Q3 2023 RenaissanceRe Holdings Ltd Earnings Call
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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 third 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 go ahead.
But to be choppy.
And welcome to Renaissance released third 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.
These statements, including new and updated expectations for our business and results of operations. Following the value of this transaction.
It's important to note that actual results may differ materially from the expectations shared today.
Information regarding the factors shaping these outcomes can be found in our SEC filings.
Our earnings release.
During today's call. We will also present non-GAAP financial measures reconciliations to GAAP metrics and other information concerning these non-GAAP measures may be found in our earnings release and financial supplement which are available on our website at <unk> Dot com and now I'd like to turn the call.
Over to Kevin Kevin.
Yes.
Thanks, Keith Good morning, everyone and thank you for joining today's call I'd like to begin today by highlighting two significant accomplishments the closing of the Validus acquisition and our overall strong performance in the third quarter.
Both are a direct outcome of the disciplined implementation of our strategy.
This provided us the clarity of focus and consistency in execution necessary to seize the many opportunities that have presented themselves. This year.
Beginning with balances since announcing our planned acquisition in May many teams have been working diligently across multiple work streams our collective goal.
In closing the transition transaction as quickly as possible. It is a testament to the team's hard work that we were able to get this all done by November one.
To express my gratitude to everyone at AIG at Validus and it ran re who contributed to this outstanding achievement.
Bob will walk you through the financial details before he does however, I would like to reflect on how the Validus acquisition accelerates our strategy and provides us a competitive advantage.
Adding <unk> to our existing platform makes us a leading global P&C reinsurer and positions us to be the premier broker market for P&C reinsurance.
And further scale and diversification provides.
Patient growth in attractive lines, and a highly favorable point in the market cycle.
Further increases our access to risk by providing new costumers lines of business and platforms.
To access the geographies.
It enhances the economic outcomes for each of our three drivers of profits deepens, our relationships with AIG one of the world's leading insurance companies through this win win transaction and return they are making significant investments in our common equity as well as our capital partner businesses and finally, it added valuable new tool.
<unk> talents and capabilities by combining.
Two of the best teams and portfolios in the industry.
In short acquiring Validus further extends what we have already achieved organically this year.
We have now reviewed the validus underwriting portfolio in greater depth.
As a result, we are increasingly excited about this transaction for several strategic and financial reasons first we believe that there is upside potential to our original estimate of $2 $7 billion of incremental premium.
We have communicated this to our customers and brokers and their feedback is doomed consistently positive.
Second we believe we can support the validus underwriting portfolio with 30% less capital. This is due to the efficiency of our integrated system as well as the support of our capital partner balance sheets.
Yes.
Our flexible capital structure and focus on reinsurance make us the ideal counterparty for AIG.
Going forward Aig's investment in us.
Means we can jointly benefit from the underwriting portfolios future performance.
Third we are obtaining a large investment portfolio supporting our pool of reserves through which we have limited exposure. This is due to a reserve development agreement with AIG.
The current interest rate environment is more than 100 basis points higher than when we announced the deal as a result of the Validus investment portfolio will serve as an even stronger tailwind to profitability.
Finally.
We have always been impressed by the quality of people that validates the talent pool ramp deeper than we even expected.
Consequently, we extended offers for either full time or transition roles to many validus employees.
Successful integration of the Validus business will be a focus over the next year since may our team has been working closely with Validus re in AIG to understand Validus res operating model processes and systems. Our goal is to quickly bring our two companies together and to operate as one entity.
I am pleased to say that we have made significant progress towards this goal specifically.
By this Monday, the Validus portfolio will be represented in our underwriting system Rems.
Actually I just received an email that thats done already and all underwriters will have access to the combined portfolio with the same view of risk.
We have already implemented several technology solutions to allow teams to easily collaborate across legacy systems and data and many of our employees have already mortgages shared offices, so that they can sit together.
All remaining malls will be completed by the end of the week.
In summary yesterday, we delivered on our promises regarding the accurate its acquisition of Validus re.
We are privileged to have had the opportunity to acquire such a high quality asset from AIG.
Thanks, Peter Zaffino and his leadership team.
Integral to the success of this transaction, we are pleased to be associated with AIG and look forward to a long and successful relationship.
In short I could not be more excited about our future.
Shifting now to our strong strong financial performance in the third quarter.
We earned over $420 million of operating income.
This represents an operating return on average common equity of 25% year to date, we earned $1 2 billion and operating income and delivered a 28% return on equity.
This is an impressive outcome for two reasons.
This performance was not driven by any one time factors or unusual circumstances, rather each of our three drivers of profit made solid contributions to our financial performance in ways that are likely to persist.
