Q2 2023 RenaissanceRe Holdings Ltd Earnings Call
[music].
Mhm.
Uh huh.
[music].
Thanks.
Okay.
Uh huh.
[music].
Yes.
[music].
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 Renaissance REIT second quarter 2023 earnings conference call and webcast.
After the prepared remarks, we will open the call for your questions.
Instructions will be given at that time.
Lastly, if you should need operator assistance, Please press star zero.
Thank you and I will now turn the call over to Keith Mccue, Senior Vice President of Finance and Investor Relations. Please.
Please go ahead.
Yeah.
Thank you Chelsea good morning, and welcome to Renaissance Reis second quarter 2023 earnings Conference call.
Joining me today to discuss our results are Kevin O'donnell, President and Chief Executive Officer, and Bob <unk> Executive Vice President and Chief Financial Officer first some housekeeping matters. Our discussion today will include forward looking statements.
No.
Actual results may differ materially from the expectations shared today additional information regarding the factors shaping these outcomes can be found in our SEC filings and in our earnings release during todays 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 at run rate Dot com and now I'd like to turn the call over to Kevin Kevin.
Yeah.
Thanks, Keith Good morning, everybody and thank you for joining today's call. We are pleased to report that <unk> delivered strong second quarter results that combined consistent bottom line profitability with continued topline growth.
This growth was particularly robust in our property catastrophe business, where we continue to observe significant rate momentum.
For the quarter, we reported an annualized operating return on average common equity of 28, 8%, even with the dilution from the quarter's equity issuance on a quarter.
Excuse me on a year to date basis, our operating ROE is running at almost 30%.
Of course, our most prominent strategic milestone this quarter was the announcement that we are acquiring aig's treaty reinsurance platform Validus re.
I will highlight some of the key business reasons. We are excited about this transaction.
Rob will then cover the financial details, including our recent equity and debt issuances to help finance the transaction.
Beginning with Validus re we are very excited to partner with AIG on this win win transaction for Renaissance III. This advances our strategy as a leading P&C reinsurer, we're gaining access to a large diversified business and a favorable reinsurance market.
Validus re has a great team and they are underwriting portfolio consists of high quality mix of property casualty specialty credit lines that closely mirrors our own.
We expect the Validus acquisition to be highly accretive across our financial metrics.
For premium over book value of $885 million, we anticipate receiving a.
Gross written premium base of $3 1 billion in 2022 of which we are targeting at least $2 7 billion of premium.
$4 5 billion of investable assets.
And a $250 million equity investment by AIG, and our common shares as well as up to $500 million and our capital partner business.
At close.
We anticipate receiving $2 1 billion of Unlevered shareholders' equity, which is $1 2 billion lower than Validus re as year end 2022 equity. This reduction is due to the capital efficiency, we expect to bring to this business and as part of the reason this transaction is a win win for both us and AIG.
As a result, and as Bob will explain we believe this transaction will be immediately accretive to each of our three drivers of profit as well as book value per share earnings per share and return on equity, excluding <unk> adjustments and integration costs.
Of course, there are always risks in any transaction, but we believe we can manage them effectively to begin with we are a proven acquirer and have substantial institutional knowledge managing execution and integration risk.
Fact that Validus re underwriting portfolio is similar to our existing book also reduces our execution risk.
We have deep familiarity.
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, one and fully integrated into our risk management system. Soon afterwards diminishing execution risk.
The Validus re portfolio will also benefit from a reserve development agreement.
Validus re has a strong underwriting platform.
AIG should continue to profit from the attractive risks that they have under it.
As such AIG will retain 95% of any reserve development, whether favorable or adverse.
We expect the Validus acquisition to close in Q4 and have already begun comprehensive integration planning.
Of course, the closing is subject to regulatory approval among other customary closing conditions.
I am pleased to report that 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 could be placed on negative watch due to execution in.
Integration risk.
Conclusion of the acquisition of Validus re advances our strategy of financial terms that should be immediately accretive. In addition, it extends our relationship with AIG a key partner for these reasons I couldnt be more excited about our future.
We're more convinced that this transaction will drive shareholder value.
That concludes my opening comments I will provide more detail on.
