RenaissanceRe Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 10 speakers on the call.

Operator

Good morning. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Second Quarter 2023 Earnings Conference Call and Webcast. After the prepared remarks, we will open the call for your questions. Call.

Operator

Instructions will be given at that time. Thank you. And I will now turn the call over to Keith McHugh, Senior Vice President of Finance and Investor Relations. Call. Please go

Speaker 1

ahead. Thank you, Chelsea. Good morning and welcome

Speaker 2

to RenaissanceRe's Q2 2023 earnings conference call. Joining me today to discuss our results are Kevin O'Donnell, President and Chief Executive Officer and Bob Qtub, Executive Vice President and Chief Financial Officer. First, some housekeeping matters. Our discussion today will include forward looking statements. It's important to note call.

Speaker 2

Actual results may differ materially from the expectations shared today. Additional information regarding the factors shaping these outcomes call can be found in our SEC filings and in our earnings release. During today's call, we will also present non GAAP financial measures. Reconciliations to GAAP metrics and other information concerning non GAAP measures may be found in our earnings release and financial supplement, which are available on our website atrenre.com. And now, I'd like to turn the call over to Kevin.

Speaker 2

Kevin?

Speaker 1

Call. Thanks, Keith. Good morning, everybody, and thank you for joining today's call. We are pleased to report that RenRe delivered strong 2nd quarter results that combined consistent bottom line profitability with continued top line growth. This growth was particularly robust in our property catastrophe business where we continue to observe significant rate momentum.

Speaker 1

For the quarter, we reported an annualized operating return on average common equity of 28.8 percent even with the dilution from the quarter's equity issuance. On a quarter excuse me, on a year to date basis, our operating ROE quarter. Of course, our most prominent strategic milestone this quarter was the announcement that we are acquiring quarter. AIG's treaty reinsurance platform, Validus Reid. I will highlight some of the key business reasons we are excited about this transaction.

Speaker 1

Question. Bob will then cover the financial details, including our recent equity and debt issuances to help finance the transaction. Beginning with Validus Reve, call. We are very excited to partner with AIG on this win win transaction. For RenaissanceRe, this advances our strategy as a leading P and quarter.

Speaker 1

We are gaining access to a large diversified business in a favorable reinsurance market. Validus Re has a great team and quarter. And their underwriting portfolio consists of high quality mix of property, casualty, specialty and credit lines that closely mirrors our own. Call. We expect the Validus acquisition to be highly accretive across our financial metrics.

Speaker 1

Call. For a premium overbook value of $885,000,000 we anticipate receiving a gross written premium base of $3,100,000,000 call in 2022, of which we are targeting at least $2,700,000,000 of premium, dollars 4,500,000,000 of investable assets quarter and a $250,000,000 equity investment by AIG in our common shares as well as up to $500,000,000 in our Capital Partner business. Call. At close, we anticipate receiving $2,100,000,000 of unlevered shareholders' equity, which is $1,200,000,000 lower than Validus Re's year end 20 quarter. This reduction is due to the capital efficiency we expect to bring to this business and is part of the reason this transaction quarter.

Speaker 1

Thank you, everyone. Thank you, everyone. Thank you, everyone. Thank you, everyone. Thank you, quarter.

Speaker 1

Of course, there are always risks in any transaction, but we believe we can manage them effectively. Quarter. To begin with, we are a proven acquirer and have substantial institutional knowledge managing execution and integration risk. Call. The fact that Validus Re underwriting portfolio is similar to our existing book also reduces our execution risk.

Speaker 1

We have deep familiarity call with the lines of business that they write and have the tools necessary to support the business. As a result, we expect that we can fully deploy Validus Re into our portfolio on day 1 and fully integrated into our risk management system soon afterwards, quarter. The Validus Re portfolio will also benefit from a reserve development agreement. Call. Validus Re is a strong underwriting platform and AIG should continue to profit from the attractive risk that they have underwritten.

Speaker 1

Call. As such, AIG will retain 95% of any reserve development, whether favorable or adverse. Call. We expect the Validus Reid acquisition to close in Q4 and have already begun comprehensive integration planning. Quarter.

Speaker 1

Of course, the closing is subject to regulatory approval among other customary closing conditions. I am pleased to report quarter. Since the announcement of the Validus acquisition and completion of our debt and equity raises, the rating agencies have affirmed our A plus financial strength ratings. This is a good result as it is typical for potential acquirers to be placed on negative watch due to execution and integration risk. Call.

Speaker 1

In conclusion, the acquisition of Validus Re advances our strategy at financial terms that should be immediately accretive. In addition, it extends our relationship quarter. For these reasons, I couldn't be more excited about our future or more convinced that this transaction will drive shareholder value. Quarter. That concludes my opening comments.

Speaker 1

I'll provide more detail on our segment performance at the end of the call. But first, Bob will discuss our financial performance quarter.

Speaker 3

Thanks, Kevin, and good morning, everyone. Once again, we had a very strong quarter with net income of $191,000,000 quarter. And operating income of $407,000,000

Speaker 1

This is the 3rd quarter in

Speaker 3

a row where we have reported annualized operating return on average common equity of over 28 quarter. These excellent results reflect the momentum behind each of our three drivers of profit with underwriting, fees and investments all contributing significant income for our shareholders this quarter. Today, I'd like to start by highlighting a few key takeaways from the quarter, provide an update on the integration progress for Validus call and then discuss our results in more detail. Starting with some highlights and first, we leaned into a very attractive property catastrophe market in the mid year renewals, quarter. 2nd, quarter.