And we obtained these results even with the catastrophe losses and the financial drag from pre funding the Validus acquisition.
This outcome is before including the Bottomline contribution Validus will bring we have built a solid financial financial Fund Foundation upon which we will now overlay validus.
This will further bolster each of the three drivers of profit as a result, I am very excited about our opportunities to create shareholder value next quarter next year and into the foreseeable future.
That concludes my opening comments I will provide more detailed update on our segment performance at the end of the call, but first Bob will discuss our financial performance for the quarter.
Thanks, Kevin and Hello, everyone as Kevin said this was another strong quarter, both financially and strategically financially we delivered net income of $194 million operating income of $422 million.
And an annualized operating return on average common equity of 25%.
These operating results were strong on their own but reflects a five percentage point dilution from the additional capital we raised for Validus acquisition with the closing of the transaction yesterday. This capital has been now been put to work.
There are three drivers of profit underwriting fees and investments continues to contribute significant income for our shareholders strategically we were pleased to close the Validus acquisition yesterday. This transaction building solid foundation for the continued execution of our strategy. It is immediately accretive to each of our three drivers of profit.
As well as our book value per share earnings operating earnings per share and operating return on equity today I would like to highlight a few key financial takeaways from the quarter before I discuss our results in more detail.
We will also discuss the valence transaction.
Including how we will report it in our financials and the impact on our fourth quarter results and finally I'll provide an update on the recent Bermuda corporate income tax proposal.
Starting with some highlights first we delivered a solid underwriting performance in a quarter with a significant level of cat activity reporting a combined ratio of 78%. While this was acquired in the third quarter than we experienced in the last three years industry cat loss estimates in the U S are approaching $20 billion exceeding.
Exceeding the 10 year media.
So I think the industry loss this quarter came from secondary barrels and our results are benefiting from the higher rates and attachment point that we required from 2023 seconds.
Second fee income was $65 million more than double Q3 last year and up 14% from the second quarter of this year. This reflects increased partner capital under management compared to last year and higher performance fees and strong underwriting results.
Third retained net investment income for the quarter was $217 million. This is almost double a year ago and up 14% from the second quarter of this year. This reflects our continued rotation into higher coupon securities as well as higher invested assets related to the capital we raised for the Validus acquisition and.
Finally, we believe we are in a strong capital position, even after paying for the Validus acquisition as we approach the January renewals and we are focused on deploying our capital in the profitable business opportunities in this attractive market.
I'll now move onto a more detailed discussion of our third quarter results and starting with our first driver of profit underwriting.
Barry mentioned, we delivered a 78% combined ratio was solid current accident year results and incur in the quarter with catastrophes across both segments. We also had a nine percentage point unfavorable development year to date, we're running at a 79 combined ratio, even with an estimated industry losses approaching $100 billion.
And record industry losses from severe convective storms.
Overall gross premiums written in the third quarter were down 27% and net premiums were down 22% I'll cover this in more detail through my comments that the reduction primarily related to one lower reinstatement premiums in our property book due to lower catastrophe activity and reduction in mortgages due to the nonrecurring deal.
Last year in active cycle management in our casualty segment.
Over the last several quarters. We have told you that we have been allocating our capital to the lines such as property excess of loss and faculty, where we're seeing the best returns year to date property catastrophe net premiums written are up 18% or 40% without reinstatement premium and specialty is up 38%.
Now moving to our property segment in the third quarter is not a significant renewal period for our property catastrophe book will catastrophe net premiums written declined by $229 million $208 million of this reduction was 91% related to reinstatement premiums.
Last year Hurricane Dorian resulted in significant losses, and significant reinstatement premiums, which did not repeat this quarter.
Balance of the reduction relates to the timing of seeded contracts.
Previous quarter, we have continued to reduce risk in our other property business. This line continues to benefit from significant rate increases and although net premiums written were down 6% risk is down substantially more.
We reported an overall property combined ratio of 53% with a current accident year loss ratio of 46%.
As I mentioned previously there were significant cat activity in the quarter large loss events had an overall negative impact of $78 million on our consolidated results $57 million of this net negative impact came from the Hawaiian wildfires and Hurricane Dahlia.
Despite this cat activity other property performed well and with a combined ratio of 78%. The current accident year loss ratio was 66% with large losses contributed 12 percentage points to this ratio.
Overall for the property segment, we reported 19 percentage points of favorable development.
Property acquisition ratio was elevated compared to the prior year period, driven by the impact of reinstatement premiums last year, otherwise the ratio would have been down.
