Germany: Marketing To German Insurance Investors: A Summary

German insurers have historically been conservative investors that are highly exposed to fixed-income investments. Until recently, low interest rates motivated insurers to increase allocations to private markets and other higher return strategies. However, this low interest rate environment no longer exists.

Given their high exposure to fixed-interest-bearing securities, as interest rates rose, German insurers saw a decrease in the market value of their capital investments. Allianz and Munich Re, for example, saw a decrease of 18% and 11% respectively in the value of their financial assets from CY21 to CY22. As valuations for private funds did not experience the same adjustment, insurers became overweight on private assets. The denominator effect paired with the newfound attractiveness of traditional fixed income, has led to a slowdown in commitments to private funds.

As GPs look to raise capital from German insurers in this more challenging environment, it is beneficial to firstly understand the key types of investors, their different needs and how these can be addressed during the marketing process.

German insurance investors are often referred to by the name of the key regulation that impacts them. Broadly, insurers are either Solvency II or AnIV (Anlageverordnung) investors. In theory, Solvency II applies to large insurance companies and AnlV to "small" insurers. However, this can be deceiving. Although most insurers are, due to their size, caught under Solvency II, the investment restrictions imposed by the AnIV investment regulation remain a key feature of the German insurance market. This is driven not by small insurers, but by large Solvency II insurers that either operate pension schemes¹ or voluntarily comply with the AnIV Investment Regulation (e.g. larger insurance group companies that may have smaller insurance companies within their group). In practice, a large proportion of German insurance investors are impacted by AnlV regulations.

Key consideration for Solvency II investors

• Solvency II investors are not restricted by quantitative limits on asset classes, instead investors must maintain regulatory capital reserves which are proportionate to their investment risk. A key aspect to determine the "capital charge" of an investment is to calculate the Solvency Capital Requirement (SCR).
• In general, the SCR rules are meant to favour lower risk investments that minimise the SCR. However, allocators also consider the SCR efficiency of their investments i.e. how much return an investment gets per solvency capital required. GPs can facilitate the investment decision by providing indicative SCR calculations including the product's SCR efficiency.
• The SCR calculation for private debt loans is mostly determined by their duration and rating. For private debt managers, providing accurate calculations of duration is the best way to reduce the capital charge associated with their products. If a rating of BBB or above is achievable, ratings can also be helpful.

Key considerations for AnlV investors

• Unlike Solvency II, AnlV investors are restricted in their asset allocation based on eligibility criteria and quotas. These quotas limit the percentage an investor can allocate to certain asset classes – private equity, for example, cannot exceed 15% of the insurer's guarantee assets.
• Private debt investments can be impacted by different quotas depending on how the investment is classified. This is relevant as it can give GPs access to different and potentially larger pools of capital. GPs must identify which quota their product falls under and how much headroom prospective LPs have in that quota. Adapting side letters and fund structures may be possible to find a better fit between the GP's product and the insurer's quota allocation. Rated note feeders are often mentioned in this context. However, GPs should avoid pre-emptive structuring as these are often expensive structures and may not be required.
• For private funds, the eligibility criteria that is most often a challenge is that any units / shares in closed-ended investment funds must be freely transferable. However, this can typically be achieved through a side letter.

Additionally, both Solvency II and AnlV investors may invest through Spezialfonds, which are investment vehicles that allow investors to detach capital investments from their balance sheets. For an asset to be "eligible" for Spezialfonds it must be considered a security². This classification has implications on the investor's tax exemption status, therefore, when marketing to these investors, an eligibility memo prepared by German counsel can be helpful.

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