Speaker 3

Casualty and Specialty had another solid quarter, reporting a combined ratio of 93%. We are pleased with the positioning of the portfolio and we continue to expect mid-90s combined ratio in 2023. And third, quarter. The income rose 65 percent to a record $57,000,000 This reflects increased partner capital under management as we grow into an attractive market and a quarter. Steady increase in performance fees from strong underwriting results.

Speaker 3

And finally, retained net investment income for the quarter was $189,000,000 quarter. This is more than double a year ago and up 13% from Q1 2023, reflecting our continued rotation into higher coupon quarter. As Kevin mentioned, we're also advancing our strategy through the acquisition of Validus Re, which we announced in May. Call. I am pleased to say that integration planning is progressing well and that we are on track to close in the 4th quarter.

Speaker 3

We established a dedicated integration team that is reviewing Validus' operating model, processes and systems so that we can bring call. Together our 2 great companies. Our work today supports our initial acquisition thesis and we are very excited about the transaction. Call. Validus is a great business with great people and this deal will accelerate our strategy.

Speaker 3

As we discussed when we announced the deal, we are paying just under $3,000,000,000 for $2,100,000,000 of unlevered shareholders' equity at close. We believe this transaction will be immediately accretive call. We're paying a premium of $885,000,000 over shareholder equity for Velas. The majority of this premium approximately 85% quarter. Where we amortized over 10 years with about 40% amortizing in the 1st 2 years.

Speaker 3

In anticipation of the Ballast transaction quarter. This quarter, we also successfully raised approximately $2,100,000,000 through public equity and debt issuances. Call. This included almost $1,400,000,000 of net proceeds from the issuance of 7,200,000 common shares at $192 per share call. And about $740,000,000 of net proceeds from the issuance of 5.75 senior notes due in 2,033.

Speaker 3

Quarter. This additional funding was on top of our already strong capital position. In addition, we will issue $250,000,000 of our common shares to quarter. At closing and intend to fund the balance of the cost of the transaction with excess cash on hand. Until we close, quarter.

Speaker 3

The additional capital we raised for the deal will have a dilutive effect on our returns. In the second quarter, this capital diluted our operating return on average quarter. Our Q2 28.88 percent quarter. Operating return on equity is particularly impressive and viewed through this lens. In Q3, we expect the impact quarter.

Speaker 3

The excess capital on our operating returns to be about 5 percentage points on an annualized basis. Moving now to our 2nd quarter results and our first driver of profit underwriting, where our total combined ratio was 80% with both segments delivering strong results. We achieved these returns against a backdrop of above average catastrophe activity and modest favorable development. Overall, gross premiums written were up 8% and net premiums written were up 18%. This quarter, we continued to manage the cycle and allocated our capital to the businesses that we believe will generate the best relative returns.

Speaker 3

We grew property catastrophe and other specialty lines considerably while continuing to reduce on other quarter. Moving now to our property segment, disciplined underwriters with differentiated cat modeling capabilities, we have Continued to focus on property catastrophe and saw very attractive opportunities to grow this class of business at the midyear renewals at improved rates. Kevin will speak more to in a few more minutes. Overall, net premiums written for the property segment were up 29 quarter. With property catastrophe net premiums written up 55%.

Speaker 3

Due to the U. S. Storm activity this quarter, we recorded $30,000,000 of reinstatement premiums in property catastrophe compared to almost none in Q2 2022. Without reinstatement premiums, property catastrophe net premiums were up 49%. Our other property book also continues to benefit from significant rate increases.

Speaker 3

Although net premiums written were down 4%, we have cut the risk in this book significantly with much of the reduction in cat exposed business. Quarter. We expect other property net premiums earned to continue to decline modestly in the Q3. For the property segment overall, we reported a combined ratio quarter. 63% with a current accident year loss ratio of 41%.

Speaker 3

So far this year, cat activity has been well above average. In the Q2, large loss events had an overall net negative impact of $45,000,000 on our consolidated results. Call. About $25,000,000 of this net negative impact came from a series of severe weather events in the second quarter. The quarter.

Speaker 3

The remaining $20,000,000 of that negative impact related to Q1 large loss events, including the Turkish earthquake. We reported a 33 quarter. Current accident year loss ratio in our property catastrophe class of business. This is up from last year, but a good result given the increased cat activity in the quarter. Other property performed well in the quarter, delivering a combined ratio of 79%.

Speaker 3

As I previously explained, call. We have been reducing exposure to cats in our other property business, while benefiting from additional rate. Large losses contributed 4 percentage points to the other property combined ratio. Quarter. We continue to expect an attritional loss ratio for the other property book to be in the low 50s.

Speaker 3

Property segment. Property catastrophe has a lower acquisition cost ratio than other property and now makes up 56% quarter. Property net premiums earned compared to 45% last year. Moving now to our casualty and specialty portfolio, quarter. We had another solid quarter reporting a 93% combined ratio.

Speaker 3

Net premiums written were up by about 8%. Quarter. Similar to last quarter, there was a lot of movement within classes of business as we grew in attractive areas, while coming off of deals that did not meet our return hurdles. Specifically, quarter. Other specialty was up significantly, while we reduced on both professional liability and credit.