Moving now to our casualty and specialty portfolio net premiums written were down by $149 million or 13%.
This included $100 million of one off mortgage transactions from last year with earn out over the next several years.
In addition, we continued to manage the cycle to grow in attractive areas and reduced on deals that do not meet our return hurdles as a result growth in other specialty was offset by reductions in professional liability.
Our casualty and specialty combined ratio was 97%, which is slightly elevated compared to recent quarters. This was driven by specialty losses, which contributed three percentage points to the combined ratio. This primarily relates to the marine and energy book, which we have been growing at very attractive returns. However, it is exposed to cat like this volatility.
From time to time.
We reported one four percentage points of favorable development in the casualty and specialty segment and continue to feel confident in the robustness of our reserves despite the inflationary environment.
Year to date, the casualty and specialty combined ratio is 94% and we continue to expect a mid ninety's combined ratio after adding talent.
Moving now to fee income in our capital partners business.
Fee income increased to $65 million.
By strong management and performance fees management fees were $44 million up 78% from the third quarter of 2022, reflecting the increase in capital managed in our joint ventures.
<unk> were $20 million this quarter, reflecting continued strong underwriting performance year.
Year to date redeemable Noncontrolling interest increased by $1 2 billion.
More than half of this increase relates to the net capital inflows in da Vinci and the DC, which should continue to be a positive accelerators for fees.
Moving now to investment where retained net investment income was $217 million nearly double the third quarter of last year.
Our retained yield to maturity of 6% continues to drive up the net investment income return, which is four 9% this quarter.
Our investment portfolio remains defensively positioned and our retained portfolio, we have reduced exposure to credit and equity and shortened duration to two six years, which is down from three two years at the end of 2022.
This quarter rising rates led to retain mark to market losses of $220 million.
Pained unrealized losses in our fixed maturity investments have gone up to $585 million or about $11 43 per share.
This to accrete to par over time.
Turning briefly now to expenses the operating ratio ticked up by approximately one percentage point, which was the result of lower reinstatement premiums on an absolute basis increased expenses reflect continued investments in our platform to support our growth.
Moving now to the Validus acquisition as Kevin said yesterday, we were very pleased to close the Validus acquisition purchasing $2 1 billion.
Unlevered shareholders' equity for $3 billion.
As a reminder, this is one 2 billion lower than Validus as of year end 2022 equity due to the efficiency, we bring to this business by renewing onto our flexible platform.
At one point here is that we're acquiring a high quality underwriting portfolio that is supported by $4 8 billion.
Aestival assets and with the RDA, we're only retaining 5% of the reserve risk.
When I announced the Validus transaction I discussed the benefits to each of our three drivers of profit I am pleased to say these benefits still stands and in some cases have improved over the last few months, let me take you through the drivers and how they will impact our fourth quarter results.
Starting with underwriting.
<unk> portfolio has a similar composition to our own the market continues to be very attractive and we believe that there is upside potential to the $2 7 billion incremental premium figure that we provided in may.
For both casualty and property and we expect performance to be similar to our own as we renew our book onto our platform and over the course of the next year or two we expect to merge the validus balance sheet into existing Renaissance, we balance sheets.
Moving to fee income these will benefit from the increased capital is bringing to our joint ventures to support our growing underwriting portfolio. This includes a substantial expected investment by AIG into our capital partners business effective on January one.
For the fourth quarter, we continued to expect a similar level of management and performance fees as in the third quarter absent any large losses.
And finally net investment income we are very comfortable with the composition of the Validus investment portfolio. Since we announced the deal yields have continued to increase which should be a tailwind to net investment income in the future for the fourth quarter. We expect retained net investment income of about $260 million.
We expect that our results will benefit further from significant synergies related to the Validus acquisition, which should further optimize our operating leverage these synergies will be accident in the first year and realized over the coming years.
As we continue to integrate Validus, we expect corporate expenses will be elevated due to transaction related expenses in the fourth quarter. These will be significant reflecting onetime charges through 2024, we expect corporate expenses will be lower than Q4, but remain elevated due to ongoing integration costs and as a reminder, we do not include.
Transaction related expenses and operating income.
Now moving on to how we plan to report the valence transaction in our financials.
As we've discussed we are paying a premium it's $900 million over shareholder equity for Validus.
We're still settling in on the exact number we expect that the majority of this premium approximately 90% will be amortized over 10 years with nearly 40% 40.
40% of that amortizing by the end of 2024.
We plan to execute.
We plan to exclude the impact of purchase accounting adjustments from operating income. This includes the amortization of net value of business acquired and other purchase intangibles.
