process);

g) implementation of the investment strategy by internal or external asset management;

h) the criteria to be applied for selecting new counterparties and investment brokers (e.g. minimum credit rating, reliability, service and quality of report contents);

i) the methods used for assessing, treating and controlling the investment risk inherent in the relevant investment types (see B.2.3);

j) the necessary qualifications for employees working in investment management and investment risk management;

k) the organisational units involved in investment management and investment risk management, including their functional separation and compliance with the dual control principle between front and back office;

l) the procedures used to ensure compliance with investment limits (escalation process);

m) the internal reporting obligations in accordance with B.2.3 f) and g), and

n) the enhancement of existing risk control procedures.

The responsible management board member must review the appropriateness of the internal investment rules and procedures at least once a year in light of the insurance undertaking’s business operations and the market conditions.

B.2.3 Risk treatment and control procedures

a) The management board must ensure that appropriate internal reporting and control systems are established so that the assets are invested and managed in accordance with the management board’s investment policy and instructions, and in compliance with the statutory and supervisory requirements.

If external asset managers are used, the management board must issue contractual guidelines to these managers. In addition, the management board must ensure that the insurance undertaking is able to monitor the performance of these managers in light of the guidelines issued. The investment mandate must be specified in the contractual agreement with the investment manager. The insurance undertaking must take care that it regularly receives sufficient information to be able to check whether the contractual guidelines are being met. In addition, it must ensure that the external asset managers prepare timely reports that are appropriate to the risks, in particular so that the risks, e.g. concentration risks arising from directly and indirectly held investments, can be identified.

b) Insurance undertakings must be in a position to identify, assess, monitor, manage and control the risks associated with investment activity and to report on them in a meaningful way. The employees tasked with risk control must have sufficient expertise and experience. Investment risk management is responsible for:

i) monitoring compliance with the resolved investment policy;

ii) the formal establishment of violations and immediate reporting to the management board; and

iii) reviewing the relationship between assets and liabilities and the liquidity position.

The role of investment risk management is also to assess whether the internal investment limits are appropriate and whether the insurance undertaking’s ability to meet its obligations under the insurance contracts on a sustainable basis is assured, taking into account its existing risk-bearing capacity and the risk requirements (e.g. maximum write-down volume). Company-specific stress tests must be performed at least every quarter for this purpose. These include in particular sensitivity and scenario analyses to examine the insurance undertaking’s resilience to adverse events or scenarios. The undertaking determines the assumptions for these tests and analyses based on its own risk profile. Any additional potential market risk arising from the use of derivative financial instruments in investment funds must be included.

c) The investment risks inherent in the relevant investment types can be assessed, managed, treated and controlled using the illustrative methods described in the following:

i) for market risk exposures arising from investments in fixed-income securities and shares, as well as structured products, possible methods include stress tests and value at risk analyses (the amount of any loss, calculated on a fair value basis, that will not be exceeded within a predefined measurement period for a predefined probability level), and the tail value at risk as the expected value for extreme events. Risks inherent in fixed-income securities may also be limited using duration and maturity analyses. Investment risk management must determine both short- and long-term potential losses. Any existing currency risks may be limited, for example by using upper limits specific to the undertaking or derivative currency transactions;

ii) credit risk should be limited by defining minimum credit rating requirements to be met by issuers (debtors) at individual and group level (with regard to the use of external credit ratings and the carrying out of own internal credit risk assessments, reference is made to B.3.1 c)). Additional criteria such as liable capital or the inclusion of credit default swap spreads may be specified, and the credit value at risk may also be calculated;

iii) concentration risk can be mitigated primarily by applying appropriate limits for investment mix and diversification;

iv) liquidity risk in fixed-income securities can be managed in particular by focusing on their marketability, and in the case of shares on the issuer’s market capitalisation. To classify and limit liquidity risk, it is useful to allocate a liquidity code to all investments. This allows liquidity risk management to establish liquidity classes or groups of liquidity classes (e.g. from “available for sale at all times in any size without a discount” = liquidity class 1 to “difficult and small size available for sale at a discount” = liquidity class 9);

v) The legal risk associated with each investment should be mitigated by a risk-driven analysis, if possible before investing in the instrument. For this reason, the legal and political risks associated with an investment must be analysed comprehensively and with particular care before any investment of the guarantee assets, especially in a country that is not a member state of the European Economic Area (EEA) or a full member state of the OECD. The analysis, which must be performed by qualified persons, must also identify the undertaking’s ability to actually recover guarantee assets invested in such countries. An analysis of this transfer risk is also advisable for investments within the EEA or the OECD if they are mainly invested outside these countries. See the explanations in B.4.4 for information on investments in debt instruments.

d) Investment risk management may also be transferred to a company with the necessary specialist expertise and the organisational and personnel resources. As a rule, this also applies if that company is a group company of the insurance undertaking within the meaning of section 18 of the Stock Corporation Act (Aktiengesetz – AktG).
However, an outsourcing agreement may only be entered into with a credit institution or an asset management company if that company neither offers nor owes investments to the insurance undertaking, and is not an affiliated company within the meaning of section 15 of the AktG or section 271 (2) of the German Commercial Code (Handelsgesetzbuch – HGB). An exception to this rule applies if the assets offered or owed to the insurance undertaking do not amount to more than 5% of the guarantee assets and do not involve financial innovations. In the case of an investment in financial innovations or alternative investments (such as structured products, asset-backed securities, credit-linked notes, hedge funds etc.), the prohibition also applies if the investments offered or owed to the insurance undertaking do not amount to more than 5% of the guarantee assets.

There may not be any other indications of any limitation on the company's professional independence. The information provided by the company entrusted with investment risk management must be adequately integrated into the insurance undertaking’s internal risk treatment and control system (risk management system) to allow it to assess its sensitivity to changes in the risk profile of its investments and derivative financial instruments in a timely manner.

e) Adequate internal control procedures must be instituted to ensure that the investment activity is properly supervised, and that transactions are always executed in compliance with the investment rules and procedures approved by the management board. These procedures must be documented and must ensure the following aspects at a minimum:

i) optimum coordination between front office and back office as well as the accounting function;

ii) compliance with dealing limits and authorisations and immediate identification and reporting of violations (back office/investment risk management);

iii) acceptance by all parties involved of the conditions of a transaction (back office). The procedures for the receipt and dispatch of confirmations without undue delay and their reconciliation must be independent of the front office;

iv) the timely and complete documentation of transactions (front office/back office);

v) the correct settlement and notification of positions and the identification of delayed payments or payment receipts (as a rule, back office or accounting);

vi) the execution of transactions in compliance with the applicable market rules (front office);

vii) the independent verification of prices, as a rule by back office or investment risk management. The procedures relating to price information should not be based solely on dealers;

viii) the updating of existing risk control procedures must keep pace with emergence of new investment instruments.

The area of the company that is responsible for the back office must be separated from the front office. Responsibility for the investment management and the risk management of the insurance undertaking must be separated at management board level. The back-office function and investment risk management may be organised in one management board department, provided that independent and direct reporting from investment risk management to risk management takes place.

f) Investment risk management must report regularly to the head of investment management and the management board.

The reports to the head of investment management must be made daily or on an ad hoc basis if this is dictated by negative market developments and special circumstances.

Reports must be submitted at least monthly to the management board and to risk management. The reports must contain comprehensive, meaningful information about the risks of the investment, including limit utilisation, as well as the results of the stress tests, so that the insurance undertaking can rapidly estimate its sensitivity to changes in market conditions and other risk factors and is in a position to realistically assess new risk situations resulting from changes in the investment portfolio. If necessary, risk minimisation measures must be initiated and the investment policy must be modified.

g) The head of investment management must report weekly to the management board member responsible for investment and at least monthly to the management board on the investments in detail. The weekly report is only necessary in the event of negative market developments or special circumstances. In the sense of the principle of proportionality, a monthly report may also be sufficient. The report must address in particular:

i) investment activity during the reporting period;

ii) the portfolio at the end of the period, the individual positions by asset type and the level of cover for the technical liabilities, as well as

iii) the investment activity planned for the future.

h) Before acquiring a new type of investment product for the first time, the insurance undertaking must carry out the new product process within the meaning of B.2.2 f) and document it accordingly. The documentation must include at least the following points:

i) the product description (including handling);

ii) the risk identification and assessment;

iii) the risk monitoring and control;

iv) the integration into the reporting system; and

v) the accounting, tax and legal treatment.

B.2.4 Asset/liability management

a) The risk management system includes effective asset/liability management (ALM, section 26 (5) no. 2 of the VAG). ALM analogously defines the coordinated control of the risk from fluctuations in the value of balance sheet assets and liabilities. As a rule, depending on the company-specific ALM objective, fair values must be considered in addition to book values in order to include the economic perspective.

b) The coordinated controls stated above do not mean necessarily that the balance sheet assets and liabilities need to be balanced out with respect to the risk factors examined. On the contrary, an insurance undertaking can deliberately allow mismatches in this regard that are in line with the legal requirements as well as its risk strategy and the limits derived from this.

c) An effective ALM process must be established as part of ALM. The ALM process must be regulated clearly and must be suitable for monitoring and managing the asset and liability positions of the insurance undertaking so as to ensure that the investments are proportionate to the liabilities and risk profile of the insurance undertaking.

d) The following general principles must be observed with regard to the ALM process:

i) The objectives of ALM must be developed consistently from the requirements of the risk strategy. The objectives of ALM must be clearly defined. Because of the different underwriting commitments, the importance attached to ALM may differ depending on the line of business involved. Company-specific target or control parameters must be defined in order to operationalise the objectives of ALM.

ii) As part of ALM, all material risks that may arise from the assets and liabilities of an insurance undertaking must be identified and captured, together with their origins and interactions. Risks must also be considered with this that arise from embedded options or guarantees issued.

iii) It is not sufficient to merely estimate the risks on the basis of empirical data or past experience. Rather, a forecast must be prepared that incorporates assumptions about the future development of the environment and the undertaking. A suitable period must be chosen for this forecast. As a general principle, both short- and long-term forecasts must be prepared.. More long-term projections are necessary to reveal the effects of subtle trends.

iv) In the risk analysis, the risk exposure level must be quantified using suitable ALM methods. The effects of using alternative investments and risk policy instruments on the target parameters must also be examined. The methods used must reflect the objectives of ALM. It must be ensured that the ALM methods used for the analysis are appropriate to the nature, scope and complexity of the risks inherent in the activities of the insurance undertaking.

v) Among other things, the risk analysis must include sensitivity analyses of the investment portfolio under a range of capital market scenarios and investment conditions (in particular changes in the bond, equity, real estate and currency markets over various time horizons) as well as the effects on the level of cover of the insurance-specific liabilities.

vi) The assumptions made in the course of ALM must be carefully selected. As with the methodologies, they must be reviewed on a regular basis and adapted if necessary.

vii) The results of the ALM analysis must suggest concrete alternative courses of action and include recommendations to the responsible board members where appropriate. There are various ways to manage this, e.g. the hedging of the risks identified, asset re-allocation, the definition of internal limits or the use of derivatives (for the potential uses of derivatives, see the current Circular - Derivative financial instruments and structured products).

viii) The decision on measures to be initiated is the responsibility of the management board members responsible. Decisions that depart from the results of the analysis must be justified and documented transparently. If necessary, the implemented management rules must be reviewed and adjusted.

ix) At a minimum, this should include target/actual comparisons of target parameters and actual realised outcomes to control the implementation of the measures. In this context, the reasons for any deviations must also be analysed. Additionally, the effectiveness of the risk policy measures must be reviewed, and the measures should be adjusted where necessary. The findings obtained from the control process must be included in the next planning phase.

x) The procedure for the ALM process, the objectives, the assumptions made in the course of the analysis, the methods and management rules applied, and the results and measures resolved must be documented transparently.

xi) To verify the strategic investment policy or to allow the effects of changes in general conditions or strategic decisions to be assessed and analysed appropriately, an ALM analysis or an ALM process walk-through must be performed at regular intervals (as a rule, once a year).

xii) The information and results generated by ALM must also be transmitted as part of an appropriate reporting system to those areas that are involved in individual process steps.

xiii) The ALM process must be anchored in the organisation. This includes both interfaces to those units that are responsible for the underwriting commitments and to those units that are responsible for investment, as well as to other areas involved in ALM where applicable. The responsibilities and allocation of roles within the ALM process must be clearly formulated, unambiguously defined and communicated in the undertaking, and must be documented transparently..

e) ALM may be outsourced to third parties. The requirements governing the outsourcing of risk management apply, with the necessary modifications, in such cases (see B.2.3 d)).

B.2.5 Internal auditing

The internal auditing function at insurance undertakings that have internal auditing in accordance with section 30 of the VAG, must include all aspects of the investing activities.

Internal auditing must carefully assess the independence of investment management from risk management and the control procedures (see B.2.3.) and asset/liability management (see B.2.4.), as well as the general effectiveness of investment management (in particular the effectiveness of the internal controls for the measurement, mitigation and reporting of risks). It must also examine compliance with risk limits and the reliability and timeliness of information transmitted to the head of investment management and the management board. At regular intervals, internal auditing should also examine selected asset classes in the portfolio, including new types of investment products, and the written investment rules and procedures as well as the new-product process, in order to obtain assurance that the insurance undertaking meets its obligations to the Supervisory Authority under this Circular.

