Torus Acquires Renewals of C.V. Starr for Continental Europe; Interview with Int’l. CEO O’Donohoe

By | December 5, 2011

Torus announced that it has entered into an agreement with Starr Underwriting Agents Limited whereby Torus Syndicate 2243 acquires the renewal rights to CV Starr Syndicate 1919’s Continental European Marine, Casualty, Financial Lines and General Property business, effective January 1, 2012.

“Both Torus Syndicate 2243 and CV Starr Syndicate 1919 are managed by Starr Managing Agents Limited (SMAL). As part of their ongoing business relationship,” said the announcement. “As part of the agreement the majority of the Continental European based employees will transfer from Starr Underwriting Agents Limited to Torus Insurance Marketing Limited, which is an authorized cover-holder on behalf of Syndicate 2243.”

Torus will also be appointed as cover-holder for Syndicate 1919 by SMA in respect to the transfer of business lines, subject to regulatory approval. “This ensures that all relevant business previously insured by Syndicate 1919 and the business being renewed into Syndicate 2243 will be handled by the same Underwriting and Claims teams in Paris, Cologne, Rotterdam and Milan.”

The bulletin also noted that the transaction, as well as Syndicate 2243’s business plan for 2012, has been approved by Lloyd’s. SMAL will “remain responsible to Lloyd’s for the execution of the business plan and the management of Syndicate 2243 as well as Syndicate 1919. To ensure continuity for clients, all January 1, 2012 renewals will continue to be written by CV Starr Syndicate 1919.”

Torus Group Chief Executive Clive Tobin stated that the acquisition “further underlines Torus’ commitment to becoming a leading specialty insurer through strategic growth in key markets worldwide, as well as our stated commitment to the development of our Lloyd’s platforms.”

Dermot O’Donohoe, Chief Executive of Torus International, added: “This transaction brings to Torus a team of highly experienced underwriters who are specialists in their local markets, furthering the Torus ethos to offer local insurance solutions in each distinctive European market. In retaining the existing underwriting teams, who will continue to issue S&P A+ rated paper, Torus can ensure continuity to existing insureds.”

Chris Hancock, Active Underwriter for CV Starr Syndicate 1919 and Torus Syndicate 2243 indicated that the agreement “enables Starr to focus on expanding our operations in rapidly growing regions around the world. At the same time, our clients will experience no disruption; they will benefit from the same strong team of Underwriters and Claims handlers under the continued supervision of Starr Managing Agents Limited.”

Torus’ latest acquisition fits a pattern that has allowed the relatively new company – it was established in 2008 – to expand exponentially over the last three years. It now employs over 500 people in 14 offices in Europe, the U.S., Brazil and India. Its gross written premiums will almost certainly be more the $1 billion for 2011.

Tobin, who stepped down from his position as XL’s Chief Executive of Insurance Operations in April 2008, has described Torus as a “different kind of insurance company,” and, judging from its success, it may well be.

In an interview with the IJ, while the transaction was in negotiation, O’Donohoe gave some insights on Torus’ strategy, and how it plans to continue future expansion.

He explained that Torus was established by First Reserve Corp. to focus primarily on the energy business; however, it broadened its activities in 2009, when Tobin “refocused the company on becoming more of a specialty player, and to attempt to do it on a global basis.” O’Donohoe was part of that initiative. He joined Torus in September, 2009, as it expanded into other lines of business, as a way of lessening its dependence on the “volatile” energy sector.

Part of the expansion led to First Reserve handing over Lloyd’s syndicate 2243 to Torus in December, 2009, which it has subsequently expanded from its main energy lines to include “some construction and casualty reinsurance and, more recently, some marine lines.” It writes quota share reinsurance business for C.V. Starr for on and off shore energy.

In June of 2010 Torus acquired the insurance business of Glacier Insurance, AG, a part of Glacier Re, giving it access to aviation, space, war, terrorism, property coverage, “more casualty and some marine.” It also contributed around $300 million in additional premiums written, as well as offices in Zurich and Cologne. Torus thus acquired both offices and teams of people to handle the additional business.

It also coincided with the establishment of a U.S. subsidiary, headquartered in New Jersey, to serve the U.S. specialty lines market. In addition to the lines already in place, the U.S. operation expanded into excess casualty, D&O coverage, professional liability and “some health care, which has now been broadened to include surety.” Torus has both an admitted and an E&S carrier in the U.S. and maitains offices in Chicago, Houston, San Francisco and Atlanta.

O’Donohoe discussed the pros and cons of being domiciled and doing business in Bermuda, where many companies, including Torus, have wound down operations and established new platforms to write business. Excluding the book of business from the recently acquired Broadgate syndicate 1301, Torus no longer writes any property catastrophe coverage out of Bermuda. “Our Bermuda presence is pretty modest now,” he said, although the holding company that manages the operating companies is still domiciled there.

