RenaissanceRe Holdings Ltd. (NYSE:RNR) Q1 2024 Earnings Call Transcript May 1, 2024
RenaissanceRe Holdings Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Savannah, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe First Quarter 2024 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. I will now turn the call over to Keith McCue, Senior Vice President of Finance & Investor Relations. Please go ahead.
Keith McCue: Thank you, Savannah. Good morning, and welcome to RenaissanceRe’s first quarter earnings conference call. Joining me today to discuss our results are Kevin O’Donnell, President and Chief Executive Officer; Bob Qutub, Executive Vice President and Chief Financial Officer; and David Marra, Executive Vice President and Group Chief Underwriting 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. Last night, we reported an annualized operating return on average common equity of 29%. This is a great start to the year and builds on our momentum following an equally strong finish to last year. Individually, each of our three drivers of profit, underwriting fee, and investment income are performing well. Having all three aligned at the same time, however, has resulted in one of the strongest return profiles I’ve seen in my career. If 2023 was about advancing our strategy, 2024 is about execution. Last year, we successfully delivered a step change in reinsurance pricing terms and conditions. We then accelerated our strategy by acquiring one of the best reinsurance companies in the market, Validus Re. For 2024, our primary goal is to reap the benefits of last year’s two strategic milestones.
As reflected in our financial results for the quarter, in aggregate, these milestones are mutually reinforcing and highly accretive to our bottom line. Continued success, however, depends on strong execution. To begin, we remain highly focused on delivering the combined RenRe Validus portfolio, a process that will be ongoing through midyear renewals. We remain on track to retain at least $3 billion of the Validus premium. If we are ultimately successful in doing so, our combined portfolio will exceed $12 billion in gross written premiums. Given the very favorable reinsurance environment, we expect this to be highly accretive to shareholders. The success of the Validus acquisition, however, depends on much more than just retaining the underwriting portfolio.
Employees and systems must be integrated, synergies must be achieved, and this process must remain seamless to our customers. Consequently, we are focusing a substantial amount of effort on integration and we are making excellent progress. Our Capital Partners business is another area where the Validus acquisition is mutually reinforcing. This business is larger than it has ever been and continues to grow. This generates substantial fee income our shareholders. It also brings significant capital efficiencies to our balance sheets and to the Validus portfolio as we bring it onto our platform. This efficiency will be realized over the course of the year as we successfully renew the business and place it on the designated owned or capital partner balance sheet.
We are also focused on growing our investment portfolio in what continues to be the best interest rate environment in decades. Validus has brought us substantial additional float at an opportune time, and we are investing it at increasingly attractive returns. Our overall capital and liquidity positions are as strong as I have ever seen. In aggregate, we enter the hurricane season positioned to outperform. There’s been a lot of attention on this year’s particularly elevated hurricane season forecast, so I want to spend a few minutes discussing our perspective. Most of reports this year are focused on just two of the many important variables that are part of the forecasting models. The first is elevated sea surface temperatures and the second is the El Nino, La Nina southern oscillation.
With regard to the first, tropical Atlantic Sea surface temperatures hit record highs earlier this year. They remain warmer than average across most of the Atlantic basin at or above the already anomalous 2023 levels. Much can change between now and wind season. The long range forecast suggests that this warmth will likely persist. We have seen elevated sea surface temperatures before. While it is difficult to assess the incremental catalyst for formation this level of heat will have, our model is pointing to significant Atlantic tropical cyclone activity. The second driving force is the El Nino, La Nina southern oscillation. In 2023, we benefited from El Nino conditions which limits Atlantic tropical cyclone formation. These conditions are shifting, and long range forecasts suggest that La Nina conditions are likely to return during the late summer or early fall.
La Nina typically results in lower wind shear and increased thunderstorm activity, both of which promote tropical cyclone development. In general, El Nino has a stronger suppressing influence on formation than La Nina has on enhancing formations. That said, heightened sea surface temperatures and La Nina conditions are just two important variables in a complex system. Many other factors, such as wind shear and the drying effect of the African dust, influence formation. Additionally, steering currents are important as more storms do not automatically mean more landfalls or landfalls in densely populated areas. Ultimately, we do not cover hurricane formations. We pay losses caused by landfall and storms. Many different barriers beyond weather conditions need to simultaneously align before a major hurricane becomes a material loss for us.