On our segment performance at the end of the call, but first Bob will discuss our financial performance for the quarter.
Thanks, Kevin and good morning, everyone. Once again, we had a very strong quarter with net income of $191 million and operating income of $407 million. This is the third quarter in a row, where we have reported annualized operating return on average common equity of over 28%.
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 in the quarter provide an update on the integration progress for Validus and then discuss our results in more detail.
Starting with some highlights and first we leaned into a very attractive property catastrophe market and the mid year renewals growing property catastrophe net premiums written by almost 55% even in an above average quarter for cats, our property segment performed well reporting a combined ratio of 63% with other property.
Having a particularly strong quarter.
Second 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 Ninety's combined ratio in 2023.
And third fee income rose, 65% to a record $57 million. This reflects increased partner capital under management as we grow into an attractive market and a steady increase in performance fees from strong underwriting results and finally.
Retained net investment income for the quarter was $189 million. This is more than double a year ago and up 13% from Q1 2023, reflecting our continued rotation into higher coupon securities.
Kevin mentioned.
We're also advancing our strategy through the acquisition of Validus re which we announced in May I am pleased to say the integration planning is progressing well and that we are on track to close in the fourth quarter we.
We have established a dedicated integration team that is reviewing validus. This operating model processes and systems. So that we can bring together our two great companies.
Our work to date supports our initial acquisition thesis and we are very excited about the transaction Validus is a great business with great people and this deal will accelerate our strategy.
As we discussed when we announced the deal we are paying just under $3 billion for $2 $1 billion of Unlevered shareholders' equity at close we believe this transaction will be immediately accretive to each of our three drivers of profit as well as book value per share earnings per share and return on equity when excluding P. GAAP.
<unk> and integration costs.
We're paying a premium of $885 million over shareholder equity for balance. The majority of this premium approximately 85% will be amortized over 10 years with about 40% amortizing in the first two years.
In anticipation of the Dallas transaction. This quarter. We also successfully raised approximately $2 $1 billion through public equity and debt issuances.
This included almost $1 $4 billion of net proceeds from the issuance of $7 2 million common shares at $192 per share and about $740 million of net proceeds from the issuance of 575 senior notes due in 2033.
This additional funding was on top of our already strong capital position.
In addition, we will issue $250 million of our common shares to AIG at closing and intend to fund the balance of the cost of the transaction with excess cash on hand.
Until we close the additional capital we raised for the deal we will have a dilutive effect on our returns in the second quarter. This capital diluted our operating return on average common equity by about two percentage points on an annualized basis.
Our Q2 'twenty 888.
8%.
Operating return on equity is particularly impressive when viewed through this lens.
In Q3, we expect the impact of the excess capital on our operating returns to be about five percentage points on an annualized basis.
Moving now to our second quarter results and our first driver of profit underwriting.
Our total combined ratio was 80% with both segments delivering strong results.
We achieved these returns against the 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, we grew property catastrophe and other specialty lines considerably while continuing to reduce on other property and prefer.
General liability lines.
Moving now to our property segment and a disciplined underwriters with differentiated cat modeling capabilities. We have continued to focus on property catastrophe in some very attractive opportunities to grow this class of business at the mid year renewals at improved rates as Kevin will speak more to in a few more minutes.
Overall net premiums written for the property segment were up 29% with property catastrophe net premiums written up 55%.
Due to the U S storm activity this quarter, we recorded $30 million of reinstatement premiums and property catastrophe compared to almost nine 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.
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 we.
We expect other property net premiums earned to continue to decline modestly in the third quarter.
The property segment overall, we reported a combined ratio of 63% with a current accident year loss ratio of 41%.
So far this year cat activity has been well above average in the second quarter and large loss events had an overall net negative impact of $45 million on our consolidated results.
About $25 million of this negative impact came from a series of severe weather events in the second quarter.
The remaining $20 million of that negative impact related to Q1 large loss events, including the Turkish earthquake.
We reported a 33% 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%.
As I previously explained we have been reducing exposure to cats in our other property business, while benefiting from additional rate large losses contributed four percentage points to the other property combined ratio.
We continue to expect an attritional loss ratio for the other property book to be in the low fifties.
