Global specialty (re)insurance equity index holds up three times better than overall market in YTD

The global specialty (re)insurance-focused RISX index – which targets publicly listed companies with underwriting subsidiaries at Lloyd’s – continues to outpace the overall market with a 6.8 percent year-to-date fall in net total return terms, compared to an 18.2 percent drop on the MSCI World (Net) USD index.

Launched in May 2021, ICMR’s RISX index is an equity benchmark for the global specialty (re)insurance sector.

It measures the performance of companies much more closely associated with specialty and major catastrophe risk than other equity indices, which tend to include life insurance companies and brokers.

The benchmark demonstrates that over the long run, global specialty (re)insurance equity has proved a superior investment compared to the overall market, yielding a gain of 333.9 percent since the start of the index on 16 June 2006 versus a gain of 180.7 percent for the MSCI World USD index, both in net total returns terms.

It also shows that the global special (re)insurance industry was less affected by the financial crisis but more impacted by the Covid-19 outbreak, an impact from which RISX share prices have not recovered as quickly as the broader market.

Indeed, 2020 saw the RISX index record a fall of 12.2 percent in terms of net total returns against a 15.9 percent gain on the MSCI World (Net) USD index – a disparity which persisted the following year as both benchmarks recorded similar expansions.

However, RISX share prices have held up almost three times better than the overall market since the start of 2022, which is helping to reduce the relative gap opened since the outbreak of the pandemic.

The index has recorded a net total loss of 6.8 percent for the year to date, compared with negative returns on the MSCI World of 18.2 percent over the same period.

A lens from the investor perspective

The RISX index is based on listed companies with underwriting subsidiaries at Lloyd’s which account for over two-thirds of Lloyd’s premium and underwrite over 25 percent of all global non-life (re)insurance premiums (equivalent to around $500bn annually).

It measures their aggregate equity performance, weighted by their premiums written both at Lloyd’s and globally.

Rather than being weighted by market capitalisation, the RISX constituents are premium weighted to better replicate the underlying risk profile of specialty (re)insurance.

This produces an index with 30 constituent companies based across the globe that mimics the risk profile of Lloyd’s.

The index originated from Insurance Capital Markets Research (ICMR), the analytic and consulting firm created by former heads of research and analysis at Lloyd’s Quentin Moore and Markus Gesmann.

Two versions of the RISX index are calculated daily: a price return index (ticker: RISX) and a net total return index (ticker: RISXNTR) i.e. with dividends reinvested net of withholding taxes.

2022 price return performance

RISX’s design as a tradable equity index allows for an alternative benchmark for specialty (re)insurance-driven results that is more targeted than existing generalist insurance equity indices.

Consequently, the price return version of the index can be compared against popular stock market benchmarks to provide a good picture of the relative price performance of global specialty over a certain period of time.

As of 7 September 2022, for example, the index was down 8.6 percent year to date compared to a fall of 16.5 percent for the S&P 500.

The index also fared well against European markets, with the French CAC, the German DAX and the FTSE 250 recording year-to-date falls of a much greater magnitude than RISX.

When pitted against available insurance benchmarks, however, the performance of RISX was less impressive.

RISX fared only marginally better than the Stoxx Europe 600 Insurance index, which fell 9.8 percent over the first eight months, and was far behind the 0.7 percent increase for the S&P 500 Insurance benchmark (which includes major life insurance companies as well as brokers).

Lloyd’s valuation through the insurance cycle

The RISX index’s focus on listed global (re)insurance companies with underwriting subsidiaries at Lloyd’s has led ICMR to depict it as a measure of the value of One Lime Street itself.

Indeed, by aggregating the price data of syndicates’ publicly listed owners in a way that proxies Lloyd’s risk profile, RISX is able to provide a shadow price for Lloyd’s as if it were a listed company.

But as ICMR argues, other metrics like price-to-book (P/B) values can be aggregated in the same way using the RISX weights to gain more insight into Lloyd’s valuation and measure its evolution over time.

Indeed, by comparing the distribution of trailing P/B multiples of the publicly listed owners of Lloyd’s businesses (at the end of March of each year) with the aggregated RISX portfolio P/B value as a proxy for the Lloyd’s market, ICMR demonstrates that – apart from the most recent period – the RISX P/B metric has been better than the median performance of the constituents.

ICMR interprets this as a testament to Lloyd’s central decision-making over which syndicates it allows to grow or shrink in its marketplace but also a demonstration that – for most businesses – owning a Lloyd’s underwriting franchise enhances its value proposition.