Following big cat losses, Flagstone Re’s decision to sell some of its operations and get back to basics makes a lot of sense

Flagstone Re is going back to basics. Having expanded out rapidly into insurance and the Lloyd’s market, the company has, following a string of catastrophe losses this year, decided to sell its Lloyd’s, Caribbean and South African operations.

The company will now focus on the lines of business where it made a name for itself in its formative years: property, property-catastrophe and specialty reinsurance.

The move makes a lot of sense. Far better to acknowledge that it had overstretched itself, take corrective action and move forward, than struggle on and risk disaster.

The company’s travails are also a lesson that diversification is not always a good thing. Investment portfolio theory teaches us that it is best to have a good mix of assets so that any losses in one area can be covered by profits in others.

But this only works if all areas are going at full strength. If you expend your efforts branching out in several areas and the unexpected hits while you are
still building up certain elements, the benefits are not there to cushion you.

Some analysts and observers have accused reinsurers of diversifying for its own sake - simply because this conforms to the most prevalent business model in the industry. It is perfectly possible and acceptable to be a successful property-catastrophe writer without having a presence at Lloyd’s, without a string of international offices and without any offsetting lines of business such as casualty.

Of course, there will always be a place for large, one-stop-shop reinsurers such as Munich Re and Swiss Re on buyers’ panels.

For some risks, no one else will fit the bill. But cedants and brokers also revere companies that write a small selection of products extremely well. While handy, the corkscrew on a Swiss army knife is no match for a dedicated tool.

Ben Dyson, assistant editor, Global Reinsurance