Given this, we have constructed a portfolio that’s designed to deliver resilient performance against a wide spectrum of potential tail outcomes. Over the years, we have often discussed the three superiors that we value, superior risk selection, superior capital management, and superior customer relations. These core values underpin everything we do, leading to two important outcomes. First, the possibility of an elevated hurricane season is not a risk we transfer to our clients. Rather, we manage risk over a multiyear period and price it accordingly. For our customers, the provision of consistent coverage and pricing, regardless of forecast, is a key component of our value proposition. As I’ve discussed in the past, there’s value to incumbency.
An important aspect of incumbency is consistency. Our consistency over the years, despite forecast, plays a significant role in ensuring our position as a first fall market and a leading reinsurer across the full spectrum of property casualty reinsurance. Second, we have seen elevated forecasts before. Already we have constructed a seasonal model that incorporates the forecast of elevated frequencies for both minor and major hurricanes and have stressed our portfolios against this. As one would expect, our returns are lower under this model. But given our disciplined underwriting, proactive gross and net strategy, and strongly diversified three drivers of profit, these expected returns are still strongly positive. In summary, our portfolio is well underwritten, our risk is on the right balance sheets, and we are in excellent capital position.
Our customers rely on us for long term consistent partners and we continue to reward us with their loyalty. That concludes my opening comments. I’ll provide more detail on our segment performance at the end of the call. But first, Bob will discuss our financial performance for the quarter.
Robert Qutub: Thanks, Kevin; and good morning, everyone. We started the year with another excellent quarter with operating income of $636 million and an annualized operating return on average common equity of 29%. The strong returns in the quarter were driven by superior results across all three drivers of profit with underwriting income of $541 million, up 46%; fees of $84 million, up 87%; and retained net investment income of $267 million, up 59%. Year to date, we have grown our principal metric, tangible book value per share plus change in accumulated dividends by 5%. This represents strong earnings that were partially offset by $194 million in retained mark-to-market losses in our investment portfolio. Over time, we expect these losses to accrete back to par.
Near term, we are benefiting from higher rates on new investments. I’ll discuss our results in more detail in a moment, but there are a few key takeaways that I would like to highlight. First, as Kevin mentioned, this quarter you are seeing the full three-month benefit of Validus in our financial results. Overall, net premiums written were $3.2 billion, up 41% and underwriting income was $541 million, up 46% from Q1 last year. Second, we reported strong overall underwriting results with a combined ratio of 78% or 75% after adjusting for the impact of purchase accounting. This was a low quarter for catastrophes, with property catastrophe and other property having excellent quarters. The casualty and specialty adjusted combined ratio was 97%, which included an impact of 4 percentage points from the Baltimore Bridge collapse, which I will discuss in a moment.
And third, fee income was $84 million on the back of solid growth in our joint ventures and strong performance. And finally, retained net investment income was a healthy $267 million. Consensus is building around a higher for longer interest rate environment which should support strong net investment income for the rest of the year. In summary, we have built a powerful platform with several distinct sources of income, rewarding our shareholders with security returns while making us increasingly resilient to catastrophe activity. Now, moving up to our first quarter results and our first driver of profit underwriting. And as we discussed, we had a phenomenally successful 1/1 renewal and retained the combined RenaissanceRe and Validus portfolio according to plan.
As a result, gross premium written were up 43% with robust growth across both segments. Net premiums written were up slightly less at 41%. This reflects our decision to purchase some additional ceded protection in our property catastrophe book as part of our gross to net strategy, as well as some timing differences. We reported strong overall results with an adjusted combined ratio of 75%. Moving now to our casualty and specialty portfolio, where gross and net premiums written were up 41% and 45%, respectively, as we incorporated the Validus business onto our platform. As Kevin will explain, we exercise underwriting discipline by growing into attractive areas such as specialty, while reducing exposures to areas such as professional liability.
