Competition snag for IAG's Lumley takeover?

Business

Commerce Commission pushes out deadline for IAG-Lumley ruling for 2nd time

25th Mar 14, 4:16pm by Gareth Vaughan

By Gareth Vaughan

The Commerce Commission has, for the second time, extended the deadline for its decision on whether to clear IAG's planned takeover of rival insurer Lumley.

Whilst in itself this isn't necessarily bad news for IAG, it does suggest the consumer watchdog is considering divestments offered by IAG, mulling information brought to its attention late in the piece, or providing interested parties with more time to respond to unresolved issues.

After setting an initial deadline for its decision of January 24, the Commerce Commission unsurprisingly extended this until this Friday, March 28 . However, the deadline has now been pushed out further, until Wednesday April 30.

In its Mergers and Acquisitions Guidelines the Commission says it has "committed" to deciding clearance applications within an average of 40 working days of registering the application. IAG's application was registered on December 20. The Commission says the exact time taken to reach a decision varies depending on the merger under consideration.

"More straightforward clearance applications may take less than 40 working days. More complex clearance applications may take longer and the process is likely to continue beyond 40 working days".

There is no set limit.

"We try and give the most accurate timeline we can at an early stage. However, we may have to seek further extensions later in the process, particularly where we need to: consider divestments that have been offered; test new information provided by the applicant or market participants (including economic evidence); and/or provide an applicant with the opportunity to fully respond to any unresolved issues," the Commission says.

Asked about the Commission's second extension, an IAG NZ spokesman told interest.co.nz extensions are a common part of the regulatory review process for large transactions.

"We continue to work closely with the NZ Commerce Commission to obtain the approvals required for completion of this transaction," the IAG spokesman says.

The Commerce Commission approved IAG's takeover of earthquake-hit rival AMI on March 1, 2012, some two and a half months after that deal was announced on December 16, 2011.

In New Zealand IAG, or Insurance Australia Group, already owns NZI, AMI and State Insurance. In December it announced a A$1.845 billion deal to buy the underwriting businesses of Australia's Wesfarmers, which includes Lumley General Insurance in New Zealand.

The deal would increase IAG's share of the overall New Zealand insurance market to about 50.5% from 41.5%, lift its share of the home and contents and vehicle insurance market to 66% from 60%, and give it 40% of New Zealand's intermediated insurance market.

IAG will sell assets if it has to

In a December interview with interest.co.nz IAG's New Zealand CEO Jacki Johnson said IAG would sell assets to gain Commerce Commission approval for the Lumley purchase if it had to, but IAG sees itself as the natural owner of the assets.

The proposed IAG-Lumley tie up has struck opposition from rivals such as Suncorp and Tower, the Insurance Brokers Association of New Zealand, and the Motor Trade Association who argue it would substantially lessen competition.

However, in its full application to the Commission, IAG says the Lumley acquisition wouldn't result in a substantial lessening of competition in any insurance market. Its application paints a picture of a fiercely competitive insurance market with rivals potentially expanding or entering the market, and banks likely to begin underwriting general insurance themselves.

Aside from the Commerce Commission, in New Zealand the deal also requires approval from the insurance sector's prudential regulator the Reserve Bank, and the Overseas Investment Office. The approval of the Australian Competition and Consumer Commission (ACCC) is also required, with something expected to be announced this Thursday. However, what the ACCC says this week could vary from granting consent to a statement of issues signalling further consideration of specific areas.

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by Gareth Vaughan | 27th Mar 14, 10:17am 1395868678

Across the ditch the ACCC has rubber stamped the deal;

ACCC does not oppose IAG's insurance acquisition

The Australian Competition and Consumer Commission has announced that it will not oppose IAG’s proposed acquisition of Wesfarmers’ insurance underwriting business. IAG’s proposed acquisition was publicly announced in December 2013.

The ACCC has closely reviewed the proposed acquisition as IAG and Wesfarmers are the first and fifth or sixth-largest general insurers in Australia, respectively, and the largest suppliers of rural insurance products.