Speaker 3

Net earned premiums for the segment were about $1,000,000,000 quarter. We continue to expect a similar quarterly amount for the remainder of 2023. This quarter, quarter. Reserve development in the Casualty and Specialty segment was essentially flat. We have been closely scrutinizing trends in earlier years and adjusting our reserves as appropriate.

Speaker 3

Conversely, we have not yet recognized much of the favorable trends from the more recent years as we await for the book to season. Quarter. Moving now to fee income in our Capital Partners business where fee income reached a record $57,000,000 driven by strong management and performance fees. Quarter. Management fees were up 41 percent to $43,000,000 as we grow our joint ventures to underwrite into this attractive market.

Speaker 3

We We continue to expect management fees to run at about $45,000,000 per quarter for the remainder of the year. Performance fees have largely recovered from prior quarter. Reaching $13,000,000 this quarter. Absent large losses, these fees may tick up slightly in the second half of the year to about $15,000,000 per quarter. Call.

Speaker 3

Overall, we shared $175,000,000 of our net income with partners in our joint ventures as reflected in our redeemable non controlling interests. Quarter. $234,000,000 of this amount was operating income, which was partially offset by mark to market losses. In the quarter, The Capital Partners team also raised about $350,000,000 of third party capital focused on cat bond strategies. Call.

Speaker 3

Moving now to investments. We also reported record net investment income in the quarter. Retained net investment income was up 100 and $14,000,000 to $189,000,000 and our retained net investment income return was up 2.7 percentage quarter. We have remained very defensive in the positioning of our investment portfolio. Quarter.

Speaker 3

Most of the growth in net investment income relates to our proactive rotation into higher coupon securities over the last year. Quarter. We did generate about $10,000,000 in net investment income from increased invested assets related to the public equity and debt raise associated with the Valens acquisition. Quarter. This quarter, rising interest rates led to retain mark to market losses of about $210,000,000 quarter.

Speaker 3

These higher coupons coupled with additional capital from our equity and debt raises should be a tailwind for net investment income. We expect retained net quarter. Investment income will pick up to about $220,000,000 in the 3rd quarter. Retained unrealized losses in our fixed maturity investments are now quarter. $442,000,000 or about $8.64 per share.

Speaker 3

We expect this to accrete to par over time. Quarter. Turning briefly to expenses, where operating expenses were up 11% in the quarter with the operating expense ratio remaining relatively flat. The increase reflects quarter. Our business to support our growth.

Speaker 3

As you would expect, operating expenses will increase with the Validus acquisition. However, in the near term, quarter. We will anticipate holding the operating expense ratio relatively flat. It should then tick down over time as we realize synergies from the transaction. Quarter.

Speaker 3

Corporate expenses were elevated in the quarter with about $11,000,000 related to the Validus transaction. After we close, quarter. And in conclusion, we performed very well this quarter and continued strong with continued strong contributions from each of our 3 drivers of profit. Integration planning for Validus is well underway quarter. And we have successfully executed our financing plan for the transaction.

Speaker 3

Over the last few quarters, we have demonstrated the power of our platform to deliver superior returns. As we look forward, we couldn't be more excited about the incremental benefits that we believe Validus will provide to our shareholders quarter. Kevin?

Speaker 1

Thanks, Bob. Quarter. As usual, I'll divide my comments between our Property and Casualty Specialty segments. The Q2 was an active renewal cycle quarter with the mid year renewals in property and a busy period for Casualty and Specialty. Beginning with our Property segment, as anticipated, quarter.

Speaker 1

The midyear property renewals benefited from continuing upward rate momentum and improved terms and conditions. This brought the market in line with the step change in reinsurance we realized at January 1. Rate increases in the U. S. Average 30% to 50% with pricing particularly challenged on more risk exposed layers.

Speaker 1

It is worth noting that the mid year renewals in 2022 experienced about a 10% to 30% REIT's 2nd. Our strategy for the renewal was to offer private deals on non concurrent terms call with core customers early in the process. This allowed us to achieve higher risk adjusted rate increases on most programs relative to what was available in the open market. Overall, we leaned heavily into the property cat market in the Q2 and recorded property catastrophe net written premium growth exceeding 50%. We believe these higher rates will persist.

Speaker 1

Quarter. Prior hard markets were driven by losses intended to be geographically concentrated. The current market is being driven by equity and ILS investor sentiment and is geographically broad. In particular, investors are concerned call. That they had not been adequately compensated for the volatility they experienced and in response are demanding substantially higher returns to continue taking risk.

Speaker 1

Call. This is especially true now as other asset classes provide attractive yields with less volatility and greater familiarity. Call. From our perspective, we are focused on rate adequacy in our property catastrophe business. Rate adequacy means call.

Speaker 1

That we expect business to have rate sufficient to provide investors with a return commensurate with the volatility they assume. Call. We believe the property cat business is now broadly rate adequate. That said, inflation and climate quarter. We'll continue to increase risk, which will require ongoing monitoring and careful underwriting.

Speaker 1

We are watching other property closely as substantial rate increases continue to flow through this business, quarter, especially in property E and S. Over time, this should increase the amount of other property business that is rate adequate, which should provide us fertile Ground for future growth. Another source of future growth could be substantial unmet demand for reinsurance. Call. In part, this is because overall demand for traditional reinsurance at the mid year renewal was down, particularly in Florida.

