Insurance M&A - A Quick Guide To Acquiring A German Insurance Company

REGULATORY BACKGROUND

In this section, we provide an overview of the regulatory framework in which insurance companies operate in Germany. As used in this overview, the term insurance company includes primary insurance companies (Erstversicherungen), reinsurance companies (Rückversicherungen) and insurance holding companies (Versicherungs-Holdinggesellschaften).

OVERVIEW OF RULES APPLICABLE TO INSURANCE COMPANIES IN GERMANY

Insurance companies are subject to the requirements of insurance contract law, insurance supervision law and insurance company law. The following principles and requirements apply:

• All insurance companies are subject to a licence requirement. This requirement generally also covers non-EU insurance companies that intend to open a branch (Niederlassung) in Germany or to do business on a cross-border basis. The regulatory licence is issued separately for each insurance division (Versicherungssparte), meaning that insurance companies usually require several licences.
• The Solvency II Regulation forms the basis for the regulatory requirements for the acquisition of an insurance company at the European Union level. In Germany, it has been transposed into national law, inter alia, by the Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG) and the Shareholder Control Regulation (Inhaberkontrollverordnung).
• Many of the rules applicable to insurance companies are developed at the EU level. Some of these rules are still in the form of "EU Directives," which need to be transposed into national law by national rulemaking bodies. Therefore, while the regulatory regime is similar in all member states of the European Union, the specific applicable laws differ among member states. Other rules are enacted in the form of "EU Regulations", which are directly applicable in all EU member states.
• As a consequence of a wide-ranging harmonisation of substantive supervisory law in the European Union, European insurers may "passport" their activities into all other EU member states (i.e., they may provide services (i) through a branch or (ii) on a cross-border basis in all other EU member states without the need to apply for an additional licence in each member state in which they conduct business). Therefore, a licence for an insurance division in one EU member state will cover the entire EU market. This is known as the so-called "single licence principle". When carrying out crossborder insurance business, however, insurers must comply with the "general good requirements" in the host EU member state.
• Insurers must establish, implement and document policies and adequate procedures to ensure that all persons who effectively run or have other key functions in the undertaking are at all times "fit and proper" within the meaning of Art. 42 of the Solvency II Regulation (so-called "fit and proper" test).
• Regulatory rules require shareholders to be reliable and therefore provide for a specific shareholder control procedure (see below for details) – which is of utmost importance when acquiring a German insurance company.

COMPETENT AUTHORITIES

Despite the far-ranging harmonisation of regulatory rules on an EU level, national authorities rather than European authorities generally enforce the rules.

In Germany, jurisdiction over insurance supervision is divided between the federal and state governments. The key supervisory authority is the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin), which is responsible for the supervision of private insurance companies operating in Germany that are of considerable economic importance, as well as for competitive insurers under public law that operate beyond the borders of a German federal state (Bundesland). Supervisory authorities of the federal states supervise public-law insurers whose activities are limited to the individual federal state and those private-law insurers that are of lesser economic importance.

Insurers domiciled in another EEA member state that conduct business in Germany through the provision of services are primarily subject to supervision by their home state. Still, BaFin intervenes in consultation with the foreign supervisory authority if it identifies violations of general German legal and regulatory principles.

The European Insurance and Occupational Pensions Authority (EIOPA) seeks to protect the public interest by contributing to the short-, medium- and long-term stability, effectiveness and sustainability of the financial system for the European Union's economy, citizens and businesses. EIOPA pursues this mission by promoting a sound regulatory framework and consistent supervisory practices designed to protect the rights of policyholders, pension scheme members and beneficiaries and contribute to public confidence in the EU's insurance and occupational pensions sectors.

REGULATORY SHAREHOLDER CONTROL PROCEDURES

Shareholder control procedures (Inhaberkontrollverfahren) apply to insurance companies, reinsurance companies and insurance holding companies. In legal terms, this is a notification procedure to the supervisory authority, which primarily serves its specific information interests. Even though it does not formally constitute an approval procedure, factually it does. If BaFin is not convinced of a shareholder's reliability or that the shareholder meets the requirements for sound and prudent management of the insurance company, BaFin may prohibit an acquisition of an insurance company or even order a reverse transaction (Rückabwicklung).

Potential shareholders should be aware that the shareholder control procedure will in many cases be time-consuming and onerous in terms of paperwork, in particular if the potential shareholder does not yet own an insurance company or other financial institution in the EU. The shareholder control procedure should therefore be taken very seriously and prepared carefully.

The procedure applies to shareholders who, either individually or together with other persons or companies, wish to acquire a "significant holding" (bedeutende Beteiligung) in a German insurance company. A "significant holding" means a direct or indirect holding in an undertaking that represents 10 percent or more of the capital or of the voting rights or a holding which makes it possible to exercise a significant influence over the management of that undertaking. The 10 percent threshold can also be reached by several shareholders acting in concert (i.e., coordinating the exercise of their voting rights and influence on an undertaking).