Property acquisition cost ratio improved by four percentage points from last year, primarily driven by a mix shift within the property segment.
Operating catastrophe has a lower acquisition cost ratio is another property and now makes up 56% of property net premiums earned compared to 45% last year.
Moving now to our casualty and specialty portfolio, where we had another solid quarter reporting a 93% combined ratio.
Net premiums written were up by about 8% similar to last quarter. There was a lot of movement within classes of business as we grew in attractive areas. We're coming off of deals that did not meet our return hurdles specifically other specialty was up significantly while we reduced on both professional liability and credit.
Net earned premiums for the segment were about $1 billion.
We continue to expect a similar quarterly amounts for the remainder of 2023.
This quarter reserve development in the casualty and specialty segment was essentially flat we've been closely scrutinizing trends in earlier years and adjusting our reserves as appropriate.
Firstly, we have not yet recognized much of the favorable trends from the more recent years as we await for the book to season.
Moving now to fee income in our capital partners business, where fee income reached a record $57 million driven by strong management and performance fees.
Management fees were up 41% to $43 million as we grow our joint ventures to underwrite into this attractive market.
We continue to expect management fees to run at about $45 million per quarter for the remainder of the year.
Performance fees have largely recovered from prior year deficits, reaching $13 million this quarter absent large losses. These fees may tick up slightly in the second half of the year to about $15 million per quarter.
Overall, we shared $175 million of our net income with partners in our joint ventures as reflected in our redeemable Noncontrolling interest $234 million 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 million of third party capital focused on cat bond strategies.
Moving now to investments. We also reported record net investment income in the quarter retained net investment income was up $114 million to $189 million.
And our retained net investment income return was up two seven percentage points to four 9%.
We have remained very defensive in the positioning of our investment portfolio. Most of the growth in net investment income relates to a proactive rotation into higher coupon securities over the last year, we did generate about $10 million and net investment income from increased invested assets related to the public equity and debt raise associated with the balanced.
Acquisitions.
This quarter rising interest rates led to retain mark to market losses of about $210 million.
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 investment income.
Income will tick up to about $220 million in the third quarter.
Retained unrealized losses in our fixed maturity investments are now $442 million or about $8 64 per share. We expect this to accrete to par over time.
Now turning briefly to expenses, where operating expenses were up 11% in the quarter with the operating expense ratio remaining relatively flat the increase reflects investments in people and our businesses and our business to support our growth as you would expect operating expenses will increase with the Validus acquisition. However in the near term we will anticipate.
<unk> the operating expense ratio relatively flat. It should then ticked down over time as we realized synergies from the transaction.
Corporate expenses were elevated in the quarter with about $11 million related to the Validus transaction. After we close corporate expenses will be temporary elevated for a period of time as we integrate balance.
And in conclusion, we performed very well this quarter and continued strong <unk> with continued strong contributions from each of our three drivers of profit.
Integration planning for Validus is well underway and we have successfully executed our financing plan for the transaction.
Over the last few quarters, we have demonstrated the power of our platform to deliver superior returns as we look forward, we couldnt be more excited about the incremental benefits that we believe validus will provide to our shareholders across all three drivers of profit.
Hey, Kevin.
Thanks, Bob.
As usual I'll divide my comments between our property and casualty specialty segments.
The second quarter was an active renewal cycle with the mid year renewals in property and a busy period for casualty and specialty.
Beginning with our property segment.
As anticipated the midyear property renewals benefited from continued upward rate momentum and improved terms and conditions. This brought to market in line with the step change in reinsurance we realized a January one.
Rate increases in the U S average, 30% to 50% with pricing, particularly challenged on more risks exposed layers. It is worth noting that the mid year renewals in 2022 experienced about a 10% to 30% rate increase or rate increases. This year, we're on top of a higher base.
Our strategy for the renewal was to offer private deals on non concurrent terms 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 second quarter and recorded property catastrophe net written premium growth exceeding 50%.
We believe these higher rates will persist.
Prior hard markets were driven by losses and tended to be geographically concentrated.
The current market is being driven by equity Nio's investor sentiment and is geographically broad.
In particular investors are concerned that they had not been adequately compensated for the volatility that experienced an interim response are demanding substantially higher returns to continue taking risk.
