06 June 2023
NorthStandard Merger Update
The Birth of a 'Super Club'
One minute past noon, GMT, on the 20th February 2023, marked a new chapter in the history of P&I with the birth of another 'super-club' when the Standard Club merged in to the North of England.
Perhaps this was not an unprecedented event as we have seen mergers and takeovers before, albeit others like the Newcastle P&I Club merger were distressed, however, the NorthStandard is the first ever true merger. For the two Clubs joining forces there was an air of excitement, but there were mixed views from the market and some feelings of concern about the change away from the status quo. Was this monumental change something that Club members, the market and its brokers should be nervous about?
In this update, we will focus on what has transpired since the merger and what the new combined entity looks like today. We will look at the new financials, what new product lines are on offer to its members (and non-P&I members), how the organisation of the Club has evolved and of course the most important element – its people. There is still much unknown but we have tried to answer as many of the questions we have received from our clients and the market as we can.
The NorthStandard is the first successful merger of two large clubs in the last two decades
More recently we saw Britannia and the UK Club walk away from their merger attempt, and before that Skuld and Swedish also decided to stay independent. Many Club commentators, including Gallagher, have talked about mergers for years but none of us saw this coming! Some commentators (and Members) have advocated this change and felt the need for something bigger and more efficient, whilst others preferred the more traditional mono-line way of thinking. After all the ‘so-called’ traditional view has served the P&I industry well for the last 200 years. Since the 80’s the Clubs have become predictable in terms of where the premiums and market is headed and this is a good thing. Capital adequacy, solvency, rating agencies and investments have all played important roles here. Predictability is good, and whilst we do not think that the NorthStandard is or will be a black-swan event, it tells us that not everything is as predictable as we once thought.
After the announcement in March ‘22, it was fairly clear to us that the merger would be approved before the summer and it is commendable how hard Jeremy Grose, Paul Jennings and the entire team worked to advocate the benefits of the merger, which the membership, for the most part agreed with. It is also worth noting that such resounding support from the members also shows how close the Club manager relationship is with their legacy membership on the whole.
In our 2022 merger newsletter, we talked about the potential wider implications of mergers and now, 15 months later, we will see if our viewpoints have changed or evolved as a result:
Competition
When the merger was announced, we thought it would have little impact on competition. At the 2023 renewal, we saw a number of Clubs (particularly the Norwegian Clubs) attack (or you could also say attract) some of the NorthStandard membership. We know that some who changed Club were legacy North and Standard members who required a new second Club or were overly reliant on one Club in a post-merger world. Another portion of the membership who changed did so for reasons other than the merger. Therefore, in the very short-term, there has been increased competition as well as a defensive approach from NorthStandard at the last renewal (seeing a 15m GT decline in mutual owned tonnage) and we expect to see a similar stance and approach from the Clubs again at the 2024 renewal. The NorthStandard advised early on that the combined GT would be likely to fall somewhat at the 2023 renewal, therefore this was expected.
From a timing perspective, we expect to see the P&I market soften in 2024, given the positive combined ratios being announced, which are on the back of a benign claims year in the pool and within retention. The Clubs are still well capitalised and the decline in free reserve is investment result driven at this stage. However the underlying rating inadequacy is generally still in the fold and we predict that the 2024 renewal will serve a range of increases between 5% to 7.5%. Increased competition from the Clubs in a softer renewal environment may not be helpful for the NorthStandard, despite the 2022 year of positive results getting things off to a good start.
Further Consolidation
Whilst we all hear about Club managers ‘speed-dating’ from time to time, it is very clear that most Clubs have spoken to one another even more so over the last year. We do not expect to see a further announcement of another Club merger for 2024, given what we now know more about the amount of time, work and planning that goes into such mergers.
The general consensus, as we see it, is that the Clubs are monitoring the NorthStandard to see how they successfully integrate the businesses and most of the other Clubs feel that they are strong enough to stand on their own feet from both a financial and competition standpoint.
