By Jenée Tibshraeny
The Commerce Commission is investigating the competition issues raised by Vero buying 19.99% of Tower’s shares, separately to it considering the insurance giant’s application to get the greenlight to take over Tower.
A document released to interest.co.nz under the Official Information Act (OIA) reveals the Commission is concerned competition in the general insurance market may be reduced by Vero in February and March buying nearly a fifth of the NZX and ASX-listed company’s shares.
It is therefore investigating this acquisition alongside it considering Vero’s application to get clearance to buy 100% of Tower’s shares.
Vero, as well as its joint venture partner AA Insurance, holds a 25% share of the general insurance market in New Zealand. If its bid to merge with Tower is successful, it will increase its market share to 30%.
Vero is wholly-owned by the ASX-listed company, Suncorp. It is the second largest general insurer in New Zealand behind Aussie-owned IAG.
While Vero made its clearance application voluntarily on March 2, the Commission began a separate investigation on its own accord on April 28.
While the former process is public, the latter isn’t.
However the latter is mentioned in the ‘Letter of Issues’ the Commission sent Vero on May 5, outlining the Commission’s concerns with the insurer’s merger application and giving it the opportunity to provide feedback on these.
Interest.co.nz has just received a redacted copy of this letter under the OIA. It says: “We consider that Vero’s completed acquisition of 19.99% of the shares in Tower could raise issues under section 47 of the Commerce Act 1986.
“The Commission has opened a separate section 47 investigation into this acquisition, which we are undertaking concurrently with our consideration of Vero’s application for clearance.”
Section 47 of Commerce Act says: “A person must not acquire assets of a business or shares if the acquisition would have, or would be likely to have, the effect of substantially lessening competition in a market.”
Suncorp rejects ComCom's concerns
A Suncorp spokesperson says: "Suncorp strongly rejects the Commerce Commission’s concerns under section 47 of the Commerce Act...
"We have abided by all relevant laws throughout the acquisition process, and have worked constructively with the Commerce Commission on our application for clearance.
"We are unable to comment any further until the Commerce Commission announces its decision on 26 July."
If Vero gets clearance, the decision cannot be challenged under section 47 of the Commerce Act (provided the merger is completed within a year).
If the Commission doesn’t authorise the merger, and believes Vero breached the Commerce Act by buying 19.99% of Vero’s shares, it can take the insurer to the High Court.
The Commerce Commission has completed seven section 47 investigations since July 2012, with none of these leading to court proceedings.
Details around the section 47 investigation have been redacted from the Letter of Issues.
Merger would see insurance market ‘highly concentrated’
The Letter of Issues does however say that if Vero takes over Tower, the home, contents and motor vehicle insurance markets will be “highly concentrated”, with Vero and IAG “holding very high market shares”.
“The acquisition of Tower would result in significant change to Vero’s existing market share,” it says
“Vero and Tower are two of only three insurers (the other being IAG) with current experience in New Zealand of underwriting for distribution partners, and with the existing capability to do so…
“…existing competitors [IAG, Youi, FMG, MAS, QBE, Chubb, ANDO] may not be sufficient to prevent a substantial lessening of competition.”
The Commission goes on to say: “While intermediaries such as brokers and banks could have some countervailing power, we are concerned whether their countervailing power would be sufficient to effectively constrain the merged entity.”
The Commission says “there could be a real and substantial prospect that Tower will be significantly more competitive” if the merger doesn’t go ahead and it is either sold to Fairfax Financial Holdings (or another party), or split so that its problematic 2010/11 Canterbury quake business is ring-fenced.
The Commission says Tower’s Plan B, to split into New Tower and RunOff Co, raise capital and invest in new IT platforms “could make Tower significantly more competitive”.
Tower announced this plan in November last year, before Canadian insurance giant Fairfax in February swooped in and proposed to buy all of Tower’s shares for $1.17 each.
Fairfax at the end of June withdrew its offer, as Vero entered into a Scheme Implementation Agreement with Tower, whereby it proposed to buy all of Tower’s shares for $1.40 each.
ComCom to become more transparent
While Vero did not want the Letter of Issues to be made public while the Commission was still considering its application, the Commission maintains any concerns it has about a potential merger should be aired.
The Russell McVeagh lawyers representing Vero tried to prevent interest.co.nz from getting a copy of the Letter of Issues, taking the Commission to the Ombudsman over its decision to release the letter.
However the Ombudsman backed the Commission, so interest.co.nz could receive a redacted copy over the weekend.