Net earned premiums in the casualty and specialty were $1.5 billion, up 52%, also driven by Validus. In the second quarter, we are expecting net earned premiums to be about $1.6 billion. This quarter, we reported an adjusted combined ratio for casualty specialty of 97%, which contained 4 percentage points from the Baltimore Bridge collapse. The bridge had an overall net negative impact on our consolidated results of $55 million. On average, we continue to expect a mid-90%s casualty and specialty combined ratio after adjusting for the impact of purchase accounting. Moving to our property segment and starting with property catastrophe, where we reported strong growth driven by renewal of the combined portfolio at attractive rates and terms and conditions.
Gross premiums written were up by 44% and net premiums written were up by 30%. We ceded about $277 million, or 21% of property catastrophe business compared to 12% in Q1 last year. Property catastrophe had an excellent quarter with an adjusted combined ratio of 16%, reflecting low losses and 10 percentage points of favorable development. The acquisition expense ratio was up by about 3 percentage points, driven mainly by the impact of purchase accounting adjustments. Moving now to other property, where gross premiums written were up by 46% and net premiums written were up by 64%, driven mainly by the addition of the Validus portfolio. Net earned premiums in Q1 were $390 million, up 16%. The reductions we made in 2023 in our other property book continue to earn through and next quarter we expect other property premiums earned to be about $360 million.
Other property printed excellent results in the quarter with an adjusted combined ratio of 75% and about 11 percentage points of favorable development, predominantly from attritional losses. The other property current accident loss year ratio was 57%, which included a 5 percentage point impact from the Baltimore Bridge collapse. Going forward, we continue to expect another property attritional loss ratio in low-50%s. Moving now to fee income in our Capital Partners business, where fee income reached $84 million, up 87% from the comparable quarter. Management fees were $56 million, up 37% from Q1 2023, reflecting increased capital in our joint venture vehicles. Performance fees were $27 million, driven by joint venture growth and strong performance, including favorable development in the quarter.
In the second quarter, we expect management fees of around $55 million and performance fees of around $15 million, absent the impact of any large loss events. Moving now to investments, where retained net investment income was $267 million, up 4% from Q4 and up 60% from a year ago. Treasury rates have consistently ticked up through the year, leading to a $194 million retained mark-to-market losses in the quarter. Overall, retained unrealized losses in our fixed maturity investments stand at $189 million, or $3.58 per share. We expect this to accrete to par over time. Our retained yield to maturity was relatively flat at 5.5%, which is slightly higher than our net investment income return of 5.3% in Q1 of this year. We have kept duration stable and in the second quarter expect retained net investment income will be relatively flat compared to the first quarter.
Financial markets are expecting treasury rates to persist around current levels, which should continue to support strong contributions from net investment income in the quarters ahead. Now, turning briefly to expenses. We have already achieved significant synergies from the Validus acquisition. While absolute operating expenses have increased year-over-year due to the acquisition, our operating expense ratio ticked down to 4.3%. We expect the operating expense ratio to stay relatively flat through 2024. Corporate expenses remain elevated with about $20 million of the $39 million total related to the Validus acquisition. These transaction related expenses are excluded from operating income and should start to taper off next quarter. Now, finishing with capital management.
We are heading into the midyear renewals with a very strong capital position. As we have discussed in the past, RenaissanceRe has a long history of being disciplined stewards of capital and we remain consistent in our approach to capital management. Our primary focus is optimizing the Validus business by renewing it onto our wholly owned and Capital Partners balance sheet. As we complete the integration, we will continue looking for the best opportunities to deploy capital. And in conclusion, we had another excellent year, another excellent quarter with significant top line growth related to Validus and substantial contributions from each of our three drivers of profit. Underwriting income was strong following our highly successful 1/1 renewal.
Management and performance fees were both up significantly, driven by underlying portfolio growth and strong performance. And finally, net investment income continues to be a stable, significant source of income for our shareholders. And with that, I’ll turn the call back over to Kevin.
Kevin O’Donnell: Thanks, Bob. As usual, I’ll divide my comments between our property and casualty segments. Starting with property, we began the quarter with a magnitude 7.5 earthquake in Japan. While this was one of the strongest recorded earthquakes in the region, due to low population density and resilient infrastructure, its impact to the reinsurance industry is low. As a result, the earthquake did not have a significant influence on 4/1 renewals and programs generally renewed in an orderly manner. There was sufficient reinsurance capacity to meet demand. We have strong relationships in Japan and were successful in renewing our combined lines at rates, which were flat to down 5%. Rates online in Japan tend to be low, so such a small shift in price does not significantly impact either top or bottom line.
