COMMISSION DECISION of 17/08/1999 declaring a concentration to be compatible with the common market (Case No IV/JV.21 - * / *** SKANDIA / STOREBRAND / POHJOLA) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)

Brussels, 17.08.99

PUBLIC VERSION

Merger Procedure

Article 6(1)(b) Decision

In the published version of this decision, some information has been omitted pursuant to Article 17(2) of Council Regulation (EEC) No 4064/89 concerning non-disclosure of business secrets and other confidential information. The omissions are shown thus [ ]. Where possible the information omitted has been replaced by ranges of figures or a general description.

To the Notifying Parties

Dear Sirs

Subject: Case IV/JV21 - Skandia/Storebrand/Pohjola - Notification of a concentration pursuant to Article 4 of Council Regulation 4064/89

I. The Notification

On 5 July 1999, the Commission received a notification pursuant to Article 4 of Council Regulation (EEC) No 4064/89 [1] ("the Merger Regulation"), according to which Försäkringsaktiebolaget Skandia ("Skandia"), Storebrand ASA ("Storebrand") and Pohjola-Yhtyuiä Vakuntus Oyj ("Pohjola") (together "the Notifying Parties") will create a full function joint venture ("the FFJV"). The FFJV will be established in Sweden and offer non-life (property and casualty, "P&C") insurance products in Norway, Sweden and Finland.

[1] O.J. L 395 of 30 December 1989, p.1; corrected version O.J. L 257 of 21.9.1990, p. 13; as last amended by Regulation (EC) No. 1310/97, O.J. L 180 of 9.7.1997, p. 1; corrigendum in O.J. L 40 of 13.2.1998, p. 17.

After examination of the notification and subject to the satisfactory implementation of various undertakings given to the Commission, the Commission has concluded that the notified operation falls within the scope of the Merger Regulation without however raising serious doubts as to its compatibility with the common market or the EEA agreement.

II. The Parties

Skandia is the parent company of the Skandia group. In recent years, the Skandia group has focused on three strategic business units: Long-Term Savings (life and unit linked assurance), Asset Management and Property & Casualty Insurance. SkandiaBanken, a telephone and Internet bank, completes the groups range of services by providing deposit and lending services, mutual funds and advisory services.

Storebrand and the members of the Storebrand group conduct financial activities in the areas of non-life insurance, life assurance and banking. The Storebrand group operates mainly within Norway. The Storebrand group markets a wide range of direct insurance products, as well as in the savings sector, both for private individuals and companies and public bodies. Over recent years, the Storebrand group has focused on three business sectors: Long-Term Savings, Asset Management and Property & Casualty Insurance. Storebrand Bank, a telephone and Internet bank, complements the groups range of services by providing deposit and lending services, mutual funds, and advisory services. In January 1999, Storebrand offered to buy all the shares of Finansbanken ASA. This acquisition aims at completing the product range of Storebrand.

Pohjola is the parent company of the Pohjola Group, the business of which includes life, non-life and, through affiliated companies, employment pension insurance. The Pohjola Group offers companies, private households, investors and savers a wide range of insurance, claims settlement and risk management services. Financing and leasing services are additionally available to corporate clients. The Pohjola Group operates primarily in Finland, but also in the Baltic region. Pohjolas various business functions are incorporated in separate subsidiary companies. In addition the Pohjola Group owns guarantee shares in and is affiliated with the Pension Insurance Company Ilmarinen Ltd (which underwrites statutory employment pension insurance and self-employed persons' pension insurance) and Suomi Mutual Life Assurance Company.

III. The Operation

The Notifying Parties are transferring their P&C insurance activities to the FFJV which is a Swedish insurance company, currently called the P&C Insurance Company but which is to be renamed. This company, in turn, is held by a holding company ("NewCo Holding"). Both the FFJV and NewCo Holding (together "the New Group") are established in Sweden and the operations of the FFJV in Norway and Finland (excluding mainly run-off business) will be conducted through branch offices.

NewCo Holding is presently a wholly owned subsidiary of Skandia. As further described below, NewCo Holding will, as consideration for the transfer of the P&C businesses of Storebrand and Pohjola to the New Group, issue new shares to Storebrand and Pohjola. It follows that the concentration is an acquisition of joint control of a pre-existing company. It is expected that regulatory approval for the transfer of the insurance activities to and for the change of ownership of the New Group will be obtained in [ ] 1999.

Skandia presently conducts business in Norway through its wholly owned subsidiary Vesta. Due to the operations of Vesta, there will be overlapping markets in Norway. The Notifying Parties have undertaken to the Commission to divest Vesta in the terms set out in [Confidential] Annex 1 to this Decision.