Persons or entities that intend to acquire a significant holding, or to increase their holding to 20, 30 or 50 percent or more of the voting rights or capital, must notify this intention immediately to BaFin or the supervisory authorities of the German federal states. In the event of cooperation with other persons or companies, there is an obligation of all parties involved to notify the competent supervisory authority. The first notification must be accompanied by a business plan, statements of reliability and further extensive disclosures about the acquirer, its management, its shareholders and its group in German or English. It should be noted that legal entities domiciled in a third country, sovereign wealth funds, private equity funds and hedge funds are subject to additional requirements regarding the documents and declarations that they must submit.

The authorities have up to 90 working days to review the filings. The clock for the assessment period will only start ticking once all required documentation has been submitted and the competent authority has confirmed its receipt. In practice, this leaves authorities considerable discretion as to when the assessment period starts. While no formal approval of the acquisition by authorities is required, authorities may, within the assessment period, prohibit the transaction. Thus, they have a de facto veto right.

While, following from all this, the shareholder control procedure should be taken very seriously and prepared carefully, it should also be stressed that in the recent past a number of investors other than traditional European Insurance companies have successfully completed the procedure. This shows that authorities recognise that the German insurance industry can strongly benefit from outside investors and their financial strength.

Although it is generally assumed that the exercise of a veto right by BaFin would not render the acquisition invalid under civil law, the consummation of such acquisition before clearance can qualify as an administrative offence, which BaFin could heavily sanction. Therefore, the lapse of the assessment period or a certificate of non-objection by BaFin will generally be agreed as a condition precedent to the closing of a transaction.

In addition, if a primary insurance company acquires 10 percent or more of the nominal capital of a third-party company, a separate notification obligation generally applies.

TRANSACTION PARTICULARITIES

TRANSACTION STRUCTURING

The acquisition of an insurance business can, in general, be effected as a share deal or as an asset deal. In addition, German insurance law provides for a special type of an asset deal, the portfolio transfer (Bestandsübertragung). Besides that, general measures of the German Reorganization of Companies Act (Umwandlungsgesetz) such as spin-offs (Ausgliederungen, Abspaltungen) and mergers (Verschmelzungen) can be utilised (e.g., to first separate or combine the business to be sold into one legal entity, which is subsequently sold to the purchaser by way of a share deal).

SHARE DEAL

A share deal can be structured as a direct or indirect acquisition of shares in an insurance company. The advantage of a share deal is that the licence of the target company remains unaffected (i.e., it represents the acquisition of an insurance company with an existing licence). All agreements of the target company generally also remain unaffected. However, agreements can contain change-of-control clauses that may be triggered by the transaction and result in a termination right or an automatic termination of the respective agreement. This is particularly relevant for financing agreements and must be thoroughly analysed in the legal due diligence.

The purchaser must, however, undergo the shareholder control procedure(s), as described above, if the transaction concerns a significant holding in the insurance company.

ASSET DEAL

An asset deal allows a purchaser to select the assets (and liabilities) that form part of the transaction. The main advantage of an asset deal is that it does not require the approval of the regulatory authority. The purchaser, however, must ensure that the purchasing entity possesses the licence that is required to conduct the acquired insurance business at the time of the closing. If entire insurance contracts (comprising all rights and obligations) are to be transferred, the contracting party (e.g., the policyholder) must approve the transfer.

Obtaining the approvals may be impracticable if a large number of third parties are involved. In such cases, the portfolio transfer (as described in more detail below), may serve as a solution; besides that, the transfer of renewal rights (Erneuerungsrechte) or the reinsurance (Rückversicherung) of an insurance portfolio as subtypes of asset deals may be utilised as an interim solution.

By operation of law, employees whose work assignments predominantly relate to the acquired business are also transferred to the purchasing entity (save for their individual right to object to the transfer within one month after receipt of a transfer letter).

However, the employees do not only automatically transfer, but they also keep their existing terms and conditions of employment and seniority, and the purchaser assumes all existing liabilities associated with these employees (which may, for instance, also include pension and other long-term liabilities). Their employment cannot be terminated if such termination is a direct consequence of the transfer of the business. Given the employees' right to object to the transfer, if a purchaser wants to ensure that certain key employees are transferred, it is advisable that the purchaser reaches out to these employees while purchase agreements are being negotiated. If the transaction requires a carveout of a part of a business and the employees have established a works council, the carveout typically requires consultation with the works council, which may take several months and may negatively impact the transaction timeline.

PORTFOLIO TRANSFER (Bestandsübertragung)

A special feature of German insurance law is the transfer of insurance portfolios if a primary insurance company sells its business operations, in whole or in part, by way of an asset deal. The portfolio transfer enables the transfer of various individual insurance contracts without obtaining the consent of each relevant creditor (i.e., the policyholder). The consent of the relevant creditor is replaced by the approval of the competent supervisory authority. However, it should be noted that the portfolio transfer relates to the insurance contracts only, while the assets of the respective security deposits (Sicherungsvermögen) and other assets (e.g., reinsurance contracts, business assets, agency agreements and bank accounts) pertaining to the insurance portfolio must still be transferred individually (i.e., by way of an asset deal). Hence, the consent of third parties may be required in this regard.