This is especially true now as other asset classes provide attractive yields with less volatility and greater familiarity.
From our perspective, we are focused on rate adequacy, and our property catastrophe business.
Right.
Adequacy means that we expect business to half rate sufficient to provide investors with a return commensurate with the volatility to assume.
We believe the property cat business is now broadly rate adequate.
That said.
Inflation and climate change, we will continue to increase risk, which will require ongoing monitoring and careful underwriting.
We are watching other property closely at a substantial rate increases continue to flow through this business, especially in property NFS overtime. 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 in part. This is because overall demand for traditional reinsurance at the mid year renewal was down particularly in Florida.
Several reasons for this.
First Florida homeowners insurers reduce their exposure were stopped driving business altogether.
Many of these policies went to citizens, which purchases proportionately less reinsurance.
Second many larger companies obtained coverage from the reinsurance to assist policy holders for wrap layer.
Which is approximately $2 billion of free property catastrophe reinsurance below the Cat fund provided by the state of Florida on a one off basis.
Third cat bonds were increasingly used and more risk remote layers and fourth.
Companies did not have adequate budgets to purchase additional cover that they desire.
The first two factors.
It should be temporary drag on demand, meaning it is only a function of time before demand returns to the traditional market.
The third the third factor is the growth in cap ons plays to one of our unique strengths our industry, leading capital partners business as Bob discussed.
These market opportunities allowed us to grow our cat bond 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 bonds should positively benefit our bottom line.
Looking forward, we are seeing some signs of increased demand coming to the market.
Seasons, Macy's seek additional limit if they can.
Believe capacity is available and the achieved rate increases to provide adequate funds for the purchase.
Our other property business had a strong quarter overall and you're seeing the benefit of much of the work we have done over the past year to reduce exposure all benefit from increased rates.
This business continues to experience double digit rate increase that shows little sign of abating.
At the same time, we have been shifting cat exposure away from other property, which has freed considerable capital that we deploy for growth in property cat.
Even with the premium growth in property catastrophe on a percentage of equity basis, our risk is flat versus last year and down.
More frequent return periods for southeast wind.
We base this calculation on our pre capital raised equity base as such it does not include the almost one 4 billion in capital. We raised in May as that capital is earmarked to support the Validus re acquisition later this year.
We are closely monitoring meteorological conditions this storm season.
As usual Renaissance really risk Sciences has provided valuable information to help us understand the climate dynamics likely to influence the remainder of the year.
We are expecting an average hurricane season, which reflects the dampening effect of the El Nino cycle offset by above average sea surface temperatures.
Due to the prevalence of severe convective storms the U S experienced its most active second quarter.
Catastrophe losses since 2011.
Public reports of these losses are already exceeding $20 billion and we expect once the quarter is fully developed this number could approach $30 billion.
These events were localized in at least three are likely to exceed $4 billion in industry loss.
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 that occurred late in the first quarter based on additional information we received this quarter.
And that contributed to the cat losses.
Against this backdrop, we are happy with the property segments performance this quarter.
Property catastrophe reported $211 million of underwriting income, 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.
Moving now to the casualty segment.
We were pleased to report.
That it was a solid quarter across the board with good top line growth. The current accident year loss ratio, we're running a little better than expected and reserves remaining consistent this resulted in a combined ratio of 93% and $70 million in underwriting profit.
In traditional casualty, we saw a continuation of the trends that January one.
Rates have been moderating relative to increases achieved over the last several years and consequently, we have continued our process of managing the cycle with a focus on optimizing the portfolio through selectively reducing our share on less attractive deals in reducing acquisition costs to offset lower rates.
For example, underlying rates and public D&O programs continue to deteriorate.
Albeit after several years of substantial increases in response, we have had to come off business or reduced ceding commissions in some instances by two to three points.
This morning, you can see these actions reflected in a 25% decrease in net premiums written in professional liability.
This decrease has been very selective and has resulted in an improved overall risk profile.
In our specialty business market conditions remained broadly favorable and we continue to grow into a dislocated market characterized by limited supply.
Specialty lines.
