In a rare occurrence in the insurance sector, the Commissariat aux Assurances (CAA) issued a news item dated 19 July 2024 which was published on its website (the CAA publication) to inform the public of the insolvency of the Luxembourg life insurance company FWU Life Insurance Lux S.A. (FLL).
This is only the second Luxembourg insurance undertaking to experience such difficulties, the first being Excell Life International S.A. (Excell Life), which was placed into judicial liquidation following a judgment on 12 July 2012 and had its authorisation to conduct insurance business withdrawn by ministerial order of 5 June 2012.
FLL is a wholly owned subsidiary of FWU AG, whose holding company is based in Munich (the group).
FLL’s difficulties are not unrelated to those of its parent company, as the group encountered critical liquidity problems and decided to cease its insurance activities in the European Union. This decision would require selling the group’s main entities, including FLL, over the next 9 to 12 months. The group has also been declared insolvent by a German tribunal due to its excessive debt. FLL has a claim of up to 50 million euros against the group.
FLL’s Board of Directors requested the transfer of 30 million euros to alleviate its liquidity problems from the group, which was unable to respond due to its own insolvency proceedings. Without the support of its sole shareholder, FLL stated that it is unable to meet its liquidity needs and its liabilities far exceed its available assets. As of 22 July 2024, FLL had assets of 1,095,926,823.28 euros and liabilities of 1,107,410,316.56 euros. According to FLL’s projections, the company would have been unable to pay its debts from the end of July if no measures had been taken.
During July, the CAA triggered an initial protection mechanism of the triangle of security aiming at protecting customers of Luxembourg insurance companies.
If FLL is wound up, this could well lead to the very first practical implementation of the triangle of security, as reformed and reinforced by the law of 10 August 2018 (the 2018 law) implementing the Insurance Distribution Directive and amending the law of 7 December 2015 on the insurance sector (the LIS).
The CAA publication
On 19 July 2024, FLL informed the CAA that it no longer complied with the Minimum Capital Requirement (MCR) and the Solvency Capital Requirement (SCR), as specifically required by the LIS.
Following this notification, the CAA decided on 23 July 2024 to freeze FLL’s assets matching technical provisions with the credit institutions to protect the interests of policyholders and beneficiaries (in accordance with Article 116 of the LIS) and prohibited FLL from paying any contractual benefits.
FLL was also instructed to submit a realistic short-term finance scheme to the CAA within a month (i.e. by 19 August 2024), for the CAA’s approval. The scheme would have to cover FLL’s plans to restore, within three months, the eligible basic own funds, at least to the level of the MCR.
FLL’s failure to submit a realistic finance scheme or to comply with such a scheme would lead to a procedure by the CAA to withdraw FLL’s authorisation to conduct insurance business (Article 113 (2) of the LIS).
The SOP judgment
In the meantime, on 24 July 2024, FLL also applied to the Luxembourg District Court to benefit from a stay of payment (SOP) as provided for in Articles 244 et seq. of the LIS.
A stay of payment may be ordered by the Luxembourg courts on the request of either the CAA or insurance undertaking itself in the following cases:
The purpose of a stay of payment is to allow the insurance company to suspend its payment obligations to most of its creditors, in order to allow it to seek a solution to improve its solvency during the stay. It also ensures that all payments are subject to the prior verification and approval of a supervisory commissioner.
The stay of payment proceeding is a reorganisation measure which is defined as “measures involving any intervention by the administrative or judicial authorities which are intended to preserve or restore the financial situation of an insurance undertaking and which affect pre-existing rights of parties other than the insurance undertaking itself, including but not limited to measures involving the possibility of a suspension of payments, suspension of enforcement measures or reduction of claims” (Article 229 2. of the LIS).
In a judgment rendered on 2 August 2024, docket number TAL-2024-06048 (the SOP judgment), the Luxembourg District Court granted FLL’s request and ordered the SOP which provides for the appointment of a supervisory commissioner and a 6-month stay of payment.
Under penalty of ity, the written authorisation of the supervisory commissioner is now required for all acts and decisions of FLL.