Therefore for the time being, we do not believe that another 'Super-Club' event is on the horizon, although it is worth noting some Club CEO’s have been more public about their views on this subject. A take-over, as opposed to a merger, on the other-hand could surprise us all. However, with the recent respite in claims activity (both pool and within each Club own retention), those Clubs that are financially struggling at the moment may well be under less pressure in the next twelve months.
Our original prediction of 5 Super-Clubs doesn’t seem to be a likely scenario in the immediate future, although that prospect cannot be ruled out longer term. On the flip-side we do think that the six large S&P A-rated Clubs will continue to attract a larger market share, and the P&I landscape divide will grow wider. The relative margins for the smaller Clubs could be more of a challenge in the next 5-10 years.
NorthStandard Update
Four months into the new NorthStandard, it is interesting to observe the new teams (and offices) now integrating. We must not forget that at one point, the two Clubs were fierce competitors and so to now see them embrace and complement each other in a short space of time seems surreal, but positive. The culture there is clearly one of ‘how can one do things better’ and how they can both learn and cultivate a new unique Club for the future.
The NorthStandard stands at 365 million GT (255 million owned GT) making NorthStandard the second biggest mutual Club by owned GT entered (Gard is first with 275 m owned GT). The combined 2022-23 result for the Club suggests that they are off to a good start with the technical result on the right side of 100% (reported at 95.2%).
However free reserves have fallen some -$59 million, although much of this is attributed to paper losses in the fixed income securities due to investment volatility. The NorthStandard has some weight in government bonds and low exposure to equities, which means that this fall in free reserve is not a concern for the medium to long term. S&P have also recently issued NorthStandard an A (stable outlook) rating, that is an improvement from A (negative outlook) ratings held by the two individual Clubs pre-merger. Therefore it is clear that the rating agency is not overly concerned about the drop in free reserve. We will go into more detail on the Club results in our next new newsletter, however, for this update we summarise the NorthStandard high-level result as follows:
2022-23 NorthStandard Highlights
· Combined Ratio: 95.2% (down from 107% in 2022)
· Free Reserve: $684.5 million ($744 million in 2022)
· Premium income: $796 million (all classes)
· Investment result: -4.5% deficit (-1.5% in 2022)
· S&P: A stable (upgrade from A negative outlook) at 20th Feb 2023
Legacy North of England - in USD millions
Legacy Standard Club - in USD millions
Combined NorthStandard basis - in USD millions
Free Reserves - 6 Largest A-Rated Clubs - in USD millions
Premium (all classes) - in USD millions
Technical Performance (Combined Ratio)
Premium to Free Reserve Ratio (an indication of utilisation of capital)
The tables and graphics below, give a very simplistic comparison of the six larger Clubs’ utilization of capital to back underwriting levels. The percentage value provides an indication of whether a Club is working its capital more conservatively (lower %) or harder than others (higher %). Diversification strategies provide more income to the Club but also more, but differentiated, risk. This basic indication is purely earned premium divided by free reserve, which produces the ratio. It is interesting to note that the new NorthStandard is using its capital harder when compared to the five within its peer group and up until recently the legacy North premium to free reserve indicator followed that of the Skuld. Today there is a 5.3% swing. The NorthStandard 2022 total income is $765 million and its free reserve is $685 Million.
The below table looks at this a rather crude “premium to capital” ratio for the bigger clubs. We have adjusted Gard’s 2022 figures to reflect the fact that its latest results are only for a 10 month period. Further it should be noted that the premium to capital ratios for UK, Steamship and Britannia clubs are all based on 2021-22 figures and will likely rise for the 2022-23 year as, generally speaking, premiums have risen and capital falling in the most recent year.
It is however interesting to see the new NorthStandard utilising its capital “harder” than any other club in its peer group, which also reflects the fact that both clubs had above average capital utilisation prior to the merger. It is also important to note that, even allowing for 2022-23 increases in this ratio, the more mono-line larger clubs operate at a significantly lower premium to capital ratio: inherently more conservative, but also pointing towards their being relatively overcapitalised within the peer group.
