A. Preliminary remarks

To all insurance undertakings authorised to conduct direct insurance business

a) that are domiciled in Germany
b) that are domiciled in a member state of the European Community or another contracting party to the Agreement on the European Economic Area
c) within the meaning of section 110d of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz - VAG

The following Guidance Notes represent the new administrative practice of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) governing the investment of the restricted assets of insurance undertakings and supplement the collective decree dated 15 April 2011 (Ref. no. VA 54 – I 3200 – 2010/0009).

B. Notes on the Investment of Restricted Assets of Insurance Undertakings

B.1. General

Under section 54 (1) of the VAG, the guarantee assets and the other restricted assets must be invested in a way that ensures maximum security and profitability, taking into account the type of insurance business conducted and the structure of the undertaking, while safeguarding the insurance undertaking’s liquidity at all times and maintaining an appropriate mix and diversification. Section 54 (2) of the VAG lists those investments that are permitted in principle. The Regulation on the Investment of Restricted Assets of Insurance Undertakings (Verordnung über die Anlage des gebundenen Vermögens von Versicherungsunternehmen – AnlV) issued on the basis of section 54 (3) of the VAG specifies these statutory requirements in greater detail (section 2 (1) of the AnlV). The obligation to ensure qualified investment management, appropriate internal investment rules and control procedures (section 1 (2) and (3) of the AnlV) 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 today places even greater demands on insurance undertakings than in the past. Reasons for this include the considerably greater variety and complexity of investment products, the lower risk-free returns and the high volatility of investments.

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 investment rules.

All information given in this Circular relates solely to restricted assets. The only exception applies to investments by a Pensionskasse in a sponsoring company (section 4 (6) of the AnlV). In all other respects, insurance undertakings are free to invest the remainder of their assets. However, the Supervisory Authority may issue instructions if an investment might jeopardise an insurer’s solvency (section 81b (3) of the VAG).
It may prohibit equity interests in undertakings that are not subject to insurance supervision and whose nature or scope could jeopardise the insurance undertaking (section 82 of the VAG).

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 (section 1 (2) sentence 1 of the AnlV). 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.

Risk management is particularly important in light of the prudent person principle. The Circular 3/2009 (VA) on “Minimum Requirements for Risk Management in Insurance Undertakings” (Aufsichtsrechtliche Mindestanforderungen an das Risikomanagement – MaRisk VA) already addresses key qualitative requirements for risk management and the internal risk treatment and control system. The requirements set out in the present Circular should be understood as more detailed specifications of the rules contained in Circular 3/2009 (VA).

In view of the wide variety of insurance business, the extent to which the requirements described in the following must be complied with may differ depending on the volume, structure and nature of the insurance business conducted, as well as on the nature and scope of the investments (proportionality principle in the MaRisk VA). However, 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. Only exemptions in accordance with section 64a (5) of the VAG are possible (exemptions from internal audit and/or preparation of a risk report).

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 (section 1 (3) sentence 1 of the AnlV). 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 7 (2) sentence 2 of the VAG; for derivative financial instruments, see Circular 3/2000) change the insurance undertaking’s risk position. The insurance undertaking must identify, assess, disclose, manage, treat and control the specific risks of the investments and the derivative financial instruments. The following material risks in particular must be considered in the investment process:

i) market risk (market risk refers to the risk resulting directly or indirectly from fluctuations in the level and/or volatility of market prices for assets and financial instruments; market risk includes currency risk and interest rate risk);

ii) credit risk (credit risk is the risk arising from the default of or changes in the credit quality or credit rating (credit spread) of issuers of securities, counterparties and other debtors against which insurance undertakings have claims);

iii) concentration risk (concentration risk refers to the risk arising from the insurance undertaking assuming single or highly correlated risks with significant loss exposure and/or potential defaults);

iv) liquidity risk (liquidity risk is the risk that an insurance undertaking is not in a position to meet its financial obligations as they fall due for lack of fungibility);

v) legal risk (the legal risks inherent in the investment, in particular complex contractual terms 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) 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 permitted investments, taking into account the statutory provisions and supervisory requirements (investments that are not to be acquired as a matter of principle must be explicitly excluded if necessary, e.g. investments in structured products);

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, ratings, 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;

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 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 control procedures, consisting of an internal reporting and control system, as well as an internal audit function, 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 rules set out in section 8 of Circular 3/2009 (Outsourcing of functions and services within the meaning of section 64a (4) of the VAG) must be complied with. It must be ensured 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, control and report on the risks associated with the investment activity. 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). Stress tests must be performed at least every quarter for this purpose. 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), including 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 ratings to be met by issuers (debtors) at individual company and group level. External ratings must be issued by recognised rating agencies; credit quality may also be assessed by the insurance undertaking itself (internal rating), and such a procedure may be appropriate to avoid dependencies on rating agencies if the insurance undertaking has the personnel and technical resources necessary to do so, taking into account the nature of the investment. 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;

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 restricted 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 restricted 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 agreement to outsource functions or a service 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 restricted assets and do not involve financial innovations. In the latter case, the requirements governing the outsourcing of risk management in accordance with the circulars on Investments in Structured Products (Circular 3/99), Asset-Backed Securities and Credit-Linked Notes (Circular 1/2002), as well as Hedge Funds (R7/2004 (VA)), continue to apply.

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 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 investment management and for the independent risk control function at the insurance undertaking must be separated at management board level (see MaRisk VA 7.2.1).

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 monthly to the management board and the independent risk control function. 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 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. The report shall 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.

B.2.4 Asset/liability management

a) Asset/liability management (ALM) is a key condition for developing the strategic investment policy. The implementation and proper functioning of the ALM process, which must be anchored in a defined workflow, is particularly important. The process must be suitable for monitoring and managing the asset and liability positions of the undertaking so as to ensure that the assets invested are appropriate to the liabilities and risk profile of the undertaking.

b) The following general principles must be observed when implementing 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. It should be noted that, 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. The investment rules in section 54 (1) of the VAG, the rules set out in the AnlV and the requirements of the applicable circulars are additional constraints on ALM. As a rule, fair values must be considered in addition to book values in order to include the economic perspective.

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. Such risks may in particular be market risks, underwriting risks and liquidity risks. Risks arising from embedded options (e.g. in the case of structured products) or guarantees issued must also be taken into consideration.

As a rule, however, 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 predictions about the future development of the environment and the undertaking (e.g. capital market trends, new business trends, changes in the cash flow profile). 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. The assumptions made must be documented to facilitate a subsequent target/actual comparison and to more easily identify potential forecasting errors.

In the subsequent 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 should reflect the objectives of ALM. It must be ensured that the ALM methods used for the analysis are appropriate to the size and complexity of the insurance undertaking, as well as the risk of the insurance business conducted and the nature of the underwriting commitments.

Among other things, the analysis must include tests of the elasticity of the 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 cover for the restricted assets. The insurance undertakings may use standardised approaches and proprietary calculation methods for this purpose.

