Takeover bid – in-depth

The Commerce Commission says insurance underwriting levels will be a central focus of its investigation into IAG (NZ) Holdings’ bid to acquire 100 per cent of the shares in Lumley General Insurance (NZ). It has released a statement of preliminary issues into the proposal. Its decision on whether the takeover can go ahead will be based on the Commerce Act 1986 and is due by March 28. “We assess whether a merger is likely to result in a substantial lessening of the competition,” states the commission. “We will investigate the prospect of the proposed merger to lessen competition in relevant markets. “As the proposed acquisition would result in aggregation at underwriting level, this area is likely to be a major focus of our investigation. However, we will also consider the impact on the distribution of insurance to retail consumers through intermediaries, such as brokers and banks. The takeover involves the overlapping of insurance products, so the commission will fully investigate different categories taking competition in account. These are private motor vehicle, commercial vehicles, commercial property, liability, commercial hull and marine cargo. Because of the overlap in supplying private and commercial vehicle products, auto-glass and windscreen and collision repair services will also be considered. IAG considers that in personal and commercial insurance lines, the merged entity would continue to face strong competition from large and well-established competitors, smaller competitors and retail banks. It adds it would be straightforward for an existing provider to expand, while there’s offshore competition for large commercial contracts. The commission will consider the closeness of competition between IAG and Lumley – and the merged entity – and alternative providers, including those overseas. It will also examine the extent to which banks are likely to act as competitive restraints on the new company and the scope for providers to expand so they can compete with the merged entity. The investigation will look into the scope for buyers of products to switch to alternative providers if the merged entity raises prices – or decreases product quality – and whether it would be able to strengthen its buying power to create a major drop in competition in windscreen and collision repairs. “IAG submits there are no significant barriers to new entry or expansion in relevant markets,” the commission states. “We will consider entry and expansion conditions, and whether [these are] likely, timely and sufficient to prevent a substantial lessening of competition. “We will consider the extent of countervailing power held by brokers and banks, including the scope for them to discipline the merged firm in other markets or sponsoring new entry.”