Greater exposure to volatility than more traditional casualty business and often require specialized knowledge and skills to successfully underwrite this makes renaissance.
Deal home for this business as we have the people tools and platforms necessary to price and manage volatile risk.
When pockets of opportunity arise such as.
We are currently experiencing lines, such as aviation and Marine and energy, we can move quickly to grow this business.
In our credit portfolio, we are monitoring economic conditions and the potential for a U S recession.
Mortgage rates are again around 7% and continued supply demand imbalances that left many housing markets in the state of low volume equilibrium.
Currently we continue to reduce market share in mortgage move up the capital stack and target seasoned business demand exceeds readily available supply and mortgage reinsurance and rates continue to rise. We continue to believe that our mortgage portfolio is attractive and resilient in the event of a recession.
And another example of appropriate cycle management as we grew significantly in this business last year.
Closing out with capital partners, our fee generating activities performed well this 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 Aercap on fund the DG continue to see strong capital inflows from both new and existing investors and as a result exceeded one 7 billion in assets under management.
In aggregate, we have capital commitments of over $700 million. So far this year for deployment into cat bond strategies, either through but each year segregated accounts.
Another highlight for the quarter.
As I have already discussed.
AIG intent to invest up to $500 million of our capital partners business. Overall, we're pleased with the performance of the capital partners.
This is a growing and substantial part of our business that increasingly generates low volatility management fee income. This differentiates it from most of the ILS management industry, where investor appetite has diminished by poor performance trapped capital and Collateralization issues.
Our long term track record and ability to bring rated balance sheets to ILS investors distinguishes our capital partners business and explains our continued success in.
And raising capital and growing fees in an otherwise difficult environment.
Finally, I want to recognize the extraordinary contribution of Ian Brown again has made over the past approximately 25 years. He has developed a world class risk oversight framework and advanced our strategy.
It's made us a better company and be a better better manager and a better person. He is leaving run rate, but we will always be part of us. So thank you I would like to thank Ian for his service and with that I will turn it over to questions.
Yes.
Thank you.
At this time, if you would like to ask a question. Please press star one on your telephone keypad.
If you wish to remove yourself from the queue you may do so by pressing star Q.
We remind you to please on mute your line, but you could use.
Possible pick up your handset for optimal sound quality.
In the interest of time, we ask that you. Please limit yourself to one question and one follow up.
Our first question will come from Elyse Greenspan with Wells Fargo.
Hi, Thanks.
Kevin My first question.
Is on Validus re deal right. So you guys reaffirmed by all the targets you had laid out when you announced the deal.
And so the premium base that you guys expect to kick off right at $2 7 billion. That's off of 2022, and I know AIG themselves might be pointed to growing validates we by over 40% at January one. So when you think through that lens that the growth that they thought one one perhaps some during mid year.
Does that put you guys in position to perhaps bring on more premium than that asos, you don't have the deal potentially be more accretive venue.
The expectations, you've laid out to the street.
Yes, we're trying to be consistent in the information that was available at the time of the acquisition to your commentary about their growth.
Absolutely provides us with significant upside as to the amount of desirable business Thats at Validus. So when we talk about the two 7% to seven with potential upside I think everything that validus achieved since.
At the end of the year provides us with substantial upside.
Thanks, and then my second question.
Bob.
We're discussing casualty and specialty.
I think your comment was that you guys have not taken with leases from recent accident years.
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 loss trends are you seeing and what are you paying attention to you before you might see some positive action there.
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 starting in 19 carrying on through this year and many of the classes of business.
And that rate did exceed the trend and that's what I was referring to.
Yes.
One thing I would add to Bob's comments.
Much of our growth in casualty and specialty is from 19 forward.
Which are obviously younger years and also years that have had COVID-19. We generally do not recognize good news in our reserves until the curve is approximately 30% developed.
So.
I like the balance of the reserve profile within our casualty having had substantial growth since 2019.
And with that we're being cautious about the recognition of good news embedded in those portfolios.
Thank you.
Thank you.
Our next question comes from Ryan Tunis with Autonomous research.
Hey, Thanks, Good afternoon, guys first question on <unk>.
<unk>.
Net written premium that you guys are getting and how should we think about what percentage of that you plan on sharing with some third party capital partners.
