This chapter treats public disclosure, focusing primarily on the Report on Solvency and Financial Condition under art. 51, para. 1 of the Solvency II Directive. Thus, the first subjects to be addressed are the objectives and addressees of public disclosure. Then the required content of the report is examined. This part concludes by addressing the duty to update the report when information changes significantly. Further inquiry is undertaken into the relationship between such public disclosure and the duty of public disclosure as existing in national capital market and commercial law. Next, the duty of public disclosure for groups and the form of the reports are examined. Finally, some general conclusions concerning public disclosure are set forth, based on the determinations reached.

First published as “Die Veröffentlichungspflichten von Versicherungsunternehmen gegenüber der Allgemeinheit nach Solvency II” [in English: Insurance Undertakings’ Duty of Disclosure to the Public under Solvency II], in Dreher/Wandt, eds., Solvency II in der Rechtsanwendung [in English: Solvency II in Legal Application], Frankfurt Edition, Volume 17, Karlsruhe (2009), 129 ff. with Martin Schaaf as coauthor. Martin Schaaf was at that time a research assistant at the Law School of Johannes Gutenberg University in Mainz.

13.1 Introduction

Following the passage of the Solvency II Framework Directive by the European Parliament on 22 April 2009 and its adoption by the European Council on 10 November 2009, legislation at the first stage of the Lamfalussy process concludes with announcement in the official journal scheduled for the last quarter of 2009.¹ Thus far, preparations for the new supervisory regime by the direct insurance and reinsurance undertakings covered under the Directive, as well as the insurance academic literature, have focused almost exclusively on the solvency and governance requirements of the first and second pillars. By contrast, the third pillar—namely, the public disclosure requirements of interest in this chapter—has received very little attention.² This is surprising since, with arts. 51 ff. of Solvency II,³ the issuer of the Directive ultimately imposes a significant change on direct insurance and reinsurance undertakings with respect to disclosure requirements.

As a consequence of the recent international developments in the financial services sector, the insurance supervisory regime in the future will no longer rely solely on disclosure duties on the part of the undertaking to supervisory authorities.⁴ Instead, Solvency II expands these present duties—which will still be numerous, partly modified in content, and more extensive—with the addition of comprehensive disclosure obligations to the public.⁵ At the center is the “Report on Solvency and Financial Condition”, to be published annually by all direct insurance and reinsurance undertakings in accordance with art. 51, para. 1, subpara. 1 of Solvency II.

The present article explores questions associated with this report from a legal perspective. In matters where the draft of the Directive remains general, specific details from the working papers of CEIOPS are drawn upon to facilitate an evaluation of the expected legal landscape based on current information. The analysis first looks at the objectives and addressees of the new duties of public disclosure (Sect. 13.2, below). It then turns to the content required in the Report on Solvency and Financial Condition (Sect. 13.3, below). Related to the report content, the duty to update in accordance with art. 54, para. 1, subpara. 1 of Solvency II will also be discussed (Sect. 13.4, below). An inventory of disclosure duties under current commercial and capital market law in the national context then follows (Sect. 13.5, below). Building on this analysis, the article examines the alignment in content between the emerging disclosure duties in the insurance supervisory regime under Solvency II and the current publication duties in national law (Sect. 13.6, below). The particularities in connection with the corresponding disclosure obligations at the group level are treated separately (Sect. 13.7, below). Following this, the article discusses the formal requirements of publication of the Report on Solvency and Financial Condition (Sect. 13.8, below) and the protection of trade secrets (Sect. 13.9, below). It closes with a number of conclusions, including the potential for synergies and achieving proportionality in the public disclosure duties required under Solvency II (Sect. 13.10, below). Omitted from the subject-matter of this article is the question of which legal requirements arise in terms of organizational measures for meeting the public disclosure duties Solvency II.⁶

