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Are you sticking to your knitting?

Dear Friend,

It’s strange how fashions come and go in business. The only certainty is that once every generation fashions do an about turn and go back to where they came from.

Today’s Swiss Re takeover of GE insurance solutions only makes the whole process more fascinating.

In the post war era — corporations were all about building diversity — big groups all aimed to become conglomerates. The Bill Gates’ of the day all set out to own vast swathes of non-correlating industries, with the thinking that extreme diversification was the best way of protecting a group from putting too many eggs in one basket.

Hence an industrial machine-maker was added to a raw materials producer, which was then blended with a consumer goods group and a major retailer:- a bank was bolted on and probably an insurance company was welded on for good measure. A good year for banking could offset a poor year for the raw materials and vice-versa. Theoretically this grouping would produce predictable earnings growth.

This conglomerate trend probably reached its peak in the 1960s in the States when a few high-profile collapses knocked some of the sheen off the strategy. However, this way of organising big business still held sway until the mid-eighties, when the process suddenly swung into reverse.

Instead of looking at the positives of diversification, analysts started to concentrate on the negatives — instead of being prudent it now began to mean that you were a bit of a “jack of all trades” and probably a master of none.

The new mantra became “sticking to core competences” and concentrating on markets and sectors in which you were most successful and most likely to dominate and dictate terms. London stock market slang called this process “sticking to your knitting”.

Suddenly demergers and spin-offs became the order of the day. The insurance industry was no stranger to this trend — although, due to its innately conservative nature, it was a little slower on the uptake. The new style really kicked in back in the hard market years of 1992-94. Then pretty much overnight all the insurance composites stopped dabbling in London market business and firms started the long process of demerging their reinsurance and primary operations.

The creation of the Bermudian monoline catastrophe reinsurer also occurred at this time. The powerful logic was to be a specialist and a leader at what you do — and it makes an awful lot of sense. Allstate, Allianz, AXA, Aviva, AIG and Zurich could concentrate on doing what they do best, whilst leaving specialist reinsurers to be strong at what they did.

The funny thing now is that diversification is back on the agenda. Monoline cat players are deeply unfashionable, especially with the ratings agencies. In fact start-up supremo extraordinaire, Don Kramer, told us only last week that he thought that the monoline model was pretty much dead.

But the great thing about fashion in business is that it is there to be ignored.

Look at GE — perhaps the last emperor from the old conglomerate world — and a company whose interests stretch from aeroplane engines through to store-card finance. Only now is it is exiting the insurance business — decades after similar conglomerates broke themselves up.

Fashion doesn’t pay the bills — in the end the only thing that matters is results. If the insurance results had been better GE would probably still be in the (re)insurance game and happy with its investment.

So if you want to start a monoline property catastrophe reinsurer — I say forget what everyone else thinks and go for it! Now is as good a time as any other — and you’ll probably be back in fashion in a decade or two.

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