Yes, so I think.
It's still 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.
And the new portfolio will also go into Fontana.
The Fontana percentages, just under 20% at this point I think thats.
We still have the modeling to do but I think that's a likely reasonable target as to how much will go in from the casualty specialty perspective as well.
Got it and then.
In terms of fee income if I go back to 2016 2014 to 16 when they work.
And culturally.
Performance fees really closer to 50% of the total fee income this quarter. It was only like 'twenty is that the right way to think about.
How should we think about.
The potential for what performance fees.
Could be.
Does that mean the partner capital we have has grown significantly over that period of time and that just in of itself is going to support.
A strong basis for the management fees coming in our fee schedules are unchanged.
Haven't changed we brought in a new vehicle and 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 third party capital providers and you can see that reflected in the management fees and the confidence that we have and being able to give the guidance just the management.
Syed a $45 million the performance fees are on top of that based on performance and they can have been volatile with activity and as I said, it's about $15 million is kind of what we're looking right now absent any large losses that may come through the book.
Got it and then last one for Pablo.
Talk a little bit about demand.
Yes.
Helen This theory primary should be buying more but that hasnt really been a theme thus far so.
So from your perspective, if you want to make a prediction like what what needs to happen for.
The demand become too.
Your experience what.
Needs to and what needs to happen and that lag.
Yes.
It's a good observation that demand, we didn't really Florida and the mid.
Midyear setup kind of as we expected I think we expected a little bit more demand to be realized at one one.
The demand was there by buyers.
Just didn't have the wallet to be able to purchase what they needed I think in order for.
Is that to change they need right.
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 second quarter cat losses, more volatility is residing on the income statement of primary companies they need rate to cover that and then excess rate to continue to build capacity on their balance sheet. The reinsurance. So we're watching what's going on with.
Primary market, particularly admitted market rate change.
That becomes more fulsome I think the appetite.
Whether there'll be able to realize.
<unk>.
The budget to be able to purchase the limit that they desire.
They are getting rate obviously, it takes a while to run through the books, there, but I believe that the the appetite has not gone away, it's simply a matter of managing the the limited wallet behalf of reinsurance right now.
Okay.
Thank you.
Our next question will come from your on Qunar with Jefferies.
Thank you good morning.
Kevin when you say that property cap rates are largely adequate now does that mean that when you get.
That you expect higher wheat to persist that you essentially expect them.
To hold where they are plus loss trend going forward.
Or is there room for additional rate increases beyond that here.
So.
We're focused on it 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 for the rest of that Theyre taking.
In general as a market I believe were there certain deals are better rated than other deals. So I think there are opportunities for rate increase but if we would.
If the market went and renewed is 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 adequate means and whether they are relatively satiated with the returns that they are achieving.
But looking at it from a more academic perspective, I believe rates are compensating at adequate levels for the volatility we are observing in our portfolio.
Our portfolio is a bit unique in that we do capture alpha above what we consider to be the market and then theres distribution across our.
Our owned and rated balance sheets provide us additional 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.
Got it.
Can you opine on what loss trends are like in property cat.
The best estimates.
I'm not sure I understand your question.
Alright, I guess, what do you see as the.
Rate of increase of costs.
Property catastrophe.
I think.
So there is kind of known things to think about and then.
And 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.
On covered perils.
When we think about that.
We spend a lot of energy.
Determining the rate of change and I believe we've talked about this on other calls that we think nature has outpaced science.
We have spent a lot of time trying to think about what the climate right.
Climate ramp looks like.
Today's today's regime to what we think a hotter world looks like in the future and then trying to stay ahead of the rate of change between the current state of the future State I think we've done that well I think R. R.
The shape of our curve reflect what I think is 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.
In the industry social inflation is another one thats difficult to monitor but I think we've done a good job staying ahead of what is likely the future state.
Thanks, so much.
Thank you.
Our next question will come from Josh Shanker with Bank of America.
Yeah, Kevin I don't mean to catch you and Bob.
And the conflict 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.
Your capital utilization on your risk exposure. However, you want to measure it is lower than it was last year.
Is there a disconnect there and how do you guys think about those two things if I'm, if I'm putting correctly.
