RISX: Equity index based on Lloyd’s of London
The ICMR (Re)Insurance Specialty Index
The ICMR (Re)Insurance Specialty Index (RISX) index is a benchmark for investments within the Lloyd’s of London insurance market (Lloyd’s).
The RISX index measures the equity performance of publicly listed global insurance and reinsurance companies that control syndicates at Lloyd’s. RISX constituent companies are weighted based on their premiums written at Lloyd’s and globally, not on their market capitalisation.
The RISX index is the first of its kind to measure the performance of companies much more closely associated with specialty and major catastrophe risk than other equity indices, which tend to include life companies and brokers. This means the RISX index is far closer to describing the performance of diversified alternative insurance assets than any other published index. It also provides a benchmark for investments made at Lloyd’s of London.
The RISX index has been created by Insurance Capital Markets Research (ICMR), the analytic and consulting firm created by two former heads of department (research and analysis) at Lloyd’s.
The RISX Index Summary
- World’s first equity index based on a single specialty (re)insurance market
- A barometer for changes in perceived value at Lloyd’s of London
- Based exclusively on listed companies’ participation in the Lloyd’s of London insurance market, the oldest continuous trading specialty (re)insurance market in the world
- A real-time lead indicator of how specialty (re)insurance earnings accrue from premium and claims over time, implying real time price to book value multiples across the Lloyd’s of London insurance market
- Specialty (re)insurance is an asset class with lower correlation to other asset classes because of the fortuitous nature of claims (e.g. hurricanes or earthquakes), making it a diversified asset within a portfolio
- A diversified index over the universe of listed companies that participate at Lloyd’s of London
- Specialty (re)insurance is a key Environmental, Social and Corporate Governance (ESG) contributor through transferring risk and facilitating economic expansion
The RISX index back test is as far as mid-2006 following Lloyd’s of London publishing full GAAP annual accounting financial statements from year-end 2005. The vertical stripes on the chart above represent major insurance and reinsurance claims events in excess of US$10bn insured global loss. The reaction of the RISX index to real-time catastrophe events can be seen, with the impact of COVID-19 having the most significant negative impact.
About Specialty (Re)insurance
Specialty (re)insurance focuses on large and complex risks, principally commercial risks such as oil platforms, satellites, office complexes, windparks, airline fleets and cruise liners. It also encompasses reinsurance, which is the protection insurance companies themselves purchase to reduce their aggregation risk, e.g. from hurricane damage claims.
Specialty (re)insurance business tends not to behave like a retail insurance business with its large, homogeneous groupings of broadly similar risks, e.g. home or motor policies.
The profitability of specialty (re)insurance underwriting is driven by both premium pricing levels and the frequency/severity of catastrophe claims activity. When premium pricing levels are generally high (a hard market), even the occurrence of some severe catastrophe claims will not prevent overall profitability. When premium pricing levels are generally low (a soft market), the absence of catastrophe claims can still lead to profitable outcomes. However, the occurrence of catastrophe claims in a soft market can compound capital destruction and balance sheet weakening.
Successful specialty (re)insurance companies tend towards a diversified portfolio of risks, backed up by continual modelling of potential impacts from theoretical catastrophe claims events. This enables them to understand their balance sheet exposures in real time. Because many of the risks underwritten are so large and complex, the vast majority are underwritten by more than one specialty (re)insurance company - the so-called subscription market model. One company will price the whole risk and will then underwrite a percentage of it, the remainder being submitted to other specialty (re)insurance companies to follow with smaller percentages on the same terms. In this way, large risks can be underwritten in their entirety by a group of specialty (re)insurance companies, not leaving the insurance buyer overly exposed to just one such company. It also means that, over time, differences in underwriting performance between specialty (re)insurance companies exhibit more gradual shifts than sharp swings. This is because these companies often share the same risks year after year.
In recent years, these companies’ appetite for certain exposures has been outstripped by the appetite of certain capital markets investors keen to access cash flows from specific risks. These relate principally to catastrophe bonds.
Many specialty (re)insurance companies hedge their own risk through issuing catastrophe bonds in the growing Bermuda catastrophe bond market, a market of over US$100bn of exposure limits. This makes many specialty (re)insurance companies both aggregators of risk and traders of risk. Capital markets investors’ interest in these types of specialty (re)insurance risk is driven by it generally being seen as a diversified asset class with lower correlation to investment market risk.
More comprehensive contextual analyses of specialty reinsurance performance can be found in the S&P 2020 Global Reinsurance Highlights Report. Those for specialty insurance can be found in the Deloitte Insurance Industry Outlook.
About Lloyd’s of London
The Lloyd’s of London market is the leading global speciality insurance and reinsurance marketplace, underwriting complex and large risks. Its annual premiums are in excess of £35bn (US$50bn) and it sets global pricing on specialty risk many times this amount.
