Ace Europe's decision to redomicile its headquarters to the UK has had a dramatic impact on its ranking in 2005. After it entered the top 10 at number seven, Ralph Savage discusses the insurer's future ambitions with chief executive and chairman Andrew Kendrick
Ace Europe has been a major player in the UK commercial market ever since it acquired the Ockham worldwide Lloyd's business in 1996 and the $3.45bn (£1.8bn) global general insurance business of Cigna Corp in 1999. Andrew Kendrick, chief executive and chairman of Ace Europe, and a Lloyd's man through and through, makes no secret of his company's commitment to underwriting for profit. However, for an insurer as deeply embedded in the UK commercial market as Ace Europe, this is a difficult strategy to maintain, and in the past Kendrick has been quick to explain how it is concerned about the "bloodbath" in UK commercial lines (Post, 31 August, p3).
As for Mr Kendrick himself, his CV suggests a loyal streak. He has enjoyed a 25-year career underwriting largely financial institutions business for what has been essentially the same employer throughout. He began, in 1978, at Sturge, which latterly became the Ockham agency and was then acquired by Ace Europe. "At one stage we were the largest syndicate in Lloyd's, at £900m," he says. "Then I was asked to go to Bermuda to run the operation out there. When I came back, they gave me the opportunity - in 2004 - to run the whole of Ace Europe, which is Ace Global Markets, including the syndicate operations and all the European retail operations, with the UK being the largest part. Today, because of our rapid expansion into other markets, we are reducing our dependence on the UK."
The reduction of Ace Europe's UK bias is clearly at the top of the agenda because Mr Kendrick mentions it numerous times. He says it is largely a rebalancing of the portfolio, with other parts growing faster than the UK. The insurer is now making a concerted effort to grow its Central and Eastern European business to reduce its reliance on commercial business in the UK. However, he says Ace Europe is likely to remain a top 10 player among UK underwriters for the foreseeable future.
Mr Kendrick agrees that the firm is probably perceived in the UK as being slightly different to its peers, largely because of the number of platforms it operates with. "Ace Europe is relatively new because it has been around only 21 years but it has progressed enormously. The group is in more than 50 countries worldwide and has 10,000 employees. In London we have a presence from being in Lloyd's, and we also have a strong regional presence in the UK. I think we are perceived as being many things to people."
He continues: "We have particular expertise in large, complex risk and are seen as being a global player, with good expertise and a very sound technical approach to underwriting. We tend to respect the local way of doing business by employing local people, whether in France or Manchester. That brings you closer to your clients and allows you to articulate how Ace Europe wants to behave corporately - it brings closeness in terms of still understanding your clients."
Ace Europe's recent history has been heavily influenced by one single event: the 11 September 2001 terrorist attack on the World Trade Center happened at the time when one of its syndicates, 2488, was the largest in the market. Since that period, the firm has systematically reduced its exposure to Lloyd's, reallocating that income to its insurance company. The insurance company moved its domicile from Belgium to the UK during 2005 and Ace Europe is now the seventh largest insurer in the UK.
"Most people rightly had concerns over how Lloyd's would deal with itself post the 11 September crisis. No one knew how big the loss was going to be," says Mr Kendrick. "We had the largest syndicate in Lloyd's but found that some of the syndicates we were sitting next to weren't operating in that same professional fashion as us. We endeavoured to create change within Lloyd's but it wasn't as responsive as we would have liked. So we chose not to be overexposed to that particular platform and to move some of our business into our own insurance company where we could control and manage it better."
Mr Kendrick concedes that a lot has changed since Ace Europe made its decision to begin migrating business out of Lloyd's but this is not likely to influence it enough to return as much capacity to Lime Street as it once had there. "Subsequently, Lloyd's has created significant change and it is doing much more of the kind of job we expected of it before. I'm very supportive of what Lloyd's has done. Ace Global Markets operates both through Lloyd's and the company market so the overall business hasn't changed. We haven't shrunk that business, we've simply moved it from one place to another. The aggregate is still the same."