Speaker 1

There were several reasons for this. Call. First, Florida homeowners insurers reduced their exposure or stopped driving business altogether. Many of these policies went to citizens, quarter. From the Reinsurance to Assist Policyholders or RAP Layer, which is approximately $2,000,000,000 of free property catastrophe reinsurance quarter.

Speaker 1

3rd, cat funds were increasingly used in more risk remote layers. And 4th, companies did not have adequate budgets to purchase additional cover that they desired. Quarter. The first two factors should be temporary drags on demand, meaning it is only a function of time before demand returns to the traditional market. Call.

Speaker 1

The third factor, the growth in cat bonds, plays to one of our unique strengths, our industry leading capital partners business. As Bob discussed, These market opportunities allowed us to grow our TAD fund strategy substantially. We will benefit which will benefit our fee income. The risk remote layers covered by cat bonds typically do not fit well on our wholly owned balance sheets due to their capital consumptive nature. Consequently, this shift in demand to cat bond should positively benefit our bottom line.

Speaker 1

Looking forward, call. We are seeing some signs of increased demand coming to the market. Seedans may seek additional limit if they believe capacity is available quarter. And we achieved rate increases to provide adequate funds for the purchase. Our other property business had a quarter overall, and you are seeing the benefit of much of the work we have done over the past year to reduce exposure or benefit from increased quarter.

Speaker 1

This business continues to experience double digit rate increase that shows little sign of abating. Call. At the same time, we have been shifting cat exposure away from other property, which has freed considerable capital that we deployed for growth in property cat. Call. Even with the premium growth and property catastrophe, on a percentage of equity basis, our risk is flat versus last year quarter and down at more frequent return periods for southeast wind.

Speaker 1

We base this calculation on our free capital raised equity base. Call. As such, it does not include the almost $1,400,000,000 in capital we raised in May as that capital is earmarked to support Valadis Re acquisition later this year. We are closely monitoring meteorological conditions this storm season. As usual, quarter.

Speaker 1

RenaissanceRe Risk Sciences has provided valuable information to help us understand the climate dynamics likely to influence the remainder of the year. Quarter. We are expecting an average hurricane season, which reflects the dampening effect of the El Nino cycle offset by above average quarter. Due to the prevalence of severe convective storms, the U. S.

Speaker 1

Experienced its most active second quarter quarter. Of catastrophe losses since 2011. Public reports of these losses are already exceeding $20,000,000,000 and we expect once

Speaker 4

quarter. The quarter is fully developed, this number could approach

Speaker 1

$30,000,000,000 These events were localized and at least 3 are likely to exceed $4,000,000,000 in industry loss. Call. Taken together, it is not surprising that at least some of this loss would impact reinsurance. In addition, we updated our estimates on several of the events

Speaker 4

quarter. That occurred late in

Speaker 1

the Q1 based on additional information we received this quarter and that contributed to the cat losses. Quarter. Against this backdrop, we are happy with the property segment's performance this quarter. Property catastrophe reported $211,000,000 of underwriting income, quarter, which is up from the same quarter last year. Other property results were particularly strong with minimal impacts from catastrophes, Demonstrating the benefit of our underwriting discipline.

Speaker 1

Moving now to the Casualty segment. Call. We were pleased to report that it was a solid quarter across the board with good top line growth, the current quarter. Year loss ratio running a little better than expected and reserves remaining consistent. This resulted in a combined ratio of 93% quarter.

Speaker 1

$70,000,000 in underwriting profit. In traditional casualty, we saw a continuation of the trends quarter at January 1. Rates have been moderating relative to increases achieved over the last several years. Call. Consequently, we have continued our process of managing the cycle with a focus on optimizing the portfolio call.

Speaker 1

Through selectively reducing our share on less attractive deals and reducing acquisition costs to offset lower rate. Call. For example, underlying rates in public D and O programs continue to deteriorate, albeit after several years of substantial increases. Call. In response, we have either come off business or reduced ceding commissions in some instances by 2 to 3 points.

Speaker 1

This quarter, quarter. You could see these actions reflected in a 25% decrease in net premiums written in professional liability. This decrease has been very selective quarter and has resulted in an improved overall risk profile. In our specialty business, quarter. Market conditions remain broadly favorable and we continue to grow into a dislocated market characterized by limited supply.

Speaker 1

Specialty lines have greater exposure to volatility than more traditional casualty business and often quarter. This makes RenaissanceRe an ideal home for this business call. As we have the people, tools and platforms necessary to price and manage volatile risk. When pockets of opportunity arise such as call. We are currently experiencing lines such as Aviation and Marine and Energy.

Speaker 1

We can move quickly to grow this business. Quarter. In our credit portfolio, we are monitoring economic conditions and the potential for a U. S. Recession.

Speaker 1

Mortgage rates are again around 7% quarter. And continued supply demand imbalances have left many housing markets in the state of low volume equilibrium. Quarter. Currently, we continue to reduce market share in mortgage, move up the capital stack and target seasoned business. Quarter.

Speaker 1

Demand exceeds readily available supply in mortgage reinsurance and rates continue to rise. We continue to believe that our mortgage portfolio is quarter. And another example of appropriate cycle management as we grew significantly in this business last year. Call. Closing now with Capital Partners.