Asked what affect the present economic conditions have had on Torus’ main markets – Europe and the U.S. – O’Donohoe said: “It hasn’t had too much of a direct impact at this stage. It’s very hard to gauge whether any insurers’ balance sheets are exposed, at least potentially, to investments that may depreciate.” However, he added that “none of the major players, as yet, have indicated that they have an over exposure to sovereign debt from one country to another.”

But the environment, the uncertainty and the recession means that “most of our clients are suffering from the downturn.” That situation, combined with the impact of this year’s natural catastrophes, as well as the lower investment income and economic uncertainty in terms of future economic growth, has created a “squeeze on margins” for the insurance industry.

However, he also pointed out that there is “one upside” to the downturn on investments, as it has led companies “to return to profitable underwriting,” which will lead to “better pricing on the sort of risks that you want to write.”

O’Donohoe also pointed out that the “insurance industry has come through the banking crisis and the subprime [situation] in the U.S. fairly well as an industry,” and, although company share values may be below book value, that doesn’t mean that the industry as such is in a poor financial condition. He stressed the importance of underwriting operations, and in “managing the business and the distribution” as being crucial to “getting a return on your investment.”

As a result companies are taking care to place their capital where it can provide the best return, as well as “making sure that they have partnerships with the right kind of reinsurers to eliminate any potential volatility from their results” – a position he described as providing “moderate growth.”

Moreover the current situation does provide greater opportunities for growth through merger and acquisitions. “It is a good time, potentially, to acquire operations, or books of business, or teams of people, and sort of bolt them on, so you can grow via acquisition, rather than organically,” he said. This is the strategy Torus has been following, notably with the acquisition of Glacier Insurance and Broadgate, and now with the agreement with Starr Underwriting. “It means you can very cost effectively improve teams of people and books of business without having to grow organically.”

Although many publicly traded companies are currently below their book value, O’Donohoe said that “very few deals are actually done at less than book [value].” In some cases, however, a company might actually be worth more – to a potential buyer – as a runoff business.

The situation is further complicated by the impeding imposition of the Solvency II regulations in the European Union, which will also impact the U.S. . “That [Solvency II capital requirements] has forced a number of Lloyd’s players, in particular subscale Lloyd’s players, to realize that actually they need to be part of something bigger, or grow to critical mass, or indeed to get more capital.” Whatever happens under Solvency II, “it certainly won’t result in less capital for the industry,” which “makes capital management a huge issue going forward.” More will be needed both to meet the capital requirements, and to pay for the additional costs accounting work and capital model implementation for Solvency II. O’Donohoe estimated that on average a Lloyd’s syndicate would spend “three to five million pounds [$4.7 to $7.8 million]” annually, directly related to the regulations.

As a result more Lloyd’s players, such as Broadgate, may become available. He mentioned Jubilee, Sagicor and Flagstone as showing interest in exiting the Lloyd’s market. “Lloyd’s is attractive, but unless you reach scale there, is it really attractive?” The situation will put added pressure on smaller syndicates and “niche players,” and will continue the trend at Lloyd’s for further consolidation, which has been happening since 1994, when it first admitted corporate capital to back its syndicates.

One of the key factors will be how business is distributed. O’Donohoe explained that while “insurers can hold a little bit more of the balance of power between distribution, now you’ve got a situation where everyone’s trying to access business, and the distributors are sitting in the middle, and they’re controlling the business, etc. And that’s kind of the key. The battle for distribution over who controls it over the next couple of years is actually going to be the key as to who’s going to succeed and who’s going to fail going forwards.

“The issue right now is it’s at the worst point of the cycle in terms of where rates are, and you’ve also got a client base who are suffering because of the double recession. So generally the whole industry’s margins are being squeezed.” This applies across the board – Europe, the U.S., the wholesale markets and Lloyd’s.

In closing O’Donohoe touched on the spiky issue of contingent commissions, and the push by brokers to obtain more compensation. “They’re actually trying to demonstrate to their clients that by bringing more efficiency as to how they manage the companies, how they access capacity, that ultimately it’s beneficial to the client.” Methods include savings on price and more innovation by accessing specialized niche markets, which ultimately results in the “client getting more value.

“Theoretically, from the insurers’ point of view, if the brokers are bringing in the sort of business that you think you want to write, or, you have a particular expertise in, then in a perfect world, you should write more of the business that you want.” However, as the cycle is at its low point and margins are being squeezed, this puts further pressure on the insurers. As a result, he said Torus, like most insurers, concentrates eon trying to get what we think is the best possible business flow, where we can get the best margin, and bring benefits to getting [more] efficiency.” The costs of obtaining those benefits are ultimately borne by the insurers and their clients.

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