IAG NZ CEO says insurer would sell assets if forced to by Commerce Commission to secure Lumley acquisition

By Gareth Vaughan

Insurance Australia Group's New Zealand CEO says the company would be prepared to sell assets if this is what's required to secure Commerce Commission approval for its proposed Lumley Insurance acquisition.

"We're prepared for that, if that has to happen," Jacki Johnson told interest.co.nz in a Double Shot interview.

"We think we are the natural owner of these assets to be able to give certainty to New Zealanders. But if the Commerce Commission end up with a different view, we are prepared to divest some of that."

Johnson said IAG did want full clearance because its staff had worked out "the metrics" of the deal, and it wants to keep insurance successful and affordable.

"But we'd be prepared to divest," she said.

Asked what assets IAG might be prepared to sell Johnson wouldn't be drawn, saying it was too early to say.

Big kahuna of NZ insurance

IAG, which already owns NZI, AMI and State Insurance in New Zealand, is buying the underwriting businesses of Australia's Wesfarmers, which includes Lumley Insurance in New Zealand. The A$1.845 billion deal, agreed between the two companies and announced on Monday, still requires regulatory approval, which in New Zealand includes the Reserve Bank, Commerce Commission and Overseas Investment Office.

Lumley offers commercial insurance products through brokers and personal insurance through a partnership with Westpac.

IAG says the acquisition will give it 40% of the New Zealand intermediated market, whilst analysts say swallowing Lumley would increase IAG's share of the overall insurance market to 50.5% from 41.5%. They also say the deal would lift IAG's share of the home and contents and vehicle insurance market to 66% from 60%. This is marketshares of the size that may  attract the interest of the Commerce Commission, which potentially could block the deal, or ask for asset sales before rubber stamping it.

"In terms of competition, that's the job for the Commerce Commission and we've started engaging this week with the Commerce Commission," Johnson said. "And really we want to be responsible in the market, but we feel we've got a lot to offer the New Zealand market as has been demonstrated in the last 12 years."

IAG had "very constructive engagement" with the Commerce Commission this week.

"It's really about putting all the facts on the table. And the facts are the facts in terms of there's a lot of documentation about what the market shares are of different classes (of insurance) and how the market works," Johnson said.

This incorporates who actually sells IAG's products and who competitors are.

"And remember the competitors in this market for commercial products aren't just local players that are licenced through the Reserve Bank. There's actually capital that comes into the market in the form of Lloyds for example, for specialised risks. So it's a very, very complex type of market structure that the Commerce Commission will have to spend some time thinking through in terms of the distribution as well as the underwriting and what that means for New Zealand," said Johnson.

IAG announced the $380 million acquisition of AMI's "good" business on December 16, 2011. Final regulatory approval for that deal, from the Reserve Bank, came in April 2012 after the Overseas Investment Office and Commerce Commission had already cleared it.

'We don't like to use the word dominant'

Meanwhile, Johnson said Wesfarmers was a complementary business to IAG right across the group.

"Where Lumley's strengths have been is in the commercial and intermediated market, and particularly in commercial motor. And when we look at the two businesses coming together, it really does consolidate a position that can provide certainty to businesses in New Zealand by bringing in the best of both," she said.

Johnson said the deal would give IAG 45% of the overall New Zealand insurance market, but she added that insurance is a global product with reinsurance capital brought in from overseas.

"We don't like to use the word dominant. We think we lead and this will give us a leadership position across those classes where we weren't the leader under NZI, and that's what we'd be like to be able to secure," Johnson said.

Deutsche Bank analysts estimate the Wesfarmers deal will reduce IAG's annual reinsurance costs by about A$47 million, or 4.7%.

Johnson confirmed IAG had discussed the acquisition with its reinsurers before announcing it, saying it would be "a bit foolish" to do the deal without being sure the reinsurers would back it.

"For them (reinsurers) they're already exposed to this market and they already had good relationships with Lumley. So we've had indications that there's no problem with them continuing to give the support."

What will it mean for customers' premiums?

Asked what the Lumley acquisition might mean for customers' medium and long-term insurance premiums, Johnson said probably not a lot.

"As an input cost we've got the reinsurance cost and then distribution cost, and if you're going through an intermediary you're already paying a commission to whoever is distributing your product. So all those things actually come together to form the price. A lot of those things don't change through the deal and so we will still be a very disciplined insurer in terms of making sure we price correctly," Johnson said.

She also said IAG was "well on track" to have all its Christchurch earthquake related claims finalised by December 2015, having a "very large part" of commercial claims done, and being "nearly half way" through residential claims.

Asked about the Labour Party's ambition of establishing a government owned insurance company called KiwiAssure if it wins next year's election, Johnson said half the insurance market was already in government hands through the Accident Compensation Corporation and Earthquake Commission.

"So we're really only half a market in New Zealand. We don't have long tail (insurance) classes like bodily injury predominantly available to the private sector (or) first loss property damage insurance. So that's an important fact," said Johnson.

"It is a little odd for them (Labour) to announce that when State Insurance was sold to Norwich by a Labour Party." The Labour government sold State to Norwich Union for $735 million in 1990.

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