Germany Tells Insurers to Vet Private Asset Deals More Carefully

Germany’s financial watchdog is pushing insurers to step up scrutiny of private credit investments after several firms were stung by losses on loans to real estate companies.

BaFin, which oversees more than 500 insurers, is asking 30 to 40 firms with higher than average investments in alternative assets about how they vet them, Julia Wiens, who leads insurance supervision, said in an interview. The watchdog wants to make sure that large deals in particular are reviewed by the firms’ top executives.

“Especially where there’s a big investment, we expect the board as a whole to look behind the curtain,” Wiens said in her office in Bonn. “It may well be that some insurers fell short in this respect in the past.”

Private Credit’s Push for Retail Money Stokes New Vulnerability

Germany was a flash point in the global commercial real estate meltdown over the last two years, with the insolvency of Rene Benko’s Signa conglomerate, the collapse of major project developers and the restructuring of landlord Adler Group triggering billions in losses. Insurers and pension funds were among lenders that got burned as they delved into riskier credit in a search for yield during a decade of ultra-low interest rates.

While German insurers’ average exposure to private credit and private equity is smaller than their holdings of stocks and bonds, individual firms have more than a third of their investments in the respective asset classes, Wiens said. That proportion rises to as much as 70% in some cases when adding other alternative assets such as real estate, infrastructure and mezzanine loans, she said.

“Insurers invested significantly in alternative assets over the last years, which is understandable, given the long phase of low interest rates and depressed bond yields,” she said. “They’re generally free to take their own investment decisions, as long as they have decent risk management with adequate staffing and the necessary know-how.”

The pitfalls were on display at Signa and Adler. Insurers were among investors in funds which then lent the money to development projects owned by Adler. Such projects are often inherently risky, with creditors potentially being left stuck with a half-finished construction site if its owner runs out of money.

While Wiens didn’t name any insurers, court documents give some insight into the range of firms involved. Take for instance Aggregate Holdings, which was previously a major shareholder in Adler, and has since collapsed into bankruptcy in Luxembourg.

Insurers HUK-Coburg, Barmenia and KKH Kaufmaennische Krankenkasse were among investors in its landmark Fuerst project on Berlin’s Kurfuerstendamm. The rise in interest rates as well as other costs such as energy and labor contributed to a drop in the property value, forcing a takeover by lenders. Even the most senior creditors, which include most of the insurers, were expected to take a haircut under the court-approved restructuring plan.

Benko’s Signa was a particularly complex case, with insurers investing throughout the company’s capital structure. Debt extended to the conglomerate ranged from mortgages on individual trophy properties, often with good security as a result, to equity-like instruments issued by Signa’s major units.

Insurers including Continentale Versicherungsverbund, Gothaer Group and Signal Iduna Group invested in such so-called Genussscheine issued by Signa Prime Selection, according to documents seen by Bloomberg News. These subordinated instruments are likely to be wiped out as Signa’s major units are liquidated in a bankruptcy process in Austria.

Officials for Continentale and KKH didn’t respond to requests for comment. Spokespeople for Signal Iduna and HUK-Coburg declined to comment, as did a spokeswoman for the investment unit of BarmeniaGothaer, the two insurers that recently merged.

Risk managers at insurers should “be more precise” and look more closely at their systems for limiting exposures, for example to individual issuers, Wiens said.

Despite the losses, Wiens said that neither Signa nor Adler posed a threat to the stability of insurers or to their ability to fulfill contracts with their customers.

“Also, you have to look at the Signa and Adler investments in the context of when they were made,” said Wiens. “In some cases, the insurers had these on their books for several years during the search for yield. At that point, they were adequate, sensible investments with very good returns.”

In late 2022, German insurers had about €4 billion ($4.3 billion) of exposure to Signa, some 0.2% of the industry’s investments. Following writedowns, that has fallen to about €2 billion.

Wiens said she still supports the regulatory framework under which insurers make their investments, which gives them “a lot of freedom” but also strengthens the role of governance. Still, insurers that run up large losses should also expect further scrutiny from BaFin, she said.

That would entail a “close conversation” with the company, for example on the exact processes in the investment decision and the quality of its analysis and relevant limits, she said. That could be followed up by an inspection at the firm’s premises.

“We’re not going to look at every small investment and even very public insolvencies may have limited effect,” she said. “Our job is to safeguard the stability of the insurer and to make sure that it can meet its obligations to policyholders.”

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