North-Standard merger seen as counterweight to Gard

Everything is now in place for the planned merger of North and Standard protection and indemnity (P&I) clubs at the next renewal deadline, the two chief executives involved have confirmed, with information packs for members who will vote on the decision going out today.

Reaction from shipowners so far has been positive, according to Paul Jennings of North and Jeremy Grose of Standard, who will share the top job at the new entity, to be known as North Standard.

Prime selling points include building a counterweight to Gard, the largest marine mutual in the International Group, and building on the two clubs’ complementary product lines.

The hope is North Standard will also have enhanced clout to ride out market volatility, stronger purchasing power for buying reinsurance and be able to eliminate some duplicated functions.

The consolidation comes after a difficult period for the P&I niche, which has been forced to opt for a series of hefty rate hikes over the past three years, in response to rate erosion and record levels of pool claims.

Arendal-based Gard has emerged in the best fettle of its peers, thanks to a 20% market share and a business model of writing non-P&I lines on a for-profit basis to subsidise the mutual membership.

Depending on the 2022/23 renewal outcome, North Standard’s entered tonnage will be either fractionally above or just below its Norwegian rival.

“There’s an element of lop-sided competition in the market,” Grose said.

“At the moment there’s one big player and a number of medium to large clubs that sit below it in terms of scale. Another organisation of similar scale could bring stronger competition.”

But Jennings said the merger had not been born out of a desire to replicate Gard’s offering, but rather approached on the basis of what it could bring to members.

“Coincidentally, we’re going to be at the same kind of size as Gard, but that wasn’t the intention. The benefits of scale are large for the combined group,” he said.

There has been speculation about P&I consolidation for some time. In 2020 Skuld chief executive, Ståle Hansen, said he expected the International Group – which has 13 members now and will have 12 after North Standard is up and running – to shrink to six or seven by 2025.

Mark Cracknell, head of P&I at broker Marsh, has also made the theoretical case that fewer P&I clubs would mean free reserves could be used more efficiently than they are at present.

But merger talks between UK and Britannia stalled in 2016 and no subsequent merger attempts were publicly announced between that date and this March, when North and Standard unveiled their intentions.

Grose said Standard had broached a merger with Britannia in the 1990s, although the deal did not ultimately go anywhere. The P&I world tends to be very traditionalist in outlook, which may account for the slow pace of any consolidation process.

“There is a great deal of support and affection for clubs. Many members feel very associated with clubs that have supported them, often for generations. There’s quite a lot of resistance to change from within.

“Also, there is no equity release to be created from two mutuals coming together. There are no shareholders that will receive anything as a consequence.”

Jennings added he did not believe the creation of North Standard would necessarily be a catalyst for further consolidation.

“It’s easy to think about the domino effect of what might happen, but it’s not as easy as just shaking hands over lunch or dinner and saying ‘this is going to happen’.”

Moreover, he would not fear the emergence of a Scandinavian super-club bringing together Skuld, Gard and possibly the smaller Swedish Club, an outcome some have canvassed.

“I wouldn’t fear it. It may happen, I don’t know. This is the right thing for us, it might lead some other people to have conversations. We’ve got to do what we think is right.”

Stretch back a bit further into the past, namely the 1990s and early 2000s, and North was involved in a number of rescue operations that were euphemistically dressed up as “mergers”, largely for reasons of saving face.

These include the Newcastle P&I Club, the Liverpool and London P&I Club and the Sunderland P&I club – all members of what was once a 16-strong International Group.

But those transactions were obvious bailouts for financially struggling entities. North and Standard have both done due diligence of each other’s financial standing, using third parties to do so. There is no question of a shotgun marriage on either side.

“It’s easy to think about the domino effect of what might happen, but it’s not as easy as just shaking hands over lunch or dinner and saying ‘this is going to happen’”
_{Paul Jennings
North}

One potentially attractive aspect of the merger is the complementary nature of the lines the participants provide in addition to their core P&I offers.

North has a growing commercial bluewater hull business and substantial fishing vessel hull portfolio, while Standard is well known for its strike and delay class and also offers war risk and offshore cover.

“Not every shipowner is going to buy every line from us. But the fact is we can use the capital to generate additional income – and profit – to support the mutual membership,” Jennings said.

North Standard will not initially be a one-stop shop for all marine insurance needs, but could evolve in that direction.

Competition complications are not foreseen, according to Jennings. The subject is always sensitive, as cartel allegations have been levelled against the International Group in the past.

“The International Group agreement is a mild restriction on competition for 12 months because of the collective reinsurance. There is that side of competition that people talk about, which we monitor carefully.

“The other side of competition is, have you got too few clubs getting too large a market share? This coming together won’t give us a larger market share, so it’s hard to see why that would be, from a competition perspective, offensive.”

Nor are the implications for pricing clear. By their very nature, the terms “hard” and “soft” are relative, depending on the state of the cycle at any one time.

Reduced competition could allow clubs collectively to charge more; economies of scale could allow North Standard to offer keener rates.

But Grose stressed: “The aim of P&I clubs is to ensure at-cost insurance. We’re not seeking to make a profit out of our activities.”

This article first appeared in Lloyd’s List, a sister publication of Insurance Day