The portfolio transfer is in similar form also available to reinsurance companies and in case of cross-border transfers of insurance portfolios. In case of the latter, additional prerequisites may need to be observed and the specific responsibilities of the supervisory authority depend on the individual circumstances.

SPIN-OFF STRUCTURES

In some cases, the parties wish to transfer only specific parts of a business or a business which is spread over a number of different legal entities. In this case, it can be advisable to:

• separate the business to be sold into a newly established entity (NewCo) (first step) and then
• transfer the NewCo to the purchaser (second step).

The first step can be achieved by way of an asset deal, which, however, requires the approval of third parties. The German Reorganization of Companies Act offers the possibility to spin off all assets and liabilities pertaining to a certain business from one legal entity (transferring entity) to another entity (assuming entity) by way of partial universal succession (partielle Gesamtrechtsnachfolge).

The advantage is that approvals of third parties are generally not required. As a result, a business can easily be transferred into a NewCo which itself is subsequently sold and transferred to the purchaser. If a licence is required for the transferred business, the NewCo can be structured as a limited partnership that is ultimately merged into the purchaser, so that an existing licence of the purchaser can be used (so-called collapse merger).

On the flip side, spin-off transactions pursuant to the Reorganization of Companies Act result in a joint liability of the transferring entity and the NewCo as assuming entity for liabilities of the transferring entity for a time period of five years (or 10 years for company pension liabilities). Therefore, purchasers will regularly request a guarantee or indemnification from the seller to protect them from such liability. Ultimately, the risk associated with a spin-off for the purchaser largely depends on the financial standing of the seller.

Which structuring alternative is best suited in a specific situation depends on a variety of factors, such as the nature of the insurance business involved, licence requirements, number of (insurance) agreements pertaining to the insurance business, number of employees and necessity of a post-acquisition restructuring, tax and financing aspects, and time constraints. It is important to analyse advantages and disadvantages of the different alternatives at an early stage. This allows efficient allocation of resources and a smooth transaction implementation.

DUE DILIGENCE

Performing a legal due diligence on a German insurance business requires special attention with regard to compliance with data protection and very strict insurance secrecy rules. Disclosure of the mere fact that a natural person is insured constitutes a criminal offence. In practice, this problem is resolved by only allowing persons who are legally bound to maintain confidentiality (e.g., lawyers, auditors or tax advisors) to review the contracts in a separate (red) data room; ideally, personal data in that data room should also be redacted. Further, the target company must scrutinise any reporting from the red data room to the interested party. These legal restrictions render the process more time-consuming than other due diligence processes.

Besides these legal restrictions, during the legal due diligence purchasers should pay particular attention to the following aspects:

• licences: existence of required licences for each insurance class (Versicherungssparte) to conduct the insurance business;
• regulatory requirements: compliance with regulatory requirements (including Solvency II Regulation); the review should include reports from the supervisory authorities (e.g., if a special audit has been carried out) and correspondence between BaFin and the target company from the recent past; additional requirements apply in the case of an insurance group. This becomes more complex again in the case of an international insurance group;
• outsourcing of asset management and distribution contracts: review of contractual arrangements particularly with regard to the continued existence of control and monitoring rights for the outsourcing company and audit and control rights with regard to the outsourced functions;
• insurance intermediaries: compliance with the laws governing insurance intermediaries (Versicherungsvermittler);
• proper advice and instruction of the policyholders: review of whether the legal requirements (e.g., for information on rights of withdrawal) have been complied with and properly documented;
• terms and conditions of insurance contracts: review of the insurance contracts forming part of the insurance portfolio, particularly with regard to the validity of general terms and conditions and compliance with the Insurance Contract Act (Versicherungsvertragsgesetz);
• syndicated insurance policies (Konsortialgeschäfte): if policies are underwritten by multiple insurers to split the risk under the policies, antitrust issues may arise if no exemption under applicable laws applies; and
• legacy or systemic issues in the insurer's conduct of its business, and in particular regulatory investigations or consumer redress requirements.

To view the full article, click here.

Visit us at mayerbrown.com

Mayer Brown is a global services provider comprising associated legal practices that are separate entities, including Mayer Brown LLP (Illinois, USA), Mayer Brown International LLP (England & Wales), Mayer Brown (a Hong Kong partnership) and Tauil & Chequer Advogados (a Brazilian law partnership) and non-legal service providers, which provide consultancy services (collectively, the "Mayer Brown Practices"). The Mayer Brown Practices are established in various jurisdictions and may be a legal person or a partnership. PK Wong & Nair LLC ("PKWN") is the constituent Singapore law practice of our licensed joint law venture in Singapore, Mayer Brown PK Wong & Nair Pte. Ltd. Details of the individual Mayer Brown Practices and PKWN can be found in the Legal Notices section of our website. "Mayer Brown" and the Mayer Brown logo are the trademarks of Mayer Brown.

© Copyright 2025. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.