Risk of a judicial liquidation proceeding
The purpose of a stay of payment scheme, as mentioned above, is to restore the financial situation of an insurance company and thus avoid further judicial actions, particularly the commencement of a judicial liquidation proceeding with all its consequences. The stay of payment proceeding can be a (non-mandatory) prelude to a judicial liquidation which may be ordered in the following cases:
As set out above, it follows from the SOP judgment that the stay of payment was ordered by the court mainly on the basis of FLL’s inability to satisfy its liquidity needs, which was partly due to the fact that the group could not honour the request for 30 million euros. FLL further stated to the court that it is in a liquidity crisis and/or that its creditworthiness is impaired. FLL also acknowledged that without a stay of payment scheme it would most certainly have been unable to meet its debts by the end of July.
Unless FLL improves its financial situation in the context of the SOP, it would appear that the sole outcome will be the commencement of judicial liquidation proceeding. Indeed, in light of the information available, it seems that at least the first condition for the commencement of winding-up proceedings would then be met, without prejudice to the other potential conditions for doing the same.
Reinforced triangle of security and holders of insurance claims’ protection
The LIS, however, provides for protection of insured parties, policyholders or beneficiaries (policyholders) and their insurance claims.
The most prominent protection of insurance claims, more commonly known as the “triangle of security”, is characterised by the conclusion of a tripartite custody agreement between the CAA, a custodian bank and the insurance undertaking and aims to enforce the principle of segregation of assets and ensure the availability of the assets, and thus the enforcement of the super-privilege granted by law to policyholders.
Firstly, the LIS provides that each insurance company must establish technical provisions with respect to all their obligations resulting from insurance contracts. To guarantee the payment of insurance claims, insurance companies must then segregate assets to a value at least equivalent to the technical provisions, known as assets matching technical provisions, and register the latter in a permanent inventory of matching assets.
Policyholders further benefit from a super-privilege as they have a preferential right on the segregated assets which takes precedence over any other preferential rights, including claims held by creditors such as public authorities. In the event of a winding-up of an insurance company, policyholders – as first-tier creditors – will therefore be paid preferentially from the proceeds of the liquidation of all matching assets allocated to their claim which cannot be used to repay other creditors.
Under the enhanced triangle of security mechanism as reformed by the 2018 law, unit-linked life insurance contracts and life insurance contracts with guaranteed rates correspond to separate pools of assets. In other words, the unit-linked pool will primarily be reserved for the execution of the commitments of the corresponding unit-linked life insurance contracts. In the case of an insurance company being wound up, policyholders of unit-linked insurance policies have a first lien on the proceeds from the realisation of the underlying assets. In practice, this would present itself as follows: consider a specific underlying asset – all policyholders whose contracts are linked to that asset will enjoy a joint first-ranking claim over the value of the asset held by the insurance company once liquidated. This asset’s liquidation proceeds are then allocated to these policyholders in accordance with the number of units that were linked to their contracts.
In case the underlying assets comprise unquoted assets, Luxembourg law allows liquidators to transfer the assets in kind (to the extent that the insurance contract so provides, or with the agreement of the policyholder) to the policyholders.
Beside this super-privilege, policyholders are also protected in case the assets covering the technical provisions are insufficient to guarantee payment of their claims, in which case they benefit from a lower ranking privilege to the company’s assets for outstanding amounts.
Through the custodian agreement, assets matching technical provisions are not only clearly segregated from the insurance company’s assets from a legal point of view, but also from a material standpoint, as the insurer is prohibited from holding these assets matching technical provisions itself and has to deposit such assets with a custodian bank.
The triangle of security has already been actioned by the CAA when it ordered the freezing of assets matching technical provisions with the custodian banks on 23 July 2024.
The triangle of security offers strong protection to FLL’s policyholders for the payment of their insurance claims.
And now?
The CAA has created a dedicated page on its website allowing the public to follow developments in the situation with FLL. This page can be consulted by following this link: https://www.caa.lu/fr/consommateurs/insolvabilite-de-fwu-life-insurance-lux-sa.
Please contact our team for any questions you may have in relation to FLL’s potential insolvency.