B.2.6 Investment process for investments in investment funds

a) Prior to acquiring investment funds, insurance undertakings must thoroughly analyse whether and which investments are eligible for implementing their investment strategy. In addition, prior to the acquisition and during the term of the investment, they must independently verify compliance with the general investment rules and the eligibility for inclusion in the guarantee assets. The investment process, compliance with the investment rules and the examination of the eligibility must be adequately documented. All available information and documents must be provided for the examination. Depending on the type of investment fund, this includes in particular:

i) the fund rules or the articles of association and the sales prospectus as well as the investment guidelines and the additional contractual agreements, where applicable;

ii) information on the (actual) investment policy, investment restrictions, transferability and the possibility to redeem the units or shares (under insurance supervision, the distinction between open-ended and closed-ended investment funds is governed by section 1 (4) and (5) of the KAGB (Kapitalanlagegesetzbuch – KAGB) in the version applicable until 19 July 2014);

iii) information on leverage and the execution of short sales;

iv) information on the depositary, and

v) annual and semi-annual reports.

The contractual documents (fund rules or statutes and additionally agreed investment guidelines) should only permit those investments that the insurance undertaking really intends to acquire and which correspond to its investment strategy and the internal investment guidelines. The general investment rules and exclusion clauses in accordance with section 2 (4) of the AnlV (e.g. with regard to intangible assets) must be observed. Furthermore, only those investments are permitted in which the investor’s loss is limited to the value of the exposure; an obligation to make additional contributions must be excluded. Nor may there be any other liability of any kind on account of the investment in the event of the management company’s insolvency. In the case of units and shares in foreign or EU investment funds, the result and the checked points of the comparability check with a corresponding qualifying domestic investment fund must be documented.

b) To ensure the necessary care when selecting investment funds and management companies, a due diligence must take place. Due diligence and manager selection are of great importance for the security and profitability of an investment in investment funds. Depending on the type of investment fund, the following information must be collected in particular:

i) structural information on the investment fund, such as company information, details on management and external service providers;

ii) information on risk measurement and risk management, the process of valuation, performance, reporting system, and fees.

c) Investments in investment funds must be adequately considered in the risk management of the insurance undertaking in accordance with type and risk content of the investment. A comprehensive and verifiable analysis of legal and economic risks must take place before the acquisition and during the term of the investment. Insurance undertakings must, at all times, be able to quantify the effects of an investment onto their portfolio and must monitor their exposure to investment funds with regard to compliance with the investment strategy and supervisory requirements on an on-going basis. Depending on the type of the investment fund, this requires the respective management company to report comprehensively and regularly to the insurance undertaking. The monitoring must be documented in a verifiable manner.

B.3. General investment rules

B.3.1 Security

The security of the investments determines the quality of the insurance cover. Only a secure investment guarantees the ability of the insurance undertaking to meet its obligations under the insurance contracts it has entered into.

a) The requirement to ensure the greatest possible security of investments, that was deliberately positioned by the lawmakers at the beginning, therefore has utmost priority.
In the first instance, security means securing the nominal value of an investment. The question of whether this can be achieved must be examined prior to acquisition and regularly during the term of the investment. The intensity of the examination is determined by the nature of the investment, the credit quality of the issuer (debtor) and the market environment. Security also means safeguarding the intrinsic value of the investments, and attention must also be paid to this requirement when selecting investments and structuring their conditions. Economic substance can only be ensured in the case of debt instruments and loans by the preservation of their capital, both legally and constructively.

b) The security principle also requires, as a general rule, that each investment must be disposable and transferable at all times.
Because the fungibility of different investment types varies (for example real estate or equity interests are less easy to dispose of than securities), the right of the insurance undertaking to dispose of an investment may not as a rule be subject to any further restrictions. In particular, it may not be subject to the approval of the issuer (debtor) of the investment or third parties, because clarification of the need for approval may result in delays that are not compatible with the interests of the beneficiaries under the insurance contracts (see VerBAV 2002 p. 103 for information on the fungibility of shares in companies). The examination of the transferability of direct and indirect investments in assets located outside the OECD or assets that are exclusively traded outside the OECD must be made in the course of examining the legal risks (see B.2.3 c)).

c) In order to fulfil the investment rule of security, in particular investments in accordance with section 2 (1) nos. 3, 6, 7, 8 and 18 of the AnlV must as a general rule have an investment grade rating (this corresponds to, e.g., BBB- by Standard & Poor’s and Fitch or Baa3 by Moody’s). This requires the insurance undertakings to assess the credit quality of the investments..

Insurance undertakings included in the scope of Regulation (EC) No. 1060/2009 (Regulation on credit rating agencies, CRA Regulation) must comply, in accordance with section 28 (2) of the VAG, with the obligations arising from the CRA Regulation in the version in force at the material time. According to Article 5a(1) of the CRA Regulation, insurance undertakings must carry out their own credit risk assessments and may not rely exclusively or automatically on ratings when assessing the credit quality of a company or financial instrument. The scope of Article 5a of the CRA Regulation is applicable only to those receivables and investments that are rated in line with market standards. For these investments, external ratings, in addition to own internal credit risk assessments, are an important tool for assessing credit quality and may continue to be used (in addition to other information) if they are issued by recognised rating agencies that have been reviewed and registered under the CRA Regulation (https://www.esma.europa.eu/supervision/credit-rating-agencies/risk). Information from third parties (e.g. rating agencies, credit institutions, asset managers) can therefore additionally be included in the own internal credit risk assessment. However, the more this information is based on subjective assessments by third parties, the more intensively the insurance undertakings must subject it to an examination before including it in their own assessment.

At present, BaFin considers it sufficient for an own internal credit risk assessment to take the form of a plausibility check of the external rating assessments of recognised agencies. For example, such a plausibility check of credit risk assessment can be carried out on the basis of the rating report of the external agency. This must be documented in an auditable manner.

If the undertaking’s own internal assessment is better than the external rating, an appropriate quantitative assessment must be added to the qualitative assessment described. If two external ratings are available, an additional quantitative assessment by the insurance undertaking is necessary if the undertaking’s own internal credit risk assessment is better than the less favourable of the two available external ratings. If three external ratings are available, an additional quantitative credit risk assessment by the insurance undertaking is also necessary if its own internal assessment is better than the second best external rating. The quantitative credit risk assessment must be documented in an auditable manner.

If the European Securities and Markets Authority (ESMA) issues guidelines that conflict with the procedure as described above, the ESMA guidelines prevail.

The investment grade rating must be reviewed at least once a year, or more frequently if indicated by other negative circumstances. The rating procedure must be documented transparently. If an investment loses its investment grade rating during its term of the investment, or if such a loss is pending, the insurance undertaking must examine whether the asset can be classified as a high-yield bond (see e) below) or if the opening clause can be applied. Where applicable, special regulations may apply to investments in accordance with sections 2 (1) no. 4 and no. 10 of the AnlV (see B.4.3 d) and B.4.6 b)).

d) The principle of investment security must also be complied with in the case of indirectly held assets. In the case of investments in units and shares of investment funds, the principle of investment security applies not only to the investment fund as a whole, but also individually to each indirectly held asset. Consequently, it is insufficient if the investment fund is only predominantly secure.

An investment grade rating is also required for indirectly held assets, as a general rule. However, investment funds managed by an asset management company do not have to be additionally assessed by the insurance undertakings with their own internal credit assessment, provided that the asset management company is included in the scope of the CRA Regulation. Nevertheless, the insurance undertaking must ensure that the asset management company complies with the supervisory requirements regarding rating and credit assessment.

With regard to indirectly held investments which do not have an investment grade rating (high-yield bonds with a speculative-grade credit rating), reference is made to e).

Investment funds whose guidelines or fund rules permit investments below a speculative-grade credit rating (this corresponds to, e.g., a rating below B- by Standard & Poor’s and Fitch or B3 by Moody’s) are not eligible for inclusion in the guarantee assets.

If investments are downgraded during the holding period to a rating below speculative-grade, the following procedure must be applied:

i) In the case of a special AIF with more than 3% of the investment fund value invested in assets below a speculative-grade credit rating, it must be ensured that the investments concerned are sold or removed from the investment fund. If this is not possible, the entire investment fund will no longer be eligible for inclusion in the guarantee assets. It is in the interests of the insurance undertaking to sell it (as a rule within 6 months) or to reclassify it to other assets.

ii) In the case of a retail investment fund with more than 3% of the investment fund value invested in assets below a speculative-grade credit rating, the retail investment fund is no longer eligible for inclusion in the guarantee assets and, analogous to special AIFs, must be sold or reclassified to other assets in the interest of the investors.

iii) In the case of an investment fund with less than 3% of the investment fund value invested in assets below a speculative-grade credit rating, the insecure investments will be tolerated if they do not affect the interests of the policyholders.

Asset Backed Securities (ABS) and similar investments held in investment funds must have an investment grade rating. Investment funds whose guidelines or fund rules permit ABS and similar investments below an investment grade rating are not eligible for inclusion in the guarantee assets. If ABS and similar investments lose their investment grade rating during the holding period, they will be tolerated if they account for less than 3% of the investment fund value and they do not adversely affect the interests of the policyholders. If these investments account for more than 3% of the investment fund value, the investment fund is no longer eligible for inclusion in the guarantee assets and must be sold or reclassified to other assets in the interests of the policyholders. This means that investments in accordance with section 2 (1) no. 10 of the AnlV are subject to stricter criteria because the high-yield ratio in the guarantee assets cannot be applied to these assets.

As part of the 3% tolerance limit, ABS and similar investments which lose their investment grade rating during the holding period and other investments which are downgraded to a rating below speculative-grade during the holding period, must be added together. These are not separate tolerance limits.

The insurance undertaking must examine at regular intervals whether the management company follows these principles. In the case of special AIF, the insurance undertaking can influence the investment policy act in an advisory capacity in the fund’s investment committee. In the case of retail investment funds, the insurance undertaking is required to analyse the reporting documents, in particular with regard to whether the principle of investment security is complied with.

e) If the risk-bearing capacity is adequate, investments can also be made as part of the list of investments (section 2 (1) of the AnlV) in so-called high-yield bonds that have at least a speculative-grade credit rating (this corresponds to, e.g., B- by Standard & Poor’s and Fitch or B3 by Moody’s).

The speculative-grade credit rating must be verified at least once a quarter, or more frequently if indicated by other negative circumstances. The rating procedure must be documented transparently. If an investment loses its speculative-grade credit rating during the term of the investment, or if such loss is pending, the insurance undertaking must remove this asset from the guarantee assets (for investment funds see d)).

The directly and indirectly held proportion of high-yield bonds may not exceed 5% of the guarantee assets (high-yield ratio), and must be counted as risk asset towards the risk asset ratio in accordance with section 3 (3) sentence 1 of the AnlV. The high-yield ratio mainly comprises investments in accordance with section 2 (1) nos. 3, 6, 7, 8 and 18 of the AnlV. If the high-yield ratio has been fully utilised, high-yield bonds can also be acquired via the opening clause if there is sufficient security (at least speculative-grade credit rating).

f) On 1 January 2017, the German Resolution Mechanism Act (Abwicklungsmechanismusgesetz – AbwMechG) in section 46f of the German Banking Act (Kreditwesengesetz – KWG) changed the ranking of liabilities in the event of bank insolvencies in order to facilitate a bail-in (creditors’ participation in the losses of a bank). The new regulation of the ranking of liabilities in section 46f of the KWG has created a new category of debt instruments that have priority over subordinated funds in accordance with section 39 of the German Insolvency Code (Insolvenzordnung – InsO), but are subordinated to the other liabilities.

Debt instruments in accordance with section 46f (6) sentence 1 of the KWG in conjunction with section 46f (5) of the KWG and corresponding debt instruments subject to a comparable foreign regulation (bail-in eligible debt instruments) can be allocated in the list of investments in particular to investments in accordance with section 2 (1) nos. 7, 8 or 18.

In order to comply with the investment rule of security, the directly and indirectly held proportion of bail-in eligible debt instruments may not exceed 25% of the guarantee assets (bail-in ratio). This takes account of the risks associated with these investments. Bail-in eligible debt instruments that were acquired before 1 January 2017 do not count towards the bail-in ratio, as at the time of acquisition it was generally not yet apparent that these debt instruments could be bail-in-eligible.

This does not affect how these debt instruments are being counted towards the high-yield ratio (see e)). Therefore, directly and indirectly held bail-in eligible debt instruments below an investment grade rating (this corresponds to, e.g., BBB- by Standard & Poor’s and Fitch or Baa3 by Moody’s) must be additionally counted towards the high-yield ratio in accordance with the previous regulation or allocated to the opening clause if these investments have at least a credit rating in the speculative-grade range (this corresponds to, e.g., B- by Standard & Poor’s and Fitch or B3 by Moody’s).

B.3.2 Profitability

a) Investments must be profitable. They must generate a sustainable return, taking into account the security and liquidity requirements and the capital market environment. As a matter of principle, no specific minimum return to be generated is prescribed. However, investments that do not generate a return are not eligible.

b) In the current low interest rate environment, however, BaFin will not object if, in the context of the investment rule of security, investments with a zero or negative return are also included in the guarantee assets. The investment rule of security must be particularly observed, so that this applies primarily to investments in loans to governments in accordance with section 2 (1) no. 3 of the AnlV or listed government bonds in accordance with section 2 (1) no. 7 of the AnlV as well as overnight and term deposits in accordance with section 2 (1) no. 18 of the AnlV, if the borrowers are particularly highly rated. The overall profitability of the portfolio must be guaranteed.

B.3.3 Liquidity

a) It must be possible to settle payment obligations without delay when they fall due. The entire investment portfolio must therefore be structured in such a way that there is always an amount of liquid or easily realisable assets available to meet essential operating liquidity requirements. This demands comprehensive financial and liquidity planning by the undertaking.

b) Borrowing is always non-insurance business and is therefore only allowed in exceptional cases. Such an exceptional case is when borrowing is designed to prepare for or secure investments, if and to the extent that this is done on the basis of commercially prudent financial planning and its nature, scope and maturity do not exceed what is reasonable for insurance undertakings (VerBAV 1995 p. 215). By contrast, a transaction is ineligible non-insurance business if the funds are borrowed by a company in which the insurer holds an equity interest that it has included in other assets and for which it is liable as a shareholder with its entire assets.