13.2 The Objectives and Addressees of the Duties of Public Disclosure

In legislating the public disclosure requirements, the Directive aims to capitalize on the dynamics of the European internal insurance market for supervisory purposes based on the model of banking supervisory law.⁷ ^, ⁸ Such public disclosure can increase transparency in the insurance market and remove informational imbalances. Current, reliable information on the financial condition, solvency, and corporate governance of direct insurance and reinsurance undertakings, particularly with respect to risk management, could encourage the addressees of publication, in the process of making economic decisions, to reward risk-conscious businesses that deploy rigorous systems for managing risk, and conversely, to sanction those who do not. This market behavior as intended by the issuer of the Directive could be even further intensified by the option presented in art. 54, para. 2 of Solvency II. Undertakings that make use of this option in the future and thereby voluntarily disclose certain information exceeding the minimum requirements for the Report on Solvency and Financial Condition⁹ would set new standards for transparency. A corresponding reward in the marketplace could force other businesses to follow suit. In practice, however, such behavior on the part of individual undertakings should not be expected. This is so because the mandatory information is already very highly detailed; and additional information must not be reselected each year. Rather, under arts. 51, para. 1, subpara. sent 1, and 35, para. 4 of Solvency II, which should also apply in this case, information would need to be “consistent over a longer period of time” and, under art. 55, para. 1 of Solvency II, “ensure the ongoing appropriateness of any information disclosed”.

At issue, however, is who the addressee of publication is from a legal point of view. The answer to this specific question is the basis for the legal assessment of whether—and to what level of depth and differentiation—the duties to inform are factually justified, and whether they are proportional in their impact on the insurance undertakings they pertain to. Opinions on this matter from a legal point of view have thus far not been forthcoming. From an economic perspective, on the other hand, all persons and institutions that may have a potential interest related to insurance undertakings, with no differentiation among them, have been elevated to addressees of publication with respect to the public disclosure duties incumbent on insurance undertakings.¹⁰ Interest in information from an economic point of view and legal duties to inform or rights to be informed, however, must be strictly separated in consideration of the material and personnel expense associated with disclosure as well as the concomitant interference with secrecy and confidentiality interests. Consequently, from a legal standpoint, the legal addressees of publication must be specifically defined. The objectives of the Solvency II Directive and its specific rules on public disclosure duties are to be used as the relevant criterion,

According to Recital 16, the “main objective” of the Solvency II Directive is the “adequate protection of policy holders and beneficiaries” defined as “any natural or legal person who is entitled to a right under an insurance contract”. As “other objectives”, meaning secondary objectives, Recital 16 names “financial stability and fair and stable markets”, referring to insurance markets. Art. 27 of Solvency II makes reference to this fundamental objective under the heading, “Main objective of supervision” as follows: “Member States shall ensure that the supervisory authorities are provided with the necessary means, and have the relevant expertise, capacity, and mandate to achieve the main objective of supervision, namely the protection of policy holders and beneficiaries”. Art. 27 is the introductory paragraph to Chapter 3 of Solvency II, which bears the heading, “Supervisory authorities and general rules”. Thus, the subsequent specific rules must be interpreted on the basis of these “general rules”. This applies with particular meaning to “public disclosure” in arts. 51, 52, 54 of Solvency II, which indicate no sub-objectives of their own, but instead explicitly stipulate in art. 51, para. 1, subpara. 1 that “the principles set out in paragraph 3 and 4 of Article 35” must also be taken into account for the rules on public disclosure duties. For its part, art. 35 of Solvency II refers directly and correctly to “information to be provided for supervisory purposes”. Even in this respect, but independently of it as well, each rule in the Directive harks back to the underlying objectives of the Directive. From a legal view, therefore, each must also be evaluated on this basis when the assessment and specification of its content in a rule is at issue.

Consequently, based on the main objective of the Directive, the primary addressees of public disclosure can only be policyholders and insured parties as well as other entitled persons such as beneficiaries. The broader public—such as competitors and shareholders of the insurance undertaking, insurance brokers, the press, and ratings agencies—can only be considered secondary addressees of publication. Nevertheless, Recital 38 of Solvency II must be taken into consideration, as it relates to public disclosure duties. The introductory phrase is of sole interest in this passage: “In order to guarantee transparency …”. Recital 38 and the disclosure rules themselves provide no other points of reference for the transparency requirement, as seen elsewhere in the Directive. This is logical when considering that each rule in the Directive must be able to contribute to achievement of the objective, as discussed. The European Economic and Social Committee (ESC)¹¹ and CEIOPS¹² presume that disclosure duties serve “to reinforce market discipline”. But this creates no deviation because such statements by the ESC and CEIOPS represent only an analysis of means and consequences with regard to the disclosure mandates found in the actual Directive. Thus market discipline as such is not an objective of the Directive against which the result of public disclosure duties would be gauged from a legal standpoint. Rather, the legal benchmark for evaluating these disclosure rules is formed by the objectives of the Directive, which sees policyholders, insured parties, and others with entitlements arising from insurance contracts as the primary addressees of disclosure, with recognition of any broader public even as a secondary addressee of disclosure under Solvency II as a subordinate aim.