The market comprises over 50 individually capitalised and regulated businesses. In addition, there is a policyholder protection fund to which all businesses subscribe funds annually. This is to pay valid claims if any one of the market’s regulated businesses becomes unable to.
Consequently, policies issued are Lloyd’s of London policies, not policies of the individual businesses. Lloyd’s maintains a single market-wide financial strength rating from each of the largest global rating agencies as well as a network of international licences to trade around the world. In over 300 years of continuous operation, Lloyd’s boasts that it has never failed to pay a valid claim.
Today, over 80% of Lloyd’s regulated businesses are owned by publicly listed global insurance and reinsurance companies, and some own more than one Lloyd’s regulated business. Lloyd’s, through its position in the London insurance market, remains a strategically important platform in these companies’ global operations.
Direct capital investment in Lloyd’s is a heavily regulated activity with a number of strict requirements to fulfil as well as the cost of entry. Lloyd’s has provided attractive and diversifying returns to many of those investors who have had the resources and time to become regulated Lloyd’s members (Names). However, invested capital can remain at risk for a number of years even after active investment at Lloyd’s has ceased.
The risks underwritten at Lloyd’s are specialty in nature and are predominantly large and complex. The breakdown of premium by class of business and by geographic territory is given below:
|US and Canda||Other America||UK||Europe||Central Asia & Pacific||Rest of the World||Total|
At present, Lloyd’s capital providers fall into the following categories:
|Lloyd's Capital||US insurers||Bermudian insurers||UK insurers||Rest of the World insurers||Japan insurers||European insurers||Private capital||Worldwide non-insurance||Middle/Far east insurers|
The heavily regulated nature of specialty (re)insurance in general, and the Lloyd’s of London market in particular, requires changes of ownership of businesses at Lloyd’s to be vetted and approved. Planned growth within Lloyd’s must also be approved, as Lloyd’s seeks to protect its brand, financial strength rating and global network of licences.
Since 2003, Lloyd’s internal performance management directorate has monitored the performance of the marketplace closely and controls who can own a Lloyd’s business, who can start a business and who can grow its business. This approach has attracted and encouraged more professional global insurance businesses to participate and invest in the Lloyd’s market.
Further information on Lloyd’s of London, its history, performance and regulation can be found at www.lloyds.com.
About the ‘RISX’ Index
The RISX index brings together all the listed global specialty (re)insurance companies that trade in the Lloyd’s of London market into a single equity index with daily pricing. It uses a transparent weighting algorithm using published data from the constituent companies and their Lloyd’s of London subsidiaries to create a proxy for Lloyd’s of London’s aggregate performance.
The following chart compares underwriting performance of the RISX index against the reported Pro-Forma aggregate of the Lloyd’s of London market. The metric used is the insurance industry standard metric of combined ratio, which comprises the total calendar year claims plus the total calendar year costs (both business acquisition costs and operating expenses) divided by the calendar year premium receipts.
The above chart shows the similarity in combined ratio performance of the reported Pro-Forma aggregate Lloyd’s of London market over the last 15 years when compared to the backtest of the RISX index. This is not surprising, given the existence of the subscription market, mentioned above, where multiple specialty (re)insurance companies share different percentages of the same risks, whether through their Lloyd’s of London subsidiaries or otherwise, year after year.
The peaks in the chart correspond with years in which there were significant catastrophe claims - 2005 hurricanes Katrina, Rita and Wilma; 2011 Chile earthquake, Thailand floods and Fukushima earthquake/tsunami; 2017 hurricanes Harvey, Irma and Maria.
Given the similarity in combined ratios, the RISX index also shows similar return on capital characteristics to the reported Pro-Forma aggregate Lloyd’s of London market over a similar time period.
The above chart shows the comparable returns on capital for the RISX index and the aggregate Lloyd’s of London market. The peaks from the previous chart are matched by troughs in this chart for the same reasons.
A further reason for the similarity in returns is the capital efficiency of both Lloyd’s of London and specialty (re)insurance companies. Neither Lloyd’s of London businesses nor specialty (re)insurance companies tend to retain capital on the balance sheet that won’t be used to support future underwriting in the short term. Over time, significant use is made of dividends, special dividends and/or share buy-backs.
Churn within the RISX index over time has typically occurred where a constituent company has either sold their Lloyd’s business, either to another constituent company or via a take-private transaction (eg an MBO or private equity acquisition) or where a previously private Lloyd’s business has been acquired by a listed specialty (re)insurance company. The following chart shows how the total number of constituents in the RISX index has evolved over the course of the backtest.
Currently, over 80% of Lloyd’s of London’s capital is provided by companies represented in the RISX index. These companies’ Lloyd’s subsidaries also account of over 80% of Lloyd’s total underwriting premium.
The RISX index has been created as a tradable equity index. Constituents are weighted by trailing net premium, adjusted where necessary to ensure the tradability of each underlying constituent when traded as part of an index portfolio trade.
