RenaissanceRe Holdings Ltd. (NYSE:RNR) Q3 2023 Earnings Call Transcript
RenaissanceRe Holdings Ltd. (NYSE:RNR) Q3 2023 Earnings Call Transcript November 2, 2023
Operator: Good morning. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe 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. [Operator Instructions] Thank you. And I will now turn the call over to Keith McCue, Senior Vice President of Finance and Investor Relations. Please go ahead.
Keith McCue: Thank you, Chelsea. Good morning, and welcome to RenaissanceRe's third quarter 2023 earnings conference call. Joining me today to discuss our results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer. First some housekeeping matters. Our discussion today will include forward-looking statements, including new and updated expectations for our business and results of operations following the Validus transaction. It's important to note that 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 today's call, we will also present non-GAAP financial measures.
Reconciliations to GAAP metrics and other information concerning non-GAAP measures may be found in our earnings release and financial supplement, which are available on our website at renre.com. And now, I'd like to turn the call over to Kevin. Kevin?
Kevin O'Donnell: 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 has provided us the clarity of focus and consistency in execution necessary to seize the many opportunities that have presented themselves this year. Beginning with Validus, since announcing our planned acquisition in May, many teams have been working diligently across multiple workstreams. Our collective goal has been closing the 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 1st.
I would like to express my gratitude to everyone at AIG, at Validus and at RenRe 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 Validus to our existing platform makes us a leading global P&C reinsurer, positions us to be the premier broker market for P&C reinsurance. Adds further scale and diversification, provides efficient growth in attractive lines at a highly favorable point in the market cycle and further increases our access to risk by providing new customers, lines of business and platforms to access new 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. In return, they are making significant investments in our common equity as well as our capital partner businesses. And finally, it adds valuable new tools, 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'll now review the Validus underwriting portfolio in greater depth. As a result, we're 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 has been 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. As 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 portfolio's future performance. Third, we are obtaining a large investment portfolio supporting a 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, the Validus investment portfolio will serve as an even stronger tailwind to profitability. Finally, we have always been impressed by the quality of people at Validus, the talent pool runs 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 and AIG to understand Validus Re's operating model, processes and systems. Our goal is to quickly bring our two companies together and to operate as one entity. I'm 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 that's done already. Then 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 moved into shared offices so that they can sit together. All remaining moves will be completed by the end of the week. In summary, yesterday, we delivered on our promises regarding the acquisition of Validus Re. We are privileged to have had the opportunity to acquire such a high-quality asset from AIG. Now I want to thank Peter Zaffino and his leadership team who are 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 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 in 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 obtain these results even with 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 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'll 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. Bob?
Robert Qutub: 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 are strong on their own, but reflect a 5 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. Our 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 builds a 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. I will also discuss the Validus transaction, which including how we'll 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 the quarter with a significant level of cat activity, reporting a combined ratio of 78%.
While this was a quieter third quarter than we experienced in the last three years, industry cat loss estimates in the US are approaching $20 billion, exceeding the 10 year median. Much of the industry loss this quarter came from secondary perils, and our results are benefiting from the higher rates and attachment points Validus Re required in 2023. Second, fee income of $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 from 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 in the higher coupon security, 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, we're focused on deploying our capital into profitable business opportunities in this attractive market. I'll now move on to more detailed discussion of our third quarter results and starting with the first driver of profit, underwriting. As already mentioned, we delivered a 78% combined ratio with solid current accident year results that incurred in a quarter with catastrophes. Across both segments, we also had a 9 percentage points of favorable development.
Year-to-date, we're running at 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. But the reduction primarily related to one lower reinstatement premiums in our property book due to lower catastrophe activity, the reduction in mortgages due to the nonrecurring deals last year and active cycle management in our casualty segment. Over the last several quarters, we have told you that we have been allocating our capital to lines such as property, excess-of-loss, and specialty where we're seeing the best returns.
Year-to-date, property catastrophe net premiums written are up 18% or 40% without reinstatement premiums and specialty is up 38%. Now, moving to our property segment, in the third quarter, it's not a significant renewal period for our property catastrophe book. While catastrophe net premiums written declined by $229 million, $208 million of this reduction or 91% related to reinstatement premiums. Last year, Hurricane Ian resulted in significant losses and significant reinstatement premiums, which did not repeat this quarter. The balance of the reduction relates to the timing of ceded contracts. In-line with previous quarters, 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 net negative impact of $78 million on our consolidated results, $57 million of this net negative impact came from the Hawaiian wildfires and Hurricane Idalia. 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 contributing 12 percentage points to this ratio. Overall, for the property segment, we reported 19 percentage points of favorable development.
The 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, which earn-out over the next several years. In addition, we continue to manage the cycle to grow in attractive areas and reduce 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 3 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 volatilities from time to time. We reported 1.4 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-90s combined ratio after adding Validus. Moving now to fee income in our capital partners business where fee income increased to $65 million, driven by strong management and performance fees. Management fees was $44 million, up 78% from the third quarter of 2022 , reflecting the increase in capital managed in our joint ventures.