Our goal is to ensure that our operating income reflects the performance of our business GAAP accounting does not distinguish between tangible amortization of true capitalized expenses and those that arrived some purchase accounting adjustments, we believe that by removing the impact of purchase accounting from operating income we will better reflect the performance of our business.
To provide a more comparable metric to that of our peers and ultimately offer greater transparency of our core results for shareholders.
Purchase accounting will also impact other metrics such as the combined ratio and we plan to provide additional disclosures. So that you can see our performance without the impact of these adjustments.
Finally, let me provide an update in terms of Bermuda corporate income tax proposal.
Peruvian government recently proposed a 15% corporate income tax effective 2025, and response to the OECD global minimum tax rules.
The government has taken a collaborative approach and seeking feedback on their proposal, but we expect that we may pay more taxes, we believe that being based in Bermuda will still create a competitive advantage for us for a variety of reasons, including tax.
In conclusion. This is a very exciting day for us as we move forward as one company. After the Validus acquisition, we reported strong results in the third quarter with continued composition from all three drivers of profit we continue to demonstrate the power of our platform to deliver superior returns and as we look forward, we believe that Validus will.
Additional benefits to our shareholders across all three drivers of the profit and with that I'll turn it back together.
Thanks, Bob.
As usual I'll divide my comments between our property and casualty segments, starting with property <unk>.
Our property segment performed well this quarter delivering over $350 million in underwriting profit.
It also demonstrated its resilience and ability to produce attractive loss ratios in both property cat and other property.
Going forward each will benefit from the addition of the Validus portfolio.
Property strong performance this quarter as against a backdrop of continuing catastrophe activity.
This cat activity.
Had a much smaller impact on us than it would have had in previous years. This is due to the underwriting changes, we have made namely requiring higher rates and attachment points.
Catastrophes this quarter were a mix of large events and secondary barrels.
Beginning with hurricane of Dahlia, which made landfall on the Florida Peninsula on August 29% as a strong category three hurricane.
As joined impacted a sparsely populated area of the state, which should limit the industry loss to low single digit billions of dollars.
Additionally, the alliance town of Lehane, yet was impacted by severe wildfires in August industry, all off estimates around mid single digits billions still persist.
And finally, there were a handful of other events in the third quarter. These included ongoing severe convective storm in the United States, a flood in Hong Kong and a tornado that hit advisor plant in North Carolina.
Over the course of 2023 natural catastrophe activity has persisted although the nature of these events has deferred from 2022, we have experienced increased prevalence of smaller events and secondary barrels our scientists and rent and re risk scientists believe that weather events that have been influenced by a combination.
A slowly evolving large scale factors. These factors include the specifics decadal oscillation short term volatility due to the transition to El Nino conditions and enhanced energy in the system due to climate change.
Moving now to our casualty and specialty segment, which is also demonstrating resilience. This segment experienced some current year loss activity in the quarter year to date. However, it has returned to attract an attractive underwriting profit and strong results.
This is the positive impact of the portfolio shaping we've emphasized classes with the most attractive returns while managing the cycle returns are more challenged.
Breaking this down by class of business and traditional casualty now.
Our portfolio is weighted towards the most attractive years 'twenty to 'twenty two when rates exceeded trend.
More recently rates have been moderating. Consequently, we continue to manage the cycle. We do this by working with customers to differentiate based on performance focus on the best deals and cutting back on less attractive business.
In specialty we continue to believe that pockets of this business remain attractive following a step change in terms and conditions in 2023.
That said, we will remain disciplined as we approach these risks against the backdrop of increased geopolitical uncertainty.
And in credit we continue to see strong results, while managing exposure across the portfolio with inclusion of the Validus credit business portfolio optimization will become an increasing focus.
Moving now to the upcoming January one renewal.
This year, we head into the renewables in a favorable position in our property business last year renewables again was one of the most dislocated in recent memory.
Over the course of 2023, we achieved a significant step change in both rates and terms and conditions. Our customers' expectations are now better aligned with the market conditions and the reinsurance budgets are likely to have increased.
Looking at the market overall inflation climate change and geopolitical instability have been consistent drivers of exposure.
The industry insured losses in 2023 are likely to exceed $100 billion. Once again this puts more pressure on demand for reinsurance at.
At the same time, we have seen very little new capital into the system.
There will be no reinsurance glass of 2023 and minimal third party new capital.
As Bob explained we have a robust excess capital position and are prepared to meet some of the additional demand that said validus affords us considerable optionality.
We have substantial growth already built in the size and strength of our combined portfolio allows us the flexibility to remain disciplined.
Applies equally well to casualty as I've said many times, we think about the casualty business cycles over an approximate 10 years' time scale.