The assumptions made in the course of ALM must be carefully selected. As with the methodologies, they must be reviewed regularly and adapted if necessary.

iii) The results of the ALM analysis should suggest concrete alternative courses of action and include recommendations to the responsible management board members where appropriate. There are various ways to manage or hedge the risks identified. One option is asset re-allocation and the definition of internal limits. Additionally, derivatives may be used for hedging purposes (see Circular 3/2000 for potential uses of derivatives).

iv) The decision on the measures to be initiated is the responsibility of the management board members responsible. Supplementary management rules to be defined in advance may also be taken into consideration. Decisions that depart from the results of the analysis must be justified and documented transparently so as to facilitate subsequent control.

v) Implementation of the measures resolved is followed by their control. This includes in particular target/actual comparisons of target parameters and actual outcomes. The reasons for any deviations should also be analysed in the course of this process. 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.

c) 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.

d) To allow the effects of changes in general conditions (e.g. changes in the law, changes in the capital market environment) or strategic decisions (e.g. the launch of a new insurance product) 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), in particular to verify the strategic investment policy.

e) The information and results generated by ALM must be transmitted as part of an appropriate reporting process to those areas that are involved in the individual process steps (including the independent risk control function).

f) The ALM process must be anchored appropriately 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 if applicable, for example the accounting function. An insurance undertaking must therefore be organised in such a way that close, permanent cooperation between these and other areas involved in ALM is possible. This demands good communication and coordination in particular. The organisation of ALM must be structured to match the nature of the insurance business conducted and the size and complexity of the insurance undertaking. 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.

g) The outsourcing of ALM to external parties or to a group company of the insurance undertaking within the meaning of section 18 of the AktG is permitted. The requirements governing the outsourcing of risk management apply, with the necessary modifications, in such cases (see B.2.3 (d)). However, even in those cases where ALM is outsourced, responsibility for ALM remains with the responsible management board member of the insurance undertaking. This applies in particular to the definition of the objectives of ALM and the decision on the measures to be adopted. Outsourcing can therefore solely extend to ALM analysis and the formulation of alternative courses of action and recommendations. Additionally, advisory and supporting activities relating to the ALM process may be outsourced.

The results of the outsourcing partner must be examined and discussed with that partner where necessary. In addition, it must be ensured that the outsourcing partner makes appropriate reports and that its services can be monitored for compliance with the defined requirements.

If functions that relate in part to ALM have been outsourced (e.g. the investment activity), adequate documentation is required and interfaces must be defined.

B.2.5 Internal auditing

The internal audit function at insurance undertakings must include all aspects of investment activity. A risk-based audit plan must be used to ensure that weaknesses in internal control and deficiencies in the operating systems are identified at an early stage.

Internal audits must be performed by experts who are familiar with the risks inherent in the investment portfolio.

The auditors 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). They 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 of a maximum of one year, the auditors should also examine selected asset classes in the portfolio and the written investment rules and procedures in order to obtain assurance that the insurance undertaking meets its obligations to the Supervisory Authority under this Circular.

The internal audit function must prepare a written report on each audit in a timely manner and, as a general rule, must submit this report to the responsible members of the management. In particular, the report must include a description of the subject of the audit and the findings, including any planned measures where appropriate. The results of the audit must be assessed; material deficiencies must be emphasised. In the event of serious deficiencies, the report must be submitted immediately to the management. All members of the management must be informed immediately in the event that the audit results in severe findings against members of the management. The undertaking must define what constitutes material/serious deficiencies (see MaRisk VA 7.4, subsection 7). The elimination of any deficiencies identified must be suitably monitored and documented.

Section 64a (5) of the VAG applies to exemptions from the requirement to establish an internal audit function.

B.3. General investment rules in section 54 (1) of the VAG

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 of section 54 (1) of the VAG therefore has utmost priority. This applies both to each individual investment and to the portfolio as a whole.

Speculative investments are prohibited. 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. In the case of long-term investments – such as certain product scenarios involving structured products (see Circular 3/99 for information on structured products) – that can be entered into with a very low coupon compared with standard market yields at the time when the asset is acquired, or even with a zero coupon, there is a risk that the economic substance of the investments will be eroded, thereby jeopardising the interests of policyholders. For this reason, such products may only have a maximum maturity of twelve years and the present value of the capital guarantee must equal at least 50% of the capital invested. In the case of longer maturities, the structured product must have a guaranteed floor over its entire term that is at a minimum equal to the current technical interest rate for life insurance undertakings (currently 2.25%). It is also sufficient if the average coupon reaches this level over the entire maturity of the instrument (see BaFinJournal 06/07, p. 19). This fact is of particular importance because insurance undertakings may invest on a large scale in debt instruments and loans that are only subject to the general 50% minimum diversification requirement. As a result, particular attention must be paid to the requirements governing the return on investments.

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)).

See the explanations in B.4.12 for information on the requirements governing the fungibility of funds.

c) If prime-rated investments such as quoted bearer bonds have standard market ratings, the ratings issued by rating agencies that have been examined and registered in accordance with Regulation (EC) No. 1060/2009 must also be taken into consideration when assessing the security of an investment.

Assets they have rated with an investment grade rating (e.g. long-term BBB- ratings by Standard & Poor’s and Fitch or Baa3 by Moody’s, and e.g. short-term A-3 ratings by Standard & Poor’s, F 3 by Fitch or Prime 3 by Moody’s) may be included in the restricted assets.

As a rule, using two rating agencies is sufficient; if there are two different ratings, the lower of the two ratings must be applied. If three or more ratings leading to different assessments are available to the insurer, the lower of the two best credit ratings must be used. However, such assets may not be included in the restricted assets if other circumstances or risks, such as current negative company news or general market trends, indicate that a differing, negative assessment is more appropriate.

The insurance undertaking may include certain unrated assets in its restricted assets as part of the list of investments (section 2 (1) of the AnlV), subject to supervisory requirements to the contrary (e.g. Circular 1/2002), if its own auditable assessment indicates that the level of security is positive. An insurance undertaking’s own internal rating may only be recognised if it has the personnel and technical resources necessary to perform such a rating, taking into account the nature of the investment.

An investment grade rating or an internal rating equivalent to this rating category must be verified at least once a year, or more frequently if indicated by other negative circumstances. The rating procedure must be documented transparently. If an investment’s rating is downgraded during its term to a rating that is no longer investment grade, or if the loss of an investment grade rating 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. The same applies to internal ratings.

d) The principle of investment security must also be complied with in the case of indirectly held assets. In the case of investments in German fund units and investment stock corporations, as well as foreign investment companies domiciled in another member state of the EEA (hereinafter referred to as a “company that decides on the investment of funds deposited for investment”), the principle of investment security applies not only to the fund units or shares in the aggregate, but also individually to each indirectly held asset. Consequently, it is insufficient if the fund or company assets are only predominantly secure. If investments have standard market ratings, the insurer must ensure that the company that decides on the investment of funds deposited for investment only acquires investments that have been awarded an investment grade rating by recognised rating agencies. Reference is made to e) below with regard to investments with standard market ratings that have not been awarded an investment grade rating. The company that decides on the investment of funds deposited for investment must have made a positive assessment of the security of investments that do not have standard market ratings.