Firstly, Bob and I are completely in sync.
Bob.
We may have used different where youre absolutely right that those are two things, we said so leading into the property cat market was.
You have to adjust for rate.
So when we look at our percent of equity exposure, including rate and reinstatement premium and watching the effect of that it's also against the bigger equity base. So we've shifted the shape of our overall portfolio.
So that we have reduced the amount of frequency risk were taking and southeast and as a percent of equity basis upheld our.
Net negative impact from large catastrophe for large wind storms are catastrophes in the southeast relatively flat.
I think.
On a risk.
Basis absent the effect of rate there might be a way to say that those are inconsistent, but when <unk> 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 that we're taking.
The other thing is included in my comments is the reduction in other property. So our other property contribution to southeast wind storm would be lower which allows us to further lean into the property cap market.
When you think about doing this over a 30 year period, what kind of market needs to occur for you to meaningfully increase.
The <unk>.
Risk adjusted.
Exposure of the portfolio.
That's a good question.
Sure.
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 to great returns that we could get for a relatively consistent level of risk.
I think thats the right strategy. It's also why we bought validus so by buying valid as we can.
Can take.
Our existing portfolio and fully exposed with effectively what is <unk>.
A 30% quota share of our book.
Date of close if we were to try to leverage into a.
Better cat market, which is what we're seeing right now.
Our portfolio would become on balanced and the tail would be.
More singularly exposed to windstorm.
Then we would have that we think would have been optimal by buying validus, we continue to.
Expose the tail with diversified risks and it's a better trade for investors and trying to grow solely into better property market that's being offered.
Okay. Thanks for the answers.
Thank you.
As a reminder, that is star one to ask a question.
Our next question will come from Meyer Shields with K B W.
Thanks, just a couple of questions. If I can first Kevin you mentioned expectations of an average hurricane year this year.
The casing.
Actually impact.
Underwriting decisions.
You made it at mid year or even in January .
We don't believe Thats that.
We can underwrite on a forecast because we don't think it's fair to our clients, who look for us to provide consistent.
Capacity we.
Do use our understanding of what is the market like or what is.
Likely to occur to help shape the portfolio on the margin.
Got it.
It.
Formations in landfall are very different 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 I think it helps on the margin, but we believe that as our risk to manage not our risk too.
<unk>.
Two on an annual basis.
With our customers or take from our customers.
Okay understood that's helpful.
And question on casualty and specialty reserve, but I am having a little bit of a challenge related to a question, but if the process is unchanged at the last couple of quarters that profit.
That $20 million favorable development give or take what was it in the process that led to a different outcome that pod.
The process remains unchanged, we take a look on an annual basis second question.
And then when you will look at on an annual basis, we'll take a look at the curves that we have on development. We will look at the where we are on the development along that curve you can get some rebalancing that may look at it differently. So nothing has really changed at the core.
This is part of an annual process. We go through the outcome of that process. This quarter was that we had just very very modest favorable development as opposed to what we saw last quarter.
One thing I would add to that is in different quarters there are different.
Deep dives down in different elements of the portfolio that are looked at and so it's.
It's not as if a formula has run against the portfolio and it spits out an answer theres different emphasis within different books of business at different times. So.
I would say nothing I wouldn't read anything into.
Reserves at this point I think our reserve I feel equally good this quarter as last quarter as a quarter before with the reserve profile that we have and how things are developing on an actual versus expected basis.
Okay and then one final question if I can.
And this is I think for Kevin can you talk about second quarter catastrophe losses approaching $30 billion so far.
Feed from public company book manageable, even if they are painful is that a fair representation of what the length of the broader market or could get to the second quarter losses year to date losses impact cat reinsurance purchasing program.
So some of these covers are so some of the deals that have happened or are geographically small, but rather large in that 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 win season. This year due to the activity in the first quarter. So I think that's another reason that there's going to be more retained at the primary level.
So.
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 than than one would have normally expected.
The fact that more of its residing with primary companies. It is not surprising and the fact that some regional companies are benefiting from recoverable because of the concentrated nature of some of the events.
Okay perfect. Thank you so much.
Thank you.
Our next question comes from Mike Zaremski with BMO.
