Affected market: Life insurance
The OFT's decision on reference under section 22 given on 6 May 2005. Full text of the decision published 1 June 2005.
Britannic Assurance plc (BA) is a wholly owned subsidiary of Britannic Group PLC (BG). BG is a financial services group specializing in asset management and ownership and administration of closed life funds. Its closed funds relate to life assurance policies, pension policies and health insurance policies. It has around £10 billion assets in its life operations. BG has two divisions: the Asset Management Division, which manages investment portfolios on behalf of individuals and large institutional clients and the Assured Services Division, which owns and administers its closed funds through a number of companies, one of which is BA. Another subsidiary of BG and an entity within the Assured Services Division is Britannic Management Services (BM) which provides administration services for BG's companies in connection with life and pension policies.
Allianz Cornhill Insurance plc (ACI) is the UK subsidiary of Allianz AG. The life assurance operations of ACI comprise the life assurance operations of both the ACI life division (LD) and Allianz Cornhill Direct Life Division (DIL). Its closed funds also relate to life assurance policies, pension policies and health insurance policies. All ACI's life operations are also closed to new business. LD closed to new business in 2001 and from late 2004 the DIL business was also a closed book. The turnover of ACI life operations in 2003 was £139.3 million.
BG through its wholly owned subsidiary BA acquired the life assurance operations of ACI on 31 December 2004. The transaction was an agreed acquisition for the sum of approximately £110 million, with £93 million being paid on completion and the balance being paid once the completion valuation has been agreed. The total consideration is unlikely to exceed £120 million.
On 31 December 2004, the operational assets of ACI (for example, property, leases, computer hardware and software and third party contracts) were transferred to BG pursuant to a business Purchase Agreement. At the same time, the entirety of ACI's life business was reassured to BG pursuant to a Reassurance Agreement; the entirety of ACI's life assurance business is now administered by BG, pursuant to an administration Services Agreement; and investment management of ACI life funds was transferred to BG pursuant to an Investment Management Agreement.
A legal transfer of life policies from one company to another requires court approval pursuant to the Financial Services and Markets Act 2000. The parties are in the process of obtaining the necessary court approval but have already effected the transfer of the economic interest.
Details of the transaction were obtained from the parties through direct enquiry by the OFT. A satisfactory submission was received on 18 March 2005 and therefore the administrative timetable expires on 18 May 2005. The transaction completed on 31 December 2004 and the four month statutory time limit was extended to 6 May 2005.
As a result of this transaction BG and ACI's life assurance business have ceased to be distinct. The UK turnover of ACI's life assurance business exceeds £70 million, so the turnover test in section 23(1) (b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created for the purposes of section 22 (1) (a) of the Act.
Open and closed life funds
A life fund, whether open or closed, invests premiums from life assurance policies in, for example, equities, property, fixed interest securities and cash. When a customer opens a policy in a life fund they are deemed to purchase units in the fund. A life fund can be open or closed. An open life fund continues to take on new life assurance policies whereas a closed life fund is one which has stopped writing policies to new policyholders and hence is not taking on any new business.
The parties submit that open life funds tend to close for a variety of reasons such as there being no new business prospects due to a lack of strong brand, lack of economies of scale, strong competition or simply where the sales and marketing costs of obtaining new policies are too high. The parties further submit that closed funds seldom re-open for new business, a contention supported by third parties.
Life companies may own open or closed funds or both. The parties own only closed life funds generally made up of life assurance policies that have both investment and protection elements for the customer (e.g. with-profit bonds and endowment policies). According to the parties, there are many reasons why some companies choose to sell their closed life funds. This may be because closed funds are non-core operations tying up management and administrative resources, they absorb capital that could be redeployed to other core growth areas or because the medium term run-off becomes less economical over time (see [note 1]).
Areas of overlap
The parties' activities overlap in the ownership, management and administration of their own closed life funds. Neither party is involved in the management or administration of funds owned by third parties.
Demand side substitution
Policies held in closed funds owned by BG and ACI consist of life assurance, pension and permanent health. Although closed funds do not compete with each other because no new business is accepted into the fund, a competitive constraint on closed funds could arise from open funds which accept new business. Even though a closed fund does not accept new business, it must continue to offer competitive terms and service levels to existing policyholders or risk losing its customers to open funds.
If switching or termination costs for policyholders in closed funds are high, each closed fund could be in a separate frame of reference. This could lead to policyholders being unable to switch to an open fund in the event of a price rise in premiums or deterioration in service levels. If this were the case then the merger may not have an effect on competition as each owner of a closed fund would already be a monopolist in respect of its fund customers.
One third party submitted that policyholders can and do switch from one fund to another (ie from closed to open or from open to open). Surrendering or terminating a policy may often result in a cost to the policyholder. The parties were unable to provide termination costs but said that the ability of owners of closed funds to protect themselves against switching, by introducing surrender penalties, is limited by the same rules and practices that also apply to owners of open funds under the Financial Services and Markets Act 2000.
Supply side substitution
As outlined above, although in principle closed funds could re-open for business, the evidence suggests that this seldom occurs unless there is a specific change in the circumstances that led the fund to close in the first place. This is supported by third party views.
In conclusion, evidence of switching from closed funds to open funds may suggest that the relevant frame of reference should to be wider to include open funds. However, given that the OFT concludes that no competition concerns arise on any definition, it is not necessary to reach a firm conclusion on the relevant product frame of reference.
Insurers from abroad would need to gain regulatory clearance from the Financial Services Authority to operate in the UK. Previous cases involving the UK insurance sector considered the UK as the relevant geographic frame of reference (see note 2), and the OFT has found no evidence in this case to suggest that a substantial number of individuals look beyond the UK for life assurance suppliers. Therefore the relevant geographic scope is considered to be the UK.
The parties overlap in the ownership, management and administration of closed life funds which invest the premiums from life assurance policies. However, given the nature of closed funds and the fact that no new business is accepted the parties are not considered to be actual or material potential competitors. The parties manage only their own closed funds and do not compete with other closed funds. In any event, even if pre-merger the parties' closed funds were competing with each other, the parties' combined share of supply of life, pension and permanent health policies in the UK is less than 10 per cent.
There is no evidence that this transaction raises any vertical competition concerns
THIRD PARTY VIEWS
No third party expressed any concern.
Although the parties to the transaction overlap in the ownership, management and administration of closed funds the OFT does not consider that they are each other's competitor. The parties are involved solely in closed funds which invest the premiums from life assurance policies and given that no new business is accepted into closed funds the parties were not competing with each other pre-merger. In any event, post-merger the combined share of supply of the number of life assurance, pensions and permanent health policies in the UK is low and does not raise any concerns.
Consequently, the OFT does not believe that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- The run off problem occurs when there are only a small number of policies left in a fund after a certain duration resulting in increased unit costs. This problem might be deferred by selling off closed funds to consolidators such as BG as these will have more policies from other closed funds to help meet the expenses of administering and managing the fund.
- See Unum/Swiss Life, OFT reference decision of 31 October 2003.