RenaissanceRe - Earnings Call - Q1 2021

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the RenaissanceRe's First Quarter Earnings Conference Call. This time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session you will need to press 1 on your telephone. Please be advised that today's conference is being recorded.

If you require any further assistance please press 0. I would now like to hand the conference over to Mr. Keith McHugh, Senior Vice President, Finance and Investor Relations. Thank you. Please go ahead, sir.

Speaker 1

Good morning. Thank you

Speaker 2

for joining our first quarter financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't receive

Speaker 3

a copy, please call me at (441)

Speaker 2

239-4830, and we'll make sure to provide you with one. There will be an audio replay of the call available from about PM eastern time today through midnight on May 29. The replay can be accessed by dialing (855) 859-2056 toll free or +1 40453734006 internationally. The passcode you will need for both numbers is six five four four one seven eight. Today's call is also available through the investor information section of www.renre.com and will be archived on RenaissanceRe's website through midnight on 05/29/2021.

Before we begin, I'm obliged to caution that today's discussion may contain forward looking statements, and actual results may differ materially from those discussed. Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you. With us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer and Bob Cutub, Executive Vice President and Chief Financial Officer. I'd now like to turn the call over to Kevin. Kevin?

Speaker 3

Thanks, Keith. Good morning, everyone, and thank you for joining today's call. As you saw in our earnings release last night, our financial results were impacted by winter storm URI losses in The United States as well as mark to market losses in our investment portfolio. As a result, we reported annualized return on average common equity of negative 17 percent and annualized operating return on average common equity of positive 30.3%. Despite the challenges of the quarter, I am pleased with our performance and excited regarding our future business prospects.

I believe that we continue to execute our long term strategy, and the measures we took this quarter will provide a strong foundation for growth and profitability of our business over the next several years. Specifically, I'd like to highlight three of these measures. First, we grew premiums materially in both property and casualty specialty in an improving market. Our growth was greatest in the lines where we saw the highest rate increases and expect the most sustainable long term profitability. And third, we thoughtfully managed our excess capital by repurchasing shares at attractive prices.

To begin with, opportunities to grow do not come frequently, and you need the skill to recognize these opportunities as well as the determination to act decisively when they do. January 1 was one such opportunity. By employing our flexible platform, we grew our gross written premiums in the quarter by 26% or $537,000,000 and net premiums by 37% or four seventy five million dollars both after adjusting for reinstatement premiums. As we discussed last quarter, we expect to grow net written premiums by at least $1,000,000,000 in 2021, with a little over half of this growth in our casualty and specialty book and the balance mostly coming from other property. This quarter, we also increased the contribution from property catastrophe to our business through a combination of increased ownership in da Vinci and proportionately less ceded spend.

This combination of growing top line while retaining more of the bottom line resulted in us fully deploying the $1,100,000,000 we raised last June. We did so while keeping tail risk consistent with prior years on a percentage of equity basis. This strong top line growth we delivered is the direct result of the diligent execution of our long term strategy, which is to match desirable risk with efficient capital through the application of our three superiors: superior customer relationships, superior risk selection and superior capital management. While we are a leader in property cat, we find casualty and specialty and other property particularly attractive at this point in the cycle and continue extending our leadership into these businesses. There are three main reasons why the other property and casualty and specialty businesses are appealing to us.

First, they

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are experiencing

Speaker 3

significant above trend rate increases, which should provide attractive long term underwriting returns. Second, we believe we have a competitive advantage in selecting the best risks in these businesses and monitoring their performance. And third, we have preferential access due to the trusted relationships and strong value proposition that we've developed with our customers over many years. Starting with rate trends. On previous calls, I've said that we believe we are in a hard market, and this hard market differs from many in the past, however, as it is not driven by a lack of reinsurance capital.

Rather, it is an insurance underwriting hard market. Climate change, modeling malpractice and social inflation have increased loss costs, while historically low interest rates have decreased investment income. As a consequence, strong underwriting results are necessary to generate sufficient returns on equity. Due to this necessity, we have seen rate increases exceeding trend across the insurance industry for several years now. These rate increases are approaching adequacy, and because they are necessary for profitability, they should persist.

Both our property and casualty and specialty bring us closer to this insurance risk, where we can benefit directly from improvements in underlying insurance rates, as well as more stringent underwriting from improved terms and conditions on risks such as communicable disease and silent cyber. So while reinsurance markets have been stable with sufficient capital to fulfill programs, it is still possible to realize substantial rate increases by getting closer to the business. Second, we believe we have a competitive advantage in selecting the best risks and monitoring their performance. An important aspect of our strategy is maintaining the capability to selectively choose among risks. We have sufficient scale to access business while still retaining the flexibility to increase on the best deals and decrease on the worst.

Ultimately, we believe this affords us better margins. Over the last several years, we have methodically built the necessary infrastructure access both other property and casualty business, leveraging our industry leading risk and capital management technology and underwriting expertise. There are some different strategic considerations, however, between other property and casualty. For example, we are increasingly positioning the other property book to serve as an alternative means to assume catastrophe risk. Currently, our increase in exposure to catastrophe perils is largely emerging from the other property business, where we have tripled premiums over the last two years.