B.3.4 Mix

a) The investment mix is designed to mitigate risks typical to investments by offsetting risks between the various assets and thereby contributing to the security of the entire portfolio.

Direct and indirect investments in securities loans under section 2 (1) no. 2 a) of the AnlV as well as unlisted debt instruments under section 2 (1) no. 8 of the AnlV must be restricted to a prudent level. The restriction to a prudent level also applies to investments in debtors domiciled in states outside the EEA for which there is no assurance that they are covered by the preferential right in section 315 of the VAG to be complied with in the event of the insolvency of the insurance undertaking.

The level to be regarded as prudent is determined by the individual situation of the insurance undertaking, and in particular its risk-bearing capacity. The term “prudent level” has replaced the 5% ratio that existed in the past. This continues to serve as a benchmark, but may vary significantly upwards or downwards depending on the risk-bearing capacity of the insurance undertaking.

b) Section 3 (2) to (6) of the AnlV contains special minimum diversification requirements that are explained in B.6. In the case of investment types for which there is no special minimum diversification requirement, the mix refers to the fact that no one investment type may predominate. This can be assumed to be the case if no investment type accounts for more than 50% of the relevant portfolio.

c) In the case of investment types to which the general 50% minimum diversification requirement applies, particularly high security requirements must be applied to the investment. The reason for this is that the basic stock of investments of an insurance undertaking should be composed of these investment types to ensure sustainable cover for the technical liabilities. As a result, investments that do not satisfy the highest security requirements, such as high-yield bonds, may only be included in the portfolio in a very prudent manner in those areas where the general minimum diversification requirement applies (see B.3.1 e)).

d) Certain numbers of the list of investments only form an investment type together with other numbers. In the case of these assets, the 50% minimum diversification requirement does not apply to each individual number, but to the numbers that form an investment type.

Securities loans within the meaning of no. 2 a) and loans collateralised by securities within the meaning of no. 2 b) form a single investment type and are subject in the aggregate to the 50% minimum diversification requirement. However, securities loans for which shares in accordance with no. 12 are the subject of the loan are not allocated to the general 50% ratio but to the 35% risk asset ratio in accordance with section 3 (3) sentence 2 of the AnlV for risk management purposes.

Loans within the meaning of nos. 3 and 4 a) and assets in accordance with no. 11 represent a further investment type.

Additionally, listed debt instruments are an investment type. Investments within the meaning of no. 7 and listed bearer bonds that additionally meet the requirements of no. 6 because of a special cover pool existing by virtue of law are also allocated to this investment type.

The unlisted debt instruments investment type merely comprises unlisted debt instruments in accordance with nos. 6 and 8.

The general 50% ratio and the special minimum diversification requirements in section 3 (2) to (6) of the AnlV also apply to small portfolios of newly established insurance undertakings or of insurers with a low volume of business. However, the 50% ratio can be exceeded for “directly and indirectly held listed debt instruments in accordance with no. 7 of the AnlV and indirectly held investments in accordance with nos. 6 and 8”. Exceeding the 50% ratio will be tolerated to the extent that the 35% risk asset ratio is not fully utilised. This ratio can thus amount to up to 85% if there are no risk assets.
The insurance undertaking is very exposed to interest rate changes because this proportion of listed debt instruments may then be very high. The insurer must be able to absorb the resulting write-downs. This can generally be assumed to be the case if relevant company-specific analyses (e.g. stress tests, forecast calculations) demonstrate positive outcomes or if the insurance undertaking has reported a high proportion of listed debt instruments as fixed assets.

B.3.5 Diversification

a) Diversification refers to the allocation of investments of all types to various issuers (debtors), or to properties in the case of real estate, that is necessary for risk diversification requirements. Regardless of the concrete direct or indirect investment type, investment clusters (accumulation risk), and a focus on specific locations in the case of real estate, must be avoided. Any concentration on equities and equity interests in a single sector or a small number of related sectors must be avoided. The examination of the appropriateness of diversification must also include securities purchased under repurchase agreements (see B.4.2) and accumulation risks that may result from country, sector, counterparty and concentration risks arising from asset-backed securities and credit-linked notes or other indirect exposures.

b) Section 4 (1) of the AnlV specifies the general diversification principle in more detail for investments in a single issuer (debtor). All investments in a single issuer (debtor) may not exceed 5% of the guarantee assets. The investments by the ten largest issuers (debtors) in an open-ended investment fund in accordance with section 2 (1) nos. 15 to 17 of the AnlV are counted towards this percentage and the percentages stipulated in section 4 (2), (3) and (4) of the AnlV.

Additionally, investments in units or shares in an open-ended investment fund in accordance with section 2 (1) nos. 15, 16 and 17 of the AnlV are subject to different treatment. These instruments are not deemed to be investments in a single issuer (debtor) if the investment fund is in itself sufficiently diversified (section 4 (1) sentence 4 of the AnlV). Investment funds in accordance with section 2 (1) no. 17 of the AnlV are considered open-ended if they can be redeemed at least once a year against payment of the units or shares.

Nevertheless, manager risk means that a concentration of assets in one or more investment funds managed by a single portfolio manager must be avoided if these account for more than 20% of the guarantee assets; this percentage is to be reduced for risk assets in accordance with section 3 (3) of the AnlV to reflect the risk content of the investment fund. This limitation does not only apply to the management company itself. For example, more than 20% can be invested in a German Master-KAG (master asset management company). In this case, the mandates within the investment fund must be distributed amongst a corresponding number of managers.

c) A concentration of up to 30% of the guarantee assets is permitted in accordance with section 4 (2) sentence 1 of the AnlV for all investments in single issuers (debtors) as specified in section 2 (1) no. 3 a), b) or d) of the AnlV.
Notwithstanding section 4 (1) of the AnlV, a ratio of 15% of the guarantee assets applies to investments in debt instruments put into circulation by a single credit institution that are secured by a special cover pool existing by virtue of law (section 4 (2) no. 1 of the AnlV). This applies both to debt instruments in accordance with section 2 (1) no. 6 of the AnlV and to their listing in accordance with section 2 (1) no. 7 of the AnlV (see B.3.4). Finally, investments in a single eligible credit institution in accordance with section 2 (1) no. 18 b) of the AnlV (section 4 (2) no. 2 of the AnlV), investments in a single public-sector credit institution in accordance with section 2 (1) no. 18 c) of the AnlV (section 4 (2) no. 3 of the AnlV) and investments in a single multilateral development bank in accordance with section 2 (1) no. 18 d) of the AnlV (section 4 (2) no. 4 of the AnlV) are subject to the 15% ratio.

However, in the case of an investment in accordance with section 2 (1) no. 18 b) of the AnlV, the increased diversification percentage of 15% of the guarantee assets applies only if the investments exceeding the normal diversification percentage are actually secured by a comprehensive bank guarantee or by the deposit guarantee system. This is not the case, for example, for liabilities for which bearer securities were issued or for return obligations from securities lending transactions (section 6 (1) a) of the statutes of the Deposit Protection Fund operated by the Association of German Banks (Bundesverband Deutscher Banken e.V.)). Such investments are subject to the lower diversification percentage set out in section 4 (1) of the AnlV.

All investments in accordance with section 4 (1) and (2) of the AnlV attributable to a single issuer (debtor) may not exceed 30% or 15% of the guarantee assets. If the 5, 15, or 30% diversification percentage is exceeded in the portfolio of the insurance undertaking because of a merger of issuers (debtors), it must be returned below the limit as quickly as possible.

Notwithstanding section 4 (1) sentence 1 of the AnlV, a reduced diversification percentage of 3% of the guarantee assets applies in accordance with section 4 (3) sentence 2 of the AnlV to investments in group companies of the insurance undertaking, with the exception of receivables arising from reinsurance relationships in accordance with section 2 (1) no. 2 b) of the AnlV. Limiting the eligibility of intra-group investments, in particular loans, debt instruments and time deposits, is designed to reduce the risks for the policyholders from the danger of contagion resulting from intercompany relationships. Additionally, risks may arise from the fact that the funds transferred for investment at group level may be invested in investments or equity interests that are otherwise not eligible for inclusion in the guarantee assets. Investments in accordance with section 4 (2) nos.1 to 4 of the AnlV remain subject to the diversification percentage of 15% of guarantee assets.

d) In accordance with section 4 (6) of the AnlV, investments by a Pensions-kasse in a sponsoring company within the meaning of section 7 (1) sentence 2 no. 2 of the German Occupational Pensions Act (Betriebsrentengesetz – BetrAVG) and its group companies may not exceed 5% of total assets. This restriction also applies if a Pensionskasse is sponsored by more than two companies, whereby investments in these companies are limited to no more than 15% of total assets. The restriction on investments in a sponsoring company or companies, including group companies, is designed to protect members and beneficiaries in the event of insolvency of the sponsoring company.

e) Notwithstanding section 4 (1) of the AnlV, investments in accordance with section 2 (1) nos. 9, 12 and 13 of the AnlV in a single company, as well as units and shares in a closed-ended investment fund in accordance with section 2 (1) no. 17 of the AnlV, may not exceed 1% of the guarantee assets (section 4 (4) sentence 1 of the AnlV).

In the case of shares in a company whose sole purpose is to hold investments in other companies set out in section 4 (4) sentence 1 of the AnlV, the 1% limit applies to indirect investments of the insurance undertaking in those other undertakings (section 4 (4) sentence 2 of the AnlV). The same applies, with the necessary modifications, to multi-tier investment structures between the insurance undertaking and the other companies.
The term “shares in a company” also includes profit participation rights and subordinated liabilities in accordance with section 2 (1) no. 9 of the AnlV in cases where the equity-equivalent structure of these instruments means that they are required by the accounting provisions of commercial law to be reported as balance sheet equity at the issuing company. The same shall apply, with the necessary modifications, to multi-tier investment or profit participation structures. In the case of units and shares in closed-ended investment funds pursuant to section 2 (1) no. 13 b) or no. 17 of the AnlV, the 1% limit applies in principle, unless the investment funds invest in suitable target funds (fund of funds), in which case the 1% limit refers to the target funds held.

f) In accordance with section 4 (5), no more than 10% of the guarantee assets may be invested in a single item of land, land right or in shares in a single real estate company in accordance with section 2 (1) no. 14 a) of the AnlV or in units or shares in an investment fund in accordance with section 2 (1) no. 14 c) of the AnlV. In the case of shares in a real estate company in accordance with section 2 (1) no. 14 a) of the AnlV, the 10% limit applies to its indirectly held land or land rights.

As section 125 (4) of the VAG requires the guarantee assets to be separated from other assets, each asset that is to be allocated to the guarantee assets must be capable of being allocated as a whole to the guarantee assets at all times. Because of this, the carrying amount of an item of land that exceeds the 10% limit, for example, cannot be allocated to the other assets (see GB BAV 1997 Part A p. 67 no. 1.1.6).

B.4. List of investment types in section 2 (1) of the AnlV

B.4.1 Mortgages and land charges (no. 1)

a) Only genuine property loans are eligible for inclusion in the guarantee assets. These are loans that are secured by a lien and whose interest payments and principal repayments are secured at all times by the mortgaged property, regardless of the nature of the borrower.

b) Another indispensable element of proper management is that each insurance undertaking must prepare and comply with lending and valuation principles.

c) Under section 16 (1) to (3) of the Pfandbrief Act (Pfandbriefgesetz –PfandBG), only the perpetual characteristics of the land and the income that the land can generate sustainably for any owner as a result of proper management may be taken into account in the required prudent determination of the loan value. The loan may not exceed 60% of the calculated loan value (section 14 of the PfandBG).

Where statutory provisions in other EEA member states or full member states of the OECD that are equivalent to the PfandBG stipulate higher borrowing limits, these may be applied, while lower borrowing limits must be applied. Foreign provisions are equivalent to the PfandBG if they stipulate a security standard equivalent to the PfandBG and consequently offer the lender particularly good protection. However, if the foreign provisions stipulate a higher borrowing limit than 80% of the property value, or no borrowing limit at all, it is no longer possible to assume that the security standard is equivalent. Such loans are not compatible with the principle of investment security.
that exceed the mortgage lending value of 60% but not 80% and are not eligible for inclusion in the guarantee assets in accordance with section 2 (1) no. 3 e) of the AnlV (see d) and B.4.3 b) can only be included in the guarantee assets via the opening clause of section 2 (2) of the AnlV.

d) As a rule, loans should be first-ranking. Property loans that have been guaranteed by an eligible credit institution within the meaning of section 2 (1) no. 18 b) of the AnlV, a public-sector credit institution within the meaning of section 2 (1) no. 18 c) of the AnlV, a multilateral development bank within the meaning of section 2 (1) no. 18 d) of the AnlV, or property loans for which an insurance undertaking within the meaning of Article 14 of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (OJ L 335 from 17 December 2009, p. 1), last amended by Directive 2014/51/EU (OJ L 153, 22 May 2014, p. 1), has assumed the risk of non-payment, are eligible in accordance with section 2 (1) no. 3 e) of the of the AnlV (see B.4.3 b)).

e) Only loans for which the focus is on the real security offered by the lien, together with the necessary examination of the borrower’s credit quality, can be allocated to no. 1 of the list of investments. By contrast, loans to companies, regardless of their legal form, that are secured by mortgages, are allocated to no.4 of the list of investments if the focus is on the company’s earnings capacity and performance.

