COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no: 32/LM/May05
In The Large Merger Between:
Santam Ltd & Kagiso Newco Acquiring
Firm
And
Nova Group Holdings Ltd Target Firm
Reasons for Decision
APPROVAL
1. On 29 June 2005 the Competition Tribunal issued a Merger Clearance Certificate
unconditionally approving the merger between Santam Ltd and Kagiso Newco and the
Nova Group Holdings Ltd.
THE TRANSACTION
2. The parties to this merger are Santam Ltd (“Santam”) and Kagiso Newco and the Nova
Group Holdings Ltd (“Nova Group”). 1 Sanlam holds approximately 53% of the issued
share capital in Santam. 2 Kagiso Newco is a wholly owned subsidiary of Kagiso
Treasury Services (Pty) Ltd (“KTS”).
3. The Nova Group together with its shareholders and Santam entered into a shareholders
agreement in terms of which Santam acquired the entire issued share capital and claims
against the Nova Group, and Santam sold the entire issued share capital of its wholly
owned subsidiary Santam Risk Finance Limited (“SRFL”) to the Nova Group. In turn,
Kagiso Newco acquired 33.3% of the entire issued share capital in and claims against
the Nova Group. Postmerger, Santam and Kagiso Newco would hold 66.7% and 33.3%
in the Nova Group respectively.
RATIONALE FOR THE TRANSACTION
4. The stated commercial rationale for the proposed transaction is the creation of synergies
between the merging parties’ businesses as they complement each other. Nova Group’s
1 Nova Group’s shareholders are the Munchener RuckversicherungsGesellschaft Aftiengsellschaft
(“Munich Re”), Munich Reinsurance Company of Africa Ltd (“MroA”), Capital Alliance Holdings Ltd
(“CAL”) and Share Incentive Scheme.
2 See page 2 of the transcript of 29 June 2005.
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shareholders are currently exiting their noncore investments hence the present deal. 3
The merging parties’ activities
5. Santam provides shortterm insurance policies for all classes of business including
alternative risk transfer (“ART”). It provides its ART business which consists of both cell
captive4 and rentacaptive products, 5 through SRFL. It also controls underwriting
managers. Santam’s parent company, Sanlam, is a registered longterm insurer which
provides longterm insurance polices and also some ART based longterm insurance
products.
6. Kagiso Newco is a newly formed company not trading at the moment. However, there
exist a number of firms within the Kagiso Group offering a diverse range of products.
Both Kagiso Treasury Services and Kagiso Treasury Solutions provide treasury
services. Kagiso Risk Solutions is the current holder of a shortterm insurance licence
which permits it to provide cell captive and rentacaptive product, but it has never
traded. Kagiso Trust Investments (Pty) Ltd (“KTI”) has a 10% shareholding in
Metropolitan Life (“Metropolitan”), a longterm insurer. However, KTI does not have
control of Metropolitan.
7. The Nova Group, a target firm, is a holding company which provides goods or services
through its subsidiaries Nova Risk and Nova Life. The former is a shortterm insurer
which primarily offers cell captive products and underwriting management of various
classes of insurance. It also provides rentacaptive products to a limited/lesser extent.
The latter company provides cell captive life assurance products in terms of the long
term insurance licence.
COMPETITION ANALYSIS
Relevant Market
Product market
3 Paragraph 3 at page 4 of the Commission’s Competitiveness Report.
4 According to the Commission, a cell captive insurer operates on the basis that each client is issued
with a cell and each cell carries a different dividend entitlement relating to the insurance business of a
particular cell and is issued to the cell owners with appropriate and negotiated level of share premium
that provides the requisite solvency of the cell captive insurer to underwrite. The issued share capital,
share premium and retained earnings comprise the solvency capacity of each cell to fund the
particular insurance business of the particular cell owner and will differ across the cells. Further to
this, Cell owners can use separate cells to separate cells to sell third party insurance.
5 We were told that rentacaptive is a variation of captive insurer and entails a large corporation
insuring its aggregate deductible where it believes that only a continued bad claims experience will
result in the deductible being exceeded. In this case, deductible is paid to a rentacaptive as a
premium. The corporation will then pay its deductible responsibilities up to the amount of the
aggregate deductible out of the rentacaptive; thereafter the insurer bears the losses up to an agreed
limit.