Against this background, the information disclosed in the Report on Solvency and Financial Condition must, on one hand, be sufficiently detailed to motivate economically rational action on the part of the relevant addressees. But the content may neither overload the disclosure addressees with information¹³ nor unduly burden the undertakings required to make disclosure.¹⁴ With a view to the high wire act the European legislator must perform, CEIOPS proposes in a catch phrase that each element of the information disclosed be “fit for purpose”.¹⁵ Stated plainly, the new disclosure duties are an additional organizational and financial burden on the affected direct insurance and reinsurance undertakings, a burden that it is difficult to overestimate. They must internally collect and process the information needed for disclosure—possibly group-wide. This requires considerable human and material resources. From the perspective of the undertaking, the urgent question arises of whether and to what extent the new disclosure duties under insurance supervisory regime brought on by Solvency II overlap with existing commercial and capital market legal disclosure requirements,¹⁶ creating synergistic opportunities as a result.¹⁷

13.3 Minimum Content of the Report on Solvency and Financial Condition

13.3.1 Overview

Under art. 51, para. 1, subpara. 1 of Solvency II, the publication of a Report on Solvency and Financial Condition by direct insurance or reinsurance undertakings must proceed in accordance with the principles specified in art. 35, para. 3 and 4 of Solvency II. Under these principles, the information to be disclosed comprises a mix of quantitative and qualitative elements. With regard to time, it can be historic, current, or prospective in nature. The information may originate from internal or external sources. Its representation must be complete, verifiable, and consistent over a long period of time.

Art. 51, para. 1, subpara. 2 of Solvency II provides a list of the minimum required content for the annual Report on Solvency and Financial Condition. The list is apparently based on the information undertakings must disclose to the supervisory authority for supervisory purposes in accordance with art. 35, para. 1 in conjunction with art. 36 of Solvency II.¹⁸ However, as a result of the different purposes of disclosure, it does not fully match the overall scope and depth of this information.¹⁹

Although the Commission will provide further substance for the content of the Report on Solvency and Financial Condition through implementation measures at the second level of the Lamfalussy process,²⁰ the foundation of the report’s content is already apparent from the Framework Directive. It can be roughly divided into financial reporting information, information on organizational form, and risk reporting information.²¹ The financial reporting information allows the addressees of publication to draw conclusions about the net asset, financial, and earnings position of the undertaking in question. The information on organizational form reveals the design and operational structure of a direct insurance or reinsurance undertaking including information on staff holding key functions. Risk reporting information describes risk management at the undertaking.

13.3.2 Financial Reporting

13.3.2.1 The Description of the Business and Performance

Art. 51, para. 1, subpara. 2 (a) of Solvency II first requires a description of the business and performance of the respective undertaking. The description of the business must start with a presentation of the corporate structure of the undertaking, including the nature and purpose of the undertaking, its legal form, and—if applicable and along general lines—its shareholder composition.²² ^, ²³ It must also provide addressees with the business policy objectives of the insurance undertaking as well as the strategies and time frame under which it pursues them.²⁴ Here, any changes and adjustments to the business strategy compared to the prior year must be explained. Also required here is the main constituent internal and external business data as well as risks²⁵ or developments that could positively or negatively influence attainment of the stated objectives.

The description of the performance of an insurance undertaking should provide a portrait to the addressee of economic results during the reporting period.²⁶ This must be quantified by the inclusion of performance-related figures and the data on key indicators customary in industry practice. Performance-related figures include in particular the profit and loss statement, verifiable cash flow calculations, and presentation of the largest income and expense items in the market segments covered by the undertaking.²⁷ Common key indicators are the claims ratio,²⁸ expense ratio²⁹ or combined claims/expense ratio.³⁰ These provide the addressee with insight as to the adequacy of an insurance undertaking’s premium structure.