If bonds are downgraded during the holding period to a rating below high-yield within the meaning of e) below (below e.g. B- by Standard & Poor’s and Fitch or B3 by Moody’s), the following procedure must be applied:

In the case of a special fund with more than 3% of the fund volume invested in assets lower than B- / B3, it must be ensured that the assets concerned are sold or removed from the fund. If this is not possible, the entire fund is no longer eligible for inclusion in the restricted assets. It would be in the interests of the insurance undertaking to sell it (as a rule within 6 months) or to reclassify it to other assets.

In the case of a special fund with less than 3% of the fund volume invested in assets lower than B- / B3, the insecure assets will be tolerated for up to six months. If the assets have not been upgraded within this period, they must be sold. If this is not possible, the entire fund is no longer eligible for inclusion in the restricted assets. It would be in the interests of the insurance undertaking to sell it (as a rule within 6 months) or to reclassify it to other assets. In contrast to the previous paragraph, two six-month periods are involved here, firstly the toleration period and secondly the period in which the fund must be sold.

In the case of mutual funds with more than 3% of the fund volume invested in assets lower than B- / B3, the insurer should obtain information about the assets concerned from the investment company and urge the fund manager to remove those assets from the fund. If it is not possible to remove the assets from the fund, the insurer should adopt the same approach as for special funds.

In the case of mutual funds with less than 3% of the fund volume invested in assets lower than B- / B3, the insecure assets will be tolerated for up to six months. If the assets have not been upgraded within this period, the insurer should obtain information about the assets concerned from the investment company and urge the fund manager to remove those assets from the fund. If it is not possible to remove the assets from the fund, the insurer should adopt the same approach as for special funds.

Exceptions are permitted with the consent of BaFin in individual cases that must be justified by the insurance undertaking – in particular in the case of negligibly low percentage rates of securities in funds with a rating lower than B-.

Asset-backed securities (ABSs) and similar assets held via investment funds must have an investment grade rating from a recognised rating agency. Investment funds whose guidelines or fund rules permit ABSs and similar assets with a sub-investment grade rating are not eligible for inclusion in the restricted assets. If there is no external investment grade rating from a recognised rating agency, the credit quality of the exposures and the security and profitability of the overall investment can be assessed by the fund manager (see Circular 1/2002). In the case of rating downgrades, the same procedure as for plain vanilla bonds must be applied (see above), although the 3% limit already applies here for a rating of e.g. BB+ by Standard & Poor’s and Fitch or Ba1 by Moody’s. This means that investments covered by section 2 (1) no. 10 of the AnlV are subject to stricter criteria because the high-yield ratio in the restricted assets cannot be applied to these assets.

The insurance undertaking must examine at regular intervals whether the fund or company management has anchored these principles in its investment policy. In the case of special funds, the insurer can influence the investment policy in an advisory capacity in the fund’s investment committee. In the case of mutual funds, in which the insurer is not generally represented on the investment committees, the insurer is required to analyse the reporting documents of the company that decides on the investment of funds deposited for investment to establish whether the principle of investment security is complied with. If the mutual fund or fund management is rated by recognised rating agencies, the results must also be taken into consideration.

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 high-yield bonds that have at least a speculative grade ratings of e.g. B- by Standard & Poor’s and Fitch or B3 by Moody’s.

The security of investments that do not have standard market ratings must be assessed by the company that decides on the investment of funds deposited for investment or by the insurance undertaking. An insurance undertaking’s own internal rating may only be recognised if it has the personnel and technical resources necessary to perform the rating, taking into account the nature of the investment. The assessment must be documented transparently.

The speculative grade rating or the internal rating equivalent to this rating category 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’s rating is downgraded during its term to a rating that is lower than the above-mentioned categories or if the loss of that rating is pending, the insurance undertaking must remove that asset from the restricted assets (for funds, see B.3.1 d).

The directly and indirectly held proportion of high-yield bonds may not exceed 5% of the guarantee assets and the other restricted assets, and must be counted as a risk asset towards the risk asset ratio in accordance with section 3 (3) sentence 1 of the AnlV.

B.3.2 Profitability

a) Investments must be profitable. They must generate a sustainable return, taking into consideration the security and liquidity requirements and the capital market environment. This applies both to each individual investment and to the entire directly and indirectly held portfolio. As a matter of principle, no specific minimum return to be generated is prescribed (see B.3.1 a) with regard to structured products). However, investments that do not generate a return are not eligible.

b) Adequate risk-bearing capacity is necessary to enter into more significant risks from risky assets. It must be possible to estimate the risks reliably at all times.
Investments with a very low guaranteed or even no basic interest rate compared with standard market yields at the time when the asset is acquired and whose overall return is designed to be generated primarily from another source of income, e.g. from an equity portfolio (structured products), may only be acquired to a limited extent and taking into account the insurance undertaking’s risk-bearing capacity. In the case of income shortfalls from these assets, it must be possible to offset the return in the amount of the technical interest rate in personal insurance by other assets or by means of recognised reserves. Default risks existing for the other assets must be included in the analysis. If there is no assurance that the technical interest rate can be generated by other investments alone, the insurance undertaking may not invest in assets that might generate only a low or no return.
With regard to the reinvestment risk in bond investments, callables, i.e. structured bonds or loans that grant a one-time or multiple call right to the issuer (debtor) must also be included in the undertaking's investment and risk management to an appropriate extent. The premium payable for these instruments initially increases the return on the bond or the loan. However, if the call right is exercised because capital market rates have fallen, reinvestment of the funds at a lower rate of interest may jeopardise the ability to generate the guaranteed interest rate in personal insurance.

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 77a 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.

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, and in personal insurance to ensure in particular that the guaranteed interest rate can be generated on a sustainable basis. As a result, investments that do not satisfy the highest security requirements, such as unrated bonds or bonds with only a speculative grade rating (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).

As with all special minimum diversification requirements in section 3 (2) to (6) of the AnlV, the general 50% ratio applies to both the guarantee assets and the other restricted assets. In view of the generally low volume of the other restricted assets, no objections will be raised for reasons of practicality if the ratios are exceeded in this block of assets, provided that the ratio in question is no longer exceeded after the corresponding assets of the guarantee assets and the other restricted assets are added together.

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” (see “Mix” appendix in the reporting circular). 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 the insurance undertaking can demonstrate positive stress test outcomes in the fixed-income scenarios or has reported a high proportion of the 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 restricted assets. The investments by the ten largest issuers (debtors) in fund units, non-voting shares issued by an investment stock corporation, or units issued by an investment company are counted towards this percentage and the percentages stipulated in section 4 (2), (3) and (4) of the AnlV.