Other property differs from property cat excess of loss business in that it employs quota shares per risk treaties, delegated authorities, and other pro approaches. By taking property risk in the form our customers increasingly choose to cede it, we move closer to the risk while helping students better manage their net risk. In addition to catastrophe risk, however, these pro pro rata approaches are also exposed to attritional loss. This involves a different underwriting skill that requires substantial monitoring of our partner's performance over the life of the relationship. Building the system and infrastructure necessary to evaluate catastrophe risk as well as monitor attritional risk has taken many years and much effort.

Since we are capable of underwriting both, this enhances our value proposition and puts us in a preferential position to work with customers and access the best risk. It is similar with our casualty business. We have invested in our casualty tools and methodically grown both organically and through strategic acquisition. As rate and profit margins have improved, we have expanded our positions and our customers have rewarded us with larger portions of existing programs or access to new lines. Casualty is exposed to different risks than property and typically has a complementary risk curve, lower volatility and a narrower dispersion between good and bad years, which increases our capital efficiency.

Over time, we expect capital usage to increase, but as long as our peak exposure remains property catastrophe, casualty should remain extremely efficient. At the January 1 renewal, for example, only a small amount of capital we deployed was needed to support casualty. Because of this, and provided we write profitable business, the return on required capital for casualty should be attractive. In addition to the underwriting income that we earn on casualty, it brings substantial float, which is the premium paid to us that we invest as we monitor loss trends. This asset leverage contributes meaningfully to our earnings through investment income while also reducing operating earnings volatility.

Since 2018, our casualty reserves have more than doubled to $6,000,000,000 and currently the duration of casualty liabilities is longer than property liabilities, so it allows us to extend the average duration of our invested assets and consequently improve returns. This combination of underwriting income and investment return not only drives profit, but also buffers volatility. While we have grown casualty top line materially, you have yet to see this reflected in increased profitability. The higher rates from the business we wrote over the last several years will be gradually recognized going forward as the business seasons and confident grows that rate exceeds trend. This should result in decreasing loss ratios reflected in our financials over time.

The third distinguishing factor in the other property and casualty business is that Siemens want to work with well known, reliable reinsurers that demonstrate robust enterprise risk management, high ratings, and proven experience. They want long term partners with strong value proposition who respect relationships and do not behave transactionally. They also want reinsurers with access to multiple forms of capital that can bring innovative, large scale solutions to solve their biggest problems. We believe this set of traits characterizes the reinsurer of the future, the way reinsurers increasingly need to be structured in order to be optimized for a changed market. We have worked hard to embody this ideal, and as a consequence are able to trade even more broadly with our best partners accessing the most desirable risks on the best terms.

Our third big success for the quarter was the proactive steps we took to reallocate our excess capital primarily through share repurchases. In my letter to shareholders from 2015, I explained our strong preference for share repurchase repurchases to manage excess capital. Even after deploying over $1,000,000,000 of capital at the January 1 renewal, we continued to hold more than ample dry powder to capture additional underwriting opportunities this year. At the same time, we believe that our share price did not reflect the significant improvements in rates we have been experiencing nor the strength of the earnings engine we have built. Bob will discuss these repurchases in greater detail, but we viewed it as an attractive opportunity to reallocate a portion of our excess capital in a way that we expect to be accretive to shareholders over the long term.

Before I hand it over to Bob, I'd like to briefly comment on our plans to return to working from our offices. We have always had a strong collaborative culture, and I believe we work best when we work together. We will be diligent in planning our return to our offices, following best practices and always putting the safety of our employees and other stakeholders first. That said, I look forward to when we can return to our pre pandemic operating model. That concludes my opening comments.

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

Speaker 1

Thanks, Kevin, and good morning, everyone. As Kevin discussed, we reported a net loss of $291,000,000 and positive operating income of $4,000,000 for the quarter. These results were primarily driven by winter storm Uri along with mark to market losses in our investment portfolio. Now before I discuss our results in more detail, I want to call to your attention to the enhancements that we made to our earnings release. Our goal was to provide investors with additional disclosure on important themes in the quarter, draw attention to key metrics, and simplify the overall format.

With these enhancements, my comments today will focus on our accomplishments during the quarter and items that drove our consolidated results, including our three drivers of profit, share repurchases, and continuing expense leverage. Starting with our consolidated results where we reported an annualized return on average common equity of negative 17%, primarily related to mark to market losses in our strategic investment and fixed income portfolios. Our annualized operating return on average common equity was 0.3%, primarily driven by winter storm Uri, which I will refer to as Uri. We closed the first quarter with a book value of approximately $7,000,000,000 which decreased by $482,000,000 or 6% from December 2020. This decline was primarily from two factors.

First is the $291,000,000 net loss for the quarter that I previously mentioned. And second, we repurchased 1,100,000.0 shares for a $172,000,000 at an average price of approximately $160 per share, which reflects an average price to book of 1.15. We continued to repurchase shares after the quarter end. And as of April 23, we have repurchased an additional 330,000 shares for $55,000,000 at an average price of $168 per share. In total, this year, we have repurchased 1,400,000.0 shares for $227,000,000 at an average price of a $161 per share.