B.4.2 Securities loans and loans collateralised by securities (no. 2)

a) Securities loans must be adequately secured by cash payments, the pledge or assignment of credit balances, or the assignment or pledge of securities in accordance with section 200 (1) to (3) of the KAGB or equivalent provisions of another member state of the EEA or a full member state of the OECD. If these foreign provisions stipulate higher borrowing limits, these may be applied, while lower borrowing limits must be applied. Securities loans that do not meet these requirements or are not collateralised can only be held in the guarantee assets via the opening clause in section 2 (2) of the AnlV.

b) Insurance undertakings are prohibited from borrowing securities because securities loans are a loan in kind within the meaning of section 607 of the German Civil Code (Bürgerliches Gesetzbuch – BGB) and are thus loans that fall under the prohibition on borrowing (see GB BAV 1994 Part A p. 24 no. 1.1.4).

c) Under no. 2 b) of the AnlV, receivables are eligible for guarantee assets if debt instruments in accordance with nos. 6 or 7 have been pledged or assigned as collateral for them. This means that securities accounts pledged to reinsurance undertakings in favour of the primary insurance company are eligible.

Receivables under genuine sale and repurchase agreements are also eligible. In the case of genuine sale and repurchase agreements under which the transferor transfers to an insurance undertaking, as the transferee, ownership of the securities against payment of an amount as a margin, and the insurance undertaking enters into a commitment at the same time to return the assets at a specified or unspecified time (see section 340 (2) of the HGB), the insurance undertaking has a receivable from the transferor in the amount paid for the transfer (see section 340b (4) sentence 5 of the HGB). For this reason, receivables under genuine sale and repurchase agreements are also eligible as guarantee assets under no. 2 b) provided that they are appropriately collateralised. By contrast, insurance undertakings may not lend securities under repurchase transactions because of the prohibition on borrowing that applies to them.

d) The positive balance of liquid receivables and settlement liabilities of the primary insurer to the reinsurer is eligible for inclusion in the guarantee assets in accordance with section 2 (1) no. 2 c) of the AnlV.

B.4.3 Loans (nos. 3 to 5)

a) In accordance with no. 3 a), loans to the Federal Republic of Germany, its Länder, municipalities and association of municipalities are eligible for inclusion in the guarantee assets. The definition of a loan does not specify any minimum term and thus also includes short-term investments such as call money and time deposits.

In addition, loans to another member of the EEA or a full member state of the OECD (no.3 b)) and loans to regional governments and regional or local authorities of another member of the EEA or a full member state of the OECD (no.3 c)) are eligible.

Loans to international organisations in which the Federal Republic of Germany is a full member are also eligible (section 2 (1) no. 3 d) of the AnlV). International organisations within the meaning of section 2 (1) no. 3 d) of the AnlV also include the European Union, the European Stability Mechanism (ESM) and the European Financial Stabilisation Facility (EFSF).

b) Loans whose interest payments and principal repayments have been fully guaranteed by one of the bodies specified in no. 3 a), b) or d), by an eligible credit institution within the meaning of section 2 (1) no. 18 b) of the AnlV, by a public-sector credit institution within the meaning of section 2 (1) no. 18 c) of the AnlV, or by a multilateral development bank within the meaning of section 2 (1) no. 18 d) of the AnlV, or loans that have been insured against default by an insurance undertaking within the meaning of Article 14 of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (OJ L 335 from 17 December 2009, p. 1), last amended by Directive 2014/51/EU (OJ L 153 from 22 May 2014, p. 1), are also eligible under no. 3 e). These companies may not be group companies of the insurer within the meaning of section 18 of the AktG and must have sufficient financial strength in the form of a minimum credit rating equivalent to the category A rating issued by recognised rating agencies.

The rating must be reviewed at least annually. The results of the review must be documented transparently. If the insurance undertaking which insured the default risk loses its minimum credit rating corresponding to the category A of recognised rating agencies during the term of the investment, or if such a loss is pending, the loan can only be allocated to the opening clause (section 2 (2) of the AnlV) if there appears to be adequate security.

The conditions for a full guarantee or insurance of the default risk are satisfied if the contractually agreed interest payments and principal repayments for the loan are guaranteed and the creditor receives full settlement within a reasonable period. This is the case, e.g., for a directly enforceable surety in accordance with section 773 (1) no. 1 of the BGB for each individual loan; in this case, the investor obtains a second debtor against which it can assert a claim directly in addition to the primary debtor.

Loans for which the debtor and the guaranteeing credit institution are identical are not eligible in accordance with this number, but rather in accordance with no. 18 b), c), or d).

As before, loans to other German corporations or to German public-law institutions can only be included in the guarantee assets via the opening clause in section 2 (2) of the AnlV or with the approval of BaFin in accordance with section 2 (3) of the AnlV.

c) Loans to liquidation institutions (Abwicklungsanstalten) within the meaning of section 8a (1) of the Financial Market Stabilisation Fund Act (Finanzmarktstabilisierungsfondsgesetz – FMStFG) are also eligible in accordance with no. 3 f) to the extent that a body specified under a), b), or d) has assumed an obligation to offset losses of this liquidation institution in accordance with section 8a (4) sentence 1 no. 1 sentence 1 and no. 1a of the Financial Market Stabilisation Fund Act.

d) Loans to companies domiciled in a member state of the EEA or in a full member state of the OECD that are not credit institutions are eligible for investment in the guarantee assets in accordance with no. 4 a), provided that the credit quality of the borrower is guaranteed and the corporate loan is adequately collateralised.

BaFin will continue to be guided by the “Principles for the Granting of Loans to Companies by Insurance Undertakings – Borrower’s Note Loans” (formerly “Credit Guidelines”) as amended when examining the credit quality of the borrower. These principles are published by the German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft – GDV) in Berlin.

The debtor’s credit quality must be investment-grade when the loan is granted. This applies if the minimum requirements for the company’s key figures set out in the “Credit Guidelines” are complied with. However, no other circumstances or risks, such as current negative company news or general market trends, may indicate that a differing negative assessment is more appropriate. Alternatively, the credit quality of the borrower can also be examined by reference to an equivalent own internal assessment by the insurance undertaking. The credit quality of the borrower must be reviewed at least once a year, or more frequently if indicated by other negative circumstances, and this must be documented.

First-ranking liens (aa)) of the AnlV are to be regarded as adequate security. The loan value must be measured extremely conservatively, an adequate haircut must be charged and the encumbrance must be limited to a maximum of 40% in the case of industrial or commercial use with low reusability and a maximum of 60% in the case of residential property and commercial property with high reusability.

Receivables that are pledged or transferred as collateral, or securities admitted to trading or admitted to another organised market in accordance with section 2 (5) of the Securities Trading Act (Wertpapierhandelsgesetz – WpHG) or included in such a market (bb)), are eligible only if these receivables and securities could also be added directly to the guarantee assets. Conservative borrowing limits must be defined in the case of collateralisation by securities that are subject to fluctuations in their price.

Loans in return for a commitment not to provide collateral to all other creditors as well (negative pledge) are permitted only if and to the extent that the borrower can guarantee interest payments and principal repayments for the loan by virtue of its status (cc)); the borrower must therefore be “prime rated”, i.e. particularly highly rated companies (the company’s key figures indicate a particularly high credit quality (corresponding to, e.g., at least A- (Fitch, S&P) or A3 (Moody’s)) that are pre-eminent in their sector. In the case of collateralisation by means of a negative pledge in accordance with cc), the issuer of the regulatory authority places particularly high demands on the borrower, as this type of collateral cannot otherwise be considered to be equivalent to the collateralisation options under aa) and bb). For assessments based on the company’s key figures, the special status of the borrower is taken into account in particular by

i) the increased requirements for key figures related to the capital structure,

ii) the exclusion of compensation options between the key figures, and

iii) the possibility of an extraordinary termination in case of breach of key figures for contractual agreement that stipulate compliance with financial ratios during the entire loan.

The insurance undertaking must document this appropriately when granting the loan.

In the case of borrowers that are not at the same time represented by listed debt instruments on the capital markets (section 264d of the HGB), the Supervisory Authority also continues to expect an unrestricted negative pledge under which the commitment by the borrower not to grant any other creditors better rights or collateral than the lender refers to all loan liabilities and is not limited to “capital market liabilities” or “financial liabilities”.

The above requirements governing collateral for lending transactions in accordance with section 2 (1) no. 4 a) of the AnlV are so high because up to 50% of the investments of the guarantee assets can be invested in loans in accordance with section 2 (1) nos. 3, 4 a) and investments in accordance with section 2 (1) no. 11 of the AnlV.
In the case of loans that do not meet, or do not meet in full, the requirements for the rating of the borrower (investment grade rating) and/or for the collateralisation in accordance with aa), bb) or cc) (e.g. unrestricted negative pledge in the case of non-publicly traded borrowers; contractual agreement on the compliance with financial ratios during the entire loan term), it must be examined whether a classification in accordance with no. 4 c) (see f) below) or, if there is sufficient security, an assignment to the opening clause (section 2 (2) of the AnlV) can be made.
e) Loans to real estate companies within the meaning of no. 14 a) in which the insurance undertaking is a shareholder (shareholder loans) are eligible if the loans comply with the requirements of section 240 (1) and (2) no. 1 of the KAGB. In particular, it is necessary for the loan terms to be in line with market conditions and for the loans to be adequately collateralised. The total amount of loans granted to the real estate company may not exceed 50% of the value of the land held by that company. If the real estate company is wholly-owned by the insurance undertaking, it can grant loans amounting to a maximum of 50% of the value of the land held by the real estate company. If the insurer holds a 90% interest in the real estate company, a loan of up to 90% of the theoretical maximum loan amount is possible.

Because of the prohibition on borrowing in accordance with section 15 (1) of the VAG, third parties may not grant loans to the real estate company if shareholder loans are granted. For this reason, shareholder loans in accordance with section 2 (1) no. 4 b) of the AnlV are possible only if the individual insurance undertaking or the insurance group holds a majority interest. The shareholder loan must be allocated within the insurance group in line with the percentage equity interests in the real estate company.

The grant of such loans to indirectly held property companies is permitted if the sole purpose of the intermediate holding company is to hold (see section 4 (4) sentence 2 of the AnlV) shares in a company whose sole purpose is to acquire, develop and manage land or land rights (see section 2 (1) no. 14 a) of the AnlV).

Investments in accordance with no. 4 b) are counted towards both the ratio in accordance with section 3 (5) of the AnlV and the ratio in accordance with section 4 (5) of the AnlV.

f) In accordance with no.4 c), loans to other companies domiciled in a member state of the EEA or in a full member state of the OECD which are not credit institutions are also eligible for inclusion in the guarantee assets, provided that these loans are sufficiently materially secured or under the law of obligation. This extends the investment possibilities in corporate loans compared to no. 4 a). The granting of loans to infrastructure companies is being facilitated in particular. In addition, in the context of no. 4 c) there is the possibility of granting loans to newly constituted companies and companies with a rating below investment-grade (so-called “high-yield enterprise loans”). However, in order to safeguard the investment rule of security, at least one rating in the speculative-grade range is necessary.

The credit quality of the borrower must be reviewed at least once a year, or more frequently if indicated by other negative circumstances. If the speculative-grade credit rating is lost during the term of the investment, the loan must be removed from the guarantee assets.

Loans in accordance with no. 4 c) are limited to 5% of the guarantee assets in accordance with section 3 (2) no.3 of the AnlV. In addition, an allocation to the risk asset ratio is made in accordance with section 3 (3) sentence 1 of the AnlV.

g) Policy loans continue to be an eligible asset. By contrast, investments in life insurance contracts are not eligible. Equally, these cannot be allocated to the guarantee assets via the opening clause under section 2 (2) of the AnlV because they do not have the character of investments determined by the capital markets.

B.4.4 Debt instruments (nos. 6 to 8)

a) Pfandbriefe, municipal bonds and other debt instruments with a special legally established cover pool are eligible assets if the credit institution issuing the debt instrument is domiciled in a member state of the EEA or in a full member state of the OECD (no. 6).

b) In contrast to the assets under no. 6, the eligibility criterion for no. 7 is not the issuer of the debt instrument, but admission to trading on a stock exchange, admission to another organised market, or inclusion in such a market (a)), or at least application for admission to trading in an organised market (b)), or admission to trading on a stock exchange in a state outside the EEA, or admission to trading on or inclusion in another organised market in that state (c)).

No. 7 a) and b) refer to the organised market. The organised market is defined in section 2 (1) no. 4 a) bb) of the AnlV and refers to section 2 (5) of the WpHG. This means that, under no. 7 a) and b), debt instruments are only eligible if they are included in an organised market in the EEA or if the terms and conditions of issuance require an application to be made for their inclusion there, provided that this happens within one year of their issuance.

The organised market in section 2 (5) of the WpHG corresponds to the definition of the regulated market in point (21) of Article 4(1) of the Directive of the European Parliament and the Council of 15 Mai 2014 (2014/65/EU) on markets for financial instruments (MiFiD II). Under Article 44 of MiFiD II, the member states are empowered to grant authorisation as a regulated market to markets established in their territory. ESMA publishes and updates on a regular basis a list of all regulated markets on its website (http://registers.esma.europa.eu/publication/searchRegister?core=esma_registers_mifid_rma). An organised market is a system operated or managed in Germany, in another Member State of the European Union or in another signatory state of the EEA that is authorised, regulated and supervised by multilateral public bodies and that brings together, or facilitates the bringing together, of multiple third-party buying and selling interests in financial instruments that are admitted to trading there in the system in accordance with defined rules in a way that results in a contract to buy these financial instruments. The regulated unofficial market is not an organised market in accordance with section 2 (5) of the WpHG.