The years prior to 2020 were soft consequently, we were cautious taking risk in this area for.
Three years from 2020 to 2022, so far.
Far exceeding trend in many lines, we scaled as we scaled up quickly.
Creating a deep reservoir of what we anticipate being favorable business.
Throughout 2023, we've been exercising discipline and coming off business that does not meet our return hurdles as.
<unk> been property the Validus.
Acquisition provides us with Optionality and casualty, we're obtaining a large portfolio of well priced risk guaranteeing growth, while providing us the flexibility to be otherwise selective.
Moving now to our ILS business. It was a quiet quarter end capital partners. We can continue to prepare for the Validus integration one of the many advantages validus will bring us as growth in our capital partners business. This is because as our underwriting portfolio renews next year, we will share it proportionately with capital partners.
AIG remains on track to invest $500 million in aggregate into da Vinci and Fontana. This investment is expected to be facilitated through a combination of selling down our shares and injecting new capital to support growth or capital part of the business is performing well and the fees that generates continue to serve as a capital light.
Low volatility source of earnings.
Closing, we reported another strong quarter and what so far has been one of the most successful years to date, both strategically and financially strategically we closed a valid valid is accurate.
Strategically we closed the Validus acquisition yesterday, we now expect it to deliver value at or better than originally modeled financially each of our three drivers of profit are positioned to continue delivering results, particularly when considering the added benefits of validus. Consequently, I couldnt be more excited about.
Our potential for future performance and ability to create value for our shareholders.
With that I'll turn it over to questions. 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 mute your line when a chicken and if possible can pick up your handset optimal sound quality.
And 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.
Line is open.
Hi, Thanks, Good morning, My first question.
The January one renewals.
Kevin.
Looking for more color just on how as you think.
It increases.
Great.
On the cost side.
Risk adjusted basis.
Assuming I guess losses for reinsurance given where we are right now are modest for the rest of the year.
Great. Thanks.
Thanks Felicia.
I'm going to divide my answer between where rent re is and where the market is and the reason being is because when we with the closing of Validus. We're in a very different position going into this one. One then we were going into last year's one one as I said in my comments, we are already one company, we have all of the Validus risk.
Reflected.
On a pro forma basis in our risk systems, and we have by the end of the week all of the Validus employees co located with us.
<unk> been talking to our clients into our broker. So we go into this renewal.
Very very strong position as a single company.
Into what is a very accretive market last year, we had the conversation where we talked about.
The step change that was required in that was achieved over the course of the year. So when we go into let me just start with property. When we look at the property renewal, we're going into what we think will be a significantly easier renewal than what we experienced last year.
Because of the achievements over the course of the year I think buyers have reset expectations. One thing that didn't materialize over the course of this year as the increased demand.
That we anticipated we believe that demand will come in in 2024, so there'll be relatively steady supply because capital has not been flowing into the business at an accelerated pace. We think there's increased demand and that should create a healthy tension for pricing so from a relatively strong price.
<unk> environment, we have expectations of private positive rate change, but rate change that's not disruptive I would consider last years rate change disruptive this year, it will be positive, but more manageable.
From a casualty perspective, no go ahead sorry.
I'll keep going Kevin Thank you.
Sure. So from the casualties perspective, we've talked before that we look at casualty over a 10 year rolling basis.
Most lines of business right now.
Brining year basis.
Providing strong returns to capital, but more rate is required because of the <unk>.
Prior year rating cycles.
So we look at this market as.
Very accretive one in which.
Rate is above trend, but Paris, we close to trend in many classes. So.
What our strategy will be so we're going to reward companies that are committed to increasing rate to stay ahead of social inflation economics into pollution and overall trend. So it's really meaning that risk selection portfolio construction and underwriting discipline will be rewarded which really plays to our strength. So I think of the casualty market.
And a very strong place, but one in which underwriting will be rewarded puts us in a preferred position property very strong in specialty it's kind of like property, where it went through a step change last year.
We believe it's a strong market, we think theres good adequacy in most classes not all classes within specialty rates above trend, so again underwriting discipline and underwriting expertise will be rewarded which it plays strongly into our hand.
Thanks, and then my follow up Kevin you mentioned incremental demand I know, we're still a couple months out from the one one but could.
And you had to peg it Tom how much incremental demand do you think we could see and do you think it will all come at January one or will that be something that we'll be talking about throughout 2024.
It's a great question.
It will come throughout the course of 2024.
Thank you.
Too early for us to put a number on what's available I think the one.
<unk> point I would highlight is new demand will come at the more remote layers.