Speaker 1

Our fee generating activities performed well this quarter quarter with strong management fees and profit commissions reflecting both growth in partner capital and rebounding profitability. One highlight is the continued success of Medici quarter. Medici continued to see strong capital inflows from both new and existing investors quarter. And as a result exceeded $1,700,000,000 in assets under management. In aggregate, we have capital commitments of over $700,000,000 so far this year for deployment into quarter.

Speaker 1

Another highlight for the quarter, as I've already discussed, is quarter. The AIG intent to invest up to $500,000,000 to our Capital Partners business. Overall, we're pleased with the performance of the Capital Partners call. This is a growing and substantial part of our business that increasingly generates low volatility management fee income. This differentiates call from most of the ILS management industry where investor appetite has diminished by poor performance, trapped capital and collateralization issues.

Speaker 1

Our long term track record and ability to bring rated balance sheets to ILS investors distinguishes our Capital Partners business quarter. And explains our continued success in raising capital and growing fees in an otherwise difficult environment. Call. Finally, I want to recognize the extraordinary contribution of Ian Brannigan has made over the past approximately 25 years. He has developed a world class risk oversight framework and advanced our strategy.

Speaker 1

He's made us a better company and be a quarter. A better manager and a better person. He is leaving RenRe, but will always be part of us. So thank we'd like to thank Ian for his service. Call.

Speaker 1

And with that, we'll turn it over to questions.

Operator

Thank you. Call. We remind you to please unmute your line when introduced and if possible call. Call. Our first question will come from Elyse Greenspan with Wells Fargo.

Speaker 5

Hi, thanks. Good morning. Kevin, my first question is on the Validus Re deal, right? So you guys reaffirmed, right, all the You had laid out when you announced the deal. And so the premium base that you guys expect to take on, right, that 2,700,000,000 quarter.

Speaker 5

That's off of 2022. And I know AIG themselves, right, they pointed to growing Validus III by over 40% at January 1. So when you think it through that lens of the growth that they saw at 1.1, perhaps some during mid year. Does that put you guys in position to perhaps bring on more premium than that base and have the deal potentially be more accretive than your the expectations you've laid out to The Street.

Speaker 1

Call. Yes. We're trying to be consistent in the information that was available at the time of the acquisition. Your commentary about their growth absolutely provides us with significant upside as to the amount desirable business that's at Validus. So when we talk about the 2.7%, we're saying 2.7% with potential upside.

Speaker 1

I think everything that Validus achieved since the

Speaker 5

quarter. And then my second question, Bob, quarter. When you were discussing casualty and specialty, I think your comment was that you guys have not taken releases from recent year. So can you just provide and it sounded like that could be favorable, like what lines of business and accident years. Are you assessing and what loss trends are you seeing and what are you paying attention to before you might take some positive action there?

Speaker 3

Call. First, we feel very good about our reserves in Casualty and Specialty. And my reference was to the earlier years that we've been keeping a careful eye on it, Limited favorable development. That's just an outcome of a process that we have. In my comments, I was referring to the favorable rate that we saw quarter.

Speaker 3

Starting in 2019, carrying on through this year and some in many of the classes of business. And that rate did exceed the trend, and that's what I was referring to.

Speaker 1

Yes. Actually one thing I'd add to Bob's comments is much of our growth in casualty and specialty is from quarter. Which are obviously younger years and also years that have had COVID. We generally do not recognize good news in our reserves until the curve is quarter. Approximately 30% developed.

Speaker 1

So, I like the balance of the reserve profile within our casualty having had quarter. And with that, we're being cautious about the recognition of good news embedded in those portfolios.

Operator

Quarter. Thank you. Thank you. Our next question comes from Ryan Tunis with Autonomous Research.

Speaker 6

Hey, thanks. Good afternoon, guys. First question, on Validus, Of that net written premium that you guys are getting in deal, how should we think about what percentage of that you plan on sharing with within a party capital partners?

Speaker 1

Question. Yes. So I think it's going to be largely similar split to what we have now where I think what we've talked about is we share roughly 50% of our property cat premium quarter. At this point, I think that's we still have some modeling to do, but I think that's a likely reasonable target as to how We'll go in from a casualty specialty perspective as well.

Speaker 6

Got it. And then in terms of fee income, if I go back to 2016 2014 to 2016 when they weren't capped. It was closer like performance fees were closer to 50% of the total fee income. Quarter. This quarter, it was only like 20.

Speaker 6

Is that the right way to think about how should we think about call. The potential for what performance fees

Speaker 3

could be. We've grown. I mean the partner capital we have has quarter. Our fee schedules are unchanged. They haven't changed.

Speaker 3

We brought in a new vehicle in Vermeer over that period of time. But by and large, nothing's changed. So it just reflects the growth in our platform and the stability that we have and the relationship that we have with our 3rd party capital providers. And you can see that reflected in the quarter. And the confidence that we have in being able to give the guidance on just the management fee side of $45,000,000 The performance fees are on top of that based on performance and they can and have been volatile with activity.

Speaker 3

As I said, it's about $15,000,000 is kind of what we're looking right now absent any large losses that may come through the book.

Speaker 6

Got it. And then I guess last one for Kevin. You talked a little bit about demand. And yes, I kind of get out in theory, primary should be buying more, but that hasn't really been a theme thus quarter. So just curious like from your perspective, if you want to make a prediction like what needs to happen for The demand to come through, from your experience, what needs to happen to end that lag?