We have a long track record of being good stewards of our investors' capital and believe that these repurchases have been an attractive opportunity to reallocate a portion of our excess capital to shareholders. I'll now shift to our three drivers of profit, starting with underwriting income. We grew our top line significantly in the quarter with gross premiums written $627,000,000 or 31%, with the property segment growing $396,000,000 and the casualty segment growing $230,000,000. We reported underwriting losses of $36,000,000 in the quarter and a combined ratio of a 103%, 27 points of which related to Yuri. Yuri had a $180,000,000 net negative impact on our overall results with a 137,000,000 related to property catastrophe, $40,000,000 related to other property, and 3,000,000 related to casualty.

For our property segment specifically, the gross premiums written growth of nearly $400,000,000 was split roughly equally between property catastrophe and other property. Excluding the impact of $90,000,000 in reinstatement premiums, however, growth in property premiums was about 25% with two thirds of that growth in other property. Other property gross premiums written grew by $200,000,000, a 71% increase from the prior period. This reflects our growing expansion in primary property E and S plus additional underwriting opportunities we are seeing in our other property class of business. Property catastrophe grew by 21% or 11% excluding reinstatement premiums, but that's on a much larger premium base of $1,000,000,000 We reported a combined ratio of 107% in our property segment, driven by a 54 impact from Yuri in the quarter.

Most of these losses were on our property catastrophe business. As a reminder, however, other properties also exposed to catastrophe risk, and Yuri had 15 impact on both the combined and current accident year loss ratio for this class of business. Excluding the impact of Yuri on our other property book, attritional losses are running about 50%, which is within our expectations for this business. And moving on to our casualty specialty segment and results. As we discussed on the last call, we had a very successful January renewal.

And I'm pleased to report that this is the first quarter our casualty segment gross premiums written have surpassed $1,000,000,000 growing by 29%. Except for financial lines, premium growth was at or above 30% in all disclosed casualty lines. Other than the small impact of Yuri, there were no individually significant events in the quarter. There was a small amount of favorable prior year development, and the combined ratio for casualty was 98.9%. Now finishing up the underwriting section, I want to briefly address COVID-nineteen.

This time last year, we reported our first COVID nineteen losses, which were primarily in the casualty book. This quarter, there was no significant changes to our COVID nineteen losses. That said, this is a developing situation, and we will we will receive more information over time. We'll continue to monitor COVID-nineteen development across all segments and lines, and our current reserves represent our best estimate of potential losses. Now moving on to our second driver of profit, fee income, which totaled $24,000,000 and is down from $45,000,000 in the first quarter last year.

This decline is driven by a $23,000,000 reduction in performance fees, primarily in da Vinci and Upsalad related to Yuri. As a reminder, when a significant event occurs in the quarter, we typically unwind previously booked profit commissions. This can result in negative performance fees like you see this quarter. Management fees continue to grow, and we expect that they will increase over time as we continue to grow our joint ventures. Overall, the net noncontrolling interest attributable to these vehicles was $47,000,000 This was driven by reported losses in da Vinci and Medici, which were partially offset by income in Vermeer.

As I said last quarter, we raised $730,000,000 in capital Upsilon, Da Vinci, and Medici effective January 1, which included $131,000,000 of our own capital. As a reminder, as part of this capital raise, we increased our stake in Da Vinci to 28.7% effective January 1. Subsequent to January 1 capital raise, we raised an additional 132,000,000 in Medici with $28,000,000 in the first quarter and 104,000,000 effective April 1. As a result of this new capital, our ownership percentage in Medici declined slightly on April 1 to 13.7%. Turning now to our third driver of profit, investment income.

Our investment results declined in the quarter due to rising interest rates and volatility in our equity portfolio. Net investment income was $80,000,000 offset by $346,000,000 in mark to market losses. This resulted in total investment results of negative $266,000,000 The $262,000,000 in mark to market losses from our fixed maturity portfolio related to the sharp upward movement in treasury rates during the quarter, particularly at longer dated maturities. This increase in interest rates has improved the yield on our retained fixed maturity portfolio to 1.5%. The duration on our retained portfolio has increased slightly to three point seven years.

The $68,000,000 mark to market loss in our equity portfolio was primarily related to our strategic investments portfolio, more specifically $91,000,000 related to our long term investment in Trupanion, offset by gains in the remainder of our equity portfolio. Trupanion has been a tremendously successful investment for our shareholders over the last fourteen years, generating an annualized internal rate of return of 35% on a $6,000,000 investment. Given the rapid appreciation of our investment in Trupanion last year, we took steps early in the quarter to rationalize our exposure. We sold down about 1,300,000.0 of our 2,800,000.0 shares, generating proceeds of about a $130,000,000. Subsequent to the end of the quarter and as of April 27, we sold an additional 411,000 shares of Trupanion, generating another additional proceeds of $33,000,000.

Now before I move on to expenses, I wanna tell you about an investment we made that ties directly with the first prong of our ESG strategy, promoting climate resilience. We were a seed investor in BlackRock's new US carbon transition readiness fund, which is aimed at identifying the winners of the transition to a low carbon world. This investment provides another opportunity for us to proactively manage climate risk on the underwriting, capital partners, and investing sides of our business. We were excited to participate with a $100,000,000 investment in the ETF launch on April 8 with a total of 1 and a quarter billion in assets, making it the largest exchange traded fund launch ever. Now I'll provide additional information on expenses and foreign exchange gains.