<unk> will top up their program. So I think it'll be continue to be difficult to reduce retentions.
With that there'll be more peak exposure coming so there'll be some Japanese.
Additional supply constrained just because of concentration which will add to the overall positive rate environment.
So I feel we're in a good position with the Validus portfolio coming on with our capital position with Premier was top layer to play into this is quite specifically and should help the overall portfolio, but it's difficult to calibrate exactly how much of that demand will come into the market, but it'll be our expectations assume a billions single digit billions.
Thank you.
Thank you.
Our next question will come from John <unk> with Jefferies.
Your line is open.
Thank you good morning, I guess, maybe a follow up on non for last question.
Give me more on the supply side so.
<unk>.
Im calling in on the fact, we haven't seen new entrants in ILS still seems to be holding back but at the same time and youre talking about 25% return essentially the process given the validus capital because I was.
Waiting to be deployed to calpine and for Validus.
So if I look at that and think about others that are also generating 20% returns right now.
It does suggest a good $60 billion or more of generating capital by incumbent reinsurers over the course of 'twenty three.
So I guess my question is do you think that additional supply.
Still not exceed.
Elemental demand over the course of 'twenty four.
It's a really good question.
The demand is not proportional to the portfolios that are already built so demand is the demand thats likely to come to the market, which would be the pull on the on the <unk>.
Additional supply that you referenced there from retained earnings.
<unk> going to on balanced portfolios, because it's going to be peak, driven because thats what primary companies need to protect.
So that capacity that supply can temper some of the demand.
We're going to need some of the demand, but it's not it cannot all be deployed against what is likely to come to the market, which is those top players.
If you look at what we did this year that is exactly why we bought validus. So we raised the money over the summer and what we said is that money will be fully deployed which happened yesterday. Our portfolio is 100% diversified similar to what it was prior to that and fully deployed which is not something that can.
We achieved in the short term by growth.
I think when I when we look at this the expectation of how the market is going to change in 2004 is consistent with our with our forecast and our strategy to by Validus.
Against another diversified basis against the capital we raised I think it's even more.
Important to disappoint out recognizing where we are in the market.
Got it thank you.
And then maybe shifting gears investments.
Bob I think you had referenced $260 million of expected.
Pained NII.
In the fourth quarter does that contemplate the reallocation of the investment portfolio.
Actually you are holding a lot of liquidity.
Risk free essentially.
Waiting for the Validus deal to close.
Quickly can you reallocate that into maybe.
More.
In line with longer term expectation.
Investments and how much of a lift you got from that.
That's a good question, we've been working through that as we spoke we had an ability to.
Physicians some of the portfolio up to about $500 million. So we actually were able to correct them.
There's some shorter term securities a R T bills and shorter term notes.
And I think that.
Yes.
We have the ability to position the portfolio pre purchase of that $500.500 billion allocation the $217 million will come down.
We deployed.
The one for that $3 billion, a little bit because that was being invested in there, but we had pretty significant upside already we were 2% when we looked at it probably five months ago with the repositioning of the portfolio into shorter duration similar to ours that lift is going to take us up to $2 62.
<unk> is a better reflection of the run rate this quarter and as we go into 2024, we shouldnt expect to see that continued growth.
And that continued left is that just coming from higher interest rates are also from a reallocation of the portfolio.
Our new money.
Our new money, what I alluded to it when I said in the call was that our new money rate of 6% right now and we're closing in on that so we have upside of four 9% and what we've seen this quarter of $4 seven for the year and book yield. So we will see upside we'll see it continuing to grow as Raytheon rates are kind of all around right now, but we're still benefiting from where they're at.
Thank you.
Yeah.
Our next question will come from Josh Shanker with Bank of America. Your line is open.
Yes, thank you very much given how.
Paul in the Fed's comments yesterday and whatnot.
Maybe either is going to be a.
Ending to the inverted yield curve Steepening does this change at all how you oriented investment portfolio would you have a smaller allocation just short term and be willing to go out just.
Three or four years or what's normal in the portfolio income securities that are currently maybe three months in duration.
That's a great question, we have a lot of agility in the portfolio. The team is looking at how do your leg into some longer duration right now we've seen rates moving around but it is a balancing act between what you've seen with the fed has said we will establish that the economy still seems to be on fire for the bond market players I think took some captured some duration that youre seeing right now with the tenure.
And in the five years, but we're actively looking at adjusted good question duration will not happen overnight, we'll leg into it over time.
And so Bob when you get off the phone with us.
After this call here and you have all of this $4 $6 billion in investments you've just received from AIG.
How you shape right now today.
Currently invested in a bunch of securities of Aig's choosing.