The methodology uses triple relative weighting; constituent companies relative to each other, constituent companies relative to their own syndicates and, finally, syndicates relative to the Lloyd’s market aggregate. The result is that those constituent companies which trade predominantly through their Lloyd’s subsidiaries will have higher weightings compared to those for whom their Lloyd’s subsidiaries are incidental to their global premium volume. Thus, the RISX index is not based on market capitalisation.
The index is reviewed quarterly—in March, June, September and December—with the objective of reflecting change in the underlying ownership and control of businesses in the Lloyd’s of London market in a timely manner, while limiting undue index turnover.
The RISX index is owned and provided by IC Capital Markets Ltd and is administered, calculated and distributed by Moorgate Benchmarks Ltd. The index is designed to be compliant with both the IOSCO Principles for Financial Benchmarks and the UK and EU Benchmarks Regulations.
Moorgate is regulated by the Financial Conduct Authority as a registered benchmark administrator under the UK Benchmarks Regulation and by BaFin as a registered benchmark administrator under the EU Benchmarks Regulation.
Governance of the index is provided through the Moorgate Benchmarks Index Management Committee, which is responsible for the management and implementation of the methodology rules, their continuing fitness for purpose and any periodic amendments thereto. It is also responsible, in the event of the rules not providing a clear process for the management of any situation, for determining the process to be followed.
- The RISX index creates the world’s first specialty (re)insurance equity index and is a real time benchmark for investments in the Lloyd’s of London insurance market
- The index is based exclusively on listed companies’ participation in the Lloyd’s of London insurance market, the oldest continuous specialty (re)insurance market in the world
- The index is a key/lead indicator of how earnings from this sector accrue from premium and claims over time, and implies real-time price-to-book value multiples across the Lloyd’s of London insurance market
- The index represents a diversified universe of listed companies (c.30) that participate at Lloyd’s of London
- The index offers an alternative benchmark for specialty (re)insurance-driven results that is more targeted than existing generalist insurance equity indices
- Specialty (re)insurance is a key ESG contributor through transferring risk and facilitating economic expansion
For information about licencing the RISX index, please contact:
Insurance Capital Markets Research (ICMR, the trading name of IC Markets Research Ltd), is a specialist analytic and consulting firm, focusing on specialty (re)insurance performance and capitalisation. It was founded by Lloyd’s of London’s former Heads of Analysis and Research, Markus Gesmann and Quentin Moore. Gesmann and Moore were instrumental in the establishment of Lloyd’s highly regarded performance management framework. Their teams developed and established much of Lloyd’s performance reporting and data-driven assessment tools used by Lloyd’s internally to this day.
Having also worked together in investment banking, capital markets and insurance-linked securities, they founded ICMR in early 2020 as an incubator for analytics, investment and academic research in specialty (re)insurance.
About Moorgate Benchmarks Ltd
Moorgate Benchmarks are experts in designing, managing and calculating indices for clients; streamlining operations using leading-edge technology; and implementing best practice governance systems to meet EU Benchmarks Regulation.
Moorgate Benchmarks was founded in 2018 and is independent and employee-owned. It has one minority shareholder, ETFS Capital. It offers real-time index calculation and iNav / IOPV calculation services tailored to companies’ needs, regardless of methodology or timezone used, and regardless of index, related data or underlying data source used. Using highly flexible and limitlessly scalable infrastructure, Moorgate Benchmarks is authorised under both the UK and EU Benchmarks Regulations, and compliant with the IOSCO Principles for Financial Benchmarks.
This document was prepared by Insurance Capital Markets Research (ICMR, the trading name of IC Markets Research Ltd), including all statistical tables, charts, graphs or other illustrations contained herein, unless otherwise noted. ICMR is not a legal, tax or accounting adviser and makes no representation as to the accuracy or completeness of any data or information gathered or prepared by ICMR and contained in this document.
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This document is not intended to provide the sole basis for any evaluation by you of any transaction, security or instrument. The data and analysis provided by ICMR herein or in connection herewith are provided “as is”, without warranty of any kind whether expressed or implied. In no event will ICMR be liable for loss of profits or any other indirect, special, incidental and/or consequential damage of any kind, howsoever incurred or designated, arising from any use of the analysis provided herein or in connection herewith. The results presented herein are subject to significant variability. Any opinions that ICMR publishes may be wrong and may change at any time.
The information contained in ICMR publications is not, and should not be read as, an offer or recommendation to buy or sell or a solicitation of an offer or recommendation to buy or sell any securities. ICMR publications are not, and should not be seen as, a recommendation to use any particular investment strategy.
Neither ICMR, nor Moorgate Benchmarks nor RISX are associated or affiliated in any way with Lloyd’s of London or the Society of Lloyd’s or the Corporation of Lloyd’s.