Reduction of the valuation reserves or profit participation

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The Regional Court of Stuttgart (Stuttgart Regional Court, ruling of 20 December 2017, file no. 16 O 157/17) ordered an insurer (VR) to pay the policyholder (VN) of a life insurance policy (KLV) the “valuation reserves (profit participation) that were eliminated as of the reporting date 1 November 2014”.


The contract for the KLV ended on the cut-off date. The retention of the valuation reserves was not prevented by the absence of a “security requirement”, but rather by the fact that the BoD could not invoke this requirement because of the simultaneous transfer of profits to the parent company.


Distribution of valuation reserves according to LG Stuttgart

Until the Life Insurance Reform Act (LVRG) came into force on 7 August 2014, the valuation reserves from value and price gains on investments were divided equally between the BoD and the UN, Section 153 III 2 Hs.1 VVG.

This half for the UN has since been reduced only in the case of fixed-interest securities, insofar as there was a legally prescribed “need for security” due to the lower interest rate levels determined by the Bundesbank. This was also confirmed by many courts, partly after obtaining actuarial court opinions. However, a corresponding “payout block” at the Stuttgart Regional Court failed because a profit transfer agreement existed and thus, in the opinion of the Regional Court, a profit is actually distributed to shareholders (§ 56a III VAG old, since 1 January 2016: § 139 III VAG). Therefore, despite the need for security and although the parent company is then liable for (subsequent) losses (section 302 I AktG), the BoD can no longer invoke this need for security for the distribution ban on the valuation reserves.


Constitutional regulation of the LVRG

The legislator has “a wide scope for assessment, evaluation and design”, so that the LVRG is not unconstitutional (BGH, judgement of 27.06.2018, ref. IV ZR 201/17). The LVRG was ‘a reaction to the phase of low interest rates that had been going on for years as a result of the financial market and public debt crisis’; some economists may have a causally different view of this. VN are not disadvantaged in relation to shareholders, as a distribution of a balance sheet profit to shareholders is prohibited by law if the valuation reserves are simultaneously blocked from distribution. Under a profit transfer agreement, however, profits are transferred in advance, so that there is no balance sheet profit at all. It is proven that the legislator did not want to exclude this possibility, which is known to him.


Primary burden of proof and burden of proof

Firstly, the UN is ‘obliged to present and provide evidence for its claim that the valuation reserve paid to it by the BoD at the end of the contract is too low and that it is entitled to a higher amount’. The BoD then bears the secondary burden of demonstrating that a corresponding need for security existed at the end of the CLI agreement, § 153 III VVG, § 56a III, IV VAG (old version).

The fact that the German Federal Financial Supervisory Authority (BaFin) did not object to the need for security is irrelevant – as it is merely a case of maladministration and not legal supervision.

Since the valuation reserves may not be arbitrarily reduced, the UN has a claim to have this question clarified by a civil court (Federal Supreme Court, loc. cit.), especially with regard to the effectiveness of the protection of fundamental rights.


Double violation of the laws of thought – or equality in injustice ?

In terms of its approach, the Stuttgart Regional Court equates – albeit probably incorrectly – the direct distribution to shareholders with the (indirect distribution to a parent company of the board of directors) via a profit and loss transfer agreement, because the legislator had always wanted to prevent “unjustified outflows of funds”. However, this would not make the profit transfer agreement itself illegal, but its fulfilment – and the question of a (subsequent) obligation to assume any losses could be left open, Section 302 I AktG.

If there is an objective need for the BoD to provide security, the statutory distribution ban affects the UN, whose valuation reserves must first be reduced by the BoD – in order to then mathematically clarify this process within the framework of the secondary burden of proof and also prove it with a court actuarial expert opinion.

Meanwhile, the Scientific Service of the Bundestag (Profit and Loss Transfer Agreements in Insurance Supervision Law, WD 4 – 3000 – 106/17, dated 30 January 2018) had stated the following on the legal situation: “If the servicing of profit and loss transfer agreements is to be included in the payout block, this limitation would have to be inserted in § 139 (2) sentence 3 VAG”. According to the wording of § 139 VAG, profits are also currently to be transferred to parent companies on the basis of profit transfer agreements. This means that – even if profits are paid out to shareholders illegally – the BoD is not at liberty to reduce the UN’s share of the valuation reserves, but is still legally obliged to do so.


Amount of the security requirement is decisive

According to the legislator’s stipulation, the need for security, which is determined actuarially according to prescribed formulas, is a quantity that is determined absolutely independently of who bears it and is not reduced if, for example, shareholders participate in ensuring that insurance contracts can be fulfilled.

In addition, the starting point of the total valuation reserves relevant for customer participation (only for fixed-income securities) is reduced by this hedging requirement, so that the UN alone bears the hedging requirement here anyway.

Therefore, the ban on the distribution of dividends is a supplementary measure as a contribution by shareholders to the stabilisation of the insurer, so that they, and not only the customers, are also included. However, this does not directly serve to finance any security requirement, does not reduce it arithmetically, and does not lead to an increase in the UN’s participation in the valuation reserves.


Dividend block due to hedging requirements despite profit transfer

The Regional Court correctly recognised that the issue was “whether the defendant was allowed to hold a security requirement against the plaintiff in the context of calculating the profit participation”. However, it is not relevant whether the BoD carried out a profit transfer – the need for security does not change as a result. Therefore this can hardly justify a conviction.

The ban on distribution due to the need for security – both in respect of retained earnings and valuation reserves – is a legal obligation which the BoD may not simply “invoke” at its discretion, but which it must comply with. A breach of the law in one place does not mean that you no longer have to comply with the law in another place. Especially not if – as in the case of profit and loss transfer agreements – these are permissible arrangements.


Finance Minister announced the LVRG – and kept his word

The market yield was already below the level of interest on the savings portion of life insurance policies guaranteed by VR in 2013. At the same time, ever higher participations in the valuation reserves had to be paid out to terminated and expired contracts. This endangered the ability to fulfil the long-term contracts that continued to exist. The then finance minister announced, among other things, that surpluses would be distributed more fairly between contracts that were due soon and those that would only be due in decades. The LVRG then distributed the costs of excessive guaranteed interest more fairly. It is mandatory, and not just as an option that a BoD can invoke at will, or to its current competitive advantage to the long-term detriment of the UN. Exactly the latter circumvention possibility would, however, be legally opened by the LG Stuttgart.


by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm


by courtesy of (Published on 27.09.2018)




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Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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