Prior to the divestment of Vesta taking place, Storebrand and Vesta intend to enter into a separate agreement to combine their respective Marine & Energy insurance businesses by establishing a jointly owned management company [2]. As a result of having transferred Storebrands Marine & Energy insurance business to the FFJV, the FFJV will replace Storebrand as party to the joint venture with Vesta. [ ]. This operation does not form part of the notified arrangements.

[2] The market for Marine and Energy appears to be a global one in which Vesta and Storebrand currently each have a market share of [ ]%.

In addition to the notified arrangements, the establishment of the New Group will require several agreements between the Notifying Parties and between the Notifying Parties and the New Group. Such agreements will include inter alia agreements to execute the business transfer, lease agreements, distribution agreements [ ], investment management agreements, agreements regarding support services, co-branding agreements regarding personal risk products and other agreements regarding services provided. All such agreements will be entered into on market conditions.

It is the intention of the Notifying Parties and the New Group to co-operate in the areas of shared services (inter alia treasury, risk management, finance and procurement) and IT-services, by establishing joint operations for such services. However, the structure, scope and further details of such operations have not yet been decided upon in detail. Further, the intention is that the internal sales forces of the Notifying Parties will provide services to the New Group and that each of the Notifying Parties will provide asset management services to the New Group.

IV. The Concentration

According to Article 3(2) of the Merger Regulation, the creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity constitutes a merger within the meaning of the regulation. Such joint ventures are considered to be "full-function".

Essentially this means that a joint venture must operate on a market, performing the functions normally carried out by undertakings operating on the same market. In order to do so the joint venture must have a management dedicated to its day-to-day operations and access to sufficient resources including finance, staff, and assets (tangible and intangible) in order to conduct on a lasting basis its business activities within the area provided for in the joint-venture agreement. The fact that a joint venture makes use of the distribution network or outlet of one or more of its parent companies normally will not disqualify it as full-function as long as the parent companies are acting only as agents of the joint venture [3].

[3] Commission Notice on the concept of full-function joint ventures under Council Regulation (EEC) No 4064/89 on the control of concentrations between undertakings, OJ C 66 2/3/98, at paragraphs 12 and 13.

Joint Control

After completion, Skandia will hold 42 per cent of the capital and one third of the voting rights of NewCo Holding, Storebrand 33 per cent of the capital and one third of the voting rights and Pohjola 25 per cent of the capital and one third of the voting rights. [ ]. Each representative will have one vote.

The Board of Directors of NewCo Holding will consist of nine directors elected at the general meeting. [ ]. In addition, the Managing Director of NewCo Holding will be a member of the Board and two directors will, in accordance with Swedish labour law, be elected by the union(s) representing the employees of NewCo Holding and its subsidiaries [4]. [ ]. The chairman of the board will not have a casting vote.

[4] [ ].

The following issues require a unanimous decision of the Notifying Parties: [ ].

It follows that the key strategic commercial matters will need the agreement of each of the Notifying Parties and that they will therefore jointly control the New Group.

Full-function entity

The transfer of the non-life insurance activities of the Notifying Parties to the FFJV will enable the FFJV to compete in the non-life insurance sector and to perform all the normal functions of an undertaking operating in that sector. The Notifying Parties will exit this market and will not compete with the FFJV. Although, the FFJV will share the distribution network of the Notifying Parties, the latter will only act as agents of the FFJV. The Notifying Parties intend to float NewCo Holding as soon as possible and in any event before [ ] 2001.

Accordingly, the FFJV will be full-function, autonomous and of a lasting nature.

V. Community Dimension

The combined world-wide turnover (measured in premium income) of the Notifying Parties in 1998 was MECU [ ], of which MECU [ ] was in the EU and [ ] in EFTA. Skandia and Pohjola each have an aggregate Community-wide turnover of more than MECU 250. The Notifying Parties do not each achieve more than two-thirds of their respective turnover within one and the same Member State. Accordingly, the operation has a Community dimension. It is a co-operation case in accordance with Article 2 of Protocol 24 to the EEA Agreement.

VI. Relevant Product and Geographic Markets

From the demand side, each different type of non-life insurance product may be considered to constitute a distinct product market for which the geographic market is usually national in scope [5].

[5] See for example Case IV/M.759 - Sun Alliance/Royal Insurance.

A supply-side analysis shows that the conditions required to insure different types of risk are very similar. This suggests that many different types of non-life insurance should be included in the same product market definition. The conditions that must be analysed in order to group different types of risk into one product market include regulatory conditions, distribution channels, expertise required and characteristics of the risk (such as frequency of circumstances giving rise to the liability).

In this Decision, the Commission has examined the shares of the Notifying Parties by taking each non-life product separately notwithstanding the possibility that the product markets may in fact be broader. This has been done on the basis that if such an analysis does not reveal a problem, then nor will an analysis based on broader product market definitions. Accordingly, it is not necessary in this Decision to adopt a definitive position as to the precise product markets at issue.