Under the provisions of no. 7 c), only market segments offering a comparable standard may be recognised. In accordance with section 193 (1) no. 2 of the KAGB, the German UCITS management company may only acquire securities admitted to trading on stock exchanges in states outside the EEA or admitted to or included in another organised market there if the choice of this stock exchange or this organised market is authorised by BaFin. Such stock exchanges and organised markets are also eligible for direct investments by insurance undertakings.

c) Other debt instruments are also eligible under no. 8. No. 8 is consequently a catch-all clause for debt instruments that are not covered by nos. 6 and 7. Registered bonds without a legally established cover pool, unless covered by no. 18, and debt instruments that are only traded over the counter are also allocated to no. 8.

Special requirements apply to the examination of the security offered by debt instruments within the meaning of no. 7 c) and no. 8. Not only the current and future macroeconomic trends of the state concerned, as well as political risk, must be considered when acquiring and continuously monitoring the investment. The examination must also extend to whether interest payments and principal repayments can be transferred without any problem, both constructively and legally. If necessary, transfer approvals or corresponding binding declarations must be obtained from the principal monetary authorities of the state concerned.

B.4.5 Receivables due from subordinated liabilities and profit participation rights (no. 9)

a) A particular feature of receivables due from subordinated liabilities and profit participation rights is that they are subordinated to the claims of the other creditors in the event of the debtor’s insolvency. For this reason, no. 9 is the more specific provision governing all forms of subordinated liabilities and profit participation rights. Profit participation rights, which are termed profit participation certificates if they are securitised, convey contractual claims to typical shareholder assets, such as profit participation rights with a dividend-linked distribution, but do not establish any participation rights under company law.

The eligibility condition in accordance with no. 9 is not a specific minimum credit rating (see B.3.1), but rather that the debtor or issuing company is domiciled in a member state of the EEA or in a full member state of the OECD (no. 9 a)). In the event of a listing (no. 9 b)), the same conditions apply as for debt instruments (see B.4.4).

b) Because of the increased risk attributable to subordination, it remains a requirement for subordinated loans and securitised subordinated receivables that are not included in an organised market, that the company that owes the receivable must make available to the insurer its annual financial statements that have been prepared and audited in accordance with the provisions applicable to corporations, and that it must undertake to submit such annual financial statements at each balance sheet date in the future. The analysis of the annual financial statements by the insurance undertaking is a necessary element of the examination of these assets prior to their acquisition and during the entire term of the investment. The same applies to profit participation rights that are not included in an organised market because in this case, the company is not valued by an organised market. For listed securities in accordance with section 2 (1) no. 9 b) of the AnlV, the requirement to analyse the annual financial statements does not apply.

c) (Perpetual) subordinated bonds with one or more call rights are, in addition, subject to the requirements of the current Circular on derivative financial instruments and structured products.

B.4.6 Asset-backed securities and credit-linked notes, as well as other investments linked to credit risks (no. 10)

a) Asset-backed securities (structured financial instruments collateralised by means of legal claims) and credit-linked notes (financial instruments linked to credit risks), as well as other investments in accordance with section 2 (1) of the AnlV whose yield or repayment is linked to credit risks, or that are used to transfer the credit risk of a third party, are only eligible if the debtor or issuing company is domiciled in a member state of the EEA or in a full member state of the OECD (no. 10 a)). In the event of a listing (no. 10 b)), the same conditions apply as for debt instruments (see B.4.4).

As a general rule in accordance with section 15 (1) sentence 1 of the VAG, the assumption of credit risks through credit derivatives within the scope of the investment is classified as ineligible non-insurance business, unless the coverage of the credit risk embedded in a cash instrument is not of material importance within the contractual relationships entered into for the investment. This can generally assumed to be the case if the insurance undertaking concludes, on the basis of its own internal assessment, that the cash instrument has at least an investment-grade credit rating. If the insurance undertaking, taking into account the procedure regulated in the present Circular (see B.3.1 c)), comes to the conclusion on the basis of its own internal assessment that the cash instrument has an investment-grade credit rating, an allocation to the guarantee assets in accordance with section 2 (1) no. 10 of the AnlV is possible. This provision excludes the allocation of asset-backed securities and credit-linked notes as well as other investments linked to credit risks to the high yield bond (see B.3.1 e)). The loss of an investment-grade credit rating automatically results in the loss of eligibility as guarantee asset. Asset-backed securities and credit-linked notes, as well as other investments linked to credit risks without investment-grade credit rating cannot be included in the guarantee assets via the opening clause either. To avoid cases of hardship, the downgraded investments may remain in the other assets.

A leverage effect in respect of the repayment must be excluded in the event of any default in the collateral pool or the occurrence of a credit event affecting the reference asset or portfolio. A leverage effect exists if the default of a debtor can lead to a disproportionate default in the repayment of the cash instrument.

If the assets included in the collateral pool, or in the reference asset or reference portfolio, are excluded for the purpose of direct investment in accordance with section 2 (4) of the AnlV - with the exception of consumer and working capital loans – this also applies to asset-backed securities and credit-linked notes and other investments linked to credit risks. The insurance undertaking must ensure that they do not, directly or indirectly, contain excluded assets.

b) Increased demands must be placed on the assessment of the security and profitability of asset-backed securities and credit-linked notes and other investments linked to credit risks, in particular with regard to the complexity of the investments. The acquisition of such assets mandatorily requires the insurance undertaking to put in place an adequate and effective investment and risk management. The structure and components of the investments must be analysed comprehensively for legal and economic risks before the acquisition and during the term of the investment. In the case of asset-backed securities, for example, the risk-return profile of the tranche, in which the investment is to be made, must be matched with the ratio of the size of all tranches in relation to the collateral pool. This is to be checked for its composition according to the nature and features of the receivables, their average weighted rating, the expected cash flows and likely probabilities of default.

Asset-backed securities and credit-linked notes as well as other investments linked to credit risks must be broken down into their components, as their inherent risks cannot be determined without identifying their main features. In addition, the transactions must be assessed to quantify the risks. A qualified credit institution or investment services enterprise can also be commissioned to divide up the components and assess them. However, this must not be the credit institution that offers the asset-backed securities, credit-linked notes or other investments linked to credit risks, nor a company affiliated with it within the meaning of section 15 of the AktG, section 271 (2) of the HGB. There may not be any other indications of any limitation on the company’s professional independence. As a rule, the valuation by the bank offering the product can only be accepted if the bank provides binding documentation of its willingness to repurchase or liquidate the respective investment at the stated price.

c) As a general rule, these requirements also apply to indirect investments. With regard to asset-backed securities and credit-linked notes as well as other investments linked to credit risks which lose their investment grade rating during the holding period, see B.3.1. d). If investments in accordance with no. 10 are linked to derivatives, the requirements of the current Circular on derivative financial instruments and structured products must also be observed, where applicable.

B.4.7 Book-entry securities, liquidity instruments (no. 11)

Receivables that are entered in the debt register of the Federal Republic of Germany or one of its Länder or in any similar list of another member state of the EEA or a full member state of the OECD, or whose entry in the debt register occurs within one year of their issue, as well as liquidity instruments (section 42 (1) of the Bundesbank Act (Gesetz über die Deutsche Bundesbank – BBankG)) are eligible in accordance with section 2 (1) no. 11 of the AnlV.

In accordance with section 2 (5) of the WpHG or comparable provisions of another member state of the EEA or of the OECD, federal bonds, federal treasury notes and five-year Federal notes, as well as similar investments of the Länder are included in the organised market and are required to be allocated to the guarantee assets in accordance with section 2 (1) no. 7 a) of the AnlV.

B.4.8 Shares (no. 12)

Only fully paid-up shares are eligible for inclusion in the guarantee assets, as otherwise additional payment obligations could reduce the value of the guarantee assets. The insurance undertaking must obtain the status under company law associated with the acquisition of the shares. Treasury shares are not eligible for inclusion in the guarantee assets. For equity certificates and equity index certificates, see the current Circular on derivative financial instruments and structured products.

B.4.9 Equity interests (no. 13)

a) In accordance with no. 13 a), equity interests in the form of other fully paid-up shares, shares in a limited liability company, limited partner’s shares and participations as a silent partner within the meaning of the German Commercial Code are eligible if the company has a business model and assumes business risks. The list of types of shares in companies and equity interests under no 13 a) is exhaustive. In accordance with no. 13 a), only equity interests that are not subject to investment law can be allocated to the guarantee assets. Investments in another type of company that is provided for by the laws of another member state of the EEA or of a full member of the OECD must be materially comparable with the types of equity interest listed in no. 13 a).

Only investments for which the investor’s loss is limited to the value of the exposure are permitted. Investments that may lead to a liability of the investor in excess of that amount are not permitted (see B.3.3).

The investee concerned must have a business model and assume business risks. BaFin will be guided by the principles set out in the following when examining the investment of the guarantee assets. The principle applies that the risk of circumventing the requirements of the AnlV must be countered and that investments that are otherwise not eligible, or investments that must be allocated to other risk categories, may not be packaged as equity interests in the guarantee assets. The enterprise value of the investee may not be composed solely of the total of the net asset values. The mere purchase and sale and the administration of investments (secondary business) by an investment company do not represent a business model associated with business risk.

As a matter of principle, investees to be allocated to no. 13 a) of the AnlV may borrow funds. In the case of holding companies, there is no objection to short-term borrowings of up to 10% for liquidity management purposes.

Units and shares, held directly or via a holding company (see section 4 (4) sentence 2 of the AnlV), in investment funds (securities, real estate or hedge funds, etc.) are not equity interests that are eligible for inclusion in the guarantee assets in accordance with no. 13 a). The same applies if an investee only holds loans. If the activity of the company extends to more than mere credit management, each loan extended (primary business, possibly requiring authorisation) is individually examined (due diligence) and supervised, and the value of the company therefore does not correspond to the total of the loan amounts, these are indicators of an investment in accordance with no. 13 a).

However, shares in companies (and holding companies) that invest solely in equity interests (including infrastructure investments) and/or investments in accordance with section 2 (1) nos. 9 and 12 of the AnlV can be allocated to the guarantee assets via section 2 (1) no. 13 a) of the AnlV. In such cases, investments are made that exhibit the characteristic of equity at the issuers, and the issuers have a business model and assume business risks.

Shares in real estate investment companies with the legal form of a GmbH & Co. KG or a comparable legal form that are not eligible under section 2 (1) no. 14 a) of the AnlV due to their corporate purpose can be allocated via section 2 (1) no. 13 a) of the AnlV.

In accordance with section 6 (1) of the AnlV, investments made up to 30 June 2010 and which have been held as guarantee assets since then on the basis of section 6 (1) of the AnlV of 20 December 2001 (Federal Law Gazette I p. 3913) in the version dated 3 March 2015 (Federal Law Gazette I p. 188) may remain in the guarantee assets until their maturity. Capital drawdowns under these existing investments are permitted, but additional purchases are prohibited.
No. 13 a) only permits investments in companies domiciled in a member state of the EEA or a full member state of the OECD. In the case of multi-tier investment structures, this requirement need only be observed in respect of the holding company. The target companies held by the holding company may also have their domicile outside these states.

As a matter of principle, the requirement to submit the most recent and the future annual reports applies both to the holding companies and to the target companies. The analysis of the annual reports of the target companies by the insurance undertaking is a necessary component of proper equity investment management. In the case of investments in investment companies, however, for reasons of practicality, the annual report of a target company need not be submitted if the investments of the investment company are sufficiently diversified. This can generally be assumed if there are at least ten target companies below the investment company.

b) In accordance with no. 13 b), investments in so-called closed-ended private equity funds that assume business risks via their target companies are also eligible for inclusion in the guarantee assets. In contrast to investments in accordance with no. 13 a), investments under no. 13 b) are subject to investment law regulation (supervision).

As in the case of investments in accordance with no. 13 a), the risk of circumventing the Investment Regulation must be countered. Investments that are otherwise not eligible, or investments that must be allocated to other risk categories may also not be packaged as equity interests in accordance with no. 13 b). The investment horizon is to be understood as a continuation of present supervisory practice. Thus, in accordance with no. 13 b), in addition to equity interests, private equity funds can also invest in assets in accordance with section 2 (1) nos. 9 and 12 of the AnlV (e.g. for the purpose of delisting). These include equity-equivalent instruments (participation rights) and other instruments of corporate financing (claims from subordinated liabilities). The mere holding of loans in private equity funds is not permitted, however. If the private equity fund, though, invests in companies whose activities extend to more than mere credit management, because each loan extended is individually examined (due diligence) and supervised, classification in accordance with no. 13 b) may be possible. In addition, liquid funds and derivatives may be used for hedging purposes to a limited extent. Borrowing, in particular for the pre-financing of capital drawdowns, is in principle permitted. In the case of investments in accordance with no. 13 b), an obligation to make additional contributions must be excluded.

Circumventing the requirements provided for in no. 13 b) must not happen either in the case of an investment in target funds. For example, units and shares in securities, real estate or hedge funds are not eligible for inclusion in the guarantee assets as target funds in accordance with no. 13 b).

The asset management company must have the authorisation in accordance with section 20 (1) of the KAGB or be registered pursuant to section 44 of the KAGB.

No. 13 b) also includes units and shares in comparable EU or foreign investment funds that are subject to the law of a member state of the EEA or of a full member of the OECD, provided that they are managed by a management company domiciled in a member state of the EEA or a full member state of the OECD. However, the management company must be subject to public supervision to protect investors and must have authorisation comparable to that in accordance with section 20 (1) of the KAGB or a registration comparable to that in accordance with section 44 of the KAGB. If the management company is domiciled in the EEA, comparability is in principle ensured due to the uniform European framework of the AIFM Directive. If the management company is domiciled outside the EEA in a full member state of the OECD, the comparability check must be carried out and documented by the insurance undertakings on their own responsibility before the units or shares are acquired. The comparability check is intended to ensure uniform standards.

