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Gen Re sues Arch over employee defections

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STAMFORD, Conn.—A state court judge has issued a restraining order against Arch Capital Group Ltd. and four former managers of General Reinsurance Corp. who left to join Arch earlier this year.

The Connecticut Superior Court judge granted the temporary order last week after Stamford, Conn.-based Gen Re filed suit against Bermuda-based Arch and the former employees, who had worked in Gen Re's facultative reinsurance department, alleging the managers "plotted to sell to the highest bidder the Gen Re business for which they were responsible," court documents say.

The managers—Jennifer Apgar, Philip Augur, Steven Franklin and Kenneth Vivian—in April orchestrated an "en masse departure" that included 26 other Gen Re employees, Gen Re alleges.

The suit seeks unspecified compensatory and punitive damages plus costs.

The defendants "engaged in a secret, long-standing plan to misappropriate, disloyally and maliciously, Gen Re's proprietary information and trade secrets, as well as raid Gen Re's (property facultative) employees" in an effort to transfer the business to a competitor for their own benefit, the lawsuit states.

Arch "aided and abetted their breaches of fiduciary duty in order to enter a business in which (Arch) had never competed," the suit says.

Gen Re formed its property facultative reinsurance division in 1956 and has spent "hundreds of millions of dollars to develop (it) into the successful and valuable business it is today," the suit says.

Gen Re wrote $600 million in property facultative business last year during the height of the hard market, and has written about $400 million in business this year, according to a Gen Re spokesman.

The senior managers who left the company accounted for just more than 10% of Gen Re's global facultative staff, the spokesman added.

The spokesman said the departures to Arch, though, will have no impact on its business. "We aim to retain it all and we think we will because we think we're going to win (the lawsuit) on the merits."

Gen Re has "long-standing relationships" with its clients. "We bring triple-A paper to the table and people like doing business with Gen Re," the spokesman said.

A spokesman for Arch could not be reached.

Arch's 10-Q report for the quarter ended March 31, which was filed May 10 with the Securities and Exchange Commission, says it launched a property facultative reinsurance operation in April "headed by a very experienced and well-respected industry veteran" that will be based in Farmington, Conn., with branch offices across the United States and Toronto.

"We view this business as a long-term opportunity that expands our specialty underwriting platform and will further diversify our book of business," the filing says.

Mark Rouck, senior director with Fitch Ratings Ltd. in Chicago, commented on the case. "Obviously, it's not a good thing when you've got employees you value going to a competitor, but whether or not it's going to have a material effect on Gen Re, it's pretty hard to say, and probably pretty unlikely, given the size and strength of that company."

In terms of the departures' impact on the overall market, Mr. Rouck said, "You've got perhaps one source of capacity being replaced by another, and it's difficult to say, really, whether all that business is going to follow the underwriters or not."

However, John L. Ward, chief executive officer of Cincinnati-based Cincinnatus Partners L.L.C., an advisory firm specializing in the insurance industry, said, "I would say 30 people with expertise in this specialty area would be a big deal to just about any size operation, because when it comes to property facultative reinsurance, there's a relatively small talent pool that is in great demand globally."

"I could see there would be ripples as a result," Mr. Ward said.

The complaint is based on an initial investigation over the past month that included interviews with current Gen Re employees and a preliminary forensic review of e-mails on selected company computers, court documents say.

"The investigation to date no doubt reveals the tip of the iceberg, because the individual defendants were very careful to do most of their plotting through face-to-face meetings or via their personal e-mail accounts," the suit says. "In addition, defendants sought to cover their tracks by deleting files and wiping clean at least one Gen Re hard drive. In spite of these actions, the substance of their plot is now transparent from the initial evidence Gen Re very recently uncovered."