He continues: "If you're going to be in Lloyd's - and it provides one of the best ways to come into London - you need to be of a significant size. We think that we have got to that size now. Could we go slightly lower? Possibly. Could we increase? I think we've reached the opinion that about half a billion sterling is probably the right size - we are £425m at the moment. This allows you to have a meaningful presence but not be overexposed in the event something catastrophic happens."
As far as the company's business mix goes, it uses both its insurance company platform and the Lloyd's syndicate for a broad range of risks. Mr Kendrick explains: "Obviously, a lot of marine business goes into Lloyd's because the market was founded on this type of insurance. There is also aviation and a lot of property as well but all energy business is written in the company."
He adds that there are three reasons for keeping the Lloyd's platform going: "Firstly, if you are dealing with a subscription market and brokers want to fill out their slip with 10 syndicates if they have to do nine in Lloyd's and then come over the road to see us with a different policy, it creates an administrative burden. So they'd rather see the syndicate and they will drive some of the decision making. If it's good business we want to see it wherever it is.
"Secondly, the clients who've had a history of insuring with Lloyd's for 80 or 100 years in some cases are quite happy there and prefer what they know. And, finally, while we have a very good licensing capability with the company - we're licensed in 42 states in the US - some aren't available in the company but they are at Lloyd's, such as California, Florida and also Australia."
Closer to home, Ace Europe has a fairly large infrastructure in the UK, where it has had to make some cuts in the past few years to improve efficiency. In March it announced that it was closing down its claims and service offices in the south-east of England and moving the combined operation to Glasgow. Mr Kendrick says the move, which affected as many as 400 employees, is now well on the way to completion. The firm now has 120 employees at the Scottish office, which should be fully up and running by the end of first quarter of 2007.
He says: "Obviously, the perceived benefits for us are that as margins come under pressure you have to create greater efficiency around what you do with better process. The way to do that has been to relocate to one place most of our administrative functions, and some of our claims and accident and health servicing functions. If you do that, you can set the process out exactly as you want - there's no embedded history or cries of 'I've always done it this way'. Effectively, you are starting from scratch."
Mr Kendrick adds: "In some cases you will get better-quality labour who will often work longer hours, and there will be a saving in that. Generally speaking a London salary is not the same as a Glasgow salary. And you've got a fantastic talent pool in Glasgow and office space is much cheaper."
Of course, the $64,000 question is always about location. Why choose a city such as Glasgow to move a substantial operation to when considerably cheaper options are available around the world? Although Mr Kendrick admits that the regional development agencies around the UK played their part, he says the decision was based ultimately on control of operational risk.
"The RDAs played a big part," he explains. "The deciding factors for us, though, were where we could get the most appropriate office and where we could get the best people. We needed to access all the right skills and once you've done that, you talk to all the RDAs. They were very helpful and, of course, you will get financial incentives - and that happens everywhere, whether it's Dublin, Glasgow or Poland. We considered many locations, and a lot of the reason for not moving to somewhere such as Poland or India was the potential risk. The closer you are to the business, the better. Most of the business is obviously UK-sourced, so it makes a lot of sense to remain here. You also have control, too. I can go up to the new building easily."
Mr Kendrick points out how important being close to the office can be, with the flight to Mumbai taking 10 hours. He says: "If half your staff in India walk out, that's a big issue. I'm not expecting that to happen in Glasgow but when you are close to it you can manage the situation. You have command, control and efficiency."
So what can be expected from Ace Europe in the next few years? The company is looking east for opportunity. Having already opened offices in Russia and Poland in 2005, it is in the process of putting together operations in Hungary and the Czech Republic. South African and Middle Eastern operations - including Egypt and Saudi Arabia - also report into the Ace Europe stable, so barring a wholesale reorganisation at group level, its network should top 20 countries in about 18 months.
The group has not made any notable acquisitions for three to four years, so analysts will undoubtedly be watching its New York listed stock for any big fundraising efforts, especially as Mr Kendrick is not short of ambition. "I want to be running to the corner of the room where everyone else isn't going," concludes Mr Kendrick, presumably with a phrase book in hand.
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