In the case of investment via funds of funds in private equity funds, the asset management companies managing the target funds, in accordance with the rules for investments in accordance with no. 13 a), may also be domiciled outside the OECD. As a matter of principle, at the level of the fund of funds, short-term borrowing of up to 10% of the value of the AIF is permitted.

In order to ensure sufficient fungibility, the units and shares in an investment fund in accordance with no. 13 b) – in accordance with long-standing supervisory practices related to shares in companies (see VerBAV 2002 p. 103 f) – must be freely transferable (see section B.3.1 b)).

No. 13 b) also covers European venture capital funds in accordance with section 337 of the KAGB and European funds for social entrepreneurship in accordance with section 338 of the KAGB. As a general rule, the above-mentioned requirements must be met in a comparable way.

In accordance with section 6 (3) of the AnlV, investments made up to 7 March 2015 and which have since then been held as guarantee assets on the basis of section 6 (3) of the AnlV of 20 December 2001 (Federal Law Gazette I p. 3913) in the version dated 3 March 2015 (Federal Law Gazette I p. 188), may remain in the guarantee assets until their maturity and be allocated to the investments in accordance with section 2 (1) no. 13 b) AnlV. This means that they continue to be counted towards the minimum diversification requirement for investments in accordance with section 3 (3) sentence 3 of the AnlV. This applies in particular to private equity funds that were acquired before 7 March 2015 and do not meet the amended requirements. Capital drawdowns under these investments are permitted, but additional purchases are prohibited.

c) The investments listed in no. 13 a) and b) differ materially from the other investments in the list of investments.

Equity exposures require not only an in-depth analysis of the investee itself, but also of its market position, its development potential and market opportunities. They require individual assessment, which is not possible without professional investment management. The question of whether an equity interest is secure and profitable can only be established and assured by a comprehensive examination prior to the acquisition and by accurate observation, continuous supervision and support following the acquisition. Insurance undertakings that do not have the personnel and technical resources to do this are required not to enter into equity exposures.

If an insurance undertaking invests in private equity companies/funds, it is also indispensable in the case of these investments for the insurance undertaking to have internal expertise, i.e. investment management with the necessary experience and sufficient knowledge of the private equity business. If the insurance undertaking is not in a position to comprehensively assess the quality of the investment, there would otherwise be no assurance it can assess the risk of such an investment.

Investments in group companies of the insurance undertaking within the meaning of section 18 of the AktG are, as a general rule, not eligible for inclusion in the guarantee assets (see B.5 for information on prohibited investments). d).

With regard to the investment process for investments in investment funds, reference is made to B.2.6.

B.4.10 Real estate (no. 14)

a) In the event of the purchase of land, land rights, or shares in a real estate company, the insurance undertaking is obliged to examine the appropriateness of the purchase price on the basis of an expert appraisal from a publicly appointed and sworn expert or by comparable means. Other appraisals may only be considered if they are of comparable quality. This can only be assumed in the case of appraisals by employees of the insurance undertaking if the conditions set out in GB BAV 1991 p. 61 no. 1.1.3 are met. The examination of the appropriateness of the purchase price must be demonstrated to BaFin, including by submission of the appraisal if requested. Consequently, an investment in land is eligible only if the purchase price is appropriate. Land that was acquired for a purchase price that is considerably higher than the market value is therefore not eligible for inclusion in the guarantee assets (see GB BAV 1998 Part A p. 63 no. 1.1.5). This can generally be assumed if the purchase price is more than 10% above the market value.

b) The prohibition on borrowing also applies to land if the rent obtainable from the prospective rental of the loan-financed building exceeds the interest on the loan (VerBAV 1995 p. 215, II.). Although the acquisition of land already encumbered by liens is permitted, any prolongation of this debt finance or its replacement by debt finance at better terms is not compatible with the prohibition on borrowing. The same applies to subsequent encumbrances that do not serve to finance the purchase (GB BAV 1995 Part A p. 56 no. 1.1.6; VerBAV 1995 p. 215).

c) An investment in a real estate company is only eligible for inclusion in the guarantee assets if there would have been no objections to the direct acquisition, development and management of the land by the insurance undertaking.

The holding of shares in real estate companies via (intermediate) holding companies does not disqualify eligibility in accordance with no. 14 a) if the insurance undertaking is indirectly invested in the same way as for a direct investment and the investment can be classified as a direct real estate investment.

d) The guarantee assets must be safeguarded in such a way that they can only be disposed of with approval of the trustee or the deputy trustee (sections 129 (1), 128 (2) of the VAG). In accordance with the current Circular - Trustee (Rundschreiben - Treuhänder), this must be done – depending on the circumstances – by way of an entry in the land register or by an inhibition notice of the trustee in the articles of association.

If the asset is an item of land, a correct and complete application must be filed with the land registry for the entry of a corresponding inhibition notice of the trustee without undue delay – but after 10 banking days at the latest – as soon as the land has been entered in the register of guarantee assets.

If the asset represents shares in a real estate company, a corresponding inhibition notice of the trustee must be included in the articles of association of the company concerned. It must reflect the fact that, to the extent and for as long as shares in companies are part of the guarantee assets of an insurance undertaking, the disposing of these shares generally requires the prior written approval of the trustee or the deputy trustee. To the extent that an urgent sale is necessary and there is thus a need of the disposing of the guarantee assets at short notice (within 5 banking days), such disposing may, under the supervisory requirements set out in the current Circular - Trustee, also be made with the later written approval by the trustee as a special exception.

e) Under no. 14 b), shares in REITs or in a similar corporation domiciled in a member state of the EEA or in a full member state of the OECD that meet the requirements of the REIT Act (REIT-Gesetz – REITG) or comparable provisions of that other state are eligible for inclusion in the guarantee assets.

A corporation can be deemed to be comparable if at least 75% of the company assets must be invested in immovable assets, at least 75% of its gross income is generated by rental and leasing or the sale of immovable assets, at least 90% of its profit is distributed on an ongoing basis, borrowing is limited to 70% of the company assets, or existing equity equals at least 30% of the immovable assets, and a tied endowment capital defined in the articles of association of the corporation is fully paid-up.

f) Shares in and units of domestic special AIF and domestic closed-ended retail AIF, which directly or indirectly invest in assets in accordance with section 231 (1) sentence 1 nos. 1 to 6 of the KAGB (including assets required for the management thereof) as well as section 235 (1) of the KAGB, are also eligible under no. 14 c). Open-ended and closed-ended “real estate special AIF” and closed-ended “real estate retail AIF” are consequently combined in no. 14 c) and directly counted towards the minimum diversification requirement for real estate in accordance with section 3 (5) of the AnlV. The use of derivatives is only permitted for hedging purposes and liquidity investments must correspond approximately to the requirements of section 253 (1) sentence 1 of the KAGB. Borrowing may not exceed 60% of the market value of the real estate portfolio of the investment fund. Short-term borrowing must be limited to a maximum of 30% of the value of the AIF.

To safeguard the interests of the policyholders and to comply with the investment rule of security, the asset management company must have authorisation in accordance with section 20 (1) of the KAGB.

No. 14 c) also includes units and shares in comparable EU investment funds, provided that these are managed by a management company domiciled in a member state of the EEA. The management company must have authorisation comparable to that required in accordance with section 20 (1) of the KAGB.

In the case of an investment via a fund of funds in “real estate target funds”, the target investment funds must also be eligible in accordance with no. 14 c). At the level of the real estate fund of funds, only short-term borrowing up to 30% of the value of the AIF is permitted.

The units of and shares in closed-ended investment funds referred to in no. 14 c) must be freely transferable.

Open-ended retail investment funds in the form of real estate funds within the meaning of sections 230 to 260 of the KAGB are not eligible for inclusion into the guarantee assets. The respective exclusion is made within the scope of section 2 (1) no. 17 a) of the AnlV. However, pursuant to section 6 (2) of the AnlV, units in retail investment funds in the form of real estate funds pursuant to sections 230 to 260 of the KAGB that were acquired before 8 April 2011 and units in comparable foreign investment funds that were acquired before 8 April 2011 may remain in the guarantee assets and be allocated to investments in accordance with no. 14 c).. The regulation goes back to the German Act to Increase Investor Protection and Improve the Functioning of the Capital Markets (Anlegerschutz- und Funktionsverbesserungsgesetz – AnsFuG) of 5 April 2011 (Federal Law Gazette I p. 538). The acquired units are to be counted towards the minimum diversification requirement for real estate in accordance with section 3 (5) of the AnlV. The purchase of additional units is not permitted.

With regard to the investment process for investments in investment funds, reference is made to B.2.6.

B.4.11 Units and shares in investment funds (no. 15 to 17)

The requirements governing investment funds are, as a general rule, based on the classification contained in the KAGB. However, investment funds are subject to special supervisory requirements in terms of their eligibility for inclusion in the guarantee assets. As a result, the requirements imposed on the quality of investment funds are stricter in some cases than provided for under the KAGB.

The KAGB makes a distinction between undertakings for collective investment in securities (UCITS) and alternative investment funds (AIF). This categorisation has, as a general rule, been transferred to the AnlV. The AnlV makes a distinction between UCITS (no. 15), open-ended special AIFs with fixed fund rules (no. 16) and other AIF not covered by no. 13 b), no. 14 c), nos. 15 and 16 (no. 17). To the extent that, under insurance supervision, a distinction is made between open-ended and closed-ended investment funds, the definition following from section 1 (4) and (5) of the KAGB in the version applicable until 19 July 2014 (see B.2.6) is the determining factor. According to that, open-ended investment funds are UCITS and AIF whose investors or shareholders have the right to redeem against disbursement their units or shares in the AIF at least once a year. Where open-ended investment funds are subject to a lock-up period during which no liquidity may be withdrawn from the fund, the investments are not eligible for inclusion in the guarantee assets.

If stipulated in the fund rules that the asset management company may suspend the redemption of units in the event of exceptional circumstances that indicate that suspension is necessary to protect the interests of the investors, there is in general no obstacle to include them in the guarantee assets.

If a side pocket (consisting of illiquid assets) is formed in an investment fund, the units in the volume of the side pocket are no longer eligible for inclusion in the guarantee assets from the date of separation. The side pocket no longer meets the requirements for the fungibility of investments by insurance undertakings. The relevant volume must therefore be withdrawn from the guarantee assets. The remaining units can still be maintained in the guarantee assets.

With regard to the investment process for investments in investment funds, reference is made to B.2.6.

B.4.12 Units and investment shares in UCITS (no. 15)

Units and shares in UCITS that are domiciled in the EEA (UCITS management company) are in principle eligible for inclusion in the guarantee assets under no. 15.

Investments in accordance with sections 2 (1) no. 15 of the AnlV must be generally transparent (see B.6.2 c)). If these are non-transparent, only a classification in accordance with section 2 (1) no. 17 of the AnlV is possible. However, if only target funds are non-transparent, and this only to a limited extent, they can be classified in accordance with section 2 (1) no. 15 of the AnlV. The non-transparent target funds are then to be counted towards the ratio for alternative investments in accordance with section 3 (2) no. 2 of the AnlV.

B.4.13 Units and investment shares of open-ended special AIFs with fixed fund rules (no. 16)

The special AIF with fixed fund rules was standardised in section 284 of the KAGB and is based on section 91 of the repealed Investment Act (Investmentgesetz – InvG). This was already further regulated in the past. As a result, the requirements imposed by the supervisory authorities on special AIF with fixed fund rules are sometimes stricter than those of the KAGB.

Open-ended special AIFs with fixed fund rules which are not already covered by no. 14 c) are eligible as guarantee assets in accordance with no. 16 if the contractual documents include in particular the following items:

i) securities may only be acquired pursuant to section 193 of the KAGB;

ii) derivatives may only be used in accordance with section 197 (1) and (2) of the KAGB;

iii) other investment instruments in accordance with section 198 no. 1 of the KAGB are limited to a maximum of 20%, other investment instruments in accordance with section 198 nos. 1 to 4 of the KAGB are limited to a maximum of 30% of the value of the AIF;

iv) unsecuritised loan receivables in accordance with section 221 (1) no. 4 of the KAGB are limited to a maximum of 30% of the value of the AIF;

v) the collateral furnished for securities lending transactions must meet the requirements of sections 200 to 202 of the KAGB;

vi) real estate may only be acquired in accordance with section 231 (1) sentence 1 nos. 1 to 6 and section 235 (1) of the KAGB and, together with units and shares in real estate funds in accordance with no. 14 c), are limited to a maximum of 49% of the value of the AIF;

vii) units and shares in open-ended target funds which comply with the requirements of no. 17 are limited to a maximum of 49% of the value of the AIF;

viii) any transfer of all underlying assets against delivery of all fund units, and in particular any physical delivery of precious metals, must be excluded;

ix) precious metals must be limited to a maximum of 30% of the value of the AIF;

x) target funds must also be open-ended and eligible for inclusion in the guarantee assets;

xi) investments in companies which are not admitted to trading on a stock exchange or included in an organised market, including units and shares in closed-ended private equity funds in accordance with no. 13 b), must be limited to under 20% of the value of the AIF.

