Catlin Group Ltd / Wellington Underwriting plc

OFT closed case: Anticipated acquisition by Catlin Group Ltd of Wellington Underwriting plc.

Affected market: Insurance and reinsurance

No. ME/2727/06

The OFT’s decision on reference under section 33(1) given on 15 December 2006. Full text of decision published 20 December 2006.

PARTIES

Catlin Group Limited (Catlin) is a company incorporated in Bermuda and its shares are admitted to trading on the London Stock Exchange. Catlin supplies a range of insurance and reinsurance products worldwide.

Wellington Underwriting plc (Wellington) is a company listed on the London Stock Exchange. Its principal activity is insurance and reinsurance underwriting at the Lloyd’s of London. Its UK turnover for the year ended 31 December 2005 was approximately £96,858,000.

TRANSACTION

On 24 November 2006 Catlin made a recommended offer to acquire the entire issued and to be issued shares of Wellington. The offer is subject to the UK City Code on Takeovers and Mergers. The effective closing date for the completion of the merger is likely to be no later than 31 December 2006.

The OFT’s statutory deadline for deciding whether to refer the merger to the Competition Commission is 15 December 2006.

JURISDICTION

As a result of this transaction Catlin and Wellington will cease to be distinct. Wellington's UK turnover 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 arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

FRAME OF REFERENCE

The parties overlap in the supply of insurance and reinsurance to customers at a worldwide level and both are present in Lloyd's of London insurance and reinsurance market. Although the parties act as managing agents for Lloyd's syndicates, Catlin only manages a syndicate in which it is the sole member is Catlin itself. Therefore, it is considered that there is no overlap and the parties’ activities as managing agents are not considered further.

Product scope

The parties and third parties consider insurance and reinsurance to be distinct frames of reference, which is consistent with past OFT [Note 1] and European Commission[Note 2] cases. The OFT has therefore considered each service separately in this decision.

Insurance

In line with previous decisions of the OFT [Note 3] and the European Commission [Note 4], the parties and third parties divide the provision of insurance services into two segments: (i) life insurance and (ii) non-life insurance due to limited supply side substitutability. The parties only overlap in the later, which can be further segmented into different frames of reference according to the risk against which insurance is sought for (e.g. accident and health, motor, property, marine, aviation, etc), or according to whether the it is a personal or a commercial line of insurance. Here, however, the majority of third parties’ indicated supply-side substitution between different segments was not particularly difficult or very costly, particularly in relation to ‘similar’ product lines where experience and business models can be easily carried over.

However, in this case it is not necessary to conclude whether the appropriate frame of reference is that of non-life insurance in general or whether it should be further divided into different insurance classes as the transaction does not raise any competition concerns, whatever frame of reference is considered.

Reinsurance

Reinsurance is a service provided to insurance companies, in which the reinsurer accepts the whole or part of the risk the insurer have assumed. This allows the insurer to spread the risk of claims they may incur, thus enabling them to diversify the - and increase the amount of - risk they write.

As it is the case with insurance services, there are elements to suggest that the frame of reference for reinsurance services could be segmented according to the different types of risk due to limited demand-side substitutability. On the other hand, evidence provided by the parties and third parties indicates that there is a degree of supply side substitution between the different types of reinsurance. However, it is not necessary for the OFT to conclude on the appropriate frame of reference as the competitive assessment remains unchanged whatever definition is adopted.

Geographic scope

Non-life insurance

Catlin submits that whilst both parties provide non-life insurance in the UK, only about 15 per cent of the risks that they insure through their respective Lloyd’s syndicates are located in the UK. On the other hand, some third parties commented that the London insurance market (at the Lloyd’s of London) has some particular characteristics in terms of types of risks underwritten and distribution chains. However, for the purpose of this case it is not necessary to conclude on the precise geographic scope of the provision of non-life insurance. The OFT has therefore considered that the frame of reference for non-life insurance on a national and wider than national scope.

Reinsurance

The parties submit, and third parties confirm, that reinsurance companies provide their products on a worldwide basis and perceive companies based in different countries as their competitors.

The OFT has in the past concluded that reinsurance markets are global [Note 5], noting however that for a few classes of business the reinsurance market could be considered national in scope.

The evidence before the OFT suggests that the geographic scope for reinsurance services is at least national and most likely global. However, for the purposes of the present case it is not necessary to conclude on this topic.

HORIZONTAL ISSUES

The parties’ combined share of supply both at a worldwide level and at a UK level for the non-life insurance segment taken as a whole, as well for the reinsurance market, is estimated to be less than one per cent. Taking different segments based on risk separately, the parties’ highest combined share of supply at a UK level is less than five per cent (for marine, aviation and transport insurance).

The parties submit, and third parties confirmed, that the non-life insurance and reinsurance markets are very competitive. In both segments there are a large number of competitors offering their services at a national and international level. Third parties’ responses suggest that sophisticated customers are able to switch providers in case of premium increases, in particular if the insurance service was negotiated through a broker.

THIRD PARTY VIEWS

All third parties that responded to the OFT contacted were unconcerned about this merger.

ASSESSMENT

The parties overlap in the supply of insurance and reinsurance to customers at a worldwide level and both are present in Lloyd's of London insurance and reinsurance market.

Even adopting a very narrow frame of reference, i.e., UK non-life insurance split according to class of risk, the parties’ combined share of supply resulting from the merger is very low at a maximum of less than five per cent. In reinsurance, the parties’ UK combined share of supply is about one per cent. A large number of alternative suppliers will remain in what is an extremely fragmented market, and third party customers have confirmed that it is easy to switch suppliers. In addition, customers and competitors of the merging parties did not raise any concerns about the transaction.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTES

  1. Case CE/2611/03 – Pool Reinsurance Company Ltd.
  2. Case COMP/M.4047 AVIVA/Ark Life.
  3. Case CE/2611/03 – Pool Reinsurance Company Ltd.
  4. Case COMP/M.4047 AVIVA/Ark Life; Case COMP/M.4059 Swiss Re / GE Insurance Solutions.
  5. Case CE/2611/03 – Pool Reinsurance Company Ltd.

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