13.3.2.2 The Description of the Bases of Valuation for Solvency Purposes

In addition, under art. 51, para. 1, subpara. 2 (d) of Solvency II, the report by the undertaking must provide separate descriptions of the bases and methods used in the valuation of assets, technical provisions, and other liabilities recognized for solvency purposes. All significant differences from the valuation required under commercial law performed in preparation of the annual financial statement must be explained. With regard to the valuation of assets for solvency purposes, differences from the valuation required under commercial law, such as those related to accounting for hidden reserves, may arise from art. 75 of Solvency II.³¹ Deviations requiring explanation in the valuation of technical provisions maybe based, for example, on the methods used for solvency calculations, which conceptually differ, sometimes significantly, from the methods allowed under commercial law. While the valuation of technical provisions under arts. 76 ff. of Solvency II are essentially based on their fair market value, the valuation methods under commercial law are characterized by the principle of caution.³²

With respect to the valuation of technical provisions, the Report on Solvency and Financial Condition must contain, above all, the total amount as well as the amount in each provision category.³³ ^, ³⁴ The “best estimate” and risk margin components, under art. 77, para. 1 of Solvency II, must be shown separately. The report must also explain the method used in determining both the “best estimate” and the risk margin. And it must provide information to the addressees with regard to the assets designated for coverage of the technical reserves as well as the target and Minimum Capital Requirements. The structure of the capital investment portfolio, at a minimum, must also be described along with an explanation of concentrations in particular sectors, regions or with certain counterparties.³⁵ Finally, insurance undertakings subject to disclosure must describe other liabilities relevant to solvency, such as pension provisions or provisions for currency risks.³⁶

13.3.2.3 The Description of Capital Management

A focus of financial reporting to the public is the description of capital management of an insurance undertaking under art. 51, para. 1, subpara. 2 (e) of Solvency II.³⁷ The description must include at least the structure and amount of own funds as well as their quality level³⁸ (i). According to art. 51, para. 2, subpara. 1 of Solvency II, the most important differences with respect to the value of these elements in the annual financial statement must be explained and their capital transferability³⁹ must be briefly described. Differences in the amount of Solvency II own funds as compared with their corresponding balance sheet items may arise in particular from the full-fair-value approach for all assets and liabilities required under Solvency II, but also from the consideration of “ancillary own funds” for solvency purposes within the meaning of art. 89 Solvency II. With the exception of the unpaid share capital or initial funds as specified in art. 89, para. 1, subpara. 2 (a) of Solvency II, ancillary own funds are specifically not own funds as meant in sense of a balance sheet.⁴⁰ Under art. 50, para. 2 of Solvency II, major changes in comparison to the prior year must be described and analyzed.

The amount of the Minimum Capital Requirement and the Target Solvency Capital Requirement must also be provided (ii).⁴¹ According to art. 51, para. 2, subpara. 2 of Solvency II, if an insurance undertaking uses an internal model to calculate the Target Solvency Capital Requirement, the report must indicate, for comparative purposes, the hypothetical amount of Target Solvency Capital Requirement that would have resulted from use of the standard formula within the meaning of art. 103 of Solvency II.⁴² Additionally, significant differences resulting from use of the internal model versus the standard formula must be explained, particularly with regard to the methods applied to the identification, analysis, and valuation of risk, the consideration of diversification effects among individual risks, simulated stress tests, and model validation (iii).⁴³ A more expansive disclosure duty based on the amendment proposed by the Council of November 25, 2008 in connection with the Target Solvency Capital Requirement appears under art. 51, para. 1, subpara. 2 (e) (iii) of Solvency II. It obligates an undertaking to disclose if it made use of the disputed—confined to the pensions business—Member State option under art. 304 of Solvency II, in the valuation of equity price risk.⁴⁴

If the supervisory authority has imposed a capital add-on in accordance with art. 37 of Solvency II, the report must disclose this information and provide a summary of the supervisory authority’s reasons for the action.⁴⁵ Any non-compliance with the target or Minimum Capital Requirement during the reporting period must be described, even if the problem has since been resolved. The origin and consequences of the non-compliance must be explained along with any remedial measures taken (iv).

