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Endurance, Fla. insurer battle over MGA agreement for $40.6M homeowners book

Falloutfrom Endurance Specialty HoldingsLtd.'s July 2015 acquisitionof Montpelier Re Holdings Ltd.on an insurer with multiple ties to the deal's target remains unresolved and servesthe basis for litigation that has cast uncertainty on what had been a $40.6 millionbook of homeowners business.

Sunrise,Fla.-based Sawgrass Mutual InsuranceCo. in January sued several Endurance entities in Leon County, Fla.,Circuit Court, including the Endurance-owned managing general agency Cladium Inc.,alleging that the Bermuda-based group had been seeking to "eviscerate"the insurer's business relationships by marketing the MGA's renewal rights for saleto competitors in violation of the terms of an underlying agreement — a contentionthat the MGA has vigorously denied. More recently, Sawgrass again filed suit ina case that Endurance removed to federal court from Leon County on July 19 regardinga demand for arbitration stemming from records requests associated with an excess-of-losstreaty it had originally entered with Montpelier Re.

MontpelierRe in May 2014 acquired Cladium. It also bought the rights to a surplus note inan outstanding amount of $14.5 million from a subsidiary of Greenlight Capital Re Ltd. Cladium subsequently entered addendumsto the surplus note through which the amount outstanding increased by $11.5 millionand $4 million to a total of $30 million as of March 31, 2015.

Enduranceagreed in March 2015 to purchase Montpelier Re. Before the deal closed, Endurance— with the purported consent and participation of Montpelier Re — began to planfor a potential sale of Cladium, renewal rights to the Sawgrass program and thesurplus note.

The $11.5million change in surplus notes more than offset the impact of a $6.5 million netloss on Sawgrass's year-end 2014 surplus, which totaled $16.4 million. Sawgrass'surplus increased to $20.4 million as of March 31, 2016.

SawgrassCEO Daniel O'Neal and John Del Col, Endurance's general counsel, met three weeksbefore the Montpelier Re deal closed, at which point Del Col allegedly told O'Nealthat Endurance had signed nondisclosure agreements with at least two of Sawgrass'Florida competitors regarding a prospective sale of renewal rights. A sale of therenewal rights would "effectively gut" Sawgrass' book of business, theinsurer argued, and O'Neal told Del Col in a letter that the nondisclosure agreementshad been "damaging" Sawgrass' reputation in the marketplace.

Cladiumcharacterized Del Col's message as being that the MGA and its new ownership structure"wanted to stop the financial bleeding" and sell their rights to the Sawgrassprogram. The MGA said Endurance met with Florida regulators in August 2015 regardinga prospective sale of renewals and continued to try to resolve Sawgrass' objectionsto such a transaction through the summer and fall of 2015.

Amongthe options Cladium presented was a possible sale of the surplus note and renewalsto Sawgrass itself and/or a group that included O'Neal. But the MGA said it becameclear by December that the parties could not resolve their disagreement.

Cladiumhas since made demands to Sawgrass to access all records associated with the book.But the insurer in its January suit is seeking a judgment that the MGA agreementdoes not authorize Cladium to disseminate its confidential business information.It also seeks a determination that the agreement does not permit Cladium to "completelysever" its relationships with policyholders through nonrenewing policies.

As Cladiumsaw it, the January complaint amounted to an "attempt by a poorly performinginsurance company to violate its contractual obligations to the entities that havepreviously funded its operations." Cladium argued that the MGA agreement allegedlymakes clear that it is the sole owner of all proprietary rights related to the Sawgrassprogram, including the names of insureds and prospects. As such, the MGA claimed,Sawgrass has no right to — or interest in — the renewal rights.

As thedispute was playing out, Sawgrass entered an MGA agreement with Sawgrass ManagementAdvisors to reduce its reliance on Cladium and maximize its competitive flexibility.David Yon, Sawgrass' outside legal counsel, alleged that the Cladium agreement is"pretty clear" that an entity like Sawgrass Management Advisors can operate.

FromCladium's perspective, however, the MGA's formation allegedly amounted to a violationof its agreement with Sawgrass and a usurpation of its rights. It is seeking declaratoryjudgment that Cladium is Sawgrass' exclusive MGA for Florida residential and commercialinsurance business and that no other entity may underwrite those policies on theinsurer's behalf.

Endurancedeclined to comment on the pending litigation.

Sawgrassattributed all of its$40.6 million in direct premiums written in 2015 to Cladium. But the company Sawgrass Management Advisorsproduced a majority of its new and renewal business, beginning Feb. 1.

SawgrassManagement Advisors and Cladium accounted for $4.6 million and $2 million, respectively,of the insurer's direct premiums written in the first quarter. Sawgrass ranked amongFlorida's 60 largest personal and commercial residential insurers, based on its22,340 policies in force as of March 31.