Speaker 6

Call. Thanks.

Speaker 1

Yes. It's a good observation that demand we didn't really Florida in the mid year setup kind of as we quarter. I think we expected a little bit more demand to be realized at oneone. The demand was there by buyers. They Just didn't have the wallet to be able to purchase what they needed.

Speaker 1

I think in order for that to change, they need rate. Quarter. So if you think about what's happened is reinsurance programs have shifted up. So for insurance companies and we're starting to see that with the 2nd quarter More volatility is residing on the income statement of primary companies. They need rate to cover that and an excess rate to continue to Build capacity on their balance sheet through reinsurance.

Speaker 1

So we're watching what's going on with primary market, particularly admitted market rate change. As that becomes more fulsome, I think the appetite or they'll be able to realize The budget to be able to purchase the limit that they desire. So, They are getting rate. Obviously, it takes a while to run through the books there. But I believe that the appetite has not quarter.

Speaker 1

It's simply a matter of managing the limited wallet they have for reinsurance right now.

Speaker 6

Thank you.

Operator

Quarter. Thank you. Our next question will come from Yaron Kinar with Jefferies.

Speaker 6

Call. Thank you. Good morning. Kevin, when you say that property cap rates are largely adequate now, does that mean that when you That you expect higher rates to persist that you essentially expect them to hold where they are plus loss trends going forward or is there room for additional rate increases beyond that here?

Speaker 1

What we're focused on is and the reason we talked about a step change is really getting to a level of rate adequacy. So investors are Both ILS investors and equity investors are adequately compensated for the volatility and for the risk that they're taking. In general, as a market, I believe we're there. So certain deals are better rated than other deals. So I think there are opportunities for rate increase.

Speaker 1

But if we were call. If the market went and renewed as expiring, adjusting for unique idiosyncratic risk within certain companies, I think the market would largely be adequate for 2024. Investor sentiment, other things will continue to be a factor as to what quarter. Adequate means and whether they are relatively satiated with the returns that they're achieving. But looking at it from a more academic perspective, quarter.

Speaker 1

I believe rates are compensating at adequate levels for the volatility we're observing in our portfolio. Our portfolio is a bit unique in that we do capture alpha above what we quarter. And then this distribution across our owned and rated balance sheets provide us additional quarter. Ability to achieve better than market returns. So although we talk about rate adequacy at the market, we believe that we are achieving returns that are above rate adequacy and hence the interest we continue to have in our equity and our third party capital vehicles.

Speaker 7

Call. Got it.

Speaker 6

And can you comment on what loss trends are like in property cat today? Call. The best estimates for those?

Speaker 1

I'm not sure I understand your question.

Speaker 6

What do you see as the rate of increase of costs and property catastrophe?

Speaker 1

Call. I think there's kind of known things to think about and quarter. Then more difficult things to think about, I think from a known, obviously, inflation. So that's something that we continue to capture. I think the more difficult things and one that obviously gets a lot of attention is climate and the effects of climate change On uncovered perils.

Speaker 1

When we think about that, we spend a lot of energy call. Determining the rate of change. And I believe we talked about this in other calls is that we think nature has outpaced science. Call. So we have spent a lot of time trying to think about what the climate rate the climate ramp looks like from today's regime to what we think quarter.

Speaker 1

A hotter world looks like in the future and then trying to stay ahead of the rate of change between the current state and the future state. I think we've done that quarter. Well, I think our the shape of our curves reflect what I think is an above nature perspective as to the rate of change. So I feel good about that, but it is a little harder to assess. So I think there are quite a few things that are affecting trend quarter.

Speaker 1

In the industry, social inflation is another one that's difficult to monitor, but I think we've done a good job staying ahead of what is likely the future state.

Speaker 6

Call. Thanks so much.

Operator

Thank you. Our next question will come from Josh Shanker with Bank of America. Call.

Speaker 2

Yes. Kevin, I don't mean to catch you

Speaker 6

and Bob

Speaker 2

in a conflict, but call. Hear me out. At the beginning of the call, you said that you've leaned into a improving property catastrophe market. But you also said later in the call call. Your capital utilization or your risk exposure, however you want to measure it, is lower than it was last year.

Speaker 2

Call. Is there a disconnect there? And how do you guys think about those two things, if I'm putting it correctly?

Speaker 1

Call. Firstly, Bob and I are completely in sync on this. We may have used different words. You're absolutely right that those are two things we said. Quarter.

Speaker 1

So, leaning into the property cat market was, you have to adjust for rate. So, when we look at our percent of equity exposed, quarter. Including rate and reinstatement premium and watching the effect of that is also against a bigger equity base. So we've shifted the shape of our overall quarter. So that we have reduced the amount of frequency risk we're taking in Southeast and quarter.

Speaker 1

As a percent of equity basis have held our net negative impact from large windstorms or quarter. So I think on a risk basis, absent the effective rate, there might quarter. A way to say that those are inconsistent, but when it comes to when including the effect of rate, I think it reflects the change in the market and is a better way to think about the risk quarter. The other thing is included in my comments is the reduction in other property. So our other property contribution to a Southeast windstorm would be lower, which allows us to further lean into the property cat market.

Speaker 2

When you think about doing this quarter. Over a 30 year period, what kind of market needs to occur for you to meaningfully increase call. The risk adjusted exposure of the portfolio.

