Germany: M&A and Corporate Restructuring of Insurance Companies in the Light of Solvency II

In view of the impending Solvency II Directive (Directive 2009/138/EC), which will be fully applied as of 1 January 2016, and the considerable changes associated with the directive, the (German) insurance landscape will not remain in its current state. Solvency II will change the capital and own funds requirements, the valuation of assets and liabilities and the business organisation, reporting and disclosure requirements. German insurance companies are now in the process of preparing for Solvency II. In our opinion, this process will also lead to changes in the corporate landscape of insurers: In order to comply with the new capital requirements, insurance companies will have to free up existing capital. This could be achieved through the sale of certain insurance lines or legacy portfolios by way of share or asset deal (portfolio transfer). Although investment companies were hesitant to invest in the highly regulated financial services sector in the past, the recent acquisition of the life insurance company Heidelberger Leben by Cinven Partners and Hannover Rück shows that private equity investors could play an important role in this consolidation process. For ensuring a better allocation of the solvency capital, a concentration of the regulatory supervision with the authority of the home State and a simplified group structure, insurance companies could change the insurance group structure through a cross-border merger. In a first step the foreign entity is merged with the entity in the home State (on the basis of the EU merger directive or by foundation of an SE). In a second step the foreign entity, which ceases to exist as a legal consequence of the merger, is replaced by a foreign branch. The German insurances group ARAG has undertaken such a "branchification" of six EU subsidiaries in recent past. In some cases an intra-group portfolio transfer might be a convenient alternative, as the cross-border merger requires a rather complex and time-consuming employee involvement process. Another option is to change the insurance company's legal form to an SE and subsequently transfer its registered seat to another EU member state. Just recently (March 2014) Tipp24 SE was the first German (non-insurance) listed public company to transfer its registered seat to another EU member state (from Hamburg to London) on the basis of the SE Regulation. The transfer of the registered seat by an insurer is treated similar to the foundation of a new insurance company (under German insurance supervisory law). As a consequence the insurance company will have to apply for the required licenses/permissions and cannot "transfer" its existing licenses/permissions. Although the implementation of Solvency II will lead to a harmonisation of the regulatory landscape, there will still be certain local differences. The transfer of seat as described above, enables the insurer to choose a specific local regulatory environment. Although Solvency II imposes new requirements for the insurance sector, which will lead to drastic changes, there are possibilities to meet those requirements, and opportunities to benefit from the new structures. These new possibilities also include structural measures under corporate law.

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