Our underwriting team is working on the midyear renewals and we have already completed several large placements. We are seeing additional demand for reinsurance come to the market, particularly in Florida, driven by a variety of factors including, first, a more attractive primary market with higher underlying rates and growing confidence that recent regulatory reforms have helped stabilize the market. This has resulted in significant take-outs from Citizens, the state run insurer of last resort, which should drive additional demand for reinsurance. And second, the end of the reinsurance to assist policyholders or the RAP layer where Florida provided $1.1 billion of free property cat reinsurance below the cat fund. We have been reducing exposure to Florida domestics for almost a decade due to their poor financial performance and social inflation issues.
Although we believe the market is in a much better place, we remain cautious. For the most part, our focus will be on applying our underwriting strategy to the Validus book. In other property, the market continues to be attractive, although rate increases have started to moderate. Rates have been growing substantially since 2019. Although the rate of increase is slowing, we continue to like the return profile of the risk that we assume. That said, we expect that our growth in other property this year will primarily be through selective renewal of the Validus portfolio. Touching now briefly on the Francis Scott Key Bridge collapse in Baltimore. As Bob discussed, this had an impact on both our property and casualty and specialty segments. Going forward, this loss is likely to result in additional opportunities for us in marine and other specialty markets, which I was — which I will outline in a minute, have already been attractive.
Moving now to casualty and specialty. Overall, this segment continues to demonstrate healthy underlying profitability. Trends from 1/1 generally continued for casualty and specialty. Our view is that general — the general casualty market is keeping in line with loss trend, and we are supporting cedents who demonstrate strong underwriting discipline. Additionally, we continue to reduce uncertain lines like D&O, where underlying rates are declining. Ceding commissions in D&O are reducing for the second year in a row in some cases. This provides an offset to rate reductions and positions the best programs for long term profitability. We are managing our portfolio accordingly. In specialty, as we discussed last quarter, the Validus acquisition provided us with a large market leadership position and broad diversification within specialty lines.
We expect that the Baltimore Bridge collapse, as well as recent aviation incidences, will further drive a specialty market dislocation and an attractive rate environment. We will continue to manage our portfolio by growing in the most attractive classes and reducing in more challenging areas. Cyber, for example, is seeing increased competition from reinsurers and we are reducing our net exposure here. In our credit business, we are largely maintaining our combined market share. After a difficult 2023, surety continues to experience significant rate increases. Mortgage origination volume has declined, but we have found some attractive opportunities within private mortgage insurance. While Validus brought us a large mortgage book, relative to our equity, our mortgage risk remains consistent.
Our agility in maintaining discipline and leaning into the most attractive lines is apparent with the premium shifts this quarter. In Q1 2023, specialty made up 27% of our gross casualty specialty premium. It now makes up 38%. Conversely, professional liability made up 26% of our premium in Q1 2023 and has reduced to 18%. We have kept a general casualty and credit relatively flat at 28% and 16% of our book, respectively. I mentioned these changes to highlight our ongoing activities to shape our portfolio and ride into the best opportunities. Shifting now to retro purchases. At 1/1, we saw continued discipline around retro structures pricing and pricing was relatively flat. We primarily traded with our long term partners and were able to secure additional capacity.
As we renew the Validus portfolio onto RenaissanceRe’s balance sheets, it is incorporated into our various retro programs. The next major renewal for our retro program is in June and we expect that we will be able to purchase the limit that we desire. That said, our strong capital and liquidity position provides us significant flexibility and we will only purchase additional limit if it improves our overall portfolio. Shifting now to Capital Partners. As Bob discussed, fees were healthy this quarter and contributed significantly to financial outperformance. Overall Capital Partners is performing well and we expect it to continue to grow. In conclusion, it was an excellent quarter. We started 2024 in a strong position with all three drivers of profit contributing meaningfully to our results.
Rates and terms and conditions continue to be favorable and we are confident in our ability to build an attractive RenaissanceRe and Validus portfolio. Interest rates continue to support strong net investment income. And finally, Capital Partners continues to — continues to grow and contribute substantial fee income. Thanks. And with that, I’ll turn it over for questions.
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