New Capabilities
The NorthStandard now provide a much broader product offering compared to a year ago. This is of great benefit to the membership and any surplus in non-mutual business, also supports the P&I Club membership. Diversification has historically proven to be beneficial to a Club membership (most of the time), providing the offering is well established and has weight.
We have seen a number of Clubs try to diversify, some have succeeded and others less so, others have chosen a route taking a minority share in a product line and not taking real risk, therefore the reward of such projects has a relative return to the membership in the short to mid-term.
The market will recall seeing that the Standard came and went from the hull market a few years ago, and the North of England also tried to enter energy sector to compete. The NorthStandard merger has allowed ambitions from the past, to now come to fruition in the merged entity, with a well-established team, reinsurance support, claims expertise and ultimately products offering great service, with a proven track record.
The five diversified lines are as follows:
· Offshore & Renewables
· Costal & Inland Fixed P&I
· Strike & Delay
· Hull & Machinery
· Sunderland Marine (Fishing & Small Vessels, Owners Fixed Premium & Aquaculture)
These five diversified lines add up to a portfolio of non-mutual income of $200 million and, according to the NorthStandard management team, is very much contributing to the Club result. In addition, we can also see that the broad level of diversification also benefits the mutual membership from an experience and knowledge perspective and also allows certain members to have a much closer relationship with the Club.
Looking at other Clubs that have a diversification strategy, we can point out the following comparisons, in order of total non-mutual (excluding charterers & FD&D) premium income:
*Thomas Miller (managers of the UK Club) have a variety of diversified, but siloed lines that do not support the UK P&I Club result. However, we have included the diversified lines here to illustrate what products are available to its membership, but also to underline that the UK Club manager’s diversification strategy is not comparative to how the rest of the IG Club market diversification models are established.
New Teams & People
With a 650+ strong team at NorthStandard, making the newest 'Super-Club' the largest employer of dedicated P&I & marine professionals in the market. Gard state that they have a team of around 600, which is also very large, however, NorthStandard have an 8% higher head count compared to the biggest Club.
The new Club has 13 dedicated offices (Gard also has 13 offices) around the globe, which we note as follows:
Source: NorthStandard Publication 31/05/2023
With such a large team of people around the globe and with the recent announcement of senior positions within the new Club, we are still learning who exactly is doing what, and we understand that the Club is still working on its structure.
Some of the common questions we get asked by members of the NorthStandard are: who is doing what, which offices are being used and what are the new reporting lines?
We have set out the below organisation chart of the new C-Suite, Underwriting, Senior Claims and Regional Heads. This origination chart is client facing and mutual P&I focused, as the new NorthStandard includes executives leading the diversified lines, as well as non-client facing executives.
New Underwriting (Culture & Technical)
Whilst we can now better understand the NorthStandard structure, culture and financials of the combined Club, we also want to highlight a few technical points for consideration:
Legacy Style & Culture
Both legacy Clubs had very different underwriting styles, this was particularly evident in the last few years taking note of the recent hard market cycle. The North has always been known to be robust, technical and happy to stand their ground. We previously saw senior underwriters require regular input from management, outside of defined renewal budgets – this is not a negative touch-point, but a style during a challenging market period which became prevalent during those years. The Standard Club, by contrast, had (or appeared to have) more underwriter autonomy - still technically robust, but the renewal process felt less arduous.
In the new NorthStandard, going forward, we expect to see a combination of the two legacy styles complimenting each other. Both Thya Kathiravel (Chief Underwriting Officer) and Mark Collins (Global Head of Mutual P&I) will be leading the underwriting narrative, particularly in 2024, with all eyes on them at the first renewal.
Technical Considerations
It is of note that NorthStandard are now responsible for almost 18% of the lower pool ($10-$30 million layer), where Gard’s pool contribution is around 14%. Such a meaningful contribution to the pool is fine when the pool has a benign year like we saw in 2022, but in a more than average trending year this could effect the members’ cost allocation.
