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Marine market merger may spark more consolidation in Scandinavia

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The ongoing merger talks between Scandinavian mutual marine insurers Assuranceforeningen Skuld and The Swedish Club could spark a flurry of merger and acquisition activity among companies operating within the hull and machinery and protection and indemnity service sectors in Sweden, Norway and Finland.

Skuld and The Swedish Club are no strangers to each other. The two insurers specialize in underwriting P&I, hull and machinery, and charterers liability business, and both are longtime members of the International Group of P&I Clubs. Skuld and The Swedish Club also operate a joint service in Hong Kong and Piraeus, Greece.

"We have decided to pursue a merger with The Swedish Club because we believe that an integration of the operations of the two associations is to the mutual advantage of our two companies," said Erik Gloersen, Skuld's chairman.

The Gothenburg-based TSC is equally bullish on the merger.

"The potential synergy gains from a merger are obvious. We would also expect to see improved risk-bearing abilities, with reduced exposure in case of major insurance incidents. A merger also has the prospect of higher efficiency levels and an increased competitive position in the global marine insurance market," said TSC's Chairman Christer Olsson.

The potential advantages also were highlighted in a recent report by Marsh & McLennan Cos. Inc. that was jointly commissioned by Skuld and The Swedish Club. That report, delivered to the companies on Oct. 17, says that "technically, there is no reason to expect anything other than a go-ahead for the merger."

A merger of Skuld and The Swedish Club, the Marsh report notes, would create a company with offices in several countries and overall portfolio of shipowners' P&I tonnage in excess of 54 million gross tons, making it the fifth-largest P&I mutual measured by entered owned tonnage worldwide. The merger has the potential to deliver a P&I club with gross premium income of e160 million ($205.2 million), which would rank it as the sixth-largest P&I association globally, the report notes.

"Skuld and The Swedish Club combined produced an overall technical surplus profit of $25 million in 2005. There is no reason to believe the technical surplus for 2006 will be any lower than 2005," says the report.

"From a Scandinavian point of view, we expect the merged group to be a commercially stronger entity than the current positions of each individual association as they are now," Marsh's report notes.

Industry analysts believe that the Nordic P&I and H&M markets are ripe for further consolidation.

"The chief motivators to new consolidation are a need for insurers to underwrite high quality fleets by lowering premium rates, and to work to prevent and control losses. The trend will be for larger insurance groups offering a full range of P&I and H&M products catering to big shipowners," said a Stockholm-based marine industry insurance analyst.

Size and the ability to service global clientele could prompt mergers and acquisitions in this sector.

"With ship values on the increase, and this is especially true in the case of ferries and cruise ships, sizable capacity is a must. A merger improves the chances of higher levels of efficiency and profitability," said the analyst.

Previous Nordic M&A activity resulted in Gard A.S., Skandia and Vesta bundling their marine insurance activities into If Property & Casualty Insurance Ltd. in 1999, with Gard being the principal platform for underwriting If's P&I, marine and energy operations.

Finland's Sampo acquired all shares in If P&C in 2004.

In January 2001, the mutual clubs Unitas and Bergen Hull Club merged to form the Norwegian Hull Club.

"Measured in premium volume, Gard is the largest underwriter in Norway for H&M-related insurances. The Norwegian Hull Club is the next player of importance. Gard and the Norwegian Hull Club are big enough to lead consolidation, rather than wait and become targets," the analyst said.

Finland-based Pohjola's P&I unit could also become a target.

"Pohjola provides shipowners and charterers with P&I insurance products and services in cooperation with The U.K. P&I Club. The unit is small, but profitable, and is likely to attract acquisitive interest," said the analyst.