VII. Competitive Assessment

The best measure of market share in this sector is premium income rather than number of policies written. Accordingly, this Decision bases itself on shares of premium income. All figures exclude cross-border insurance business for which no reliable statistics exist due to the fact that regulatory authorities do not require such information to be filed. Such business is in any event thought to be negligible.

A. Dominance

Although the Notifying Parties have premium income derived from non-life business in ten Member States and Norway, they have a greater than fifteen percent share of each non-life product segment only in Sweden, Norway and Finland. The increment in share in these products resulting from the operation is too small to be measured in Finland. Although Skandia had a 15.1% share of the commercial liability product segment in Denmark in 1998, by 1999 this had shrunk to 10%. Accordingly, the affected markets are those for the sale of a number of non-life products in Sweden and Norway.

Swedish Non-Life Market

Table 1 below sets out the shares of the Notifying Parties in each of the segments of the Swedish non-life market, together with the market shares of the Notifying Parties three main competitors (Läsförsäkringar-Wasa, Folksam and Trygg-Hansa (SEB)).

Table 1

Swedish Non-Life Market (1998)

Note: figures in square brackets are estimates based on 1997 figures.

In each case, the increase in market share as a result of the operation is minor. In only one case, transport, could the Notifying Parties be regarded as having a share of the market which could give rise to a dominant position. However, in that case it is to be noted that the customers are corporate, as opposed to individual, who are likely to be able switch between insurers more easily. This situation is reinforced by a high degree of standardisation of transport insurance contracts. Furthermore, the main competitors to the FFJV are not insignificant.

Accordingly, even if the product market definition were to be limited to each different type of non-life insurance product, the concentration would not create or strengthen a dominant position in Sweden.

Norwegian Non-Life Market

Table 2 below sets out the shares of the Notifying Parties in each of the segments of the Norwegian non-life market, together with the market shares of the parties three main competitors (Gjensidige, Var Forsikring and Zurich Protector).

Table 2

Norwegian Non-Life Market (1998)

Thus, on the basis of these figures, the Notifying Parties would have a combined share of over sixty percent in two of the different product segments, of over fifty percent in two further product segments and of over sixty of all the product segments taken as a whole. Moreover, in many of the product segments only one of the main competitors has a significant share.

Source: Tables 18, 19, 33, 34 of notification

This situation gives rise to serious doubts as to the creation or strengthening of a dominant position on the Norwegian non-life insurance market (and therefore the compatibility of the proposed operation with the common market and with the functioning of the EEA Agreement) because of the large combined market shares the parties would have in Norway. This analysis does not alter if the different non-life products are taken separately, grouped together or taken as a whole.

B. Co-ordination of Competitive Behaviour

According to Article 2(4) of the Merger Regulation, a joint venture having as its object or effect the co-ordination of the competitive behaviour of undertakings that remain independent has to be appraised in accordance with the criteria of Article 81(1) and 81(3) of the EC Treaty. For this purpose, in order to establish a restriction of competition within the meaning of Article 81(1), it is necessary that the co-ordination of the parent companies competitive behaviour is likely and appreciable and that it results from the creation of the joint venture.

In making this appraisal the Commission shall take into account, in particular, whether two or more parent companies retain to a significant extent activities in the same market as the joint venture or in a market which is downstream or upstream from that of the joint venture or in a neighbouring market closely related to the relevant market. Therefore, the prime candidate markets for co-ordination are those on which the joint venture and at least two parent companies are active on an upstream, downstream or closely related neighbouring market where at least two parent companies remain active.

After identifying whether there are markets in which spill-over effects may occur, the Commission will take into account, in particular, whether the coordination which is the direct consequence of the creation of the joint venture affords the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products or services in question.

Both the Notifying Parties and the FFJV will, after completion of the notified operation, conduct insurance activities in Sweden, Norway and Finland. However, the FFJV will conduct business only in the P&C insurance sector, whereas the Notifying Parties will restrict their insurance business to the life assurance sector [6].

[6] [ ].

The life insurance market is a neighbouring market with regard to the non-life insurance market. Therefore, it needs to be assessed whether the creation of the FFJV is likely to lead to an appreciable degree of co-ordination of the Notifying Parties' competitive behaviour on the life insurance market.

The first assessment which need to be carried out is whether the Notifying Parties together or separately have sufficient market power to make co-ordination worthwhile. Table 3 below sets out the Notifying Parties market shares for each of the main types of life assurance for each of the three countries where co-ordination might occur.

Table 3

Combined Market Shares of Life and Unit Linked Assurance (1998)

It has emerged from the Commissions enquiries that both providers of insurance services and their customers regard the life insurance sector as being one where new entry is both possible and likely. Moreover, it is clear that the Notifying Parties have competitors of comparable size in all segments of the life insurance sector in each of the three countries in question.