13.3.3 Information Related to Formal Organizational Aspects

Art. 51, para. 1, subpara. 2 (b) of Solvency II stipulates that a description of the system of governance of the insurance undertaking shall be set forth in the Report on Solvency and Financial Condition. CEIOPS requires a detailed description of the organizational structure in this regard.⁴⁶ This description includes the composition of management, the allocation of duties among its members, the composition of the supervisory body as well as the responsibilities of senior staff from the operating areas—to at least the level directly below management in the undertaking’s hierarchy. These also always include the heads of the staff functions mandated under arts. 41 ff. of Solvency II, risk management, compliance, and internal audit, in addition to the actuary.⁴⁷

An explanation of the fitness and integrity for each of these key function holders in the undertaking is likewise required.⁴⁸ These explanations should enable the addressees of the publications to judge whether the functional staff members entrusted with key tasks in the undertaking satisfy the “fit and proper” requirement in art 42, para. 1 of Solvency II. According to CEIOPS, however, a brief “statement of compliance” should suffice. With regard to the design and operating structure of the undertaking, the allocation of tasks and responsibilities as well as organization of staff functions involved in crisis prevention—risk management, compliance, and internal audit—must be presented.⁴⁹ Their activities must be delineated by the responsibilities of the operating areas⁵⁰ Lastly, the report must provide a brief description of internal reporting to management, and specifically, the reporting lines.

13.3.4 The Information on Risk Reporting

In part, the information on risk reporting to be disclosed under art. 51, para. 1, subpara. 2 (b) and (c) of Solvency II is closely connected to the information on financial reporting and organizational form. The core aim of risk reporting is to enable the addressees of disclosure to reliably assess whether the risk management employed is adequate for undertaking’s risk profile. With the obligatory disclosure of “the risk exposure, concentration, mitigation and sensitivity” in the Report on Solvency and Financial Condition in accordance with art. 51, para. 1, subpara. 2 of Solvency II, the Directive casts a very wide net in terms of content. Moreover, this disclosure must be made “separately for each category of risk”. With the six risk categories specified in art. 13, nos. 30–35 of Solvency II (underwriting risk, market risk, credit risk, operational risk, liquidity risk, and concentration risk), precisely 24 disclosure duties with respect to risk instantly result by multiplying these with the four reporting elements named in the Directive.⁵¹

Against this background, it is not surprising that the relevant CEIOPS papers address all risk related areas of an insurance undertaking, including risk strategy, the risk management process, and the risk management organization.⁵² The methods and procedures for risk identification, assessment, management, and monitoring must be discussed for each risk category.⁵³ The report is structured and designed to devote significant attention to diversification and concentration effects. The report must also describe the cooperation between the risk management function and the business operating areas that are required to practice risk management.⁵⁴ If the direct insurance or reinsurance undertaking uses an internal model to calculate the Target Solvency Capital Requirement, the report must describe its integration with the risk management system.⁵⁵ In several places, CEIOPS also emphasizes the need to present the key points of regular and ad hoc internal reporting to the undertaking’s management.

Nevertheless, although “enrichment” of risk reporting to the public is expected in secondary law despite the already broadly drafted disclosure mandates in art. 51, para. 1, subpara. 2 (b) and (c) of Solvency II, the comparison of the rules by which insurance supervisory authorities must be informed—which, in Germany, is the BaFin [Federal Financial Supervisory Authority]—and those by which the public must be informed, is surprising. The duties to inform the insurance supervisory authorities with respect to risk are laid down in art. 35, para. 1 sent. 1 and 2, and in art. 36 of Solvency II. In anticipation of this, the German legislator enacted secs. 55c and 64a of the VAG [German Insurance Supervision Act] as part of the 9th VAG [German Insurance Supervision Act] amendment, in effect since 1 January 2008.⁵⁶

Under sec. 55c, para. 3 of the VAG [German Insurance Supervision Act], insurance undertakings may “submit a summary” in place of the full risk and audit reports to the supervisory authority if these reports contain such summary. For this rule, the German legislator could in the future invoke the admissibility under the Directive of the submission of limited reports by referring to the power under art. 36, para. 6 of Solvency II, given even to the supervisory authority, to mandate the structure of the report. However, for disclosure to the public, the obligations described above with the 24-part structure are firm due to the mandatory Directive rules in this respect. Ultimately, this can only mean that risk reporting to the supervisory authority may be limited to submission of a summary risk report while the reporting by an insurance undertaking to the public must meet risk disclosure standards that are significantly more detailed and in-depth. The most recent policy documents from CEIOPS on implementation measures at the second level of the Lamfalussy process confirm this impression. In these papers, CEIOPS requires—for policyholders, specifically—an easily understandable summary of the main statements in the Report on Solvency and Financial Condition.⁵⁷ Notably, the summary is not intended to replace the detailed disclosures in the report, but rather supplement these as a separate, additional part.