Starting with the acquisition expense ratio, which remained flat overall at 23%. There was some noise between segments, and the casualty acquisition ratio increased by three percentage points to 28%. This primarily relates to the impact of purchase accounting adjustments on last year's expenses. Meanwhile, the property acquisition expense ratio declined, driven by an increase in reinstatement premiums. As a reminder, the current expected run rate of our casualty expense acquisition ratio is in the upper 20s, So this quarter was within our expectations.

Our direct expense ratio, which is the sum of our operational and corporate expenses divided by net premiums earned, declined by three percentage points from the prior period to 6% for the quarter. This was driven by a decline in expenses as we continued to leverage our platform. Both operational and corporate expenses declined in the quarter on an absolute basis. The decrease in operational expenses is related to reduced travel and entertainment expenses in the 2021 due to the COVID-nineteen pandemic. The decrease in corporate expenses is related to higher one off expenses in the 2020 related to our acquisition of TMR.

Going forward, as we grow our top line, we'll also continue to invest in the business to support our growth. However, we plan to do so at a proportionally slower rate and expect our direct expense ratio run rate to be generally consistent with this quarter. We reported a $23,000,000 foreign exchange loss in the quarter. Approximately two thirds of this loss relates to Medici and has no impact on our bottom line as it's backed out through noncontrolling interest. The remainder relates to our underwriting activities.

So in summary, we were very pleased with our strong underwriting growth this quarter and an improving market. We believe this growth, along with the increased earnings potential of our fee business, anticipated rising yields in our investment portfolio, and ongoing leverage of our expense base will continue to contribute to shareholder value. Now with that, I'll turn it back to Kevin.

Speaker 3

Thanks, Bob. As usual, I'll divide my comments between our Property and Casualty segments, starting with Property. After January 1, the first quarter of the year tends to be quiet for our Property portfolio marked by preparation for fourone and midyear renewals. This quarter, however, winter storm Uri brought ice, snow, and freezing temperatures to a large portion of The US, resulting in physical damage and power outages, most notably in Texas. As Bob explained, we are estimating a net negative impact of a 180,000,000 from this event, predominantly in our property catastrophe class of business.

In general, Texas insurers tend to have lower attachments on their reinsurance programs, which we believe will result in a greater proportion of the industry loss being shared with reinsurers than in a similar sized loss in a different region. Additionally, we expect that shortages of materials and labor, as well as COVID-nineteen restrictions will amplify loss costs. While not an unusual event statistically, the last time a comparable winter storm struck Texas was 1899, and I expect many in the industry were surprised by the size of this loss. Undoubtedly, there will be discussions across our industry if this is yet another example of the growing impact of climate change on our business. We always capture freeze for any US cat risk we underwrite, including in The Gulf.

That said, systemic losses caused by widespread power interruptions can be challenging to model given the heavy tail distribution. Our other property business was not as impacted by URI as we do not write much residential quota share in Texas, and we reported a decent profit in the quarter. Our conversations with clients in Japan at the April 1 renewal were productive and the renewal proceeded smoothly. As expected, we grew predominantly with our existing clients driven by increases in limit and rate. Wind rates in Japan were up about 5% to 10%, while earthquake rates were up low single digits.

We are deep in preparations for the Florida renewal, and while we anticipate continued upward rate momentum, it is too early to predict what the outcome will be. We have sufficient excess capital to grow if rates are adequate, but structural issues in Florida continue to be a concern. Overall, Florida domestics have not performed well for many years, with several Florida insurers having experienced ratings downgrades due to poor operating results. This trend is likely to continue into the first quarter as many Florida insurers have diversified into Texas, making credit risk an increasing important consideration when underwriting these companies. Even more troubling, some seasons continue to report adverse development on Hurricane Irma, almost four years after landfall, well past the three year period for filing a claim.

Irma did not impact our results in the quarter, but nonetheless brings into question the supposedly short tail nature of these liabilities as well as the efficacy of prior legislative reforms in Florida. We welcome recent efforts by Florida's governor and senate to limit social inflation, but anticipate that few of the proposed reforms will be enacted and any actual benefit to the market will be minimal. So when we anticipate opportunities to grow during the remainder of the year, we are not necessarily referring to the Florida domestic market. I have spoken critically about this market for many years, and it represents an increasingly smaller portion of our property book. Several Florida companies have been good partners of ours for decades, and we will continue to support them on reasonable terms.

As for the remainder of the Florida market, we believe additional material rate increases are necessary to offset credit risk, operational deficiencies, and social inflation. Absent these increases, we are unlikely to provide additional support and may even consider reducing for the second Specialty segment, where we continue to enjoy the benefit of accelerating underlying rate increases across multiple lines of business and geographies. We believe that the expected profit on this book coming out of the January 1 renewal is strong, although it will take time for this to be recognized in our financial results. April through July is active for casualty and specialty renewals, and conversations are progressing as expected. Many of these deals did not benefit from COVID related rate increases last year, so we believe that rates will continue to improve.