The ACCC’s public review focused upon the likely impact of the proposed acquisition in specific markets in Australia where IAG and Wesfarmers both underwrite the supply of insurance products, including home and contents insurance, domestic motor insurance, rural insurance products, and commercial insurance products such as heavy vehicle insurance.

The ACCC also examined how the proposed acquisition may affect competition for the acquisition of key inputs by insurers, particularly smash repair and windscreen repair/replacement services. Given the relative sizes of IAG and Wesfarmers in the rural insurance market, the ACCC’s inquiries particularly focussed on the likely competitive impact of the proposed acquisition in this market.

Rural insurance products include packaged farm insurance and crop insurance. Other underwriters with a substantial presence in the market include Allianz and QBE, via Elders. Other suppliers include ARGIS and Rural Affinity, underwritten by a Munich Re subsidiary, and a recent new entrant, Achmea.

The ACCC took into account the recent entry and likely expansion by Achmea, which is part-owned by Rabobank and underwriting rural insurance products marketed to Rabobank clients. Rabobank is the world’s leading agribusiness bank, with a branch network and existing customer base in regional Australia.

The ACCC also determined that other general insurers not currently supplying packaged farm insurance and crop insurance, including Suncorp and Zurich, which have previously been active underwriters in the market, represent credible threats of future entry or re-entry.

“The ACCC found that, while the proposed acquisition would reduce the number of key underwriters from six to five for packaged farm insurance and crop insurance in Australia, the level of existing and potential competition in this market would be expected to constrain the merged firm,” ACCC Chairman Rod Sims said.

“Significantly, no farmer or grower representative associations expressed concerns to the ACCC in market inquiries,” Mr Sims said.

For the home insurance and domestic motor insurance markets, the ACCC considered whether the proposed acquisition would remove a vigorous and effective competitor. Wesfarmers’ underwriting of these personal insurance products sold via Coles is currently small but growing.

The ACCC determined that other competitors including the banks and ‘challenger’ brands such as Woolworths are likely to have a similar ability to provide strong price-based competition for home and motor insurance.

Also, Coles will continue to offer consumers insurance products via its supermarkets and online, underwritten by IAG in accordance with the terms of a 10-year distribution agreement. The ACCC reviewed this agreement, with particular reference to arrangements for pricing and benchmarking to competitors.

The ACCC determined that, while the proposed acquisition removes an independent underwriter from the markets, at the retail level the proposed acquisition is unlikely to materially change competitive dynamics.

“The ACCC concluded that the proposed acquisition is unlikely to substantially lessen competition in any insurance market or in relation to IAG’s acquisition of smash repairs or windscreen replacement services,” Mr Sims said.

“Therefore, the ACCC has decided not to oppose the proposed acquisition.” IAG underwrites insurance sold through well-recognised brands including NRMA, SGIO, SGIC, RACV, CGU and Swann.

IAG’s Australian operations distribute a range of personal, commercial, and rural insurance products, both directly to customers and indirectly through intermediaries including insurance brokers. IAG also has a joint venture with Vero (owned by Suncorp), National Transport Insurance, which supplies heavy vehicle insurance in Australia.

Wesfarmers underwrites insurance sold through established brands including Wesfarmers Federation Insurance (WFI), Lumley and Coles Insurance. WFI is a significant rural and business insurer dealing directly with clients and via intermediaries, Lumley specialises in intermediated commercial and rural insurance products, and Coles Insurance offers car and home insurance to consumers through Coles supermarkets and online.

The ACCC’s public consultation process directed inquiries to a wide range of interested parties including rival insurers, brokers, smash repairers, and relevant industry associations including many representing primary producers.

The ACCC reviewed internal company documents from both IAG and Wesfarmers. The Australian Prudential Regulation Authority (APRA), the insurance industry regulator, also assisted the ACCC’s investigations.

In addition, the ACCC liaised with New Zealand’s competition authority, the New Zealand Commerce Commission, which is continuing to review the proposed acquisition.

Further information is available at http://registers.accc.gov.au/content/index.phtml/itemId/1160307/fromIte…