Additionally, investments in funds, non-voting shares issued by an investment stock corporation, or units issued by an investment company are subject to different treatment. These instruments are not deemed to be investments in a single issuer (debtor) if they are in themselves sufficiently diversified (section 4 (1) sentence 4 of the AnlV).

Nevertheless, manager risk means that a concentration of assets in one or more funds or company assets managed by a single portfolio manager must be avoided if these account for more than 20% of the restricted 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 fund (the diversification provisions of the Hedge Fund Circular remain unaffected).

c) A concentration of up to 30% of the restricted assets is permitted by section 4 (2) sentence 1 of the AnlV for all investments in single issuers (debtors) specified in section 2 (1) no. 3 a), b) and d) of the AnlV.
Notwithstanding section 4 (1) of the AnlV, a ratio of 15% of the restricted 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 within the meaning of 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 within the meaning of section 2 (1) no. 18 b) of the AnlV, the increased diversification percentage of 15% of the restricted 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 restricted 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 restricted 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 restricted 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 Occupational Pensions Act (Gesetz zur Verbesserung der betrieblichen Altersversorgung – 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 provisions of section 4 (6) of the AnlV implement the requirements of Article 18 (1) f) of Directive 2003/41/EC of the European Parliament and of the Council on the activities and supervision of institutions for occupational retirement provision. 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.

This special instance of the prudent person investment rule is therefore to be regarded as specific law that overrides the general provisions of section 4 (1) of the AnlV. However, it does not apply to investments in sponsoring companies that are also subject to section 4 (2) of the AnlV. Article 18 (1) sentence 2 of Directive 2003/41/EC permits the member states to exempt investments in government bonds (see section 4 (2) sentence 1 of the AnlV) from the general provisions. Based on the intended purpose of the Directive, this must also apply to investments that are awarded a privileged status by section 4 (2) nos. 1 to 4 of the AnlV because they offer a comparable level of security.

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 may not exceed 1% of the restricted 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 as set out in section 4 (4) sentence 1 of the AnlV, the 1% limit applies to the 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 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.

The provisions of section 4 (4) of the AnlV applicable to holding companies are explained in B.4.9.

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

As section 66 (5) 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 restricted assets or 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 restricted 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 (1) 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 under section 54 (1) of the VAG.

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, and property loans that have been insured against default by an insurance undertaking within the meaning of Article 6 of Directive 73/239/EEC (OJ L 228 dated 16 August 1973, p. 3) or Article 4 of Directive 2002/83/EC (OJ L 345 dated 19 December 2002, p. 1), or a reinsurance undertaking within the meaning of Article 3 of Directive 2005/68/EC (OJ L 323 dated 9 December 2005, p. 1), are eligible in accordance with section 2 (1) no. 3 e) 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 a) 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 54 (1) to (3) of the Investment Act (Investmentgesetz – InvG) 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 restricted 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 restricted 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 restricted 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.

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 restricted 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.

Loans to another member state of the EEA or a full member state of the OECD, its regional governments and local authorities are eligible if they are treated as loans to central governments of the member states with a 0% risk weight in accordance with Article 86 (2) (a) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (OJ L 177 dated 30 June 2006, p. 1) (no. 3 b)).

Loans to other regional governments and local authorities of another member state of the EEA or a full member state of the OECD that are treated as loans to central governments of the member states and have been assigned a 20% risk weight in accordance with Article 86 (3) of the Directive referred to above are also eligible (no. 3 c)). The percentage ratings contained in the Directive referred to above are degrees of credit risk. The higher the percentage weighting of a weighted asset is, the greater the estimated inherent risk of that asset will be.

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).

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 6 of Directive 73/239/EEC (OJ L 228 dated 16 August 1973, p. 3) or Article 4 of Directive 2002/83/EC (OJ L 345 of 19 December 2002, p. 1), or by a reinsurance undertaking within the meaning of Article 3 of Directive 2005/68/EC (OJ L 323 of 9 December 2005, 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 long-term rating equivalent to the category A rating issued by recognised rating agencies.

The ratings must be reviewed at least once a year. The results of the review must be documented transparently. If the borrower’s credit quality is downgraded during the term of the investment to a rating that is no longer an A rating or if the loss of that rating 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 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 restricted 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 compensate losses of this liquidation institution in accordance with section 8a (4) 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 a full member state of the OECD that are not credit institutions are eligible for investment in the restricted 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 Undertakings by Insurance Companies – Borrower’s Note Loans” (formerly “Credit Guidelines”) when examining the credit quality of the borrower. These principles are issued by the Investments department of the German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft) in Berlin. The company’s ratios must meet the minimum requirements and the minimum equity ratios must be complied with.

Alternatively, the credit quality of borrowers can be examined by reference to the long-term ratings of recognised rating agencies. In that case, the debtor’s credit quality must be investment grade when the loan is granted. In addition, other circumstances or risks, such as current negative company news or general market trends, may not indicate that a differing negative assessment is more appropriate. Long-term ratings may only be used to examine the credit quality of group companies of the insurance undertaking within the meaning of section 18 AktG if the loan is collateralised in accordance with section 2 (1) no. 4 a), aa) or bb) of the AnlV.

The rating must be reviewed and documented at least once a year, or more frequently if indicated by other negative circumstances. If the borrower’s credit quality is downgraded during the term of the investment to a rating that is no longer an investment grade rating or if the loss of that rating 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.

First-ranking liens (section 2 (1) no. 4 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 (section 2 (1) no. 4 bb) of the AnlV) are eligible only if these receivables and securities could also be added directly to the restricted 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 (section 2 (1) no. 4 cc) of the AnlV); the borrower must therefore be “prime rated”, i.e. particularly highly rated companies (the company’s ratios indicate a particularly high credit quality or a long-term rating of at least e.g. A- (Fitch, S&P) or A3 (Moody’s)) that are pre-eminent in their sector. 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, 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 as the lender refers to all loan liabilities and is not limited to “capital market liabilities” or “financial liabilities”.

The above requirements governing collateral in accordance with section 54 (1) of the VAG for lending transactions in accordance with section 2 (1) no. 4 of the AnlV are so high because up to 50% of the restricted 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 area of investments with standard market ratings, up to 5% of the restricted assets can also be invested in high-yield bonds with at least a rating of e.g. B- (Fitch, S&P) or B3 (Moody’s), provided that the risk-bearing capacity is adequate. At the same time, the Insurance Supervisor will not object if, within the 50% minimum diversification requirement for loans in accordance with section 2 (1) nos. 3, 4 a) of the AnlV and investments in accordance with section 2 (1) no. 11 of the AnlV, up to 5% of the restricted assets are invested in borrower’s note loans that do not meet in full the above-mentioned requirements for collateralisation by means of a negative pledge (in particular a minimum rating of the borrower of e.g. A- or A3 and/or an unrestricted negative pledge in the case of non-publicly traded borrowers). At a minimum, however, these loans must have an investment grade rating (e.g. BBB-/Baa3) for the borrower resulting from the credit assessment.