13.4 The Duty to Update in the Event of Significant Changes to Published Information

If major developments occur involving substantial change to the information published in the Report on Solvency and Financial Condition, art. 54, para. 1, subpara. 1 of Solvency II requires direct insurance and reinsurance undertakings to disclose these changes, including the relevant information as to their nature and impact. As examples, art. 54, para. 1, subpara. 2 of Solvency II names two potential developments: the first is any non-compliance with the Minimum Capital Requirement if the supervisory authority holds the view that the relevant undertaking cannot present a recovery plan within 3 months, (a)⁵⁸; the second is any material non-compliance with the Target Solvency Capital Requirement if the supervisory authority does not receive a reasonable recovery plan within 2 months (b).⁵⁹ Upon the respective request by the supervisory authority, and in accordance with art. 54, para. 1, subpara. 3 and 4 of Solvency II, the undertaking concerned must disclose the amount of non-compliance with the capital requirement in such cases, together with an explanation of its origins and consequences as well as any remedial measures.⁶⁰ Other “major developments” not specifically mentioned in the Directive that could require an update to the Report on Solvency and Financial Condition include an unexpected drop in share price on the equity market and material changes to legal conditions.

13.5 The Duty of Disclosure for Direct Insurance and Reinsurance Undertakings in the National Context

13.5.1 Disclosure Duties Under Capital Market Law

13.5.1.1 Area of Application

The current German Insurance Supervision Act does not contain public disclosure duties for direct insurance and reinsurance undertakings.⁶¹ However, disclosure duties under supervisory law that may also have direct relevance for insurance undertakings are stipulated in capital market law. Of primary interest in the present context are the disclosure duties under the WpHG [German Securities Trading Act].⁶² Of course, these do not extend to all insurance undertakings. They affect only those insurance undertakings that fall under the legal definition of domestic issuers in sec. 2, para. 7 of the WpHG [German Securities Trading Act].⁶³ Domestic issuers are essentially defined here as issuers whose country of origin is the Federal Republic of Germany. But, under sec. 2, para. 7, no. 1 of the WpHG [German Securities Trading Act], it does not apply if the securities issued⁶⁴ are admitted for trading exclusively on an organized market in a country outside of Germany but within the EU/European Economic Area and, in that country, the undertaking must comply with disclosure and reporting duties under the Transparency Directive.⁶⁵ Such issuers are not subject to the additional domestic disclosure duties and the associated supervision by the BaFin [Federal Financial Supervisory Authority] under securities supervisory law. Inversely, issuers whose country of origin is not Germany but another country within the EU/European Economic Area whose securities are admitted for trading on an organized market exclusively in Germany also fall under the definition of domestic issuer in sec. 2, para. 7, no. 2 of the WpHG [German Securities Trading Act]. These issuers are subject to the disclosure rules of the German Securities Trading Act and to supervision by the BaFin [Federal Financial Supervisory Authority] under German securities supervisory law.

13.5.1.2 Disclosure Duties with Respect to Ownership Structure Based on Certain Events

The first group of disclosure duties under capital market law pertains to the event-based duties incumbent upon stock issuers. Under sec. 26, para. 1, sent. 1 of the WpHG [German Securities Trading Act], a domestic issuer of stock must disclose, within 3 days of receiving the information, when certain holdings thresholds requiring notification of the issuer by the relevant shareholder or derivative beneficiary⁶⁶ have been met, not met, or exceeded. Sentence 2 prescribes a comparable disclosure duty with respect to shares held by the issuer itself. Under sec. 26a of the WpHG [German Securities Trading Act], a domestic issuer must disclose the total number of voting rights at the end of any calendar month in which an increase or decrease in voting rights took place.

There may also be additional publication duties in connection with acquisition of a controlling position in a target company under sec. 35 WpÜG [German Securities Acquisition and Takeover Act].⁶⁷

13.5.1.3 Regular Financial Reporting to the Public

The Annual Financial Report

A second group of disclosure duties under security supervisory law pertains to periodic financial reporting. According to sec. 37v, para. 1 of the WpHG [German Securities Trading Act] an undertaking that qualifies as a domestic issuer of securities⁶⁸ is required to publish an annual financial report no later than 4 months after the conclusion of each financial year. The annual report is composed of an auditing financial statement, a management report, and a related statement of compliance (financial statement affidavit) in accordance with secs. 264, para. 2, sent. 3, 289, para. 1 sent. 5 of the HGB [German Commercial Code].⁶⁹ Thus, sec. 37v, para. 1 of the WpHG [German Securities Trading Act] forms a constituent part, however, only when the undertaking is not already required to disclose the accounting documentation in the annual financial report under commercial law, and in particular under sec. 325 HGB [German Commercial Code].⁷⁰ This is specifically the case for domestic issuers registered in Germany. For such undertakings, only the disclosure duties under commercial law are relevant.