Meanwhile, the Commission’s chairman, Dr Mark Berry on July 20 delivered a speech about the organisation’s priorities for the year, saying:
“It is our view that we should proactively publish both Letters of Issues and Letters of Unresolved Issues for every clearance application where we send one.
“Confidential information would of course be redacted, but it is important that market participants and interested observers are able to see what issues we are seeking further information on so they have an opportunity to make, and we have the opportunity to receive, any relevant submissions.
“In most cases we do not consider there are legitimate reasons to withhold these letters, considering the public interest that exists in our ability to determine the effects of a merger.
“Separately, we also intend to publish a record of section 47 investigations on our website as they are opened. This would ensure that the public and market are made aware of any investigations into potential anti-competitive transactions that have not been exposed to scrutiny under the clearance regime.”
*This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.
9 Comments
Before anything else the CC should make a hard professional analysis of the Tower balance sheet, in particular, one would think, the substance and validity of the current assets. For instance the Peak-re reinsurance. The recent, and what appeared to rather sudden & desperate, $50mill advance from BNZ to prop up Tower's ratios etc with the RBNZ, indicates, one might think, that Tower is more than hard pressed in terms of working capital and that is not a healthy outlook for policy holders, outstanding claimants, but more so, the NZ Government and therefore all of us taxpayers, because with Fairfax now departed and if Vero's bid is declined, then it would seem pretty damn likely another black hole like Southern Response is about to open up.
The ability of small NZ insurers to succeed without substantial overseas parents, is limited. The cost of reinsurance is a key business input and the Aussies are among the worlds largest purchasers. Their ability to 'manage' the transfer cost of this for their NZ divisions, their deep pockets when mega disasters strike, access to big data and claim supply purchasing power, make them difficult to compete with.
ComCom would be well aware of these realities, which poses the question of how they arrive at their conclusion that Tower 'will be significantly more competitive' ( as a stand alone minnow).
More competitive that what, is not explained. Also left to the imagination is where the capital to sustain 'Tower runoff Co' will come from. Is this a proposal that Taxpayers should stump up in a re run of AMI?.
It is hard to understand the CC's sudden concern about competition in the sector. Aren't they same people who permitted AIG to accumulate 70% of the domestic insurance market. Perhaps they have an unwholesome interest in favouring AIG at the expense of others. The CC certainly have not displayed any concern about the interests of their employers the NZ public. If they had they would never permitted AIG to accumulate their near monopoly interests.
The Commerce Commission allowed IAG to buy to Lumley and take over the non-Canterbury quake related part of AMI. It currently has around a 46% share of the general insurance market in NZ.
In Vero's merger clearance application to the ComCom, Vero talked a lot about the fact the competition watchdog allowed IAG to increase its market share by around 9% by purchasing Lumley. In fact, the word 'Lumley' is mentioned 46 times in the document. You can read more about this here.
Thanks Gareth
Here is the quote direct from David's article
'The deal will increase IAG's share of the overall New Zealand insurance market to about 50.5% from 41.5%, lifts its share of the home and contents and vehicle insurance market to 66% from 60%, and gives it 40% of New Zealand's intermediated (sold through brokers) insurance market.'
OK 66% not 70%
The 46% figure refers to the entire general insurance market - personal and commercial. It is more recent than the 50.5% figure from the 2014 story. I am not sure what IAG's market share currently is, if you just look at home, contents and motor vehicle insurance.
Another interesting question on behalf of the NZ public would be the share price vis a vis the shareholders and in the latter category, the holdings in Tower by NZ Government entities, ACC, Super -An & others one supposes. In the pre Fairfax days there was heavy selling, eg Salt, of Tower which meant heavy buying all the way down to $0.70 or thereabouts, which frankly had all the aspects you could imagine of a propping up exercise. If Tower ends up insolvent all that is down the drain, but worse, much worse! So too is the 100% mark up that could have gained by selling to Suncorp at $1.40. National Government to NZ tax payers, "go whistle." It reminds sadly & badly of the cornerstone shareholding by ACC in Feltex, was it $27mill? That went merrily down the drain and not a question was raised in the house. What a rum lot our elected lawmakers are on both sides of the house!
And here's what Commerce Commission chairman Mark Berry said after rubberstamping the IAG-Lumley deal http://www.interest.co.nz/news/70326/commerce-commission-chairman-says-iag-buying-lumley-doesnt-change-nz-insurance-markets
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