In contrast to debt instruments, borrower’s note loans with a lower rating for the borrower than e.g. BBB-/ Baa3 may not be invested in the restricted assets. As a result, this 5% loan ratio cannot be additionally subjected to the risk asset ratio, in contrast to the high yield ratio.

Overall, the requirements for borrower’s note loans are higher than for debt instruments (see Guidance Notes on Circular 15/2005 (VA) Part A Section III no. 3.c) on investments in corporate loans).

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 69 (1) sentences 1 and 2 of the InvG. 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 section 7 (2) 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) 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 restricted 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, admission to another organised market, or inclusion in such a market (a), or at least application for admission to trading on or inclusion in an organised market (b), or admission to trading 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) 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 Article 4 no. 14 of Directive 2004/39/EC of the European Parliament and the Council of 21 April 2004 on markets for financial instruments (MiFiD). Under Article 36 of the MiFiD, the member states are empowered to grant authorisation as a regulated market to markets established in their territory. Section 47 of the InvG therefore also makes reference to admission to trading and the organised market. A list of the regulated markets authorised in the EC is published annually by the European Commission (www.ec.europa.eu/internal_market/securities/isd/mifid_en.htm). An organised market is a system operated or managed in Germany or another member state of the EEA that is authorised, regulated and supervised by 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” in accordance with section 48 of the BörsG, which is governed purely by private contract, is not an organised market.

Under the provisions of no. 7 c), only market segments offering a comparable standard may be recognised. Under section 47 (1) no. 2 of the InvG, the asset 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 permitted under the fund rules. 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 all 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 is not a 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, the same conditions apply as for debt instruments (no 9 b; 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.

c) (Perpetual) subordinated bonds with one or more call rights are subject to the requirements of the Structured Products Circular (3/99).

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 and credit-linked notes, 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, the same conditions apply as for debt instruments (no 10 b; see B.4.4).

b) It is also necessary to ensure that the special requirements for investments in such financial instruments – in particular the existence of an external investment grade rating by a recognised rating agency and the exclusion of leverage effects – set out in Circular 1/2002 on Asset-Backed Securities and Credit-Linked Notes are satisfied. If there is no external investment grade rating by a recognised rating agency or if there is a split rating, the investments can therefore only be allocated to the opening clause if a there is a positive assessment of the credit quality of the receivables portfolio and of the security and profitability of the investment as a whole that is documented transparently. 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.

Subordinated liabilities (tier products) and profit participation certificates (normally issued by credit institutions) that are issued (securitised) via special purpose vehicles can continue to be allocated to the restricted assets via section 2 (1) no. 9 of the AnlV. Covered bonds without a specific statutory basis that are issued via special purpose vehicles fall under section 2 (1) no. 10 of the AnlV.

These special rules exclude the allocation of these investments to the high-yield bonds (see B.3.1 e)). The loss of an investment grade rating by an external rating agency automatically results in the loss of eligibility as guarantee assets for single-rated ABSs and CLNs. This is substantiated by the permissibility of the transactions under section 7 (2) of the VAG. Under this provision, investments are classified as ineligible non-insurance business if the credit risk exposure of the investment is material. This can generally be assumed to be the case if the investment no longer has an external investment grade rating (see Circular 1/2002 Part A section I.). To avoid cases of hardship, the downgraded investments may remain in the other assets.

c) These requirements also apply to indirect investments. Circular 3/99 on Structured Products shall not be applied to investments in accordance with no. 10.

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.

German federal government securities are issued as unsecuritised book-entry securities and recorded in the debt register of the federal government by means of entries in debt register accounts. Day bonds (Tagesanleihen) and federal treasury financing paper can be allocated to the restricted assets 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 restricted 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 restricted assets, as otherwise additional payment obligations could reduce the value of the restricted assets. The insurance undertaking must obtain the status under company law associated with the acquisition of the shares. For this reason, equity certificates or equity index certificates can only be allocated to the restricted assets via the opening clause in section 2 (2) of the AnlV (see GB BAV 2000 Part A p. 42 no. 1.4). Treasury shares are not eligible for inclusion in the restricted assets.

B.4.9 Equity interests (no. 13)

a) The list of types of shares in companies and equity interests under no 13 is exhaustive. In addition to the types of company that are subject to company law (AG, GmbH, KG, silent partnership), closed-end funds that are subject to investment law and that invest in equity interests or infrastructure can also be allocated to the restricted assets via no. 13.

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. As a matter of principle, these also include foreign fund units of the above-mentioned closed-end funds that are subject to investment law and investment supervision. These do not include funds with a restricted redemption right (semi-open funds).

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).

b) The investments listed in no. 13 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.

c) 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 restricted 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 restricted assets. Foreign units of closed-end funds and funds with a restricted redemption right that are not eligible for inclusion in the restricted assets under nos. 17 or 14c may also not be allocated to the restricted assets under no. 13.

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 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.

Shares in closed-end or open-ended securities or hedge funds held directly or via a holding company (see section 4 (4) sentence 2 of the AnlV) are not equity interests that are eligible for inclusion in the restricted assets.

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.

However, shares in companies (and holding companies) that invest in equity interests and/or infrastructure and/or investments in accordance with section 2 (1) nos. 9 and 12 of the AnlV can be allocated to the restricted assets via section 2 (1) no. 13 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.

Closed-end real estate funds that are subject to investment law and investment supervision are now to be allocated to the restricted assets via section 2 (1) no. 14 c) of the AnlV. 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, however, be allocated via section 2 (1) no. 13 of the AnlV.

Equity interests that have already been properly acquired under the previous rules remain eligible for inclusion in the restricted assets. Capital drawdowns under these existing investments are permitted, but additional purchases are prohibited.

In accordance with section 6 of the AnlV, investments that were made properly under the previous limits and that exceed the amended limits set out in section 4 (1) sentence 2, subsection (2) sentence 2 and subsections (3) and (4) of the AnlV may remain part of the guarantee assets and other restricted assets until their maturity/disposal.

d) Investments in accordance with nos. 9, 12 and 13 in a single company may not in the aggregate exceed 1% of the restricted assets (section 4 (4) sentence 1 of the AnlV). In the case of shares in a company whose sole object is to hold investments in other companies set out in section 4 (4) sentence 1 of the AnlV, the 1% limit shall apply to the indirect investments of the insurance undertaking in those other companies (section 4 (4) sentence 2 of the AnlV). In the case of investments via receivables due from subordinated liabilities and profit participation rights, it is necessary that these have at least a predominantly equity characteristic. In the case of multi-tier investment structures in which there are several (intermediate) holding companies between the insurance undertaking and the target investee, the 1% limit applies to the target investee.

If an insurance undertaking invests in private equity companies, 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.

e) No. 13 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.

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

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 or by comparable means. The examination may also be based on appraisals by municipal expert committees. 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 restricted assets (see GB BAV 1998 Part A p. 63 no. 1.1.5).

