RISX equity index surge over past quarter benefits proven leaders

Successful leaders and smart follow-onlys likely to benefit at the expense of a middle market squeeze.

With much mention in the media of a challenging 1.1 renewal period, the logical conclusion is of an appetite mismatch between the coverage reassureds want and the types of risk capital now finds unattractive. The causes of this range from recent experience (cat losses and consequent trapped capital) to innate caution as economies enter recession, with the attendant fear of increasing moral hazard claims.

Yet alongside this entirely reasonable caution and withdrawal from certain specialty and reinsurance lines, we have seen a surge in both the absolute and the relative value of the RISX equity index. This index is risk-weighted and comprises the listed parent companies that own and control syndicates at Lloyd’s, illustrating an ‘as-if’ share price for Lloyd’s. The following graphs show RISX performance absolute and relative to the MSCI World Index alongside the Lloyd’s market reported pro forma returns on capital:

The last time the specialty (re)insurers’ share prices surged relative to the MSCI World Index was in 2015, when capital markets began giving credit for sustained industry returns on capital, illustrated by the high teens returns reported for the Lloyd’s market as a whole. Capital, particularly alternative capital, flowed freely into the industry, contributing to suppressed improvements in rate adequacy. This time, investors appear much more discerning in where their capital is deployed.

The announcements of recent specific ILS issues and sidecars suggests capital markets’ risk appetite remains strong but there is a flight to quality with only proven underwriters and managers being entrusted with new capital. This should benefit proven successful leaders and also the smart follow-onlys. It may, however, continue to squeeze those in the middle who cannot differentiate themselves better.

About the authors…

A co-founder of ICMR, Markus has spent 20 years in both insurance and capital markets. He is the former head of analysis at Lloyd’s, where he set up a market wide analytical performance and price monitoring framework. Markus was head of pricing at an ILS joint venture with Lehman Brothers and Vario Partners, structuring innovative risk transfer solutions into capital markets. Markus is an expert in modelling non-life insurance portfolios and probabilistic programming, and an Honorary Visiting Fellow at Bayes Business School, City, University of London.

A co-founder of ICMR, Quentin has over 30 years Lloyd’s and capital markets experience, including directorships of managing agencies and head of research at Lloyd’s where he co-authored Lloyd’s Performance Management template in the aftermath of Lloyd’s WTC losses of 2001, helping implement Lloyd’s capital modelling and risk management. Quentin co-founded an ILS joint venture with Lehman Brothers as well as co-founding Bermuda-based ILS firm, Vario Partners. He has worked in insurance private equity, in investment banking and in actuarial consulting.