Lumley acquisition would give IAG 66% of NZ home and contents and vehicle insurance market

By Gareth Vaughan

Insurance Australia Group's proposed acquisition of New Zealand's Lumley Insurance would give it 66% of this country's home and contents and vehicle insurance market meaning gaining Commerce Commission approval shouldn't be plain sailing, analysts argue.

Deutsche Bank analysts suggest IAG may be forced to agree to asset sales to secure regulatory approval and reckon IAG would be prepared to do this.

Figures from the Insurance Council of New Zealand show combined gross written premiums for the "domestic buildings and contents" and "motor commercial and private" insurance markets of about $2.52 billion for the year to September 30, 2012. That's about 57% of the total $4.44 billion market.

IAG, which already owns the NZI, AMI and State Insurance brands, announced the acquisition of the underwriting businesses of Lumley's parent Wesfarmers on Monday in a A$1.845 billion deal. The deal doesn't include the broking operations of Wesfarmers' insurance division, nor its Australian and New Zealand premium funding business.

(You can view and read an interview with IAG's NZ boss Jacki Johnson here).

Sixty six percent marketshare

Deutsche's Sydney-based analysts Kieren Chidgey and Shreyas Patel point out the deal would see IAG's share of the New Zealand home and contents and vehicle insurance market rise to 66% from 60%. It would also see IAG's share of the overall insurance market rise to 50.5% from 41.5%, ahead of the second placed Suncorp's 23.5%. Suncorp owns Vero and 68% of AA Insurance.

In a presentation on the Wesfarmers deal issued on Monday, IAG said it would increase its share of the New Zealand intermediated market, including insurance sold via brokers, from just under 30% to about 40%. Lumley underwrites Westpac's home and contents and vehicle insurance.

"IAG's attempt to frame the market share debate around an 'intermediated' distribution view suggests it holds some concerns regarding regulatory approval," Chidgey and Patel say.

"IAG has suggested pro-forma market shares of 24% in Australia and 40% in New Zealand from an 'intermediated' view. While this view is valid from a distribution viewpoint, we also believe regulators will be concerned with total share on a class of business basis and perhaps regional concentrations."

"Of particular note, IAG's share of NZ home and motor (insurance) would lift from an already high 60% to 66% share," the Deutsche analysts add.

"We think regulatory approvals on competition grounds will not be plain sailing and could potentially require divestments for the deal to proceed."

Chidgey and Patel say they believe IAG would proceed with the deal even it it had to sell some businesses.

In Australia the deal includes a 10-year distribution agreement with the Wesfarmers owned supermarket chain Coles. The Deutsche analysts say they see parallels here with the Australian Competition and Consumer Commission's view on the North platform administrative business when it rejected the proposed acquisition of AXA Asia Pacific Holdings by BNZ's parent National Australia Bank in 2010.

"Should either the Coles business or NZ home and motor be an issue for regulators, we believe IAG would be willing to divest to see the deal proceed. While we could see buyers for the NZ home and motor books (Suncorp, Tower), it is more difficult to see a potential acquirer for Coles insurance," the Deutsche analysts say.

'Regulatory approval will not be a formality'

Meanwhile, analysts at Citigroup argue the market shares IAG would obtain through the Wesfarmers deal on both sides of the Tasman  are at the level where the Commerce Commission and ACCC will closely scrutinise the deal.

"Regulatory approval will not be a formality," Citi analysts say.

"On a simple threshold of market share, the combined insurance group will be very close to the 40% level, which tends to raise the concern of the ACCC... In New Zealand, the combined market share in the intermediated general insurance market is 40%, while in the broader market including direct insurance, the combined share is 48%. There are likely to be some insurance classes where the combined share is even higher," the Citi analysts add.

*The chart above is taken from a Deutsche Bank research report.

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