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 (see no. 14 a) sentence 3), 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 restricted 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) Under section 72 (1) of the VAG, the guarantee assets must be safeguarded in such a way that they can only be disposed of with the approval of the trustee. In accordance with Circular 13/2005 (VA), this must be done by way of an inhibition recorded in the land register (see no. 2.6.4.2 of the circular). If it is not possible to demonstrate that an inhibition has been recorded, the investment is not eligible for inclusion in the guarantee assets. The recording of the inhibition notice of the trustee is therefore indispensable if the equity interest in the real estate company is to be allocated to the guarantee assets under no. 14 a).

Under the current legal situation, the inhibition notice of the trustee cannot be recorded in the land register if a GbR (civil law partnership) has been chosen as the company form. Until any change in the legal situation, it is therefore no longer possible as a matter of principle to consider the GbR as a company form for a real estate company.

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 restricted 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 closed-end funds are also eligible under no. 14 c), provided they are issued by an investment company domiciled in a member state of the EEA that is subject to public supervision to protect investors, the fund invests its assets in shares in real estate companies within the meaning of section 2 (1) no. 14 a) of the AnlV or in open-ended or closed-end real estate target funds that comply with the requirements of section 2 (1) nos. 15 to 17 of the AnlV, and the assets of the fund consist, on an indirect investment basis, of at least 80% land and land rights and up to 20% investments within the meaning of section 80 of the InvG, and the shares in or units of the fund are freely transferable;

Based on the provisions of the InvG governing borrowing, borrowings at the level of the closed-end fund are limited to short-term loans bearing market rates of interest used for bridging purposes amounting to a maximum of 20% of the fund’s gross assets. Borrowings at the real estate target funds may not exceed 60% of the value of the real estate (market value) held by them in each case, and derivatives may only be used for hedging purposes.

Previously, such investments had to be allocated to the restricted assets via no. 13. In line with the economic risk profile of such investments, closed-end real estate funds are now covered by no. 14 c). This positively affects the percentage that may be invested in equity interests and concentrates real estate investments in no. 14 of the AnlV.

B.4.11 German fund units, non-voting shares issued by a German
investment stock corporation and units of foreign investment
funds from other EEA member states (nos. 15 to 17)

The requirements governing investment funds are based on the classification contained in the InvG. However, investment funds are subject to special supervisory requirements in terms of their eligibility for inclusion in the restricted assets. This applies in particular to special funds and results, among other things, from the explanatory memorandum to the Investment Amendment Act of 21 December 2007 (Investmentänderungsgesetz - InvÄndG), under which purchasers of special fund units, such as insurers or Pensionskassen, are themselves subject to direct regulation. As a result, the requirements imposed on the quality of special funds, as well as mutual funds, are stricter in some cases than provided for under the InvG.

A distinction is made between German funds (no. 15), non-voting shares of German investment stock corporations (no 16) and foreign investment units issued by an investment company domiciled in another member state of the EEA (no. 17).

Funds can be structured as mutual funds or as special funds. Mutual fund units can be bought by anybody, whereas units of special funds within the meaning of the InvG are funds whose units can only be held by investors that are not natural persons on the basis of written agreements with the asset management company (section 2 (3) of the InvG).

When investing in investment funds, the insurance undertakings must demonstrate to the supervisory authority in the course of their reporting that the general investment rules in section 54 (1) of the VAG have been complied with (see B.3.1 d)). In the case of investments in German and foreign special funds, compliance with the general investment rules must be demonstrated by reference to the investment guidelines and fund rules and, if applicable, to the sales prospectuses, in the case of German mutual funds by reference to the full prospectus (section 42 of the InvG) and in the case of foreign mutual funds by submission of the full prospectus and the fund rules or the articles of association. In the case of German investment stock corporations, the full prospectus and the articles of association must be submitted.

Any additional contractual agreements, for example side letters, must also be submitted.

Insurance undertakings should only permit such investments in the contractual documents (fund rules and the investment guidelines agreed in addition) that they actually wish to acquire, and that match their investment strategy as well as their internal investment guidelines.

If German or foreign investment funds acquire units of other investment funds (target funds), these target funds must also meet the requirements set out in nos. 15 to 17.

In the case of investments in funds of funds with additional risks, the target funds may also be located outside the EEA. However, it must be ensured that all target funds are single hedge funds, and that their investment policy is subject to requirements that are comparable to section 112 of the InvG.

In the case of investments in German fund units, non-voting shares issued by German investment stock corporations and units of foreign investment funds, with the exception of funds with additional risks, the potential market risk arising from the use of derivatives in accordance with section 51 (2) of the InvG in conjunction with the Regulation on Risk Management and Risk Measurement in the Use of Derivatives in Investment Funds under the Investment Act – Derivatives Regulation (Verordnung über Risikomanagement und Risikomessung beim Einsatz von Derivaten in Sondervermögen nach dem Investmentgesetz – Derivateverordnung) may at a maximum be doubled. In the case of a higher potential market risk, the fund may be a fund with additional risks within the meaning of sections 112 et seq. of the InvG (see Circular 7/2004 (VA)) if, in addition to the higher potential market risk, it is possible to use debt finance for leverage purposes or short selling (section 112 (1) sentence 2 of the InvG).

B.4.12 German fund units (no. 15)

Under no. 15, units of a German fund within the meaning of section 2 (2) and (3) of the InvG are generally eligible for inclusion in the restricted assets. An exception to this is old-age provision funds under sections 87 to 90 of the InvG because they are not sufficiently fungible and serve to provide long-term private retirement saving.

In accordance with the methodology underlying the InvG, investments that are eligible for inclusion in the restricted assets under no. 15 are classified into UCITS funds (sections 46 to 65 of the InvG) and the non-UCITS fund categories real estate funds (sections 66 to 82 of the InvG), mixed funds (sections 83 to 86 of the InvG), infrastructure funds (sections 90a to 90f of the InvG), other funds (sections 90g to 90k of the InvG), special funds (sections 91 to 95 of the InvG), and funds and funds of funds with additional risks (hedge funds; sections 112 to 120 of the InvG).

The general guidance on requirements governing investments in hedge funds and the requirements governing the structuring of the investment process and risk management contained in Circular 7/2004 (VA) must be observed.

The fund units can only be deemed to be fungible if, in comparison with the other requirements of the InvG, redemption is ensured at a minimum under the following conditions:

i) in the case of real estate funds, it must be contractually stipulated that the units may be redeemed within six months;

ii) in the case of infrastructure funds, it must be contractually stipulated that the units may be redeemed within seven months;

iii) in the case of other funds, it must be contractually stipulated that the units may be redeemed within seven months; in the case of other funds with predominantly liquid investments, it must be contractually stipulated that the units may be redeemed within two months;

iv) in the case of special funds that are invested predominantly in securities, money market instruments and bank accounts, as well as in investment fund units, the contractual documents must stipulate that the units may be redeemed within one month. In the case of special funds whose investment rules are focused on real estate funds, infrastructure funds and other funds, the above-mentioned periods apply accordingly;

v) in the case of funds (section 112 of the InvG) and funds of funds (section 113 of the InvG) with additional risks, it must be possible to redeem the units at least once every calendar quarter, in line with section 116 of the InvG. In the case of funds in accordance with section 112 of the InvG, it must be possible to return units up to 40 calendar days, and in the case of funds of funds in accordance with section 113 of the InvG, up to 100 calendar days, before the relevant redemption date at which the net asset value is calculated, by means of an irrevocable declaration of redemption to the asset management company. The redemption price must be paid without undue delay following the redemption date, and at the latest 50 calendar days after that date.