The Interim Reports

For this reason, more individual significance may be assigned to the interim disclosure duties of secs. 37w, para. 1, sent. 1 and 37x, para. 1, sent. 1 of the WpHG [German Securities Trading Act]. Under sec. 37w, para. 1, sent. 1 of the WpHG [German Securities Trading Act], mainly the issuers of stock as well as issuers of debt securities within the meaning of sec. 2, para. 1 sent. 1 of the WpHG [German Securities Trading Act] must publish a semi-annual report.⁷¹ The semi-annual report is composed of a condensed financial statements, the interim management report, and a financial statement affidavit with respect to these.⁷² In accordance with sec. 37w, para. 4, sent, 1 of the WpHG [German Securities Trading Act], the interim management report must include, at a minimum, the “significant events” during the reporting period and their impact on the condensed financial statements as well as the major opportunities and risks expected in the 6 months following reporting period. Specific details can be found in this respect in the German Accounting Standard (DRS) no. 16.⁷³

Sec. 37x, para. 1, sent. 1 of the WpHG [German Securities Trading Act] requires the management of domestic issuers that do not publish quarterly reports to prepare and publish an “interim statement” no sooner than 10 weeks after the beginning and no later than 6 weeks before the end of the first and respectively the second half of the financial year.⁷⁴ ^, ⁷⁵ This statement must allow an assessment of how the operations of the issuers business have developed since the end of the most recent published annual or semi-annual financial report. At a minimum, under sec. 37x, para. 2, sent. 2 of the WpHG [German Securities Trading Act], the “significant events and transactions” of the period of the statement must be described and their implications on the financial position of the issuer presented.⁷⁶

13.5.2 Disclosure Duties Under Commercial Law

13.5.2.1 Area of Application and Scope of Publication Requirements Under Commercial Law

Under sec. 341a, para. 1, sent. 1 of the HGB [German Commercial Code] all direct insurance and reinsurance undertakings⁷⁷ regardless of legal form must issue annual financial statements including annex and a management report in accordance with the requirements for large corporations laid down in secs. 264–289 of the HGB [German Commercial Code]. The annual financial statements and management report must be submitted in electronic form to the publisher of the electronic Federal Gazette in accordance with sec. 341l, para. 1, sent. 1 in conjunction with sec. 325, para. 2 of the HGB [German Commercial Code] and published immediately following the submission.⁷⁸

13.5.2.2 Content of the Annual Financial Statements

The annual financial statements within the meaning of secs. 242, para. 1, and 264, para. 1, sent. 1 of the HGB [German Commercial Code] consist of the balance sheet and the profit and loss statement. The annex explains the annual financial statement and forms an integral unit with it. The minimum content of the annex is specified in secs. 284, para. 2, and 285 of the HGB [German Commercial Code]. In particular, it must explain the accounting and valuation methods used and also itemize liabilities and revenue. The annual financial statements provide the addressees of publication with a view of the financial, earnings, and economic position of an undertaking as of a particular reporting date. They mainly impart financial reporting information to public and contain little information on organizational form. This can be seen, for example, in the information required under sec. 285, sent. 1, nos. 9 and 10 of the HGB [German Commercial Code] as to the names and professions⁷⁹ of managing board and supervisory board members as well as their total remuneration.

13.5.2.3 Content of the Management Report

Separately from the items reported in the financial statements, the management report discloses the business performance and the situation of the entity required to make disclosure. It contains financial reporting information, but centers on risk reporting. Information on formal organizational aspects provided to addressees in the management report is rudimentary at best.⁸⁰ The financial reporting includes, in particular, information on the economic and legal environment, sales and earnings performance including the major performance indicators, information on financing and on developments in social commitment and human resources.⁸¹