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8. Both firms operate in the short and long term insurance markets. Within the shortterm
insurance market, in addition to the provision of insurance business through underwriting
managers, they both offer ART (cell captive and rentacaptive) products. Within the
longterm insurance, they offer some ART based long term insurance products, i.e., cell
captive products. It is therefore clear that product overlaps exist in respect of the
provision of cell captive and rentacaptive short term ART products, underwriting
management, and in the provision of cell captive ART based long term insurance
products.
9. As previously defined by the Tribunal, 6 ART products are a specialised form of short
term insurance, a nonconventional, more creative and flexible method of financing risk.
The Commission contended that shortterm cell captive and rentacaptive constitutes a
market on its own in that an insurer is required to have a licence to provide shortterm
ART cell captive and rentacaptive products. Both the Commission and the merging
parties contended that ART, which is another form of shortterm insurance, is a separate
market from the traditional shortterm insurance. 7
10. The merger filing reflected that both Santam and Nova Group conduct insurance
business through underwriting managers. Although they are involved in the underwriting
management business, there seem to be some differences between them. Santam
controls underwriting managers who underwrite specialist classes of insurance business
on its behalf whereas Nova Group does not control these underwriting managers. The
Commission contended that underwriting agencies operate in a particular line of short
term insurance to the extent that their operations can only substitute each other if they
term insurance to the extent that their operations can only substitute each other if they
operate in the same niche. According to the Commission, if an underwriting agent has
developed expertise and specialised knowledge in crop insurance his skills will not be
applicable in marine work and vice versa. In light of this, the Commission viewed the
relevant underwriting management market as peculiar to the specialised niche services
offered by the parties, such as motor, transportation, accident, health and property
guarantee, liability, engineering and miscellaneous.
11. Insofar as the longterm ART product is concerned, the Commission defined the relevant
market as the longterm cell captive market.
12. We need not make a definitive finding on the relevant product market because, in our
view, the transaction would not result in the substantial prevention or lessening of
competition regardless of any market definition adopted.
Geographic market
13. According to the parties, the ART products are structured in a global environment. We
were told that about 50% of the worldwide ART business is generated in New York. The
parties contended that South Africa’s ART market is relatively new although it has grown
6 See the Tribunal’s previous decision: Santam Ltd and Allianz Insurance Ltd , Case No.:
28/LM/May02.
7 See the Commission’s Report, page 6.
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significantly in recent years. The Commission argued that the relevant geographic
market appears to be international.
Market shares
14. According to the market share data submitted by the Commission and the merging
parties, both Nova Risk Partners Ltd and Santam Risk Finance Ltd would have a
combined market share in shortterm cell captive and rentacaptive market of 22% on
par with that of RMB Structured Insurance Ltd. Guardrisk Insurance Company was the
top market leader with 40% market share whilst M&F Risk Financing Ltd enjoys only 9%.
In the longterm cell captive insurance market, the merged entity (i.e., Nova Life Partners
and Sanlam Customised Insurance) would have about 12% market shares. The other
significant players are Momentum Mobility (36%), AIG Life South Africa (33%) and
Guardrisk Life (20%). Also apparent from the market share figures is that Nova enjoys a
relatively low market shares in the underwriting management of various classes of
insurance.8
Public Interest
15. According to the merging parties seven (7) employees would be affected by the
proposed transaction as it would result in the duplication of services within Nova Group
and Santam. They contended that these affected employees are very marketable in the
financial sector and would be likely to find alternative jobs. The parties gave an
undertaking at the hearing that the affected employees would not be more than five (5)
and that they would try to absorb them into Santam 9 They further submitted that the
deal was proBEE as it created an opportunity for Kagiso Trust, a preeminent
empowerment investment banking services group, to obtain shares in the insurance
market.10
Conclusion
market.10
Conclusion
16. The Tribunal is satisfied that it is unlikely that the merger will lead to lessening or
prevention of competition in the relevant markets. There are no significant public interest
issues which would alter our conclusion.
Y Carrim 04 August 2005
Concurring: U Bhoola, M Mokuena
8 Paragraph 7.3, page 8 of the Commission’s Competitiveness Report.
9 See page 5 of the transcript, 29 June 2005.
10 Page 15 and 46 of the record.
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For the merging parties: Ms Coreen Fouch é (Jan S De Villiers Attorneys).
For the Commission: Edwell Mtantato (Mergers and Acquisitions).
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