Investments that are subject to an agreement with a lock-up period during which no liquidity may be withdrawn from the fund are not eligible for inclusion in the restricted assets. If a side pocket (consisting of illiquid assets) is formed in a (fund of) hedge fund(s), the units in the volume of the side pocket are no longer eligible for inclusion in the restricted 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.

The fund rules for the individual fund categories may stipulate that the asset management company may suspend the redemption of units in the event of extraordinary circumstances that indicate that suspension is necessary to protect the interests of the investors (section 37 (2) of the InvG).

Other funds (sections 90g to 90k of the InvG) are only generally eligible for inclusion in the restricted assets if the contractual documents stipulate in particular that the use of derivatives is only permitted as set out in section 51 (1) of the InvG.

Special funds (sections 91 to 95 of the InvG) – with the exception of (funds of) funds with additional risks – are in principle eligible for inclusion in the restricted assets under section 2 (1) no. 15 of the AnlV if they are transparent and in particular if the contractual documents contain the following points:

i) derivatives may only be used in accordance with section 51 (1) of the InvG;

ii) other investment instruments in accordance with section 52 no. 1 of the InvG are limited to a maximum of 20% of the net asset value, and those in accordance with section 52 nos. 1 to 4 are limited to a maximum of 30% of the net asset value;

iii) unsecuritised loan receivables in accordance with section 90 h (1) of the InvG are limited to a maximum of 30% of the net asset value;

iv) the collateral furnished for securities lending transactions must meet the requirements of sections 54 to 56 of the InvG;

v) in the case of special funds that invest in assets in accordance with section 2 (4) nos. 5 and 6 of the InvG (real estate and real estate companies), derivatives may only be used for hedging purposes and liquid investments must correspond approximately to the requirements of section 80 (1) sentence 1 of the InvG;

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

In the case of special funds that are structured as (funds of) funds with additional risks, the requirements of sections 112 and 113 of the InvG in conjunction with the guidance contained in Circular 7/2004 (VA) must be complied with.

B.4.13 Non-voting shares issued by a German investment stock corporation (no. 16)

Under no. 16, non-voting shares issued by a German investment stock corporation in accordance with sections 96 to 111a of the InvG are eligible for inclusion in the restricted assets. In this case, the right of the shareholders to require the company to repurchase shares is equivalent to the redemption right of the unitholders of an investment fund.

The contractual documents must stipulate that the above-mentioned explanations on the individual fund categories (including the redemption periods) must be complied with where applicable.

B.4.14 Units of foreign investment funds from other EEA member states (no. 17)

Foreign investment fund units are in principle eligible for inclusion in the restricted assets, provided they are issued by an investment company domiciled in another member state of the EEA that is subject to public supervision to protect investors, and provided the foreign investment fund is subject to requirements comparable to those for funds under no. 15, and provided the investors are entitled to require disbursement of the proportion of the assets attributable to their units.

As before, the investment company must be domiciled in another EEA member state. Because the requirements for public supervision are intended to ensure effective control, mere supervision of legal registration is not sufficient.

Foreign mutual funds that meet the requirements of Directive 2009/65/EC are generally eligible for inclusion in the restricted assets, subject to compliance with the above-mentioned guidance on UCITS funds.

Foreign mutual funds that are not subject to the above-mentioned Directive must be sufficiently comparable with a mixed fund, a real estate, other, or infrastructure fund, a fund with additional risks, or a fund of funds with additional risks.

Comparability with a mixed fund, an infrastructure fund, or other fund can always be assumed in particular if, under the contractual documents, the types of acquirable assets, the use of derivatives, the conditions governing borrowing, the arrangements for unit redemption and, approximately, the investment limits are comparable in each case.

In particular, a foreign investment fund is comparable with a real estate fund if, under the contractual documents, the types of acquirable assets and, approximately, the investment limits, are comparable. In addition, derivatives may only be used for hedging purposes and short selling must be excluded. Borrowings may not exceed 60% of the market value of the real estate portfolio of the investment fund and liquid investments must correspond to those of the real estate fund.

In particular, a foreign special fund is comparable with a special fund in accordance with the provisions of the InvG if there is a contractual stipulation that the types of acquirable assets must be comparable and the requirements governing German special funds must be met. Short-term borrowing must be limited to a maximum of 30% of the net asset value. In the case of a foreign special fund focused on real estate, long-term borrowing may not exceed 60% of the market value of the real estate portfolio.

In particular, comparability with (funds of) funds with additional risks may be assumed if the requirements of section 112 or section 113 of the InvG are met. This applies to both mutual and special funds.

The redemption periods and other restrictions set out in B.4.12 apply to foreign investment fund units, in each case with the necessary modifications.

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 restricted 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 Capital Requirements Directive 2006/48/EC of 14 June 2006 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 of the above-mentioned Directive are also eligible for inclusion in the restricted assets (due to an editorial error, section 2 (1) no. 18 c) of the AnlV refers to Article 2 (3) of the Directive). 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 86 (2) b) of the Directive referred to in b) above are eligible for inclusion in the restricted 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 restricted 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 restricted 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 restricted 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 restricted assets whether the investment complies with the general investment rules.

The limits in Article 22 of the Third Non-Life Insurance Directive and Article 24 of the Life Insurance Directive may also not be exceeded in the future.

Finally, the 20% limit for unmatched investments in section 5 of the AnlV in conjunction with the Annex to the VAG Part C no. 6 b) may also not be exceeded because, under Article 23 of the Third Non-Life Insurance Directive and Appendix II no. 4 of the Life Insurance Directive, a maximum of 20% of the existing commitments may be covered by non-matching assets. A 30% limit applies to institutions for occupational retirement provision following the entry into force of the 2005 amendment to the VAG.

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 Circular 1/2002; hedge funds and investments in commodities in accordance with section 3 (2) nos. 2 and 3 of the AnlV, provided that the physical delivery of raw materials, goods, or precious metals to the insurance undertaking is excluded).

c) As before, investments that are not permitted in accordance with Article 21 or 22 of the Third Non-Life Insurance Directive and Article 23 or 24 of the Life Insurance Directive (section 2 (4) no. 2 of the AnlV) may not be included in the restricted assets. This means that only the assets specifically listed in Article 21 and 23 are permitted.

d) Section 2 (4) no. 3 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 restricted assets because they do not comply with the objective of the restricted 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 restricted 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 in accordance with 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 63 (1) of the InvG or the corresponding rules 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 restricted assets.

