Commerce Commission to mull banks' role in insurance as part of decision on whether to clear IAG's NZ$380 mln AMI bid

Insurance Australia Group's citing of the big banks as potential major competitors, if its NZ$380 million AMI acquisition is approved giving the combined group 56% and 61% market share respectively of the home-contents and motor insurance markets, is to come under Commerce Commission scrutiny.

The consumer watchdog published its statement of preliminary issues relating to the application by IAG, which owns State Insurance and NZI, seeking clearance to acquire AMI today. In it the Commerce Commission notes IAG's suggestion in its application to have the deal approved that a combined IAG-AMI would face strong competition from both existing insurers and from banks.

"The Commission understands that no New Zealand bank offering general insurance products underwrites its own policies," the Commerce Commission says. "Instead, it will resell a product of an insurance company. The Commission will assess whether or not banks are able to provide competitive constraint as a result of this relationship."

The proposed deal, which also requires the Overseas Investment Office's approval, would lift IAG's share of the general insurance market to 40% from 31%, well ahead of second placed Vero Insurance, owned by Australian rival Suncorp, with 23%. Third is Wesfarmers' Lumley with 9%.

The deal would see AMI's Christchurch earthquake exposure remain with the taxpayer after the government stepped in with a NZ$500 million support package for what until now has been a mutually owned AMI after the devastating February 22 Christchurch earthquake.

The Christchurch-based AMI subsequently reported a NZ$705 million annual loss and breached its Crown Support Deed arrangement through a NZ$76 million shortfall to its NZ$198.6 million regulatory capital requirement. Finance Minister Bill English says Treasury's best estimate of the proposed IAG deal is that it will reduce the AMI earthquake liability being carried by taxpayers to just NZ$120 million. The Government's June year financial statements estimated the AMI support package would cost taxpayers $335 million. Treasury's new prediction is based on AMI's estimated NZ$1.8 billion in earthquake liabilities, reduced by NZ$1.3 billion reinsurance and the NZ$380 million IAG purchase price.

The Commerce Commission says IAG's proposed purchase of AMI would result in aggregation of market share in three insurance product categories being domestic house, domestic contents, and domestic motor vehicles. As for market definition, it says it will consider there are separate underwriting and retail insurance markets.

"The Commission will also assess whether other related markets such as windscreen or motor vehicle repairs are relevant to the proposed acquisition."

The watchdog plans to make its decision by February 29 but notes this timetable could change.

Meanwhile, the Commerce Commission invites submissions from any other parties "who consider they have information relevant to the Commission’s consideration of this matter."

In a December research report Sydney-based analysts at Merrill Lynch suggested the Commerce Commission could potentially block the deal because it would make the New Zealand general insurance market "all but a duopoly" given the combined IAG-AMI's 40% market share alongside Vero's 23%.

The analysts also argued IAG is overpaying for AMI and say without IAG's recent NZ$325 million bond issue to New Zealand retail investors, it wouldn't have been able to fund the AMI purchase through internal funds. See the full story on the Merrill Lynch report here.

For its part the Commerce Commission says when considering a proposed merger, it must decide whether the competition that is lost in a market when two businesses merge is substantial.

"We will give clearance to a proposed merger only if we are satisfied that the merger is unlikely to have the effect of substantially lessening competition in a market."