Accordingly, although the figures in Table 3 do not in themselves rule out the possibility that the Notifying Parties have the ability to raise prices or restrict output, behave independently of customers or eliminate competition, the conditions of existing competition and the possibility of new entry suggest that this is not likely.

In any event, even if the Notifying Parties had the market power to make co-ordination worthwhile, it is necessary to examine whether the establishment of the joint venture would give them the means. For this purpose, the Notifying Parties distribution channels for life and non-life products have been examined.

In Sweden, Skandia's life products are distributed by independent brokers ([ ]%), Skandia's own sales force ([ ]%) and franchisees ([ ]%). Since 1998, distribution via two savings banks and the Internet has been added. Skandia's sales force also sells non-life products. Franchisees which are currently tied to Skandia (via a marketing subsidiary) will henceforth act [ ] for both Skandia and the FFJV. In Norway, Skandia's life products are distributed by the sales forces of Vesta and Vesta Life, by independent contractors and by brokers.

Storebrand's life products are distributed to private customers entirely by its own sales force. In the corporate sector approximately [ ]% of premium income is derived from sales through brokers. Storebrand's non-life distribution channels have always been dedicated to non-life products and do not (in the corporate sector) sell life products, with the (small) exception of workers compensation type products. In the private sector the only exception is a small number of non-life tied agents in rural areas. After the setting up of New Group, the two separate distribution channels will remain unchanged, only the external broker channels will be split in two parts (non-life to the FFJV, life to Storebrand). Some regional offices will be shared by the FFJV and Storebrand staff, but they will be managed separately.

Almost [ ]% of Pohjola's premium income for both life and non-life products to both to individual and corporate clients is achieved through sales by Pohjolas dedicates sales organisation, Pohjola Service. The remainder is sold via specialised channels, i.e., the major customers' unit ([ ]%), the franchising channel ([ ]%) and the broker channel ([ ]%).

From the above description of the distribution channels for life and non-life products it appears that there is no or only little overlap in Norway. No means of co-ordination with regard to life products would therefore appear to arise.

So far as Sweden is concerned, the means of co-ordinating competitive behaviour appear insignificant for two reasons. First, the other Notifying Parties do not offer life products in Sweden. Second, independent brokers are subject to fiduciary duties to their customers which should enable them to resist any excessive pricing resulting from co-ordination between the Notifying Parties. Furthermore, since brokers are acting in competition with each other, they may be expected to use their superior market knowledge to search for the best terms and conditions on behalf of their clients. In this sense, they may be considered to act as a disciplining force in the market.

In Finland, although there is overlap and brokers do not seem to play a significant role, the other Notifying Parties do not offer life products.

For the above reasons, there is no reason to believe that the joint venture will have as its object or effect the co-ordination of the competitive behaviour of undertakings that remain independent such as to restrict competition to an appreciable degree.

VIII. Ancillary Restraints

The Notifying Parties will retain their respective activities in the life insurance sector but will not offer competing non-life insurance products in Sweden, Finland and Norway.

The Notifying Parties have justified this non-competition clause on the basis that it is intended to reflect the parent's withdrawal from the market assigned to the joint venture. In such a situation, a non-compete clause may, inter alia, serve to protect the know-how and goodwill transferred to or developed by the joint venture and thus ensure that each of the parties is willing to transfer the necessary assets to the joint venture on a lasting basis.

[ ]. These restrictions may accordingly be considered to be ancillary.

IX. Undertakings

In response to the Commissions serious doubts as to the compatibility of the proposed operation with the common market and with the functioning of the EEA Agreement because of the large combined market shares the parties would have in Norway, the Notifying Parties have submitted undertakings in Phase I by which they commit themselves to divesting Vesta.

The principal such undertaking is to divest Vesta no later than [ ] following the date on which the new joint venture has obtained the necessary approvals for the transfer to it of Storebrands non-life insurance business. [ ] the divestment would take place as a whole and as a going concern [ ]. In considering whether to grant this approval, the Commission will take into account the need to ensure that Vesta remains a viable and well-resourced competitor on the Norwegian non-life market.

The divestment of Vesta in accordance with the undertakings will eliminate the Commissions serious doubts as to the compatibility of the proposed operation with the common market and with the functioning of the EEA Agreement since it will mean that the operation will not create or strengthen a dominant position in Norway.

X. Conclusion

The Commission considers that the undertakings are sufficient to address the competition concerns raised by this concentration. Accordingly it has, in application of Article 6(1)(b) of Council Regulation (EEC) No 4064/89 and Article 57(2) of the EEA Agreement, concluded that, subject to the complete and timely implementation of the undertakings proposed by the Notifying Parties, the proposed concentration does not raise serious doubts as to its compatibility with the common market and with the functioning of the EEA Agreement.

For the Commission

Annex

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