The Club shortly has to present the Members with the new NorthStandard loss record. Both Clubs had different ways of calculating the loss record and also had different ways of allocating cost to premium. The latter we will leave for the moment, but we give an example of how the loss records looked in both legacy Clubs:
Legacy North of England
Formula:
(Premium – GXRI – Pool – Abatement) = Net Retained Premium (A)
(Claims: Paid or Abated Claim + Estimated) = Total Claims (B)
B/A = Loss Ratio %
Legacy Standard
Formula:
(Mutual Premium) = Premium Income (A)
(Claims: Paid + Estimated + GXRI + Pool + Abatement) = Total Costs (B)
B/A = Loss Ratio %
As you can see from the above example the loss ratio % varies. For illustrative purposes we have used like for like total costs in this example (claims and costs). The second item, which we have not covered, is the allocation of the Clubs’ costs and individual underwriting models, prior to the merger. Pool and Abatement levels have always be different in both Clubs, these two cost allocations can equate to 30-40% of the rate per ton.
In the last five years the North pool contribution has averaged around 10.4%, whereas the Standard Club has averaged around 11.2%. This meant that the Standard Club allocation of pool contribution to the member’s rate was greater during that period. The NorthStandard comingled pool record will see an adjusted figure going forward from 2023, which may slightly see the legacy a North member record increase a few percentage points, as net retained premium could slightly erode, but this remains to be seen. This is a theoretical but realistic observation. It is also an important one to make when many members with very competitive premium levels may have a lesser margin for error. The harmonization of the new record and cost allocation will be important to balance and get right to avoid potential but temporary frustrations on the net retained position of each member.
There are still many more questions to be answered and we hope to continue our dialogue with the Club managers on a day-to-day basis to understand much of the detail, as we start to think about the 2024 renewal going into the summer period.
Looking Forward
It is clear that both Clubs have worked extremely hard to get to where they are now, the merged NorthStandard does pose an even more credible solution looking forward. They clearly have the people, talent, ambition, and the Club wants to use its new foundation to grow. At the 2023 renewal, we saw competition increase, where both North and Standard took defensive positions – this was expected by the NorthStandard management team. We expect to see a continuation of this in 2024. We expect to see that after the integration period (assuming this could take two years), the market will settle again. This is also likely to happen when P&I renewals should be getting easier, as the hard market cycle tails off and therefore the likelihood of movement should also be lesser.
Ultimately, the goal for NorthStandard, as we see it, is to provide the lowest cost to the membership, keeping P&I premiums competitive and predictable. Potential excess capital returns to NorthStandard members are likely in the future, in our view, especially for those legacy members that have helped build the Club’s diversification ambitions.
Most importantly providing the best shared experience when it comes to claims, proactive use of data and helping to lead the way for loss prevention, assisting shipping and its shipowners through the generational shift and in the meantime helping the industry reducing its carbon footprint. This will no doubt mean that the P&I market will have to consequently take on extra responsibility and liabilities for its members in the future - The NorthStandard should be well placed here.
In conclusion, 15 months on, the NorthStandard is off to a good start. The real hard work begins now, integrating the business, its people and creating that unique culture that will be a differentiator in the market. We look forward to see how the Club management decide on how they present the new loss record, underwriting model (in terms of cost allocation) well ahead of the renewal period; it will be important to understand this and if it affects or benefits the legacy membership.
For Gallagher, the success of the NorthStandard is something of great importance and more importantly to our clients and members of NorthStandard, we believe that regularly communicating with our clients and the NorthStandard teams will help to safeguard that success.
In our next newsletter, we will be focusing on the Clubs’ financials for 2022-23 now that these are being reported, this will give us better insight to the success of last year and forthcoming renewal challenges. If you have any questions relating to this article, please contact the Gallagher P&I team.
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