In addition, investment funds in accordance with no. 16 must be transparent in order to be eligible for inclusion in the guarantee assets. If they are non-transparent, only a classification in accordance with section 2 (1) no. 17 of the AnlV is possible. The assets within the investment fund that are not allocated to the numbers of the list of investments of section 2 (1) of the AnlV and that can therefore be counted towards the corresponding minimum diversification requirements, must be calculated towards the ratio for alternative investments in accordance with section 3 (2) no. 2 of the AnlV. Contrary to that, derivatives do not need to be included; as before, however, they are counted towards the risk asset ratio in accordance with section 3 (3) sentence 1 of the AnlV.

To safeguard the interests of the policyholders and to comply with the investment rule of security, the asset management company must have authorisation in accordance with section 20 (1) of the KAGB.

No. 16 also includes units and shares in comparable EU investment funds in the form of special AIF, provided that these are managed by a management company domiciled in a member state of the EEA. The management company must have authorisation comparable to that required in accordance with section 20 (1) of the KAGB.

B.4.14 Units and shares in other AIF not covered by no. 13 b), no. 14 c), nos. 15 and 16 (no. 17)

No. 17 extends the investment possibilities in investment funds inasmuch as all AIF, unless covered by no. 13 b), no. 14 c), nos. 15 or 16, are in principle eligible as guarantee assets. Open-ended retail investment funds in the form of real estate funds continue to not being eligible for the guarantee assets of insurance undertakings (with regard to the transitional provisions, see B.4.10 f)).

Within the scope of no. 17, investment funds that invest to a maximum of 100% in unsecuritised loan receivables, amongst other things, are permitted in the guarantee assets. This facilitates in particular investments in the area of infrastructure via debt instruments.

In the case of investments under no. 17, the investor’s loss must be limited to the value of the exposure and an obligation to make additional contributions must be excluded. Any transfer of all underlying assets against delivery of all fund units, and in particular any physical delivery of precious metals and goods to the insurance undertaking, must be excluded. The general exclusion clauses in accordance with section 2 (4) of the AnlV (e.g. with regard to intangible assets) must be observed.

To safeguard the interests of the policyholders and to comply with the investment rule of security, the asset management company must have authorisation in accordance with section 20 (1) of the KAGB.

No. 17 also includes units and shares in comparable EU investment funds, provided that these are managed by a management company domiciled in a member state of the EEA. The management company must have authorisation comparable to that required in accordance with section 20 (1) of the KAGB.

If an investment fund invests in target funds in accordance with no. 17, these must also be eligible for inclusion in the guarantee assets. However, in the case of investments in funds of hedge funds, the target funds may also be domiciled outside the EEA. It must be ensured that all target funds are hedge funds and are subject to requirements that are comparable to section 283 of the KAGB.

To ensure sufficient fungibility, the units and shares in closed-ended investment funds under no. 17 must be freely transferable. Open-ended investment funds in accordance with no 17 are treated differently from closed-ended investment funds in accordance with no 17 with regard to the diversification in accordance with section 4 of the AnlV. If investment funds in accordance with no. 17 cannot be redeemed at least once a year against disbursement of the units or shares, they must be considered closed-ended investment funds in accordance with no. 17 (see section 4 (4) of the AnlV and B.3.5 e).

no. 17 are Investment funds in accordance with no. 17 are limited to 7.5% of the guarantee assets by being counted towards the minimum diversification requirement for alternative investments in accordance with section 3 (2) no. 2 of the AnlV. In addition, an allocation to the risk asset ratio is made in accordance with section 3 (3) sentence 1 of the AnlV.

B.4.15 Deposits with central banks, credit institutions and multilateral development banks (no. 18)

a) Deposits with the European Central Bank or the central bank of a member state of the EEA or a full member state of the OECD may be included in the guarantee assets (no. 18 a)).

b) Eligible credit institutions within the meaning of no. 18 b) are only private and public-sector credit institutions domiciled in a member state of the EEA that are subject to the Directive 2013/36/EU of 26 June 2013, last amended by Directive 2014/59/EU of 12 June 2014, and meet its requirements. The credit institutions falling under this Directive are listed in the Official Journal of the European Union.

These credit institutions are only eligible if they confirm in writing to the insurance undertaking that they comply with the provisions governing capital and liquidity at their domicile. This declaration must be obtained at regular intervals of no more than one year.

c) Under no. 18 c), investments in public-sector credit institutions within the meaning of Article 2(5) of the above-mentioned Directive are also eligible for inclusion in the guarantee assets. In Germany, this is KfW Banking Group (Kreditanstalt für Wiederaufbau).

d) Additionally, under no. 18 d), investments in multilateral development banks that have been assigned a 0% risk weight in accordance with Article 117 (2) of Regulation (EU) No. 575/2013 of 26 June 2013, which was last amended by Delegated Regulation (EU) 2015/62 of 17 January 2015, are eligible for inclusion in the guarantee assets.

e) No. 18 is of a subsidiary nature. Only investments in central banks and credit institutions that cannot be allocated to another number in the list of investments fall under this provision. These are primarily call money, term and time deposits, savings deposits, loans, registered bonds without a legally established cover pool, savings certificates and current balances.

By contrast, investments in home loan and savings contracts are not eligible for inclusion in the guarantee assets because they are not investments that are determined by the capital markets.

B.5. Opening clause (section 2 (2) of the AnlV) and excluded investments (section 2 (4) of the AnlV)

a) As in the past, the opening clause allows assets to be included in the guarantee assets that are not listed in the list of investments, do not meet the criteria set out there, or exceed the minimum diversification requirements in section 3 (2) to (5) of the AnlV. Investments that are subject to the general minimum diversification requirement of 50% (see B.3.4) may not be included in the guarantee assets above and beyond this limit via the opening clause because this clause only permits the special minimum diversification requirements to be exceeded.

The general investment rules of security, profitability and liquidity also apply without restriction when the opening clause is used. It is therefore necessary to examine with the same care as for all other investments in the guarantee assets whether the investment complies with the general investment rules.

The 20% limit for unmatched investments in section 5 of the AnlV in conjunction with no. 6 b) of the Annex to section 5 (1) of the AnlV must also not be exceeded in the opening clause. A 30% limit applies to institutions for occupational retirement provision.

b) Under section 2 (4) no. 1 of the AnlV, direct and indirect investments in consumer credits, working capital loans, movable goods, or claims on movable goods, and in intangibles are excluded. This prohibition does not extend to the direct and indirect acquisition of financial instruments in accordance with section 2 (1) of the AnlV for which the above-mentioned assets are underlyings, provided that the acquisition of the financial instruments is expressly permitted (e.g. asset-backed securities that may also be based on consumer credits in accordance with B.4.6; hedge funds and investments in commodities in accordance with section 3 (2) nos. 2 of the AnlV, provided that the physical delivery of raw materials, goods, or precious metals to the insurance undertaking is excluded).

c) Section 2 (4) no. 2 of the AnlV generally excludes direct and indirect equity interests in group companies of the insurance undertaking within the meaning of section 18 of the AktG. Equity interests in group companies are not eligible for inclusion in the guarantee assets because they do not comply with the objective of the guarantee assets, which is to ensure that obligations under the insurance contracts can be fulfilled via purely financial investments. This function can only be fulfilled by investments that are actually recoverable when they are needed. These do not include equity interests in group companies because it must be assumed in the case of such investments that their value is normally correlated with the value of the insurance undertaking. If the insurer gets into financial difficulties, as a rule the recoverability of the investee is also impaired. These considerations also apply to investments in shares of a group company that are included in an organised market and thus otherwise satisfy the criteria in no. 12. Such investments are therefore not eligible for inclusion in the guarantee assets. This does not rule out the eligibility of an investment of funds of the insurance undertaking in units of sufficiently mixed and diversified investment funds that in turn contain shares of group companies of the insurance undertaking within the meaning of section 18 of the AktG. A condition for this is that a passive investment strategy is followed that ensures appropriate risk diversification by tracking a securities index recognised in accordance with section 209 (1) of the KAGB or the corresponding provisions of another EEA member state. Receivables due from subordinated liabilities and profit participation rights issued by group companies are deemed to be equivalent to equity interests due to their equity character and cannot therefore be included in the guarantee assets.
However, investments in undertakings in which the insurance undertaking is only passively invested, without being able to influence its business operations or implement ongoing development projects (e.g. investments in real estate or infrastructure companies), are eligible. The determining factor here is that the investment is purely financial and not a strategic equity investment.

d) Under section 2 (4) no. 3 of the AnlV, investments in companies to which the insurance undertaking or its group companies within the meaning of section 18 of the AktG have outsourced their business operations in whole or in part (section 7 no. 2 of the VAG), or that carry out activities directly connected with the insurance business on behalf of the insurance undertaking or its group companies within the meaning of section 18 of the AktG, are not eligible.

Another condition is that the scope of the business operations of these companies is materially determined by the object of the outsourcing of functions or the service activity. This can be assumed to be the case if the functions or services outsourced by the insurance undertaking or its group companies account for more than 50% of its total revenue.
An equity interest is also not eligible if the insurer is only indirectly invested via a holding company in a company to which it has outsourced functions. The exclusion also extends to such arrangements in order to prevent circumventions by using an intermediate holding company (see GB BAV 1999 Part A p. 58 no. 1.1.3).
Likewise, those investments that are expressly deemed to be not eligible cannot be included in the guarantee assets via the opening clause in section 2 (2) of the AnlV. As a general principle, they must be regarded as not eligible because they are not purely financial investments.

B.6. Special minimum diversification requirements (section 3 (2) to (6) of the AnlV)

The special minimum diversification requirements in section 3 (2) to (6) of the AnlV apply to direct and indirect investments. Indirect investments are not only assets held via investment funds, but also those under section 2 (1) of the AnlV that pursue a corresponding investment objective, that arise from the repackaging of assets, or whose yield and/or repayment depends on investments in accordance with section 3 (2) no. 1 and 2 of the AnlV.

B.6.1 Individual investment types

a) Directly and indirectly held investments in asset-backed securities and credit-linked notes, as well as other directly and indirectly held investments in accordance with section 2 (1) of the AnlV whose yield or repayment is linked to credit risks, or that are used to transfer the credit risk of a third party, are limited to 7.5% of the guarantee assets (section 3 (2) no. 1 of the AnlV).

b) Direct and indirect investments in accordance with section 2 (1) no. 17 of the AnlV, assets held via section 2 (1) no. 16 of the AnlV that cannot be allocated to the numbers in the list of investments in section 2 (1) of the AnlV, and other directly and indirectly held investments in accordance with section 2 (1) of the AnlV, whose yield or repayment is linked to hedge fund or commodity risks, may not exceed 7.5% of the guarantee assets in accordance with section 3 (2) no. 2 of the AnlV (ratio for alternative investments).

Investments in accordance with sections 2 (1) no. 17 of the AnlV also include (funds of) hedge funds. In addition, investments may be made outside the investment law via structured products in investments whose debtor (issuer) is domiciled in the EEA and whose yield or repayment is linked to (funds of) hedge funds, if the insurance undertakings are aware of the information on the linked (funds of) hedge fund, the main features and how the product functions. These investments must also be counted towards the ratio for alternative investments. This classification is made irrespective of whether a capital guarantee is granted or not. The requirements relating to the redemption of investments in (funds of) hedge funds in accordance with section 227 of the KAGB or section 283 (3) of the KAGB shall be applied to indirect hedge fund investments via structured products, as the packaging, e.g. in the form of a bearer bond, does not change the risk associated with the investment in (funds of) hedge funds. The issuer merely transmits the funds invested and does not assume any liability or risk whatsoever. This also includes the prohibition of lock-up periods. In the case of structured products linked to (funds of) hedge funds in which these requirements cannot be met for the underlying investments if a side pocket is formed, the side pocket must be separated out if the product is to remain eligible as a guarantee asset. This requires, for example, the issue of a new debt instrument. If there is no possibility of separation for the structured product because it normally involves only a single asset, the structured product in total is no longer eligible for inclusion in the guarantee assets. Double leverage, e.g. at the level of the structure and in the underlying (fund of) hedge fund, is not permitted and results in the investment not being eligible for the guarantee assets.

In addition, the ratio for alternative investments includes directly and indirectly held investments in accordance with section 2 (1) of the AnlV, whose yield or repayment is linked to commodity risks. However, the physical delivery of commodities to the insurance undertaking must be excluded. In the case of structured commodity products, this involves examining the features, the functioning and, if applicable, the composition of the commodity index prior to the acquisition. Structured commodity products are counted towards the alternative investment ratio irrespective of whether a capital guarantee has been issued for them or not.

c) In accordance with section 3 (2) no. 3 of the AnlV, direct and indirect investments in accordance with section 2 (1) no. 4 (c) of the AnlV are limited to 5% of the guarantee assets.

d) Up to 5% of the guarantee assets can be invested as part of the opening clause. The supervisory authority may approve an increase of up to 10% (section 3 (2) no. 4 of the AnlV). BaFin will not issue approvals up to the 10% limit on a global basis, but only for individual investments or investment types following an examination of their risk content and the risk-bearing capacity of the insurance undertaking. The limit of 1% of the guarantee assets set out in section 4 (4) of the AnlV is not affected.

B.6.2 Risk assets

a) The share of directly and indirectly held investments in shares, profit participation rights, receivables due from subordinated liabilities and equity interests (nos. 9, 12 and 13), as well as of investments that are subject to the ratio set out in section 3 (2) nos. 2 and 3 of the AnlV, is limited by section 3 (3) sentence 1 of the AnlV to a maximum of 35% of the guarantee assets. Investments in securities loans (section 2 (1) no. 2 a) of the AnlV) that relate to shares within the meaning of no. 12 of the list of investments (section 3 (3) sentence 2 of the AnlV) and direct and indirect investments in high-yield bonds (see B.3.1 e)) are also counted towards this ratio.

b) The extent to which direct or indirect investments in shares and other risk assets are acceptable in individual cases depends crucially on the risk-bearing capacity of the insurance undertaking. This is determined in particular by the extent of excess coverage and the nature and amount of the valuation reserves in the guarantee assets. Another important consideration is whether potential losses can be mitigated by hedging strategies, as well as the product policy pursued.