While we are monitoring supply and demand dynamics, we are entering the renewals in a leadership position and currently anticipate mostly stable terms and conditions with growth driven by underlying rate increases. There were a number of potentially high profile casualty events during the quarter, including winter storm Uri, the Greensill insolvency and the Ever Given blockage of the Suez Canal. Winter Storm Urie had a minimal impact on our casualty business, and we anticipate losses will be relatively muted as Texas energy companies tend to buy less liability limit. Regarding the Greensill insolvency, Greensill's model involved complex and opaque financial engineering. And as a result, we have consistently declined to participate on their reinsurance panel.

While we may have some indirect exposure, we do not currently anticipate material losses from this event. With respect to the ever given Suez Canal blockage, this could impact specialty lines such as hauled cargo and marine liability, and we expect that there will be multiple complex claims from various parties attempting to recover from insurers. While the losses to these primary insurance markets could be significant, we do not anticipate that we will be materially impacted. However, if material liability claims arise, our exposure could increase. Closing now with the Capital Partners business.

This quarter, we rebranded our ventures business as RenaissanceRe Capital Partners. This change reflects our partnership approach, strong alignment with third party investors and growing leadership in the partner capital management space. Chris Parry assumed leadership of the Capital Partners team and will continue reporting into me. Also as part of the rebranding, the strategic investments pillar of our business has been renamed Renaissance Re strategic investments. Strategic investments is responsible for seeking and managing our own public and private investments that generate attractive risk adjusted returns while advancing RenaissanceRe's business objectives.

This team will be led by JJ Anderson reporting into Bob in the finance team. In conclusion, our fortress balance sheet served us well this quarter. Despite significant catastrophic losses in volatile equity and fixed income markets, we were able to return capital to shareholders at attractive multiples, while remaining strongly capitalized and highly liquid. I look forward to executing our strategy in a strong market through the remainder of the year with each of our three drivers of profit positioned to benefit from improving conditions: improving margins on a larger book of reinsurance growth in our Capital Partners business and increased net investment income from rising interest rates. This combination of strong execution in the business, coupled with the return of capital, should continue contributing to shareholder value throughout the year.

Thank you. And with that, I'll open it up for questions.

Speaker 0

Your first question is from Yaron Kinar of Goldman Sachs.

Speaker 5

Thank you very much. Good morning, everybody. So a couple of questions. First one, when looking at the proxy, I think there's a 7% hurdle for average growth in book value per common share plus a change in accumulated dividends in order to achieve 100% compensation. So is the read through from that that the company believes that a high single digit ROE is a good target?

Speaker 1

Hey. Thanks for the thanks for the question, Yamar. Look, that's the proxy, and that's how we look at the growth in book value per share. And that's a function of earnings, you know, the return on earnings. It's a function of capital management.

And also included in there is an expense measure to make sure we're efficiently managing the platform. What we're really focused on is return on equity and our three drivers of profit that we talk about in our comments. I think when Kevin talked about how excited he was on the underwriting book, we deployed a billion dollars that we raised into what we feel is a rate exceeding trend in a very profitable business that will inure to us over time. The second thing that we both talked about was the fee income. That's a huge driver of our profit.

We added yet more capital to the Renaissance Free Risk Partners under Chris Perry. And I think we see exciting opportunities in the management fees, and that will continue to grow as we add more assets there. Third driver of profit, it's huge. It's the investment portfolio at $13,000,000,000 on a retained basis. It's not generating a lot of yield, to be perfectly honest.

It's 1.5%, but what we're not doing with that is in search of yield. We're being good stewards of the capital and consistently managing it, optimizing it to reflect the shape of our business to be in position for raising rights. Those are the three factors that we really focused on with the board and what we're trying to drive out. And that's how our comments wrap around that.

Speaker 5

Got it. That's helpful. So so essentially, focus on the ROE. ROE sounds like if if I take the three building blocks, can be in the double digits. And that's what we should really be looking at.

Speaker 1

Each of those levers are good. You got it, Yimar. You got a second question?

Speaker 5

Yes, I do. Looking at this last quarter, you had $180,000,000 net negative impact from Yuri. You had some lower fees as well. If I adjust those out, you kind of get to, what, dollars 200 ish million quarter in a benign cat environment. Is that a fair way of thinking about this?

Or are there other one time items that I should be thinking about that could maybe get the earnings a bit higher?

Speaker 3

Yeah. I let me start. When I think about our portfolio, I'm less concerned as to looking at it on a quarterly basis, and I'm thinking about what is the long term value that we can bring to to our shareholders by the book the underwriting book that we have. So I often refer into an underwriter's view of our risk, which is really our in force portfolio. And that has a the the the underwriter's view of profitability on a fully developed basis.

When I look at the portfolio that we've created and that is in force, it is enormously efficient from a capital perspective and producing very, very healthy returns, largely because of the rate increase that we've been able to achieve over the last several years. So when I think about just taking what is observable in the first quarter, I don't think we're capturing the embedded profitability in the underwriting portfolio, which will take a while to earn through and be developed over time from an actuarial perspective. But everything that I'm seeing from the portfolio is producing extraordinary returns and very, very efficient from a capital perspective. We have a lot of flexibility going forward. Anything else, Bob?

Speaker 6

Thanks

Speaker 5

for the answers. Sure.

Speaker 0

Your next question is from Elyse Greenspan of Wells Fargo.