Speaker 1

Call. That's a good question. I like this market. And I think strategically what we did is we Wanted to focus on rewarding our existing investors with the highest probability of good quarter. Great returns that we could get for a relatively consistent level of risk.

Speaker 1

I think that's the right strategy. It's also why we bought Validus. Call. So by buying Validus, we can take our existing portfolio And fully expose it with effectively what is a 30% quarter share of our book on the day of close. Quarter.

Speaker 1

If we were to try to leverage into a better cat market, which is what we're seeing right now, our portfolio would become unbalanced And the tail would be more singularly exposed to windstorm than we quarter. That we think would have been optimal by buying Valid as we continue to expose the tail with diversified risks and it's a Better trade for investors than trying to grow solely into the better property market that's being offered.

Speaker 2

Call. Okay. Thank you for the answers.

Speaker 4

Sure.

Operator

Thank you. III. Our next question will come from Meyer Shields with KBW.

Speaker 8

Call. Thanks. Just a couple of brief questions if I can. First, Kevin, you mentioned expectations of an average hurricane year this year. Does that expectation Actually impact underwriting decisions that you made at midyear or even this January?

Speaker 1

Call. We don't believe that we can underwrite on a forecast because we don't think it's fair to our clients who look quarter. For us to provide consistent capacity, we do use our understanding of what is the market like or what is quarter. Likely to occur to help shape the portfolio on the margin. But formations and landfall are very different.

Speaker 1

Quarter. I think so thinking about what an average year means and then what a landfall means, it's difficult to use that as the basis to create a portfolio. So I think it helps on the margin, but we believe that is our risk to manage, not our risk To on an annual basis, leave with our customers or take from our customers.

Speaker 8

Okay. Understood. That's helpful. Question. And question on casualty and specialty reserves and I am having a little bit of a challenge formulating this question.

Speaker 8

But if the process is unchanged quarter. And for the last couple of quarters, that process suggested $20,000,000 of favorable development, give or take. What was it in the That led to a different outcome this time.

Speaker 3

The process remains unchanged. We take a look on an annual basis. It's a good question. We will look at on an annual basis, we'll take a look at the curves that we have on development. We'll look at the where we are on the development along that curve.

Speaker 3

You can get some rebalancing that may look at it differently. So nothing's really changed at the core. This is part of an annual process we go through. The outcome of that process quarter was that we had just very, very modest favorable development as opposed to what we saw last quarter.

Speaker 1

One thing I'd add to that is in different quarters, there are different quarter. Deep dive is down in different elements of the portfolio that are looked at. And so it's not as if a formula is run against the portfolio and it spits out an answer. There's different emphasis within different books of business at different times. So I would say nothing I wouldn't read anything into quarter.

Speaker 1

At this point, I think our reserve I feel equally good this quarter as last quarter as the quarter before with the reserve profile that we have and how things are developing on an actual expected basis. Okay.

Speaker 8

And then one final question, if I can. And this is, I think, for Kevin, given you talked about quarter. 2nd quarter cash flow loss was approaching $30,000,000,000 So far, all the losses that we've seen from public companies look manageable even if they're painful. Call. Is that a fair representation of what we're looking for the broader market or could just the second quarter losses or year to date losses impact cat reinsurance Purchasing Programs.

Speaker 1

So some of these covers are So some of the deals that have happened are geographically small, but rather large in the geography that was affected. So I would expect With some regional covers, reinsurance is going to be impacted. I think that's less likely for the nationwide. There's also Much less aggregate cover that's been purchased by primary companies. Aggregate covers, I think, would be heavily exposed going into wind season this year due to quarter.

Speaker 1

So I think that's another reason that there's going to be more retained at the primary level. So call. I think everything that we're seeing is kind of consistent with our expectations. It's been a more active first half of the year in particular quarter. Than one would have normally expected.

Speaker 1

But the fact that more of it's residing with primary companies is not surprising and the Some regional companies are benefiting from recoverables because of the concentrated nature of some of the events.

Speaker 8

Okay, perfect. Thank you so much.

Operator

Call. Thank you. Our next question comes from Mike Zaremski with BMO.

Speaker 9

Hey, good afternoon. Couple ones on Validus. So call. Can you talk about the addressable cost base that you now that you've had a more comprehensive integration planning call. I know you're not giving like the exact synergies on that cost base, but what is addressable cost base?

Speaker 9

And then also on Ballast, call. In the prepared remarks, did you change the amortization schedule that you had previously given guidance on in May or

Speaker 4

call. Or maybe I just

Speaker 3

heard incorrectly. Let me take that a couple of them. Look, the synergies are going to be an outcome of a process of bringing 2 great quarter. We think that the combined platform will be a powerful acceleration of our strategy for our investors. We haven't given any guidance on synergies.

Speaker 3

We're going through the addressable quarter. Cost base is about $150,000,000 to $160,000,000 The purpose on addressing the amortization was we talked about in the call originally that the distribution or the allocation between that $900,000,000 of excess purchase price, most of that 80%, 90% quarter. It was going to be amortizable over time. A lot of that's long lived 10 years, but what I was trying to emphasize that the bulk of that, call. Mike, we'll go the amortized 40% over the 1st 2 years.

Speaker 3

So what you're going to see is massive non cash solution to our earnings and we're going to show you that separately in the disclosures once we get through to the 10 ks. So that will be fairly transparent. But what we like to show is how fast that's going to erode Really quick. That was the point of that comment. Nothing changed.