As before, investments in group companies whose sole purpose is to hold shares in non-group companies or real estate are eligible. Real estate in this context refers both to directly held land and shares in real estate companies and to shares in REITs. Investments in group companies whose sole purpose is to operate facilities for generating electricity from renewable energy sources within the meaning of section 3 no. 3 of the Renewable Energy Act (Gesetz für den Vorrang Erneuerbarer Energien – EEG) are also eligible if they are designed to generate regular, long-term income. In the case of companies whose sole purpose is to operate facilities for generating electricity from renewable energy sources within the meaning of section 3 no. 3 of the EEG, the eligibility criterion is thus also that the insurer is only passively invested in such facilities via the group company, without being able to influence its business operations or implementing ongoing development projects in the field of renewable energy.

e) Under section 2 (4) no. 4 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 5 (3) no. 4 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 or the 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 restricted 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 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 to 3 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 in each case to 7.5% of the guarantee assets and of the other restricted assets (section 3 (2) no. 1 of the AnlV).

b) Direct and indirect investments in funds with additional risks in accordance with sections 112 and 113 of the InvG, in non-voting shares of investment stock corporations with a corresponding investment policy and in units of investment funds with a corresponding investment policy that are launched in each case by investment companies domiciled in another member state of the EEA, 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 funds with additional risks in accordance with sections 112 and 113 of the InvG, or to other investment funds with a corresponding investment policy, may in each case not exceed 5% of the guarantee assets and of the other restricted assets, in accordance with section 3 (2) no. 2 of the AnlV. Such assets may be included in the restricted assets if the conditions set out in the Circular on Investments in Hedge Funds (R7/2004 (VA)) are met.

The requirements under B.4.12 v) relating to the fungibility of investments in (funds of) funds with additional risks 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 an investment in hedge funds. The issuer merely transmits the funds invested and does not assume any liability or risk whatsoever. Likewise, the existence of a capital guarantee also does not lead to a different assessment. Consequently, all product variants must in principle meet the requirements defined in section 116 of the InvG, including the prohibition on lock-up periods. 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 are no longer eligible overall for inclusion in the restricted assets. In contrast to funds, there is no possibility of separation because these normally involve only a single asset.

Double leverage, e.g. at the level of the structure and in the underlying hedge fund, is not permitted and results in the investment not being eligible for the restricted assets.

c) Under section 3 (2) no. 3 of the AnlV, direct and indirect investments in accordance with section 2 (1) nos. 15 to 17 that involve commodity risk, as well as other direct and indirect investments in accordance with section 2 (1) of the AnlV whose yield or repayment is linked to commodity risk, are limited to 5% of the guarantee assets and the other restricted assets. Physical delivery of commodities must be excluded. In the case of all direct and indirect investments that involve commodity risk, the requirements of Circular R7/2004 (VA) must be met in principle, with the necessary modifications, in particular those relating to risk-bearing capacity, expertise, the structuring of the investment process and risk management. In the case of structured commodity products, this also involves examining the features, the functioning and, if applicable, the composition of the commodity index. Structured commodity products are counted towards the commodities ratio irrespective of whether a capital guarantee has been issued for them or not. Special internal investment rules must be prepared and integrated into the internal guidelines in accordance with B.2.2 prior to the initial acquisition of direct or indirect investments that involve commodity risk.

d) Up to 5% of the guarantee assets and the other restricted assets may be invested in each case as part of the opening clause. The supervisory authority may approve an increase of up to 10% in each case (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 restricted assets set out in section 4 (4) of the AnlV is not affected.

B.6.2 Risk assets

a) The share of directly or 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 and the other restricted 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 restricted 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, which would also jeopardise the generation of the guaranteed interest rate in personal insurance. 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) German fund units, non-voting shares issued by a German investment stock corporation and units of foreign investment funds in accordance with section 2 (1) nos. 15 to 17 of the AnlV are counted in full towards the limit in accordance with section 3 (1) and the ratios under section 3 (2) nos. 1 to 3, subsection (3) sentence 1 and 3 of the AnlV if the contain assets subject to these minimum diversification requirements. This indirect attribution is not mandatory, as it gives the insurance undertaking the option to count the value of the entire fund towards the ratios in question, irrespective of its composition. However, as a matter of principle indirect attribution should not be waived from a risk management perspective in view of the qualitative asset management approach to be pursued (section 1 (2) and (3) of the AnlV). By contrast, special funds must be transparent because the InvG does not contain any provision governing their regulation at investor level.

However, a condition for indirect attribution under section 3 (4) sentence 3 of the AnlV is that the asset structure of the investment fund is transparent. 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 funds, the asset structure is transparent if the insurance undertaking is informed about the composition of the 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.

However, funds that do not meet these conditions do not as a general rule have to be counted in full towards the limit under section 3 (1) of the AnlV and the ratios under section 3 (2) nos. 1 to 3 and subsection (3) sentences 1 and 3 of the AnlV if the fund rules, the full prospectus, the investment guidelines, the articles of association of an investment fund, or an additional contractual agreement (side letter) contain quantitative upper limits for the investments concerned. If these stipulate, for example, that the fund plans to invest primarily in debt instruments within the meaning of section 2 (1) nos. 6 and 7 of the AnlV, only half of the value of the fund is counted towards the ratios under section 3 (2) nos. 1 to 3 and subsection (3) sentences 1 and 3 of the AnlV, as there is an assurance that it is otherwise invested in debt instruments to which the general 50% minimum diversification requirement applies.

In the case of non-transparent investment funds for which investments in assets subject to section 3 (2) nos. 1 to 3 and subsection (3) sentences 1 and 3 of the AnlV are limited to certain percentages by the fund rules, full prospectus, investment guidelines, articles of association, or an additional contractual agreement (side letter), it is necessary to assign the value of the other assets of the fund to the relevant investment types. For further details, please refer to the explanations in the Funds annex of the Circular on Notification and Reporting Requirements for the Entire Investment Portfolio.

d) In the case of investments under section 2 (1) nos. 15 to 17 of the AnlV, the use of derivatives in accordance with section 51 (2) of the InvG in conjunction with the Derivatives Regulation (Derivateverordnung) or the corresponding provisions of another member state of the EEA (see B.4.11) 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 – with the exception of investments in accordance with section 3 (2) no. 2 of the AnlV – to the extent that the increased potential market risk cannot be determined in a timely manner. 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) Under section 3 (3) sentence 3 of the AnlV, investments in equity interests in accordance with no. 13 may not exceed the ratio of 15% of each of the guarantee assets and the other restricted assets due to their low fungibility. 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 each of the guarantee assets and the other restricted 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 funds and investment companies may not exceed 25% of the guarantee assets and the other restricted assets in each case (section 3 (5) of the AnlV).

B.7. Matching rules (section 5 of the AnlV, Annex Part C of the VAG)

a) With regard to currency risk, the restricted 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 (Annex to VAG Part C no. 6 b). In the other restricted assets, the Annex to VAG Part C. no. 7 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.

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 restricted assets, that investment shall be removed from the restricted assets without undue delay.