Britannia and UK P&I Club merger

08 August 2016

The mooted merger between Britannia and UK P&I Club is no longer happening, but it has provoked renewed interest in how P&I clubs operate and whether other mergers may be on the table.

Talks between Britannia and UK P&I Club about a merger to create a super club eventually fizzled out in June. However, the potential tie-up has sparked conversations about the benefits of mergers between other clubs, and particularly the smaller ones operating in the market.

At a first look, it’s not clear what the benefits of any such tie-ups would be for the ship owners that comprise the clubs’ memberships. Many ship owners enjoy being members of clubs where they know that their fellow members, the directors and the club managers all have a shared understanding of the club’s aims. To themthere may be no obvious impetus to change the status quo.

However, the merger speculation has ignited questions over whether P&I clubs are commercially competitive enough. In this specialist area of coverage — ship owners’ liability to third parties — P&I clubs have a dominant position, with a market share north of 80%. Ship owners clearly enjoy the mutual ethos and the strong service culture of the club system. At face value the answer is yes. “The clubs claim they understand the business better than any commercial counterpart,” says Mark Cracknell, Senior Partner in the Marine Division at JLT Specialty. “Most of them have been around for more than 100 years, so they have a longevity that strongly suggests a tried and tested product delivering sound value for money.”

Different Styles

JLT Specialty places business across the P&I clubs, supporting ship owners in presenting risks, helping them to decide where to place business and negotiating competitive rates. “Ship owners want to know that they’re getting the right price, and that they’re in the right club. We enable them to benchmark; we are skilled negotiators and have very strong trading relationships with the clubs: plus we provide a full service, such as advice on coverage issues and contractual exposure,” says Cracknell.

Clubs certainly have different styles. This can be seen in their different management arrangements. At one end of the spectrum is Standard Club, which is managed by the publicly quoted professional services company Charles Taylor. At the other end, the management of the Swedish Club, for example, is entirely on the club payroll. This can influence how a club operates.

Britannia and UK Club are both managed by independent private firms, but there are differences in style. Britannia is seen as the more conservative, and less commercial, of the two. It has historically lacked appetite for the cruise ship industry and limited the business that it accepted to territories the Club felt it thoroughly understood, only relatively recently becoming significantly involved in Greek and Chinese business.

“The process of them doing that took a number of years, in each case, before they felt sufficiently familiar with how those markets function to take the plunge and write business in a meaningful way,” says Cracknell.
By contrast, UK Club is a broader church, open for most classes of business provided that it meets the Club’s standards and will make a positive mutual contribution.

Merger Benefits

A merger between Britannia and a UK Club would have created a second mega P&I club, the other being Gard, and may even have formed the largest. As well as Gard, Britannia and UK P&I, there are ten other mostly smaller P&I clubs — about which some of the merger chatter in the market has been swirling.

“The prospect of the merger had prompted a lot of the club managers to talk informally to one another about whether they should be proposing something similar to their boards of directors, but the discussions don’t seem to have gone very far,” says Cracknell.
The benefits of clubs merging could have included a combined, stronger management team and greater capital efficiency, reducing the need to fund a capital base from the membership, perhaps thereby reducing premiums.

“Capital in the clubs is raised from ship owners. The larger your portfolio, in simple terms, the less capital you need — you can make money go further if you’re larger, because there are economies of scale. So that’s a potential advantage of a merger,” explains Cracknell. “In principle, we could see the advantages of a merger between Britannia and the UK P&I Club, but equally we could see why it might not be attractive to all members of both clubs. They are quite different in culture and business mix.”

Combined Forces

As well as bringing together management expertise, such an enlarged environment might also have provided a more dynamic workplace for employees, potentially attracting the best people.

With pros and cons on both sides of the argument, what probably broke the deal was the reality that the capital position of each club is different, and that trying to create a value proposition for members of both clubs proved to be an insurmountable challenge.

“Britannia members most likely feel that their capital position is stronger, relatively speaking, than UK Club, while UK Club members would be unlikely to see any need to concede ground on that score to Britannia,” says Cracknell. “Most believe it fell through over the question of establishing valuations of both businesses that were mutually acceptable to each other.”

There will be disappointment on the part of some members of both clubs that the failure to agree a merger will prevent the dividend of surplus capital many had anticipated a merger would bring. That disappointment may linger as it becomes evident that – merger or not – these two clubs and virtually all the others now enjoy record surplus funds, equivalent in many cases to the requirement for an AAA rating based on the capital model of at least one well- known ratings agency. The challenge now and in the future for P&I clubs is how they will manage this.

“They are — arguably — over capitalised, and that’s a big challenge for the clubs going forward. What do they do about that? How do they deal with the fact that they have all accumulated huge surpluses, while continuing to navigate a marine liability environment that is not getting any easier?” asks Cracknell. 

P&I rates have been held pretty steady for some years, and the clubs will not wish to see the weight of their surpluses put rates under pressure. Despite the operation of the International Group Agreement, the clubs’ anti-competition agreement, there have been ‘soft’ P&I markets in the past, with disastrous results. The clubs will not wish to see P&I rates take the same path as the hull market, but it remains for them to address the fact that members increasingly consider clubs to be simply too wealthy and the pressure is on to bring premiums down. 

Download marine newsletter

For further information, please contact Mark Cracknell, Development Executive on +44 (0)20 7558 3816 or email mark_cracknell@jltgroup.com