Speaker 9

Okay. Understood. Okay. I guess lastly, call. If we were privy to kind of, I guess, ECS U.

Speaker 9

S. Cat losses in the first half of the year. Would you say RenRe's market share of U. S. Losses have kind of been

Speaker 1

call. Yes, broadly though. So the way I would think about answering your question is we have not changed The overall balance of our portfolio in a material way. I think we've done a better job In picking up a little bit more diversity away from Southeast wind in this portfolio than we quarter. Even last year.

Speaker 1

But I don't necessarily think about it as a U. S. Market share perspective because there's different barrels in different regions. And I think about it as when I look across the particularly in the tail of the distribution and the capital utilization. It is marginally better this year than last year, quarter.

Speaker 1

And the driver of the tail risk remains southeast wind and as I already mentioned that's relatively flat. So a little bit better balance in our In your terminology and our market share, but relatively consistent portfolio compared to last year

Speaker 7

quarter. Thank you.

Operator

Thank you. Our last question will come from Brian Meredith with UBS.

Speaker 7

Yes, thanks. Kevin, a couple of them here for you. First, Just curious, what size hurricane industry loss hitting Florida do you think it would take for the reinsurance industry to take a meaningful loss? And then on that, How big would it need to be for you actually see rate actually rise at 1onetwenty 4 renewals?

Speaker 1

Call. I think the I quarter. Any storm of reasonable size is going to unsettle the market. I believe the market is a bit quarter. Is enjoying the benefits of the hard work that we've achieved to bring rate adequacy.

Speaker 1

I think there's still a sense of or an expectation that results need to be achieved for quarter. The market to fully believe that this is adequate. So I think even just a loss of premium for someplace like Florida We'll have a material impact on capital's need for additional rate to continue to service the reinsurance market. The size of that is hard to predict. And I think but I think it's one in call.

Speaker 1

Which if there's another Ian type storm, I would expect that the market reaction to be at least as strong as what it was last year. Perhaps they can't achieve the same percent rate increase, but I think rate increase would be required for capital to remain committed.

Speaker 7

Got you. And then Kevin, just my second question. I'm just curious, what's your thoughts and I know you talked a little bit about the capital question. But what's your thoughts on additional capital coming into the market to take advantage of the property cat, company formation, those types of things? Are we seeing that yet?

Speaker 7

And do you anticipate any potentially happening here between now and the beginning of the year?

Speaker 1

Call. From a company formation, I think it's pretty late for a company to think that they're going to be able to come to market and execute In a way that's going to meaningfully impact the market. From an ILS perspective, I think there are Alternative. So what's going on with some of the more noteworthy allocator ILS is their alternative allocation still probably at the high end of where they'd like it. ILS fits into that So that there's a reticence to commit more.

Speaker 1

I think areas in which they have greater familiarity are producing good returns. So the competition against ILS I think the issues with collateral and fronting, COVID and other things, trapped collateral, are quarter. Still very much in the minds of where investors are. It's one of the reasons we've been successful to be honest is our platform is different than traditional ILS in that we bring rated balance sheets to clients. So it's a form that they're used to.

Speaker 1

And we bring our expertise and our entire platform Governance to Capital, so that they have the comfort of knowing that it's the RenRe franchise that's supporting their investment. So I don't believe we will be in a state where we're quarter. Impacted with the limited appetite for ILS, but I think the appetite for ILS will remain challenged going into year end.

Speaker 7

Call. Got you. Very helpful. Thank you.

Speaker 1

Sure. Thanks.

Operator

Thank you. And at this time, there are no further questions. So I'd like to turn the floor back over to Kevin O'Donnell for any additional or closing remarks.

Speaker 1

Thanks everybody for joining the call. We reported a quarter in which we significantly advanced both our financial and strategic objectives. Each of our three drivers of profit met or exceeded expectations. Quarter. And going forward, we're excited about the Validus Re acquisition and its ability to drive shareholder value.

Speaker 1

So thank you. Quarter. Appreciate the attention on the call and look forward to speaking to you next quarter.

Operator

Thank you, ladies and gentlemen. Quarter. This concludes the RenaissanceRe second quarter 2023 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.

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Key Takeaways

  • RenaissanceRe delivered a 28.8% annualized operating ROE in Q2 ’23, combining strong bottom-line profitability with 8% growth in gross premiums written and 18% growth in net premiums written.
  • The company is acquiring AIG’s Validus Re platform for a ~$885 million premium, adding ~$3.1 billion of 2022 GWP, ~$4.5 billion of investable assets and expected to be immediately accretive; integration planning is underway with closing targeted in Q4.
  • At the mid-year property catastrophe renewals, RenRe grew cat net written premiums by 55% (49% ex-reinstatements) with 30–50% average rate increases, while maintaining a balanced tail risk exposure as a percent of equity.
  • The Casualty & Specialty segment posted a 93% combined ratio in Q2, delivered another quarter of flat reserve development, executed selective portfolio adjustments, and continues to target mid-90s combined ratios for 2023.
  • Capital Partners and investments drove record fees and income: fee income rose 65% to $57 million and retained net investment income doubled to $189 million, with guidance for ~$220 million in Q3, supported by rotation into higher-coupon assets.
AI Generated. May Contain Errors.
Earnings Conference Call
RenaissanceRe Q2 2023
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