What are you going to do with that portfolio and 45 minutes.
The portfolio has a lot of it's been preposition, we got out of assets, we had a $500 million allocation that we could remove assets from that portfolio and put into T bills and Thats, what we did we directed them to do it.
Administrator and they took care of that so that got rid of thinking about things like single asset backed securities that we don't want to halt.
Things in there that we don't like that are not in our portfolio. We got rid of most of that for the portfolio is more like ours.
Than not and so I think that gives us a very distinct advantage and it's a pretty short term portfolio is around two points just under three so it's getting close to our duration.
And if I can get one more in any guidance.
Having a big boost in the investment portfolio for the last two months of the year sequentially, what thats going to do in that investor.
Net income comparing <unk> 23 to $3 23.
Two factors in that the $3 billion.
Put out there for Validus will come out of our existing portfolio and be refunded back in by $4 5 billion. So you're going to get a net increase of about $2 billion and Thats why you get up to that net change is up about $40 million to $2 60, that's how you get there.
Okay. Thank you very much.
Thanks, Josh.
Our next question will come from Meyer Shields with <unk> your.
Your line is open.
Great. Thanks, Kevin in your comments, you mentioned that you didn't really see an uptick in demand for cat cover this year, but you expect it next year I was hoping you could flesh out why you think that will play out that way.
I think we may have touched on this once or twice in our calls earlier.
Many buyers were surprised about the discipline for the change in rates that was required by reinsurers at the beginning of last year.
With that they ran out of wallet for demand that they already had identified that they wanted to purchase but I think as they are more prepared for this renewal.
Having seen the rates stick 2000 throughout the year.
No.
Have a budget process that is more flexible to include the wallet to pay for the new limit.
Okay that makes sense.
Second question I guess, one area, where we have seen some.
Capital come into the mix.
Bond market.
I'm wondering does that have any implications for vermeer.
So.
I think the capital market is has had a good year.
It's probably slowing a little bit for the pace of new money coming in.
It's something that we.
Premier is designed to be an efficient vehicle to compete with both cat bonds and.
Traditional players so more capital and activity tends to be at the <unk> internationally, it's a top layer type level, but we continue to have great success deploying vermeer.
In Lula people issuing GAAP answers, but also alongside people have chosen to Scott issue cat bonds as well so.
Okay understood. Thank you.
Yes.
As a reminder, that is star one to ask a question.
And our next question will come from Alex Scott with Goldman Sachs. Your line is open.
Hi.
First one I had is just sort of high level on growth since we looked across property and casualty it seemed like at least relative to one of your peers have recently reported there was a little more restrained around.
Where and how you are willing to grow.
Yes, I just wanted to.
Understand.
What are you seeing in the environment what are the underlying drivers of those decisions.
Seeing more opportunity at one one has to do with the Validus transaction what are the underlying reasons for that.
Yes, let me, let me start off and then Kevin.
We've seen growth all year, the third quarter is a difficult quarter and look at it on a year over year basis, because most of our renewals are done by the end of the second quarter think about one one over half of our book that's why in my prepared comments I really wanted to point you back to a year to date number year to date property cat has grown by 40% once you take out the.
The.
Reinstatement premiums in specialty, which again, we looked at the rates. Both ahead of trend. We saw that grew by 38%. So we saw the opportunity over the course of this year, but we also were selected in professional lines, we dropped by 30%. So we've made choices that were out there we have the opportunity in the market to show that growth and we've had really.
Good opportunities throughout the course of the year and that's why we pointed it back to full year. Thank.
If I can add I think bob's absolutely right, but year to date numbers look great.
I think it's important also that we were positioning the portfolio for yesterday.
And what happened yesterday as we brought in the Validus book into a portfolio that had been optimized to accept it.
The way in.
So from an underwriting perspective that book is now reflected in the Rems and the way we reflect that book is through in force gross written premium.
We have said that we believe going forward.
Gross.
Premium.
We will retain as two seven with upside the actual portfolio on an in force basis that we brought into Rems yesterday was $3 7 billion.
What enforced premium means is that the amount of premium that underwriters have the ability to touch over.
That's embedded in the Validus portfolio. So we have significant optionality when we talked about the $2 seven and we have grown tremendously because we brought in $3 $7 billion of debt.
<unk> premium against our capital base yesterday, so when I think about it we can't isolate a quarter without talking about validus because so much of what we did was to be prepared to accept that portfolio and to be operational against it today.
Okay that all makes a lot of sense.
Second one I have is.