For this reason, investments in substantial volumes of risk assets are only possible if fluctuations in their value can be offset. If this is not the case, the coverage of the technical provisions would be jeopardised, especially in the event of a sharp fall in share prices. In other words, the scope for investing in risk assets decreases as valuation reserves decline and/or equity market volatility increases. Compliance with this principle is indispensable for an appropriate risk/return structure.

c) Investment funds in accordance with sections 2 (1) no. 15 and 16 of the AnlV must be generally transparent and must be indirectly attributed to the minimum diversification requirement. This means that the insurance undertaking must be informed in a timely manner about the composition of the fund assets. In the case of special AIF, the asset structure is transparent if the insurance undertaking is informed about the composition of the investment fund by the company that decides on the investment of the invested funds within a maximum of one month after the end of the quarter concerned, such that the extent of the limit under section 3 (1) of the AnlV and the assets subject to the ratios under section 3 (2) nos. 1 to 3 and subsection (3) sentences 1 and 3 of the AnlV can be identified within this period and that compliance with the minimum diversification requirements is ensured. The period for mutual funds is three months.

Investment funds under section 2 (1) no. 17 of the AnlV may not be indirectly attributed with regard to the mix, as they are subject in total to the ratio for alternative investments in accordance with section 3 (2) no. 2 of the AnlV.

d) In the case of investments in units and shares in investment funds under section 2 (1) nos. 15 to 16 of the AnlV, the use of derivatives in accordance with section 197 (2) of the KAGB in conjunction with the Derivatives Regulation (Derivateverordnung) or the corresponding provisions of another member state of the EEA may give rise to increased potential market risk. For this reason, the maximum amount of up to 200% permitted by the fund rules, the full prospectus, the investment guidelines, the articles of association, or an additional contractual agreement (side letter) shall be applied when calculating the risk asset ratio in accordance with section 3 (3) sentence 1 of the AnlV to the extent that the increased potential market risk cannot be determined in a timely manner (section 3 (4) sentence 2 of the AnlV). The insurance undertaking must be aware of the increased potential market risk within the notice periods for the transparency of the investment funds set out in the indents above.

e) The direct and indirect investments in equity interests in accordance with no. 13, together with the direct and indirect investments in accordance with no. 9 a), may not exceed the ratio of 15% of the guarantee assets due to their low fungibility (section 3 (3) sentence 3 of the AnlV). By contrast, investments in holding companies whose sole purpose is to hold listed shares in accordance with no. 12 only fall under the risk asset ratio of 35%.

f) The supervisory authority is authorised to decrease the proportion of risk assets in individual cases to 10% of the guarantee assets (section 3 (6) of the AnlV). This authorisation is a key additional supervisory instrument for countering undesirable developments even more efficiently in individual cases.

B.6.3 Real estate

Direct and indirect investments in loans in accordance with section 2 (1) no. 4 b) of the AnlV, in real estate in accordance with section 2 (1) no. 14 a), b) and c) of the AnlV and in real estate held through investment funds in accordance with section 2 (1) no. 16 of the AnlV and meeting the requirements of section 2 (1) no. 14 c) of the AnlV may not exceed 25% of the guarantee assets (section 3 (5) of the AnlV).

B.7. Matching rules (section 5 of the AnlV, Annex to section 5 sentence 1 of the AnlV)

a) With regard to currency risk, the guarantee assets of an insurance undertaking must generally be covered in the same currency in which the liabilities are denominated. At least 80% of the investments must be denominated in the currency in which the liabilities must be settled, whereby a maximum of 20% – or 30% for institutions for occupational retirement provision – of the cover may be unmatched (no. 6 b) of the Appendix to section 5 sentence 1 of the AnlV). In the guarantee assets, no. 7 of the Annex to section 5 sentence 1 of the AnlV also stipulates that cover of up to 50% in assets denominated in euros will be deemed to be matching cover for liabilities that are denominated in the currency of a member state of the EEA whose currency is not the euro, provided that this is justified by prudent business judgement. Currency hedges can be considered as permitted in principle when fulfilling the matching rules. In doing so, the requirements in the Circular on derivative financial instruments and structured products must be complied with.

b) Land and land rights are deemed to be invested in the currency of the state in which they are located. Shares and units are deemed to be invested in the currency of the state in which they are included in an organised market.

c) Shares and units that are not included in an organised market are deemed to be invested in the currency of the state in which the issuer of the securities or units is domiciled.

B.8. Non-application of investment requirements

If one of the conditions required by the statutory investment rules or the present Circular ceases to apply to an investment of guarantee assets, that investment shall be removed from the guarantee assets in the interests of the policyholders.

C. Separate guidance notes on the investment of the guarantee assets of German Pensionsfonds

C.1. General

For Pensionsfonds, the provisions of section 124 (1) of the VAG must be observed. In addition to section 124 (1) of the VAG, Chapter 4 of the German Regulation on the Supervision of Pensionsfonds (Pensionsfonds-Aufsichtsverordung – PFAV) specifies investment rules of a qualitative and quantitative nature for the guarantee assets of Pensionsfonds in greater detail.

In section 16 (2) of the PFAV, analogous to section 1 (3) of the AnlV, the obligation to ensure qualified investment management, appropriate internal capital investment rules and control procedures as well as a strategic and tactical investment policy is emphasised. The investment and risk management is thus also particularly important for Pensionsfonds.

Section 17 of the PFAV specifies the investment types eligible for the guarantee assets. The Pensionsfonds are independently responsible for examining the eligibility for the guarantee assets. If there are uncertainties with regard to the eligibility of a particular investment, the investment must not to be made.

The following sections describe the extent to which the information in Part B of the present Circular also applies to Pensionsfonds. Major differences to the rules for primary insurance undertakings, which are subject to the provisions for small insurance undertakings (sections 212 to 217 of the VAG), and for German Pensionskassen exist in particular with regard to the requirements for the mix of the different investment types (section 18 of the PFAV). In this respect, Pensionsfonds have greater investment freedom.

C.2. Investment management

The information on investment management in B.2. applies to Pensionsfonds mutatis mutandis.

C.3. General investment rules

a) As a general rule, the information on security in B.3.1 is also applicable to Pensionsfonds, subject to the proviso that the provisions of section 2 (1) of the AnlV are replaced by the corresponding provisions of section 17 (1) of the PFAV. The quantitative cap of 5% for high-yield bonds (see B.3.1 e)) does not apply to Pensionsfonds. The directly and indirectly held investments in high-yield bonds must be limited to a prudent level in the case of Pensionsfonds.

b) The information on profitability in B.3.2 applies to Pensionsfonds accordingly, subject to the proviso that the provisions of section 2 (1) of the AnlV are replaced by the corresponding provisions of section 17 (1) of the PFAV.

c) The information on liquidity in B.3.3 applies to Pensionsfonds mutatis mutandis.

d) The information on the mix in B.3.4 and on the special minimum diversification requirements in B.6. does not apply to Pensionsfonds. However, for Pensionsfonds the investment mix is designed to mitigate risks typical to investments by offsetting risks between the various assets and thereby contributing to the security of the entire portfolio. Instead of the provisions on the mix in accordance with section 3 of the AnlV, the provisions on the mix in accordance with section 18 of the PFAV apply.

In accordance with section 18 (1) sentence 1 of the PFAV, subject to the further provisions of section 18 of the PFAV, the mix is determined by the respective pension plan, in particular with regard to the investments held for the account and at the risk of employees and employers. In all other respects, the risk-bearing capacity of the Pensionsfonds is of prime importance for determining the mix. This is determined in particular by the extent of excess coverage and the nature and amount of the valuation reserves in the guarantee assets. For this reason, investments in substantial volumes of risk assets are only possible if fluctuations in their value can be offset. Direct and indirect investments in accordance with section 17 (1) no. 17 of the PFAV must be limited to a prudent level (section 18 (1) sentence 3 of the PFAV).

The general minimum diversification requirement of 50% does not apply to Pensionsfonds, nor do the special minimum diversification requirements of the AnlV. The fundamental waiver of quantitative ceilings, in particular for risk assets, corresponds to the power of the supervisory authority in accordance with section 18 (2) sentence 1 of the PFAV to reduce the proportion of directly and indirectly held investments in accordance with section 17 (1) no. 2 a), nos. 9, 10, 12 and 13 of the PFAV if this is necessary to safeguard the interests of pension beneficiaries. The Supervisory Authority has equal power for directly and indirectly held investments in accordance with section 17 (1) no. 15, 16 and 17 of the PFAV as well as other direct and indirect investments in accordance with section 17 (1) whose yield or repayment is linked to hedge fund or commodity risks (section 18 (2) sentence 2 of the PFAV).

e) The information on diversification in B.3.5 a) applies to Pensionsfonds accordingly. The other information on diversification in B.3.5 applies to Pensionsfonds only insofar as they have a corresponding basis for Pensionsfonds in section 19 of the PFAV. The 20% ratio for limiting manager risk (see B.3.5 b)) does not apply to Pensionsfonds.

C.4. List of investments of section 17 (1) of the Regulation on the Supervision of Pensionsfonds

The information on the list of investments in B.4. also applies in principle to Pensionsfonds, provided that the provisions of the AnlV are replaced by the corresponding provisions of the PFAV.

In the case of investments in accordance with section 17 (1) nos. 12 and 13 a) of the PFAV, the shares, unlike investments in accordance with section 2 (1) nos. 12 and 13 a) of the AnlV, need not be fully paid up.

Policy loans in accordance with section 2 (1) no. 5 of the AnlV are not an eligible investment type for Pensionsfonds. In this respect, B.4.3 g) is not applicable to Pensionsfonds. However, in accordance with section 17 (1) no. 5 of the PFAV, Pensionsfonds may invest their guarantee assets in insurance contracts which are entered into with life insurance undertakings within the meaning of section 1 (2) sentence 1 of the Pension Contracts Certification Act (Altersvorsorgeverträge-Zertifizierungsgesetzes – AltZertG) to cover obligations to pension beneficiaries.

If, in B.4. references are made to minimum diversification requirements of the AnlV, these must not be applied to Pensionsfonds. The minimum diversification requirements of section 18 of the PFAV apply to Pensionsfonds (see section C.3. d). Investments in insurance contracts with a life insurance undertaking in accordance with section 17(1) no. 5 of the PFAV are considered adequately mixed and diversified if the investments of the life insurance undertaking are in themselves sufficiently mixed and diversified (section 16 (5) of the PFAV).

Guidance on the provisions on diversification in B.4. only apply to Pensionsfonds to the extent as they also have a corresponding basis for Pensionsfonds in section 19 of the PFAV.

With regard to the transitional provisions governing investments in the guarantee assets of Pensionsfonds, reference is made to section 29 (3) of the PFAV.

C.5. Opening clause (section 17 (2) of the PFAV) and prohibited investments (section 17 (4) of the PFAV)

a) The opening clause allows assets to be included in the guarantee assets of Pensionsfonds that are not listed in the list of investments or do not meet the criteria set out there. The general investment rules of security, profitability and liquidity also apply without restriction when the opening clause is used. It is therefore necessary to examine with the same care as for all other investments in the guarantee assets whether the investment complies with the general investment rules.

A Pensionsfonds can invest up to 10% of the guarantee assets (section 18 (1) sentence 2 of the PFAV) as part of the opening clause.

The 30% limit for unmatched investments in section 20 of the PFAV in conjunction with no. 6 b) of Annex 3 to section 20 of the PFAV may also not be exceeded in the opening clause.

b) The information on prohibited investments in B.5. b), c) and d) applies to Pensionsfonds accordingly, provided that the provisions of the AnlV are replaced by the provisions of the PFAV.

C.6. Matching rules (section 20 of the PFAV, Annex 3 to section 20 of the PFAV)

The information in B.7. applies to Pensionsfonds accordingly. The provisions of the Annex to section 5 sentence 1 of the AnlV are replaced by the provisions of Annex 3 to section 20 of the PFAV. In the case of Pensionsfonds, a maximum of 30% of the liabilities’ cover may be unmatched (see no. 6 b) of Appendix 3 to section 20 of the PFAV).

C.7. Non-application of investment requirements

The information in B.8. applies to Pensionsfonds accordingly.

D. Date of application of the Circular and repeal of Circulars 1/2002 (VA), 7/2004 (VA) and 4/2011 (VA) and other interpretative decisions

The administrative practice described in the present Circular is thus applicable upon publication of the Circular. The Circulars on investments in asset-backed securities (ABS) and credit linked notes (CLN) 1/2002 (VA) (Rundschreiben über Anlagen in Asset Backed Securities (ABS) und Credit Linked Notes (CLN)), the Circular on investments in hedge funds 7/2004 (VA) (Anlagen in Hedgefonds) and the previous Investment Circular 4/2011 (VA) (Kapitalanlagerundschreiben ) will be repealed upon publication of the present Circular. In addition, the following interpretative decisions will be repealed with the publication of the present Circular:

• Guidance notes on Circular 4/2011 (VA) B.4.3 d) on investments in corporate loans (Anlage in Unternehmensdarlehen) of 10 June 2013

• Guidance notes on Circular 4/2011 (VA) on high-yield investments (Anlagen im High-Yield-Bereich) of 24 June 2013

• Guidance notes on the debtor-related restrictions on installations at the EU, ESM and EFSF (Schuldnerbezogenen Beschränkung von Anlagen bei der EU, dem ESM sowie der EFSF) of 7 May 2014