Speaker 4

Hi, thanks. Good morning. My first question, throughout the call you guys have mentioned that you will kind of see the incremental margin earn in over time. You know, I think you said, Kevin, as the book seasons and confidence grows, that rate is in fact conceding trend. So we're looking at your specialty

Right? That's just around the 68% underlying loss ratio backing out the favorable development in the quarter. So, you know, can you give us a sense of time frame on when, you know, we might see improvement within that ratio? Is that later 2021 event, in the out years? Just a sense of when we'll see that incremental margin that you've referenced on into your numbers.

Speaker 3

Yeah. I, everything you're saying is is true. We are seeing rate above trend. It's it's difficult to put a a specific point in time as to when the reserving ratios will begin to change if we are in fact continue to observe better performance. What I mentioned on the last call is if you looking at the numbers as an underwriter would see them, we have an increasing gap between what our pricing actuaries are seeing to where our reserving actuaries, which is typical at this point in a market.

And reserving actuaries tend to recognize good news a lot slower than bad news. So if our underwriters are right, I would expect that we should see a migration of our reserving ratios towards our pricing ratios. So when I reflect back on my earlier comment with regard to our in force portfolio, that's what I'm looking at, and that's where we're seeing significant profit through portfolio. So I won't put a specific time on it, but I would say that each quarter we are increasing our confidence that our pricing representation of the risk is right. And over time, that will be reflected by the reserving actuaries.

Speaker 4

That's helpful. And then my second question is going back to the capital discussion. You guys bought back a good amount of your stock so far this year. So just, you know, more color, if possible, to kind of reconcile the fact that you're, you know, buying back a good amount of your stock, you know, following the raising of that capital last year. Is it just that there's more excess today than there was in June?

And then a second part of that, can you just give us a sense of how we should think about buybacks trending from here?

Speaker 1

Thanks, Elise. Good question. Thanks. I appreciate the the offer to come back and talk more about that. You know, we did raise the billion dollars back in June.

We fully deployed that that we've talked about. You asked if we had excess capital. Kevin did talk about we do have dry powder. We've been returning some of that. You saw 200 nearly nearly $250,000,000, I think, through April 23.

But we also we didn't expect what we got was capital through earnings. The mark to market in the portfolio post the capital raise generated about $750,000,000 of mark to mark. Having said that, we gave some of it back this quarter, but that provides pure capital from which we can underwrite on. But going forward, you know, we we're gonna be good stewards of the capital, and we have been. And I think this quarter here, we pulled all levers demonstrating that we can return capital.

We can identify excess capital that we'd like to continue to deploy into the business, and we did. And we have, and we will continue to manage the capital. So nothing is going to really change. You just saw it all come together this past quarter.

Speaker 4

Okay. Thanks for the color.

Speaker 0

Your next question is from Josh Shanker of Bank of America.

Speaker 1

Yes. Thank you.

Speaker 7

I just want to clarify first on Elyse's question about the casing in the book. The profitability benefit in casualty is going to come through a combination of reserve releases on current accident on the current accident year if it prove if your assumptions prove conservative as

Speaker 1

well

Speaker 7

as taking that that knowledge and applying it to the accident year loss picks in future years? Is that is that how we're supposed to understand it?

Speaker 3

Yeah. I would say, yes. It didn't be a combination of those things. I think from a probably more prior year, just ultimately how this will learn through. And I think the other thing we can see is we we could depending on how long the rate change persists, we could see that our initial loss ratio picks would drop, and that would come into the current year as well.

Speaker 7

Okay. And then on a different track, you said in the prepared remarks that you believe one of your advantages is being better at risk selection compared to your peers. If I go back through Rennery's history when you were more of a cat business, I I would argue that people came to you first. You always had a price for them under any circumstances, whether it was the price they wanted or not, and you got a lot of first looks. To what extent I I'd say the first look maybe.

When you say that we are have a better ability to select risks in in noncap property and specialty and casualty. I mean, I think you were you were an exceptional provider in cat. How many competitors do you think have the capabilities you have in the non cap markets?

Speaker 3

When I think about the our presence in the market, I think about it as as everything that we do. And we we demonstrate leadership in property cat for sure. Our other property portfolio is kinda unique in that the E and S business that we're targeting in there has a very high cat component to it. So a lot of people will look for other property type business and try to limit the cat. We're coming in seeking cat risk in that.

So we're bringing our expertise to that business in kind of a unique way. And it puts us at an advantage because we're targeting both the attritional loss and the CAT component in a way that a lot of other companies simply want more of the attritional and want to take less cat there. And we think we're getting excess margin in structuring our portfolio that way. On the casualty side, most of our casualty clients are clients across multiple things that we do, including property cat. And we are increasingly in in early conversation with them about how they're structuring their programs.

And with that, we are able to pick into those programs with, I think, greater skill and with greater access than others. And so when I think about it, it's the deployment of the entire company with large insurers around the world that gives us that advantage. And a lot of that is built on our heritage of this strong understanding of their cat risk.

Speaker 7

And if I could just get another half a question in. You know, historically, obviously, there's some cat risk that you've written that was exclusive to you because of your relationships and the terms and the size, But there was also a lot of cat business that was syndicated where some of your lesser skilled competitors would say, ah, if RenRe is on that deal, I think probably the pricing of it's fairly good. I'll I'll be on two. In the casualty business, to what extent are syndicated deals part of what you're writing that others can get the terms that you get, or to what extent are they exclusive deals that are only showing up on your book?