I guess just on new capital formation in the market any any observations around what youre seeing heading into year end and how impactful that maybe to the supply and demand dynamic and I guess, you're sort of in the same vein any commentary around your third party vehicle has an ability to go out and get capital.
To take advantage.
We are using that capacity to work.
Sure.
One comment I mean, I don't believe there will be a class a 2023 I think it's very late in the cycle for that capital companies its certainly stampede.
Operational by one one.
If we were raising equity we would have done it by now because we would want to have.
These are active conversations with clients and brokers. So there may be equity raised between.
Between now and year end, but from the lens that we would put it.
Place on it it's late.
From an ILS perspective.
Or is it different.
Capital partners business than others, we tradition most of our vehicles are rated so trapped collateral and other things that have been the beam of the market don't really exist in our platform.
The fact that we underwrite all the risk.
We are the largest investor in da Vinci.
We share the risks in <unk> and across our other across our platform. So there is a sense of security in the underwriting thats achieved it Ren refer investors to feel comfortable.
<unk>.
Structures of the vehicles provide them more flexibility than traditional ILS platforms and many of our investors for that reason are in more than one vehicle, we are not constrained to grow ILS.
We are optimizing the platform against the ILS opportunities, we want to bring to that capital in the comp and the risks that we want to retain on our own balance sheets I think the rest of the market will remain a big challenge to increase certainly will not be able to increase at a scale that is disruptive to our strategy.
All very helpful. Thank you.
Our next question.
From Brian Meredith with UBS Your line is open.
Yeah. Thank you Kevin I'm, just curious there's been some other companies have talked about some potential significant opportunities in the casualty reinsurance marketplace.
Could you kind of talk about what you think from that perspective.
Yes, I think.
Well from a reinsurance perspective, I think we're in a strong position I think our capacity is strongly needed coming in with the <unk>.
Portfolio with Validus, where more important to bigger clients. We believe that there is increased recognition for the required rate. The primary level that will inure to the benefit through proportional and reinsurers seem to be developing discipline to press on ceding commissions. So when I look at it I think not every.
Your line of business is equally attractive.
Every client is equally skilled and leveraging into those attractive markets. I think we are in the best spot to grow with the most skilled.
Seasons in the most preferred lines.
There's been a lot of discussion about rate change in D&O and professional lines and I think all of those things are things that we're looking at carefully.
But I think.
The platform that we've built and the scale that we have puts us about as strong a position as one can be going into that renewal.
Okay. That's helpful. And then my second question of the two.
$2 7 billion plus premium that is coming and I think Bob you kind of alluded to this but how much of that do you believe for I think a percentage will sit on your balance sheet versus going to a third party capital vehicles.
So when I said, we just did that's the email I got.
Before coming into the call.
Which I have to say im extraordinarily proud of the team to be able to turn this around that quickly.
I can tell you we are shifting not.
Only validus book, when Reis risk sharing to optimize <unk>.
Da Vinci Fontana and all of our own balance sheets. So its not as simple of a question of saying, we're going to take 50% of the property cat from Validus and move it.
I actually shifting what is coming from Ren <unk> limited as well I would say the overall.
Fontana will grow da Vinci will grow by a smaller percentage.
Henry will drop as a percentage share with da Vinci and Fontana will ballpark be 50 50.
No.
That's without <unk> E mail, so more to come on that but that's about where we think the optimizations will lie.
Great and do you anticipate raising some more capital in the third party data da Vinci to handle the Validus portfolio.
I mean, obviously, it aig's coming in but more than that.
Well, we've got retained earnings and AIG coming in.
<unk>.
Again this is a control that we.
As a lever that's in our control and I think if you look at the capital generation. It limited and then what's going to be generated at da Vinci, Montana and then the other vehicles.
I think we're going to.
Hold relatively flat.
Additional raises with da Vinci, maybe a little bit more in Fontana.
Thanks for answers.
Yes Youre welcome.
Thank you.
That does conclude today's Q&A portion I would now like to turn the floor back over to Kevin Mcdonald for any additional or closing remarks.
Well thank you.
I would say that the last few days, it's probably been my proudest and most exciting days at Renaissance that we've seen the validus portfolio come over we are delighted to welcome. The team every diligence we did reaffirmed the quality of the portfolio and the opportunity to bring shareholder value.
We're looking at accretive markets in 'twenty four.
And I think we are in a very enviable position as we think about servicing our clients and bringing shareholder return over the course of 2024. So thank you for your time and we look forward to reporting back.
Thank you ladies and gentlemen, this concludes the Renaissance restart quarter 2023 earnings call and webcast.
Please disconnect. Your line at this time and have a wonderful day.
Okay.
[music].
Okay.