Performance fees were $20 million this quarter, reflecting continued strong underwriting performance. Year-to-date, redeemable non-controlling interest increased by $1.2 billion. More than half of this increase relates to the net capital inflows in DaVinci and Medici, which should continue to be a positive accelerator for fees. Moving now to investments. While retained net investment income is $217 million, nearly double the third quarter of last year. While retained yield to maturity of 6% continues to drive-up the net investment income return, which is 4.9% this quarter. Our investment portfolio remains defensively positioned. In our retained portfolio, we have reduced exposure to credit and equity and shortened duration to 2.6 years, which is down from 3.2 years at the end of 2022.
This quarter, rising rates led to retained mark-to-market losses of $220 million. Retained unrealized losses in our fixed maturity investments have gone up to $585 million or about $11.43 per share. We expect this to accrete to par over time. Turning briefly now to expenses, the operating ratio ticked up by approximately 1 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 of unlevered shareholders' equity for $3 billion. As a reminder, this is $1.2 billion lower than Validus' year-end 2022 equity due to the capital efficiency we bring to this business by renewing our flexible platform.
The important point here is that, we're acquiring a high-quality underwriting portfolio that is supported by $4.8 billion of investable assets, and with 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'm pleased to say these benefits still stand, and in some cases have improved over the last few marks. Let me take you through these drivers and how they will impact our fourth quarter results. Starting with underwriting. The Validus 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, we expect performance to be similar to our own as we renew the book onto our platform. And over the course of the next year or two, we expect to merge the Validus balance sheets into existing RenaissanceRe balance sheets. Moving to fee income. Fees will benefit from the increased capital we're bringing through 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 1st. For the fourth quarter, we continue 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 actioned 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 in operating income. Now moving on to how we plan to report the Validus transaction in our financials. As we discussed, we are paying a premium of $900 million over shareholder equity for Validus. While we are 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% amortizing -- 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 the net value of business acquired and other purchase of tangibles. Our goal is to ensure that our operating income reflects the performance of our business.
GAAP accounting does not distinguish between intangible amortization of true capitalized expenses and those that arise on 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, provide a more comparable metrics 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 on Bermuda corporate income tax proposal. The Bermuda government recently proposed a 15% corporate income tax effective 2025 in response to the OECD global minimum tax rules.
The Bermuda government has taken a collaborative approach and is seeking feedback on their proposal. While 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. And 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 comp position 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 provide additional benefits to our shareholders across all three drivers of profit. And with that, I'll turn it back to Kevin.
Kevin O'Donnell: Thanks, Bob. As usual, I'll divide my comments between our Property and Casualty segments. Starting with Property. 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's strong performance this quarter is against a backdrop of continuing catastrophe activity. This cat activity has 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 perils. Beginning with Hurricane Idalia, which made landfall on the Florida Peninsula in August 29th as a strong Category 3 hurricane. This storm impacted a sparsely populated area of the state, which should limit industry loss to low-single digits billions of dollars. Additionally, the Hawaiian town of Lahaina was impacted by severe wildfires in August. Industry loss 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, flood in Hong Kong, and a tornado that hit a Pfizer 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 perils. Our scientists at RenaissanceRe Risk Sciences believe that weather events have been influenced by a combination of slowly evolving large-scale factors. These factors include specific to [indiscernible], 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 an attractive underwriting profit and strong results. This is the positive impact of portfolio shaping.
We have emphasized classes with the most attractive returns, while managing the cycle of returns are more challenged. Breaking this down by class of business. In traditional casualty, our portfolio is weighted towards the most attractive years of 2020 to 2022 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, focused 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 the inclusion of the Validus credit business portfolio optimization will become an increasing focus. Moving now to the upcoming January 1 renewal. This year we head into the renewals in a favorable position. In our Property business, last year renewals 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.
Industry-insured losses in 2023 are likely to exceed $100 billion once again. This puts more pressure on demand for reinsurance. At the same time, we've seen very little new capital into the system. There will be no reinsurance class 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 supports 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. This applies equally well to Casualty. As I've said many times, we think about the casualty business cycles over an approximate 10-year timescale. The years prior to 2020 resolved, consequently, we were cautious taking risk in this area.
The years from 2020 to 2022 saw Re far exceeding trend in many lines. We scaled up quickly, creating a deep reservoir of what we anticipate being favorable business. Throughout 2023, we have been exercising discipline and coming off business that does not meet our return hurdles. As in property, the Validus acquisition provides us with optionality in casualty. We are 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 in Capital Partners. We can continue to prepare for the Validus integration. One of the many advantages Validus will bring us is growth in our Capital Partners business. This is because as our underwriting portfolio renews next year, we will share proportionately with Capital Partners.
AIG remains on track to invest $500 million in aggregate into DaVinci and Fontana. This investment is expected to be facilitated through a combination [indiscernible] selling down our shares and injecting new capital to support growth. Our Capital Partner business is performing well and the fees it generates continue to serve as a capital-light, low-volatility source of earnings. In closing, we reported another strong quarter in what so far has been one of the most successful years to date, both strategically and financially. Strategically, we closed the Validus acquisition -- 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 couldn't be more excited about our potential for future performance and the ability to create value for our shareholders. With that, I'll turn it over to questions. Thank you.
Operator: [Operator Instructions] Our first question will come from Elyse Greenspan with Wells Fargo. Your line is open.
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