Speaker 3

Yeah. A a lot of the casualty and and business is proportional. And, you know, that's one of the things that right now we like about it is because we're enjoying the underlying rate change there. With that, it is more of a syndicated market than, you know, an excess of loss structure where you're disassociated from the primary rate. We're proportionally participating in their rate change.

So I think for casualty, we think about the world as how much is addressable. So what business do we like? And then how do we leverage into the best insurance underwriters so that we have the largest participations on the most attractive programs? So I think a lot of it is about how we're using our line size, and then bringing that onto our platform with enormously efficient capital. So I would say in the property cat historically, because of the way that market is structured, we did have more private layer business, which was uniquely priced by us and solely with us.

In the casualty business, it is more of a syndicated market, and we are participating along with others. But our portfolio looks different because we're using line size pretty aggressively to make sure we're largest on the best deals.

Speaker 7

All right. Well, good luck and thank you for the transparency.

Speaker 3

Yeah. Thank you.

Speaker 0

Your next question is from Meyer Shields of KBW.

Speaker 6

Thanks. Kevin, you've been very thorough explaining and Bob has also explained sort of the patient approach you're taking on the casualty and specialty side to recognizing the margins. I guess my one question is, but if we take out last year's COVID losses, it still seems like the attritional or accident year loss ratio went up on a year over year basis. And I'm wondering, does that imply that you see more risk now to loss trend, or is there some other factor driving that year over year change?

Speaker 1

You're referring to the current accident year for casualty, especially last year versus this year?

Speaker 6

Yes. Taking out last year's COVID.

Speaker 1

Yeah. If you take out COVID, you know, we had a couple of things. Noise in the in the in the current accident year that I talked about this year, you know, whether it was the casualty casualty impact of, the winter storm. Was a few minor movements that were unique to the quarter. But on balance, we're hitting around where we thought we would in the mid to upper sixties in this business.

Now the rate increases that we've talked about just started last year. If you think about it, 2020, you know, that that was fifteen months ago, and now we're seeing another round of the rate increase. And so we're still really on, as Kevin described, a look back basis by the actuaries on the reserving. You'll see it bump up and down a little bit here, but as we look forward, we start to see that changing as different classes of business develop differently. They don't develop over the same period of time.

Looking forward, we do expect to see the margin benefit in order to us in different classes of business. Some sooner, some later.

Speaker 3

One thing I'd add to Bob's comments as well is the business mix is different between those two years, and we have more casualty in the current book, which is at a slightly higher loss ratio. So that's a component of what you're seeing as well.

Speaker 6

Okay. That's helpful. Second question, I know it's early with regards to Florida discussions, but is there any way of distinguishing between the relative attractiveness of frequency or severity layers in the Florida market?

Speaker 3

I think if you go back to the way we would you know, historically, I've referred to that as, you know, being hot down low or not with the Florida market. I think the way the Florida market is structured, it's kind of below the FHCF, which I would say is more the frequency exposed players, and then alongside and above would be more of the true cat layers in that market. I don't have a strong view as to which one is more attractive currently. We're well equipped to look at all of those, and, you know, any structure with regard to to to the placement of those programs. At this point, I don't have enough information to say I I prefer the frequency or the severity layers.

Speaker 6

Okay. Fair enough. And one final question if I can squeeze it in. We're getting, I guess, a sense over this earning season of maybe decelerating rate increases in a number of excess and surplus lines.

Speaker 8

Does the annual renewal schedule

Speaker 6

for reinsurance imply that the deceleration would be lagged when it comes to the rates that Renmin will be writing over, let's say, the second quarter?

Speaker 3

Let me I think I think that your question is is as we incept a new deal, what what is the what how quickly do we recognize an an upward tick in underlying rates or a downward tick in underlying rates? And I'd say there's it generally is delayed. I think often these programs are written on a risk attaching basis. So even the rate increases that were coming through last year are lagged throughout the calendar year of our treaty. So, you know, it takes basically, I I think of it as about eighteen months to kinda get a good view of it.

Similar to if we're in in accepting, now, it would be twelve to eighteen months out before we see the the full impact of the rating, on an earned basis.

Speaker 6

Okay. Perfect. Thank you so much.

Speaker 0

Your next question is from Ryan Tunis of Autonomous Research.

Speaker 9

Good afternoon, guys. So Hi. On other on other property profitability, something I'm trying to score is I think Bob made the comment, low fifties loss ratio is kinda your target. And, Kevin, you mentioned the the difference between you and other underwriters or reinsurers are kinda fact properties taking more cat. So I I'm trying to, I guess, kinda understand why that 50 is is your target and why you wouldn't target something better because you have 30% expense ratio, and you're at an 80 pre cat combined.

There's obviously cat. So, I mean, are low fifties really where the attritional loss ratios need to be in that business?

Speaker 3

Yeah. I think when I look at that, the attritional isn't always as clean as what it sounds. It it could it includes some cat loss that'll be in there from noncritical cat perils. So when I look at the combined ratio for that portfolio, I do think of it as as as we can break it into the component pieces, but including the cat piece, are we getting the margin that we're targeting? And the answer to that is is yes.