The disclosure of risk reporting information is first laid out in sec. 289, para. 1, sent. 4 of the HGB [German Commercial Code]. Accordingly, the management report must describe the company’s opportunities and risks and assess the expected development of the company in consideration of them. DRS [German Accounting Standard] no. 5–20 on risk reporting by insurance undertakings can be consulted for the specific information in this requirement. Although it is only directly applicable to the group management report, corresponding application is expressly recommended for the management reports of individual entities.⁸² DRS [German Accounting Standard] 5–20 requires an “overall analysis” as of the reporting date of the actuarial risks, the risks from default on underwriting receivables, risks from capital investments as well as operational and other risks. Diversification effects must be taken into account and changes compared to the prior year must be described. It requires—to the extent technically possible—a quantification of the risks including an explanation of the valuation method applied. On this basis, the undertaking must make a projected estimate of its overall risk profile.

Sec. 289, para. 2, no. 2 (a) and (b) of the HGB [German Commercial Code] is also relevant to risk reporting. The explanations it requires, however, do not pertain to the overall risk management of an insurance undertaking under sec. 64a VAG [German Insurance Supervision Act] and sec. 91, para. 2 of the AktG [German Stock Corporation Act].⁸³ They are limited to the use of financial instruments and hedge transactions in particular.⁸⁴ Thus only in this respect is the management report required to address the company’s risk-management goals and methods, its risks pertaining to price changes, default, and liquidity, or the risks from fluctuations in payment streams to which the company is exposed.

13.6 Comparison of the Report on Solvency and Financial Condition Under Solvency II and Publication Required Under National Commercial and Capital Market Law

13.6.1 The Equal Rank of the Disclosure Duties of Solvency II and Disclosure Duties Under Capital Market and Commercial Law

According to the draft of the Solvency II Framework Directive, the obligation to publish a Report on Solvency and Financial Condition is parallel to the disclosure duties under commercial and capital market law. The duties are therefore cumulative and independent of one another.⁸⁵ Nevertheless, the issuer of the directive has acknowledged potential overlap in the content of the different disclosure requirements. The nearly identical wording of the rules in arts. 51, para. 1, subpara. 2 and 53, para. 3 of Solvency II provide evidence of this. The purpose of these passages is to avoid the disproportionate duplication of reports. Thus the direct insurance and reinsurance undertakings that must report may, in the Report on Solvency and Financial Condition, refer to “equivalent information […] disclosed publicly under other legal or regulatory requirements”. This congruence, supported by the issuer of the Directive, between the Report on Solvency and Financial Condition on one hand and the annual financial statements, management report as well as financial reports under capital-market law on the other is evaluated in the following discussion.

13.6.2 Content Overlap Between the Report on Solvency and Financial Condition Under Solvency II and the Annual Financial Statement and Management Report

13.6.2.1 Congruence in Content with Respect to Financial Reporting

With regard to the description of the business and performance, the content of the Report on Solvency and Financial Condition is largely the same as the content of the annual financial statements and management report. Required here as well as in financial reporting are disclosure of the profit and loss statement, information on key performance indicators and an analysis of sales and earnings performance. But the content is not completely identical. An example of the differences would be in the presentation of the undertaking’s internal objectives and strategies. This is obligatory—limited to key elements—only in the Report on Solvency and Financial Condition but not for the management report.⁸⁶ Indeed, in an early draft, the German Accounting Law Reform Act (BilReG) still contained a specific requirement that the undertaking discuss “significant objectives and strategies” in the management report separately from the risks and opportunities of future progress.⁸⁷ The relevant passage was deleted, however, in the ministerial draft for a BilReG [German Accounting Law Reform Act] since it was not indicated in European law⁸⁸ and it was also expected that undertakings would not or could not provide specific information.⁸⁹

On the other hand, the Report on Solvency and Financial Condition requires an extensive disclosure of information not contained in the annual financial statements or management report in the description of valuation principles for solvency purposes and the description of capital management. It also requires explanations of deviations from the annual financial statements and management report. This is due primarily to the new solvency regime of the first pillar. Much of the additional information in the Report on Solvency and Financial Condition compared to publications for accounting is directly connected with the calculation of the Minimum and Target Solvency Capital Requirements and with the optional use of an internal model for the calculation of the Target Solvency Capital Requirement in particular. Other additional information arises from the consideration of hidden reserves in the valuation of “basic own funds” and in the justification of accounting liabilities as “ancillary own funds”.⁹⁰ The description of the composition of the entire capital investment portfolio in terms of its significant characteristics and the description of capital transferability are also not required in the management report.

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