Hey, good afternoon.
Couple of.
Runs on Validus.
So.
Can you talk about the addressable cost base.
Now that you've had out a more comprehensive integration planning taking.
Taking place.
We're not giving that exact synergies on that cost base to what is the addressable cost base and then also on Dallas.
In the prepared remarks did you change the amortization schedule that you had previously given guidance on and May or maybe I just heard incorrectly.
Let me take that a couple of them like the synergies are going to be an outcome of a process of bringing two great companies together, 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, we're going through the addressable cost base is about $150 million to $160 million the perp.
On addressing the amortization was we talked about in the call originally that the distribution or the allocation between that $900 million of excess purchase price most of that 80%, 90% is going to be hard it was going to be amortized over time, a lot of that is long lived 10 years, but what I was trying to emphasize that the bulk of.
That Mike.
Mike will go the amortized 40% over the first two years, so what youre going to see is massive noncash dilution to our earnings and we're going to show you that separately in the disclosures once we get through to the 10-K, so that'll be fairly transparent, but what we like to show us how fast that's going to really quick.
So that was appointed that spec comment nothing.
Nothing okay.
Understood Okay.
I guess lastly.
If we.
We're privy that kind of.
I guess.
ECS U S cat losses.
In the first half of the year.
Would you say <unk> <unk>.
Market share.
U S losses have kind of been in line ish with your internal expectations.
Yes, Brian .
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 had even last year, but I don't necessarily think about it as a U S market share perspective, because theres different barrels in different regions.
I think about it is 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 and the driver of the tail risk remains southeast wind and as I already mentioned, that's relatively flat, so a little bit about better balance in our.
In your terminology in our market share, but relatively consistent.
Portfolio compared to last year, with a little bit better diversification and balance in the tail.
Thank you.
Thank you.
Our last question will come from Brian Meredith with UBS.
Yes, Thanks, Kevin a couple of them here for you first just curious with 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 124 renewals.
Okay.
I think I think the.
I think any any storm of reasonable size is going to settle the market.
I believe the market is up a bit.
Is enjoying is enjoying the benefits of the hard work that.
That we've achieved.
To bring rate adequacy.
There is still a sense of.
Or an expectation that results need to be achieved for.
The market.
Fully believe that this is adequate so I think.
Even just a loss of premium for some place like Florida will have a material impact on.
Capital's need for additional rate to continue to service that reinsurance market.
The size of that is hard to predict.
And I think.
But I think it's one.
Which is another <unk> type storm.
We expect that the market reaction to be at least as strong as what it was last year.
Perhaps we can achieve the same percent rate increase, but I think rate increase would be required for capital to remain committed.
Got you and then just my second question just curious what's your thoughts and I know you talked a little bit about the capital markets players, 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.
Anticipate any potentially happening here between now and the beginning of the year.
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.
Alternatives in terms of what's going on with some of the more.
Noteworthy allocators into ILS is there alternative allocation still probably at the high end of where they'd like at ILS fits into that so that there's a reticence to commit more I think areas in which they have greater familiarity are producing good returns. So the competition against dialogue remains robust.
I think the issues with collateral and fronting.
Covid and other things trapped collateral are 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 unmet we bring rated balance sheets to clients. So it is a form that they're used to and we bring our expertise and our entire platform.
Governance to capital so that they have the comfort of knowing that its the rent re franchise that supporting their investment.
I don't believe we will be in a state where we are.
<unk>.
Impacted with the limited appetite for ILS, but I think the appetite for ILS will remain challenged going into year end.
Got you very helpful. Thank you.
Sure. Thanks.
Thank you.
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.
Thanks to everybody for joining the call. We restored we reported a strong quarter in which we significantly advanced both our financial and strategic objectives. Each of our three drivers of profit met or exceeded expectations and going forward. We're excited about the validus reaction acquisition and its ability to drive shareholder value.
So thank you.
I appreciate the attention on the call and look forward to speaking to you next quarter.
Thank you ladies and gentlemen, this concludes the Renaissance REIT second quarter 2023 earnings call and webcast.
Please disconnect. Your line at this time and have a wonderful day.
Yeah.
Yes.
Yes.
Okay.