And when I compare the fully developed combined ratio for that business against a straight property cat XOL. I prefer the E and S business currently, and I think the rate change that's coming through on the E and S business will will also lag into our results over time. So so I feel on on a combined basis, I feel really good about it. And I think about the the the the attritional as not a pure attritional because it'll have some noncritical cat in it.

Speaker 9

Like, how much? 20 per maybe half of that 50 you think of as kind of attritional cats, Kevin, or less than that? I

Speaker 3

think it's hard to put a number on it. Like, we we could have an ENS book focused on on the, you know, the the Panhandle in Florida that's gonna look very different than an E and S portfolio that's in San Francisco. So it's hard to kind of pinpoint it on that.

Speaker 9

As a definition of cash, you guys could you could just use that and show us, but I'll leave that be. And my other question is just on for Bob. The the fee income underwriting income NII thing's helpful, but I wanna make sure I'm understanding this right. Is the fee income not already in the underwriting income number? Is that actually separate and distinct?

Like, I thought that ran as a negative acquisition cost.

Speaker 1

It's there's some element is in the underwriting in the form of profit commissions and overrides. You'll see it there in the property book, but also a large part of it, half, give or take, comes out of the noncontrolling redeemable interest. And it's the way the contracts are structured with the benefit in that, inures to us, and that's how we recognize that as the income.

Speaker 9

And that's in NII then? So that would show up No. In our dealings?

Speaker 1

It's it's it's unwinding the when we take out the noncontrolling interest, part of that is really back to us for the benefit and the management fee that we have out there.

Speaker 9

Got it. Cool. Alright. Thanks. I'll leave it there, guys.

Speaker 1

Thanks, Ryan. Thanks.

Speaker 0

Your next question is from Phil Stefano of Deutsche Bank.

Speaker 9

Yes. Thanks. I was I

Speaker 3

was hoping you could talk about the impact of the tax rate on the the potential changes to the GILTI and BEAT.

Speaker 1

That's a good question, timely, especially if you listened to the President last night. There's a lot going on in various jurisdictions. You're looking at The US, looking at rate increases. OECD is looking at some either through pillar one or pillar two. Even The UK is looking at it.

So it's going on a number of places that could or could impact us or not. I mean, we've been in Bermuda twenty five years, and we feel pretty good about our position here. We've got the infrastructure here. We know it, and we like it. Relative to everyone else, it's much better.

Now we'll have to wait and see. We don't know what's gonna happen. We're not gonna plan, anticipate. We're not gonna do anything in anticipation of it, but we'll keep an eye on it. We've got a global platform and we've demonstrated in the past that we have the agility to be able to adjust and still retain the relative value that we have and to offer to our shareholders.

Speaker 3

Okay. Thanks. That's it. Thanks.

Speaker 0

Your final question is from Jimmy Bhullar of JPMorgan.

Speaker 8

Hi. Had a couple of questions. First, just on, specialty lines. Your commentary is obviously pretty positive, but so is it seems like everybody else is pretty bulled up about specialty as well. So what do you think about sort of this I understand that you'll earn the price increases over time, but what do you think about actual rates in that market and how how they're gonna fare over the next year given more interest from companies on that market?

Speaker 3

Yeah. The everything we're seeing, we were still seeing positive rate move in most of the portfolios within the specialty classes. So I feel pretty good about it. I think there's a strong incentive on the primary, from the primary companies to recognize that the rate was required in some of those books. So there is still incentive for them to continue to push more rate on the specialty lines.

So I feel pretty good about it. I think the rate change will start to diminish though. So I think it'll be positive, but it will be at a decelerating rate.

Speaker 8

Okay. And then on just an overall broadly on reinsurance, there's been optimism about price and everybody's sort of talking about rate increasing trend and and exceeding loss costs. How do you think about sort of the adequacy of prices? Because, like, there's been a decent amount of optimism about pricing, yet returns for reinsurance companies, including you and your peers, haven't really been that good. So and it's not just one or two events.

They haven't been good for a while. So how do you think about the adequacy of pricing in the market? Like because obviously, they are going up, but are they going up from an adequate level? Or do they still need to catch up to where loss trends have gone over the past decade or so?

Speaker 3

Yeah. So I I think in what we've talked about on previous calls is we think of the casualty and specialty kind of rolling ten year blocks. And do I think the rate that we're getting in most of that book today is adequate? I'd say the answer is yes in most classes. The issue is if you take the ten year block, you're not at a rate that allows that block to achieve adequate returns.

So I think there is more rate that should come into those portfolios because it's been a long know, rates have been going up for a couple years, but it was a long period of rate reductions. And that on a ten year rolling basis had a pretty heavy impact on insurers and reinsurers. And right now I see, particularly with the growth that we're able to achieve, we are very quickly approaching rate adequacy for the full ten year block. And a lot of that is because we've been able to so effectively grow into the improving market.

Speaker 8

Okay. Thanks. There

Speaker 0

are no other questions in queue. I'd like to turn it back to Kevin O'Donnell for any closing remarks.

Speaker 3

Thank you for joining today's call. We enjoyed speaking to you and look forward to speaking to you next quarter as well. Thank you.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.