‘But Commerce Commission… You said yes to IAG, so why wouldn’t you say yes to us?’
This is how Vero Insurance New Zealand Limited is framing its argument, as it asks the competition watchdog for permission to take over Tower Limited.
The Commerce Commission has today received a clearance application from Vero to acquire up to 100% of the New Zealand insurer's shares.
Vero, which is wholly-owned by Australian company Suncorp, has already secured 13.3% of Tower's shares and is attempting to out-bid Canadian giant, Fairfax Financial Holdings, to secure the rest.
Vero, along with its joint venture partner AA Insurance, holds a 25% share of the general insurance market. If its bid to buy Tower is successful, it will increase its market share to 30%.
It makes a number of references in its application to the Commerce Commission’s 2014 decision to allow Insurance Australia Group (IAG) to acquire Lumley, lifting IAG's market share by around 9% to where it’s at now at 46%. In fact, the word ‘Lumley’ is mentioned 46 times in the 31 page document.
It also highlights the Commerce Commission’s call to enable IAG to buy AMI’s non-quake related business in 2012, after the 2010/11 Canterbury quakes saw the business collapse.
Vero says: “As the Commission found in those recent clearance decisions, it remains the case that there are a number of well-resourced and established insurance providers with trusted and respected brands. Just as the Commission found in IAG/Lumley, the level of existing competition means that the Transaction is unlikely to result in a substantial lessening of competition.”
Vero says a 5% market share increase is low and “more pro-competitive” than IAG’s acquisitions, as Vero isn’t the largest player in the general insurance market.
It points out its market share will still be lower than IAG’s even before it bought Lumley.
It says that even if it buys Tower, IAG will remain the market leader, with a “materially different size and scale of business to Suncorp”.
“There will be no ability for Suncorp to exercise market power in the context of that market structure, and the minimal level of aggregation will make no effective difference to that dynamic,” it says.
“The material market share differential between the number 1 and number 2 players also means that there can be no possibility of coordinated effects arising.
“Again, in the area that Tower is most active, in personal lines, the market share differential between numbers 1 and 2, of 15% in general insurance, increases to a 20% differential.”
Vero goes on to say Suncorp and Tower aren’t each other’s closest competitors as they have different strengths in the market.
When it comes to home and contents insurance, it says IAG (through AMI and State), as well as Youi (even though it only has a 1% share of the market), are greater competitors.
“Suncorp also faces significant competition from ASB, BNZ and Westpac in this market which are each underwritten by IAG.”
As for commercial insurance, Vero says Suncorp has a stronger presence in this part of the market than Tower.
“Unlike Suncorp, Tower does not participate in the broker market where the vast majority of commercial insurance is transacted.”
Quakes haven't deterred new market entrants
Vero also acknowledges the fact that in 2014, the Commerce Commission noted how the Canterbury quakes lowered the likelihood of new entrants to the market due to higher reinsurance costs, a move to sum insured, increased premiums, and the withdrawal of some underwriters.
Three years on, it says “the market dynamics in New Zealand have changed considerably”.
“This is evidenced by the substantial number of new competitors entering the New Zealand insurance market since 2014 and successful expansion from existing competitors.”
It notes the entrance of Youi, QBE, Ando and Berkshire Hathaway to the market, saying their moves indicate "barriers to entry are indeed “not significant”, but also that the costs of reinsurance have not been a significant deterrent”.
Vero says entering the New Zealand market is not that difficult for big insurers operating elsewhere in the world.
As for banks, these have “been characterised as having a degree of countervailing power in insurance markets”.
“Banks have the ability to design their desired insurance product, and then obtain competitive tenders for the underwriting of that product – with the retendering process sometimes occurring in a relatively short period (for example, every 3-4 years).
“This gives the banks the upper hand when renegotiating with the underwriters, who often make concessions in order to retain the bank’s business.”
Vero began its takeover bid for Tower on February 22 when it agreed to buy its first lot of shares for $1.30 each, and made a non-binding indicative proposal to buy the rest for the same price.
It also made ‘escalation payment’ agreements with the sellers of Tower’s shares to essentially assure them they won’t miss out if a bidding war for the company’s shares ensues.
Vero's offer rivals Fairfax's; the company on February 9 announcing it had entered into a ‘Scheme Implementation Agreement’ with Tower to buy all its shares for $1.17, pending shareholder and regulatory approval.