The Commerce Commission has declined Vero’s application for clearance to buy all of Tower’s shares.
The competition watchdog notes the proposed merger would have brought together New Zealand’s second and third largest domestic home, car and contents insurers. This would have left only two "substantial" competitors in the market, lessening competition.
Commission Chairman Dr Mark Berry explains: “The merger would remove Tower as the only independent competitor to Vero and IAG with the scale, brand strength and experience to compete effectively across the breadth of personal insurance markets.
“While there are other smaller competitors in personal insurance, we do not consider that they replicate the level of constraint that Tower imposes.
“Without the competition that Tower provides, there is a real risk that consumers would end up paying higher prices for insurance cover while receiving lower quality, such as reduced insurance coverage.”
Vero, along with 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 was successful, it would have increased its share to 30%. IAG has a market share of around 46%.
The Commission in 2014 approved IAG’s bid to acquire Lumley, boosting its share of the general insurance market up 9%.
Vero honed this point in its clearance application to the Commission, mentioning the world Lumley 46 times in the 31-page document.
It also noted the Commission enabled IAG to buy AMI’s non-quake related business in 2012, after the 2010/11 Canterbury quakes saw the business collapse.
'Real chance' Tower could be bought by a third party
Nonetheless, Berry says: “Relevant to this competitive landscape, Tower is making concerted efforts to reposition itself in the market and improve its performance.”
Tower in November announced plans to ring-fence its problematic 2010/11 Canterbury earthquake-related business. It came up with this idea, having widened its loss to $21.5 million in 2016, and its share price dropping to a record low.
The Commission, in a Letter of Issues it sent Vero in May, suggested splitting the NZX and ASX-listed company in two to form New Tower and RunOff Co, as well as raising capital and investing in new IT platforms, could make Tower “significantly more competitive”.
Berry today adds: “There is also a real chance that Tower would be purchased by a third party further enhancing Tower’s significance as an independent competitor in the market.”
Canadian insurance giant, Fairfax Financial Holdings in February entered into a Scheme Implementation Agreement with Tower, whereby it planned to buy all of Tower’s shares for $1.17 each.
Yet 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.
Vero started acquiring a stake in Tower in February; by March increasing its shareholding to 19.99%.
The Letter of Issues mentioned above (which interest.co.nz received under the Official Information Act over the weekend) reveals the Commission is investigating whether Vero may have breached section 47 of the Commerce Act by purchasing these shares.
Berry explains: “By Vero holding 19.99% of Tower, there are issues around its ability to block matters that need special resolutions to be passed.”
The Commission confirms this investigation is ongoing. It could see Vero end up in court.
Tower's share price tumbles
The Commission's decision has seen Tower's share price fall by nearly 32% to 86.0 cents (as at 10.40am). It dropped as low as 69.5 cents in November.
Tower’s Chairman Michael Stiassny says: “Tower will work with Vero to assess the implications for the Vero Scheme, but it will mean a shareholder vote will now no longer occur in early September.
“The Tower Board will look to consider the impact on its business plans, including whether it needs to conduct a capital raise in the coming months to ensure the long term sustainability and accelerate the transformation of the underlying Tower business.”
Suncorp, Vero’s Australian parent, says it is “disappointed” with the Commission’s decision.
Suncorp New Zealand’s CEO Paul Smeaton doesn’t believe the proposed acquisition would have substantially lessened competition in the New Zealand insurance market.
A copy of the Commission’s decision will be available on its Clearances Register within the next week.
Background
Vero is a New Zealand subsidiary of Suncorp Group Limited, an Australian-based finance, insurance, superannuation and banking business. Suncorp, through Vero and AA Insurance, provides a range of personal and commercial insurance products direct to customers and through insurance brokers and banks (ANZ, AMP and Warehouse Money).
Tower is a New Zealand based insurance company listed on the New Zealand and Australian stock exchanges. It offers insurance direct to consumers and through Kiwibank, TSB and Trade Me.
IAG is a wholly-owned subsidiary of Insurance Group Limited listed on the Australian Stock Exchange. It provides personal and commercial insurance products direct to consumers under the State and AMI brands, and through BNZ, Westpac and via brokers under NZI and Lumley.
See these stories interest.co.nz has done on Vero/Tower in the past.
16 Comments
It's far worse than that. Here is a quote direct from one of David's earlier articles
'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.'
I.e. 66% of the home and contents and vehicle markets
Gutsy decision from ComCom. They must have some very clever people who have determined that Towers earthquake claims reserves are adequate and won't continue to escalate to a point that threatens Towers solvency and trigger a tax payer bailout; insight that has so far eluded the best brains in the insurance industry.
Dealing in the back corridors of power without doubt. Suncorp scuttled the Fairfax package by offering nearly 30% more for the Tower shares than that had proposed. That had to be more than embarrassing to the chair & board of Tower who had sponsored Fairfax as the best deal ever likely for the Tower shareholders. So now Tower has to find another Fairfax package. But then there is the existing 20% shareholding Suncorp already has bought so how could a Tower board function with that representation present?So it would seem that the CC are now required to have a look at the, shall we say "legitimacy" of that purchase.
You know for those of us of that age there used to be a British TV series called The Planemakers which became The Powergame. This is just so reminiscent.
It really should be an election issue. But then again nz has many problems at the moment that need addressing. But lack of competition such is in the building materials sectors is one of the reason for some of the problems, including the housing 'crisis'. I note English allowed it to be called a crisis when interviewed without correcting the interviewer.
And with further dilution likely as Tower raises more capital - if it can get support of course.
ComCom is sending a message to investors that they now need to give more weight to to the regulatory intervention risk when considering putting money into ventures where the nature of the product means there are higher barriers to competition.
Don't for one moment think Suncorp will just roll over on this. Have the ability & resources to appeal all the way to the Supreme Court. That will take a long long time. And during that time, bearing in mind Suncorp's existing major shareholding, how does Tower go about its normal business, which appears depleted in terms of working capital, and large numbers of big EQ claims still to be resolved, let alone go to the market to raise capital.There used to be an insurance company called Phoenix, would be an apt name for this next stage of a Southern Response tax payer bail out, that looks to be now unavoidable.
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